SPI Energy Co., Ltd. - Annual Report: 2008 (Form 10-K)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2008

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from:                       to                      .

SOLAR POWER, INC.

(Exact name of registrant as specified in its charter)

California		20-4956638
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification Number)
1115 Orlando Avenue
Roseville, California		95661-5247
(Address of Principal Executive Offices)		(Zip Code)

(916) 745-0900 (Issuer’s telephone number)

Securities registered pursuant to Section 12(b) of the Act:
None.

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, PAR VALUE $0.0001
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

     Note: Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ 

The aggregate market value of voting stock held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2008, was $34,648,349. For purposes of this computation, it has been assumed that the shares beneficially held by directors and officers of registrant were “held by affiliates” this assumption is not to be deemed to be an admission by such persons that they are affiliates of registrant.

The number of shares of registrant’s common stock outstanding as of March 6, 2009, was 37,933,826.

DOCUMENTS INCORPORATED BY REFERENCE

     The information required by Items 10, 11, 12, 13 and 14 of Part III are incorporated by reference to the registrant’s proxy statement to be filed within 120 days of the registrant’s fiscal year end.

 

 

TABLE OF CONTENTS

PART I
ITEM 1		BUSINESS			3
ITEM 1A		RISK FACTORS			12
ITEM 2		PROPERTIES			28
ITEM 3		LEGAL PROCEEDINGS			29
ITEM 4		SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS			29
PART II
ITEM 5		MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES			30
ITEM 7		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			32
ITEM 8		FINANCIAL STATEMENTS			43
ITEM 9		CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE			43
ITEM 9A(T)		CONTROLS AND PROCEDURES			43
ITEM 9B		OTHER INFORMATION			43
PART III
ITEM 10		DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE			44
ITEM 11		EXECUTIVE COMPENSATION			44
ITEM 12		SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS			44
ITEM 13		CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE			44
ITEM 14		PRINCIPAL ACCOUNTING FEES AND SERVICES			44
PART IV
ITEM 15		EXHIBITS			45
		SIGNATURES			49
EX-23
EX-31.1
EX-31.2
EX-32

PART I

     As used in this Annual Report on Form 10-K, unless otherwise indicated, the terms “we,” “us,” “our” and “the Company” refer to Solar Power, Inc., a California corporation and its wholly-owned subsidiaries.

     Our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, and information we provide in our press releases, telephonic reports and other investor communications, including those on our website, may contain forward-looking statements with respect to anticipated future events and our projected financial performance, operations and competitive position that are subject to risks and uncertainties that could cause our actual results to differ materially from those forward-looking statements and our expectations.

     Forward-looking statements can be identified by the use of words such as “expects,” “plans,” “will,” “may,” “anticipates,” “believes,” “should,” “intends,” “estimates” and other words of similar meaning. These statements constitute forward-looking statements within the meaning of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied by these forward-looking statements. These forward-looking statements reflect our then current beliefs, projections and estimates with respect to future events and our projected financial performance, operations and competitive position.

     Such risks and uncertainties include, without limitation, our ability to raise capital to finance our operations, the effectiveness, profitability and the marketability of our services, our ability to protect our proprietary information, general economic and business conditions, the impact of technological developments and competition, adverse results of any legal proceedings, the impact of current, pending or future legislation and regulation of the solar power industry, our ability to enter into acceptable relationships with one or more of our suppliers for panel components and the ability of such suppliers to manufacture products or components of an acceptable quality on a cost-effective basis, our ability to attract or retain qualified senior management personnel, including sales and marketing and technical personnel and other risks detailed from time to time in our filings with the SEC, including those described in Item 1A below. We do not undertake any obligation to update any forward-looking statements.

ITEM 1 — BUSINESS

Overview

     We manufacture photovoltaic panels or modules and balance of system components in our Shenzhen, China manufacturing facility. We sell these products through three distinct sales channels; 1) direct product sales to international markets, 2) our own use in building commercial and residential solar projects in the U.S., and 3) it is our intent to sell our products to a network of franchisees who will serve the U.S. residential market through our wholly-owned franchise company Yes! Solar, Inc. In addition to our solar revenue, we generate revenue from our legacy cable wire and mechanical assembly segment. Our cable, wire and mechanical assemblies products are also manufactured in our China facility and sold in the transportation and telecommunications markets. We believe that we have distribution and installation advantages by having our manufacturing facilities in China that will result in lower operational cost versus other competing United States-based solar power companies and technologies that do not currently have operations in China. Solar companies that do have operations in China are viewed as competitors only to the extent that they supply solar modules to U.S. integrators that compete with us for solar design and installation work.

     Through our vertically integrated business model that serves multiple sales channels, we are able to achieve several advantages in the market place. Those advantages include product innovation in solar modules, racking systems and monitoring systems, quality control of the products we sell, business diversification through multiple revenue streams, and low operating costs through our ability to leverage goods and services from our China operations.

Business Development

     We became the registrant through a reverse merger with Solar Power, Inc., a Nevada corporation (formerly Welund Fund, Inc.), on December 29, 2006, and we are considered the accounting acquirer and registrant following that merger. Welund Fund, Inc. was originally incorporated in the State of Delaware on July 16, 2002 under that name, and effective January 2006, pursuant to authorization of its stockholders, it changed its domicile from the State of Delaware to the State of Nevada through a merger with and into its then wholly-owned subsidiary, which was a Nevada corporation. On October 4, 2006, it changed its name from Welund Fund,

Inc. to Solar Power, Inc., and it affected a one-for-three reverse stock split. For purposes of discussion and disclosure, we refer to our predecessor as Solar Power, Inc., a Nevada Corporation (formerly Welund Fund, Inc.), to distinguish it from the registrant and accounting acquirer, Solar Power, Inc., a California corporation.

     On May 10, 2005, International Assembly Solutions, Limited (a company formed under the laws of Hong Kong S.A.R. (“IAS HK”) formed the limited liability company IAS Electronics (Shenzhen) Co., Ltd. (IAS Shenzhen), in accordance with the People’s Republic of China (“PRC”) laws, a Wholly Foreign-Owned Enterprises (collectively known as the “WFOE Law”) and commenced operations the same month. Mr. Kircher, our CEO, was named a director of IAS-HK and held disposition and voting control over 8,100,000 shares or approximately 58% of the outstanding shares. Mr. Kircher made business decisions for IAS Shenzhen, and it did not have formal officers.

     In August 2006, Solar Power, Inc., a California corporation, entered into a share exchange agreement with all the shareholders of IAS HK, which was incorporated in Hong Kong on January 18, 2005 with limited liability. Solar Power, Inc., a California corporation, was originally incorporated in the State of California on May 22, 2006 to facilitate creation of a U.S. holding company for IAS-HK operations and to engage in sales, installation and integration of photovoltaic systems in the U.S. Pursuant to the share exchange agreements, the equity owners of IAS-HK transferred all their equity interest in IAS-HK in exchange for a total of 14,000,000 shares of Solar Power, Inc., a California corporation. As a result, IAS HK became a wholly owned subsidiary of Solar Power, Inc., a California corporation.

DRCI Acquisition

     In February 2005 Dale Renewables Consulting, Inc., (“DRCI”), a California corporation was formed to engage in the business of solar modules and systems installation, integration and sales. In May 2006, Solar Power, Inc., a California corporation, and Dale Stickney Construction, Inc., (“DSCI”), the parent of DRCI, agreed in principle on the acquisition of DRCI by Solar Power, Inc., a California corporation, and entered into an operating agreement with DRCI providing that Solar Power, Inc., a California corporation would effectively be responsible for all current operations, liabilities, and revenues, effective June 1, 2006, as contemplated by the proposed merger agreement.

     In August 2006, Solar Power, Inc., a California corporation, and DRCI completed the Agreement and Plan of Merger (the “Merger Agreement”), including the Assignment and Interim Operating Agreement (the “Operating Agreement”) which was an exhibit to the Merger Agreement,. The Operating Agreement obligated Solar Power, Inc., a California corporation, to provide all financing necessary for DRCI’s operations subsequent to June 1, 2006 until the consummation of the acquisition in exchange for all the revenues generated from its operations. The Operating Agreement also provided that Solar Power, Inc. was to provide all management activities of DRCI on its behalf from June 1, 2006 until the consummation of the acquisition. The Company has taken the position that DRCI became a Variable Interest Entity on June 1, 2006 based upon the accounting literature found in Financial Interpretation Number 46(R) (“FIN 46(R)”), paragraph 5. In addition, based upon FIN 46(R), paragraph 6, footnote 12, the Company had pecuniary interest in DRCI that began on June 1, 2006. Finally, FIN 46 (R), paragraph 14 supports the Company’s position to consolidate as of June 1, 2006 because it absorbed DRCI’s losses and had a contractual right to expect residual returns. Solar Power, Inc., a California corporation, acquired DRCI in order to accelerate its entry into the California market for sale and installation of solar systems, including assumption of the installation and construction contracts that DRCI had at that time.

     On November 15, 2006, the Solar Power, Inc., a California corporation, completed the acquisition of DRCI, paying $1,115,373 in cash in exchange for 100% of the outstanding shares of DRCI. The acquisition of DRCI provided Solar Power, Inc., a California corporation, with an experienced photovoltaic sales and installation team.

     Neither DRCI nor its affiliates had any prior affiliation with Solar Power, Inc., a California corporation, or any of its officers, directors or major shareholders. Mr. James Underwood was the former CEO for DRCI and remains the current CEO for DSCI. There are no continuing relationships or arrangements between us and DSCI.

Welund Merger

     On August 23, 2006, Solar Power, Inc., a Nevada corporation (formerly Welund Fund, Inc.) formed Welund Acquisition Corp., a Nevada corporation and entered into an Agreement and Plan of Merger with Solar Power, Inc, a California corporation and Welund Acquisition Corp. (“Merger Sub”). The parties entered into the agreement to facilitate Welund Fund, Inc. acquiring an operating business and completing a proposed financing to provide working capital for such operations. The shareholders of Solar Power, Inc., a California corporation, received 14,500,000 shares of the Solar Power, Inc. a Nevada corporation’s common stock and Solar Power, Inc., a Nevada corporation, substituted 2,000,000 restricted stock awards and options of Solar Power, Inc., a California corporation,

with its restricted stock awards and options on the same terms. There was no common control or related party relationships. However, Mr. Kircher was appointed to the board of directors of Welund Fund, Inc. after the merger agreement was entered into and as a condition to the financing. Mr. Kircher received no compensation in connection with his service as a director of Welund Fund, Inc. Pending consummation of the merger, a special committee was formed by the Welund Fund, Inc. board members for purposes of any and all matters related to the merger, which committee excluded Mr. Kircher due to his interest in Solar Power, Inc., a California corporation. Incident to the financing, Welund Fund, Inc. also changed its name to Solar Power, Inc., a Nevada corporation.

     On December 29, 2006, Merger Sub merged with Solar Power, Inc., a California corporation, pursuant to which Solar Power, Inc., a California corporation, was the surviving entity. As a result of the merger, Solar Power, Inc., a California corporation, became a wholly-owned subsidiary of Solar Power, Inc., a Nevada corporation (formerly Welund Fund, Inc.) and Solar Power, Inc., a Nevada corporation (formerly Welund Fund, Inc.) discontinued its former operations and business of purchasing sub-prime auto loans. In addition, Solar Power, Inc., a California corporation, received the net proceeds of the private placement made by Solar Power, Inc., a Nevada corporation (formerly Welund Fund, Inc.). In addition, 14,500,000 shares of common stock were issued to the shareholders of Solar Power, Inc., a California corporation, and 2,000,000 restricted stock awards and options of Solar Power, Inc., a California corporation, were substituted for Solar Power, Inc., a Nevada corporation (formerly Welund Fund, Inc.) stock awards and option plan. As a condition and incident to the merger, former officers and directors resigned all positions as officers and directors of Solar Power, Inc. a Nevada corporation (formerly Welund Fund, Inc.). At that time, the officers and directors of Solar Power, Inc., a California corporation, became our officers and directors. The merger was structured as a reverse merger, and we became the registrant and the accounting acquirer as a result of the merger.

     In addition, on February 15, 2007, Solar Power, Inc., a Nevada corporation (formerly Welund Fund, Inc.) completed a re-domicile into the State of California by merging with and into its wholly-owned subsidiary, Solar Power, Inc., a California corporation, which survived.

Our Subsidiaries

     Our business is conducted through our wholly-owned subsidiaries, SPIC, Inc. (“SPIC”), Yes! Solar, Inc. (“YES”), Yes! Construction Services, Inc. (“YCS”), IAS-HK and IAS Shenzhen.

     SPIC and YCS are engaged in the business of design, sales and installation of photovoltaic (“PV”) solar systems for commercial, industrial and residential markets. YCS is also a company-owned franchise territory.

     YES is engaged in the sale and administration of our franchise operations. In March 2008, the Company entered into its first franchise sale agreement. As of December 31, 2008, YES had completed franchise sales of five franchise territories.

     IAS-HK is engaged in sales of our cable, wire and mechanical assemblies business.

     IAS Shenzhen is engaged in manufacturing our solar modules, our balance of solar system products and continues to be engaged in our legacy cable, wire and mechanical assemblies business.

Industry Overview

     According to industry studies, net electricity consumption is expected to more than double between 2003 and 2030, growing from 14.8 trillion kilowatt hours to 30.1 trillion kilowatt hours. During this time frame, the report projects that natural gas and renewable energy sources are the only fuels expected to see an increase in the share of the total world electricity generation. We have not commissioned any independent industry studies and rely on existing reports.

     Currently, the electric power industry is one of the world’s largest industries with annual global revenues reaching approximately $1 trillion per year. Higher fossil fuel prices, particularly for natural gas, have raised the cost of producing electricity. As a result of these higher production costs, renewable energy sources such as solar are better able to compete economically.

     In 2003, nearly 60 percent of the total net electricity consumption in the Organization for Economic Co-operation and Development (OECD) economies was in the residential and commercial building sectors. The industrial sectors accounts for 39%.

     Economic growth is among the most important factors to be considered in projecting changes in the world’s energy consumption. Over the 2003 to 2030 period, the projected world real Gross Domestic Product (GDP) is expected to average 3.8% growth annually.

Despite higher energy prices over the last 2 years, the U.S. economy is projected to grow an average of 3.0% between 2006 and 2015 and then slow to 2.9% during the period 2015 through 2030. Canada’s growth is expected to mirror the United States while Mexico should see growth closer to 4.1%.

     Between 2003 and 2030, much of the world’s economic growth is expected to occur among the nations of non-OECD Asia. China for example, is expected to have demand grow by an average 5.5% per year. By 2020, China is expected to have the world’s largest economy, based on share of Gross Domestic Product (GDP). Another country experiencing similar demand growth is India, where the average annual GDP is projected to be 5.4% over the same timeframe.

     According to an industry report, to meet the world’s electricity demand, an extensive expansion of installed generating capacity will be required. How each country or region adds the additional capacity depends on the availability of local resources, energy security and market competition among fuel choices. The fuel mix used to generate electricity over the past thirty years has changed significantly. Coal has remained the dominant fuel but the use of nuclear power increased during the 1970s and natural gas rapidly grew during the 1980s and 1990s. This fuel mix change was encouraged by the rise in oil prices.

     The fuel mix for electricity generation included coal, natural gas, oil, nuclear power and renewable sources, such as solar, hydroelectric and wind power. Solar accounted for less than one percent. Electric power producers face several challenges in meeting anticipated growth in electricity demand:

	•		Environmental regulations. Environmental regulations addressing global climate change and air quality seek to limit emissions by existing fossil fuel-fired generation plants and new generating facilities. Countries that are parties to international treaties such as the Kyoto Protocol have voluntarily submitted to reducing emissions of greenhouse gases. National and regional air pollution regulations also restrict the release of carbon dioxide and other gases by power generation facilities.
	•		Infrastructure reliability. Investment in electricity transmission and distribution infrastructure has not kept pace with increased demand, resulting in major service disruptions in the United States, such as the Northeast blackout in August 2003. Increasing capacity of the aging infrastructure to meet capacity constraints will be capital intensive, time consuming and may be restricted by environmental concerns.
	•		Fossil fuel supply constraints and cost pressures. The supply of fossil fuels is finite. While an adequate supply of coal, natural gas and oil exists for the foreseeable future, depletion of the fossil fuels over this century may impact prices and infrastructure requirements. For example, the U.S. domestic supply of liquefied natural gas, or LNG, is not expected to meet consumption requirements by 2025, requiring significant investment in LNG shipping terminal infrastructure to support imported fuel. Political instability, labor unrest, war and the threat of terrorism in oil producing regions has disrupted oil production, increased the volatility of fuel prices and raised concerns over foreign dependency in consumer nations.
	•		Weather. Regional weather impacts, such as higher temperatures or drought frequencies and duration, may affect the demand for electricity consumption or the ability to produce additional electrical supplies, as in the case of hydro production.

     We believe that economic, environmental and national security pressures and technological innovations are creating significant opportunities for new entrants within the electric power industry. The demand for additional electricity resources will bring changes to the market place and create opportunities for those companies that anticipate, plan and execute appropriately.

Distributed Generation and Renewable Energy

     Distributed generation and renewable energy are two promising areas for growth in the global electric power industry. Distributed generation is defined as point-of-use electricity generation that either supplements or bypasses the electric utility grid. Distributive generation employs technologies such as solar power, micro turbines and fuel cells. The move to distributed power will come from capacity constraints, increased demand for reliable power reliability and the economic challenges of building new centralized generation and transmission facilities.

     Renewable energy is defined as energy supplies that derive from non-depleting sources such as solar, wind and certain types of biomass. Renewable energy reduces dependence on imported and increasingly expensive oil and natural gas. In addition, growing environmental pressures, increasing economic hurdles of large power generation facilities and U.S. National Security interests are favorable drivers for renewable energy. Renewable energy, including solar and wind power, is the fastest growing segment of the energy industry worldwide.

     Solar power is both distributed and renewable. Solar power is an environmentally benign, locally sourced renewable energy source that can play an immediate and significant role in assisting global economic development, forging sustainable global environmental and energy policies, and protecting national security interests.

Solar Power

     Solar power generation uses interconnected photovoltaic cells to generate electricity from sunlight. The photovoltaic process (PV) captures packets of light (photons) and converts that energy into electricity (volts). Most photovoltaic cells are constructed using specially processed silicon. When sunlight is absorbed by a semiconductor, the photon knocks the electrons loose from the atoms, allowing the electrons to flow through the material to produce electricity. This generated electricity is direct current (DC).

     Light can be separated into different wavelengths with a wide range of energies. These photons may be reflected, absorbed or passed right through the PV cell. Solar cell technology only has the ability to capture the energy of photons within a specific range. Lower wavelength photons create heat, resulting in higher solar cell temperatures and lower conversion rate to energy. Higher wavelength photons have lower levels of energy and thus do not generate electricity. A typical commercial cell has an efficiency of only 15%.

     Many interconnected cells are packaged into solar modules, which protect the cells and collect the electricity generated. Solar power systems are comprised of multiple solar modules along with related power electronics. Solar power technology, first used in the space program in the late 1950s, has experienced growing worldwide commercial use for over 25 years in both on-grid and off-grid applications.

	•		On-grid. On-grid applications provide supplemental electricity to customers that are served by an electric utility grid, but choose to generate a portion of their electricity needs on-site. The On-grid segment is typically the most difficult to compete in since electricity generated from coal, nuclear, natural gas, hydro and wind is generally at much lower rates. Despite the unfavorable cost comparisons, On-grid applications have been the fastest growing part of the solar power market. This growth is primarily driven by the worldwide trend toward deregulation and privatization of the electric power industry, as well as by government initiatives, including incentive programs to subsidize and promote solar power systems in several countries, including Japan, Germany and the United States. On-grid applications include residential and commercial rooftops, as well as ground-mounted mini-power plants.
	•		Off-grid. Off-grid applications serve markets where access to conventional electric power is not economical or physically feasible. Solar power products can provide a cost-competitive, reliable alternative for such power applications as highway call boxes, microwave stations, portable highway road signs, remote street or billboard lights, vacation homes, rural homes in developed and developing countries, water pumps and battery chargers for recreational vehicles and other consumer applications.

     Solar power has emerged as one of the primary distributed generation technologies seeking to capitalize on the opportunities resulting from trends affecting the electric power industry. Relative to other distributed generation technologies, solar power benefits include:

	•		Modularity and scalability. From tiny solar cells powering a hand-held calculator to an array of roof modules powering an entire home to acres of modules on a commercial building roof or field, solar power products can be deployed in many sizes and configurations and can be installed almost anywhere in the world. Solar is among the best technologies for power generation in urban areas, environmentally sensitive areas and geographically remote areas in both developing and developed countries.
	•		Reliability. With no moving parts and no fuel supply required, solar power systems reliably power some of the world’s most demanding applications, from space satellites to maritime applications to remote microwave stations. Solar modules typically carry warranties as long as 25 years.
	•		Dual use. Solar modules are expected to increasingly serve as both a power generator and the skin of the building. Like architectural glass, solar modules can be installed on the roofs or facades of residential and commercial buildings.
	•		Environmentally cleaner. Subsequent to their installation solar power systems consume no fuel and produce no air, water or noise emissions.

     Germany, Japan and the United States presently comprise the majority of world market sales for solar power systems. Government policies in these countries, in the form of both regulation and incentives, have accelerated the adoption of solar technologies by businesses and consumers. For example, in the United States, the 2005 energy bill enacted a 30% investment tax credit for solar, and in January 2006 California approved the largest solar program in the country’s history, a $3.2 billion, 11-year California Solar Initiative. The California Solar Initiative is a recently adopted state policy expiring in 2017 that provides for long term subsidies in the form of rebates to encourage all Californians to use solar energy where possible. This Initiative is of particular importance to us because our Company’s headquarters are in Sacramento, California, and we anticipate that many of our franchise sales will be in California. These three countries together accounted for 83% of the solar global market in 2005. The recently passed Federal American Recovery and Reinvestment Act (“ACT”) renewed the 30% investment tax credit and removed the cap placed on residential installations so that now homeowners can take advantage of the full credit. In addition the ACT makes it possible to monetize the tax credit if they cannot be absorbed by a tax liability.

     As a result of the benefits and government support of solar power, the solar power market has seen sustained and rapid growth. Global PV installations have increased from 345 megawatts (MW) in 2001 to 1,460 MW in 2005. Unit shipments have increased over 20% per year on average for the past 20 years, and have never seen a year with negative growth.

     Despite the benefits of solar power, there are also certain risks and challenges faced by solar power. Solar power is heavily dependent on government subsidies to promote rapid introduction and acceptance by mass markets. Solar is an inert process that makes it difficult to compare against other non-inert technologies when comparing costs as current solar modules are generally warranted for a 25 year life. When the costs of producing solar are compared to other energy sources, solar power is more expensive than grid-based energy, nuclear, wind, etc. Different solar technologies carry different efficiencies. Traditional PV solar cells carry efficiencies ranging from 13% to 22% per cell. Solar thin film technologies are less expensive to manufacture than PV solar cell but generally carry efficiencies ranging from 5% to 9%.

Our Challenges

     Although solar power can provide a cost-effective alternative for off-grid applications, we believe the principal challenge to widespread adoption of solar power for on-grid applications is reducing manufacturing and installation costs without impairing product reliability. We believe the following advancements in solar power technology are necessary to meet this challenge:

	•		Efficient material use. Reduce raw materials waste, particularly the waste associated with sawing silicon by conventional crystalline silicon technology. Efficient use of silicon is imperative for the growth of the industry due to the limited supply and increasing cost of silicon raw material expected for the near future.
	•		Simplified and continuous processing. Reduce reliance on expensive, multi-step manufacturing processes.
	•		Reduced manufacturing capital costs. Decrease the costs and risks associated with new plant investments as a result of lower capital costs per unit of production.
	•		Improved product design and performance. Increase product conversion efficiency, longevity and ease of use. Conversion efficiency refers to the fraction of the sun’s energy converted to electricity.
	•		Simplified installation process. Reduce the time and effort required to install a solar system. Eliminate non-value added functions.

Our Solution

     We offer a broad range of our solar modules, balance-of-system components, and integration services, including system design and installation. We source components that are capital intensive to produce, such as solar cells, and rely on our manufacturing and assembly process to efficiently and economically complete our final products. We utilize our in-house expertise to design and customize systems and components to meet each customer’s requirements. Finally, we modify our system components so our installation process time is reduced.

     Our solutions enable our operations to improve the quality and yield of our manufactured products, to improve the delivery of and shorten our time-to-market, thereby improving both product and service profitability. We believe that our solutions provide the following key benefits to our customers:

	•		cost-effective solar modules and balance of system products;
	•		high quality components and supply chain management expertise;
	•		custom design and manufacturing expertise; and
	•		superior customer service and post-sales support.

Our Strategy

     Our business strategy is to develop, manufacture and market solar panels and system component products to industrial, commercial and residential facilities primarily in the United States. We presently are focused on the following steps to implement our business strategy:

	•		Outsource completed solar cells. We believe that we have the resources and relationships to acquire solar cells. We have entered into discussion with several manufacturers who possess the production capacity to deliver the required number of complete solar cells and have entered into an agreement with one of them that will guarantee prices through calendar 2009, but not obligating the Company a purchase commitment. The manufacturing process to convert metallurgical grade silicon into either solar wafers or solar cells requires high capital investments and long lead times. We firmly believe that our firm’s resources are better applied to manufacturing the solar module and balance of system products.
	•		Accelerate our manufacturing cost reduction and capacity expansion. We intend to quicken the expansion pace, secure critical supply chain and leverage our technology and manufacturing capabilities through strategic partnerships with other participants in the solar power industry. We have extensive experience manufacturing cable wire and mechanical assemblies in our existing facility in China. We apply our expertise and know-how, which requires the same skill sets, into assembling solar modules and balance of system components. Our existing manufacturing team is well versed in bringing components into China, applying value-added services, exporting our finished products through the Chinese regulatory environment and delivering the final product to our customers’ doorsteps. In July 2006, we secured a new 123,784 square foot manufacturing facility providing us with the potential capacity to produce over 50 MW of solar panels annually. During fiscal 2008 we produced approximately 8.6 MW of solar panels which enabled us to fulfill our customer’s requirements.
	•		Accelerate our installation cost reductions. We are implementing a made-to-order system for each customer order. We first utilize our engineering expertise during the initial sales process. This initial review will modify the system proposal resulting in significant savings in materials, labor, and re-work and installation time. Completed orders will be bundled and packed in a custom shipping container for delivery to the customer’s address. This ordering, design review and component bundling process will greatly reduce the time needed to complete our installation process.
	•		Diversify and differentiate our product lines. We design a full complement of balance of systems components to complement a wide array of solar system designs and have private-labeled a line of inverters for multiple levels of power generating capacities.

Customers

     We are a designer, integrator and installer of photovoltaic power systems to a variety of customers including private residential owners, production home builders and commercial facilities. We also manufacture solar panels which we not only use in our own installations, but sell to other integrators in the Asian and European markets. For the fiscal year ended December 31, 2008 the Company recorded revenues of approximately $44,670,000 from the sale of solar panels and sales and installation of its photovoltaic power systems. One major customer accounted for 10% or more of our revenue with 47.9% of our total revenue.

     Additionally, through our legacy business, we build and sell cable and harness assemblies. For the fiscal year ended December 31, 2008 revenues in the cable, wire and mechanical assemblies segment were $2,751,000 or 5.8% of our total revenue.

Products and Services

     Solar power products in general are built-up through 4 stages of production:

	•		Wafers. A crystalline silicon wafer is a flat piece of crystalline silicon that can be processed into a solar cell. Wafers are usually square or square with rounded corners. A typical size is 152 millimeters by 152 millimeters.
	•		Cells. A solar cell is a device made from a wafer that converts sunlight into electricity by means of a process known as the photovoltaic effect. Solar cells produce approximately 3.5 watts of power each.
	•		Modules. A solar module is an assembly of solar cells that have been electrically interconnected and laminated in a physically durable and weather-tight package. A typical solar module can produce from 20 to 300 watts of power and range in size from 2 to 25 square feet. Our typical commercial module will range from 180 to 220 watts.
	•		Systems. A solar system is an assembly of one or more solar modules that have been physically mounted and electrically interconnected by cables, meters and inverters to produce electricity. Typical residential on-grid systems produce 2,000 to 6,000 watts of power.

     Solar modules and systems are our primary products. Our modules are competitive with other products in the marketplace and are certified to international standards of safety, reliability and quality. We expect to continue to increase the conversion efficiency and power of our solar modules as we expand our manufacturing capacity and increase our efficiencies through ongoing process improvement.

Intellectual Property

     We rely and will continue to rely on trade secrets, know-how and other unpatented proprietary information in our business. We have filed applications to register the following trademarks: Yes! Solar Solutions, Yes! Energy Series and Yes! Independence Series (the “Marks”) for use with our franchise operations and solar product brands. In addition, we have two provisional patents pending for certain proprietary technologies.

Competition

     The solar power market is intensely competitive and rapidly evolving. Our competitors have established a market position more prominent than ours, and if we fail to secure our supply chain, attract and retain customers and establish a successful distribution network for our solar power products, we may be unable to increase our sales and market share. We compete with major international and domestic companies. Our major systems integration competitors include Sun Power Corporation, SPG Solar, Akeena Solar, Sun Edison plus numerous regional players, and other similar companies primarily located in California and New Jersey. Manufacturing competitors include multinational corporations such as BP Solar, Kyocera Corporation, Mitsubishi, Solar World AG, Sharp Corporation, Sun Power Corporation and Sanyo Corporation. We also expect that future competition will include new entrants to the solar power market offering new technological solutions. Further, many of our competitors are developing and are currently producing products based on new solar power technologies, including other crystalline silicon ribbon and sheet technologies, that we believe will ultimately have costs similar to, or lower than, our projected costs.

     Moreover, we believe that our direct competitors are solar companies that have operations in China or other low cost manufacturing locations to the extent that they supply solar modules to US integrators and compete with us for solar system design and integration work. Under this view, we believe Sun Power Corporation would be considered a competitor even though their manufacturing facilities are in the Philippines and not China.

     We believe that the cost and performance of our technologies, products and services will have advantages compared to competitive technologies, products and services. Our products offer the reliability, efficiency and market acceptance of other crystalline silicon products. We believe our technological process provides lower manufacturing costs resulting from significantly more efficient material usage and fewer processing steps, particularly in module fabrication.

     The entire solar industry also faces competition from other power generation sources, both conventional sources as well as other emerging technologies. Solar power has certain advantages and disadvantages when compared to other power generating technologies. The advantages include the ability to deploy products in many sizes and configurations, to install products almost anywhere in the world, to provide reliable power for many applications, to serve as both a power generator and the skin of a building and to eliminate air, water and noise emissions. Whereas solar generally is cost effective for off-grid applications, the high up-front cost of solar relative to most other solutions is the primary market barrier for on-grid applications. Furthermore, unlike most conventional power generators, which can produce power on demand, solar power cannot generate power where sunlight is not available, although it is sometimes matched with battery storage to provide highly reliable power solutions.

Manufacturing and Assembly Capabilities

     Prior to our focus in the solar industry we previously did not manufacture solar panels. We believe that our experience in manufacturing and assembly operations in China will give us a competitive advantage in the production of solar module and balance of system products. Our senior management has broad experience in the manufacturing of liquid crystal displays and electronic module assemblies. The manufacturing and assembly process of these products is not unlike the manufacturing and assembly of solar modules and balance of system products.

     Due to the various costs associated with both silicon and subsequent wafer processing, the high cost of solar products has rendered them unmarketable in some geographic areas. The stated goal for some time in the photovoltaic industry has been to reduce manufacturing costs to allow prices to drop to a point where rebates and subsidies are no longer a necessity. We feel our vertically integrated China-based model takes a major step towards the lessening of the rebate dependency.

     We are producing our solar modules and balance of system products. It is our intent to strive to reduce costs in the overall solar system cost to the end customer with the ultimate goal to make the actual installed cost of solar equivalent to the comparable cost of grid based energy without rebate. These overall reductions in cost will be delivered by reducing labor installation costs through better system design and kit packaging and reductions in module and balance of system costs by focusing on driving prices down on these commodity types of products.

     Our principal manufacturing objective is to provide for large-scale manufacturing and assembly of our solar power products at low costs that will enable us to penetrate price-sensitive solar power markets. Our 123,784 square foot campus in NanYue, Shenzhen, Peoples Republic of China (PRC) includes approximately 101,104 square feet of manufacturing space. The Shenzhen facility includes a complete line to manufacture solar modules as well as our legacy line to manufacture cable harnesses and mechanical assemblies. Currently our solar products manufacturing and assembly business has an annual production of approximately 50 megawatts of photovoltaic modules and related balance of system products and our cable, wire and assembly business utilizes approximately eighteen percent (18%) of our manufacturing space. The unused capacity will be utilized for production of our solar products as our solar business increases.

Suppliers

     A substantial portion of our product costs will stem from the purchase of components and raw materials. Raw materials are principally comprised of glass, aluminum frames, sheet metal, EVA bonding materials, copper tabs, and wiring. Components include solar cells, printed circuit boards, electrical connectors, junction boxes, molded plastic parts and packaging materials. These are purchased from a variety of suppliers. We will be dependent on certain key suppliers for sole source supplies of customer specified items. We intend to base component orders on received purchase orders in an effort to minimize our inventory risk by ordering components and products only to the extent necessary. However, in certain circumstances due to priorities of lead times, we may occasionally purchase components and/or a raw material based on rolling forecasts or anticipated orders following a risk assessment.

     Certain components may be subject to limited allocation by certain of our suppliers. In our industry, supply shortages and delays in deliveries of particular components have resulted in curtailed production, or delays in production of assemblies using scarce components or higher component costs. These supply shortages may contribute to an increase in our inventory levels and/or a reduction in our margins. We expect that shortages and delays in deliveries of some components will continue to impact our industry, and we are striving to develop multiple sources of supply where possible.

     We currently manufacture the majority of solar modules used in our installations and product sales. We also have the ability to purchase additional solar panel requirements from third-party augment output generated by our own production facility.

Sales and Marketing

     We are bringing our solar power products to market by utilizing company-owned store operations and establishing a national franchise network. We opened our first retail showroom in October 2007 in Northern California in close proximity to our corporate operations, and sold five franchise territories in fiscal 2008.

     Company-owned store operations work directly with all regional and national commercial and residential land use companies. We intend to provide national account representatives who will establish long-term relationships with these prime customers. Our

company-owned store team is designed to provide reliable product sourcing, PV system designs and reviews, permit and rebate assistance, media and public relations recognition and co-marketing opportunities. In essence, we to strive to provide a one-stop shopping experience for these large volume customers. Through franchise territory sales, we intend to establish additional stores in California and expand to several other geographic locations in the United States.

Franchising

     Outside of Company-owned store operations, we are working with franchisee partners who have exclusive geographical territories that include specific application focus. Regional owned stores are intended to provide consistent and reliable product supply, expertise on PV system designs and reviews, assistance with all permits and rebate programs, and extensive marketing and sales support. We believe that by franchising we are able to accomplish the following:

	•		Build a national brand
	•		Leverage the brand quickly
	•		Leverage sales and marketing both regionally and nationally
	•		Develop consistency in installation, training and service
	•		Access national accounts through corporate programs rather than regional programs
	•		Provide consistent marketing schemes, materials, and programs with national sales teams

Other Mediums

     We market our products globally through trade shows, on-going customer communications, promotional material, our web site, direct mail and advertising. Our staff will provide customer service and applications engineering support to our distribution partners while also gathering information on current product performance and future product requirements.

Employees

     As of December 31, 2008, we had approximately 290 full-time employees, including approximately 13 engaged in engineering activities and approximately 156 engaged in manufacturing, the majority of which are employed through our subsidiary in China. None of our employees is represented by a labor union nor are we organized under a collective bargaining agreement. We have never experienced a work stoppage and believe that our relations with our employees are good.

Item 1A — RISK FACTORS

Risks Related to Our Business

We have limited experience manufacturing solar systems on a commercial basis and have a limited operating history on which to base our prospects and anticipated results of operations.

We commenced solar power-related operations in June 2006 and began manufacturing solar modules in April 2007. As a result, we have limited experience manufacturing solar systems on a commercial basis. Our IAS (Shenzhen) Electronics Co., Ltd. subsidiary completed its first mechanical assembly manufacturing line in May 2005 and began commercial shipment of its cable, wire and mechanical products in June 2005. Although we are continuing to develop our solar manufacturing capabilities and processes, we do not know whether the processes we have developed will be capable of supporting large-scale manufacturing, or whether we will be able to develop the other processes necessary for large-scale manufacturing of solar systems that meet the requirements for cost, schedule, quality, engineering, design, production standards and volume requirements. If we fail to develop or obtain the necessary manufacturing capabilities it will significantly alter our business plans and could have a material adverse effect on our business, prospects, results of operations and financial condition. Moreover, due to our limited operating history, our historical operating results may not provide a meaningful basis for evaluating our business, financial performance and prospects. We have incurred net losses since our inception and, as of December 31, 2008, had an accumulated deficit of $18.2 million. We may be unable to achieve or maintain profitability in the future.

Our operating results may fluctuate significantly from period to period; if we fail to meet the expectations of securities analysts or investors, our stock price may decline significantly.

Several factors can contribute to significant quarterly and other periodic fluctuations in our results of operations. These factors may include but are not limited to the following:

	•		the timing of orders;
	•		the volume of orders relative to our capacity;
	•		the availability and pricing of raw materials, such as solar cells and wafers;
	•		delays in delivery of components or raw materials by our suppliers, which could cause delays in our delivery of products to our customers;
	•		delays in our product sales, design and qualification processes, which vary widely in length based upon customer requirements;
	•		product introductions and market acceptance of new products or new generations of products;
	•		effectiveness in managing manufacturing processes;
	•		changes in cost and availability of labor and components;
	•		product mix;
	•		pricing and availability of competitive products and services;
	•		changes in government regulations;
	•		changes or anticipated changes in economic conditions;
	•		delays in installation of specific projects due to inclement weather;
	•		political uncertainties in China;
	•		changes in tax-based incentive programs;
	•		changes in currency translation rates affecting margins and pricing levels; and availability of financing for customers.

We base our planned operating expenses in part on our expectations of future revenue, and we believe a significant portion of our expenses will be fixed in the short-term. If revenue for a particular quarter is lower than we expect, we likely will be unable to proportionately reduce our operating expenses for that quarter, which would harm our operating results for that quarter. This may cause us to miss analysts’ guidance or any guidance announced by us. If we fail to meet or exceed analyst or investor expectations or our own future guidance, even by a small amount, our stock price could decline, perhaps substantially.

Our business strategy depends on the widespread adoption of solar power technology, and if demand for solar power products fails to develop sufficiently, our revenues and ability to achieve or maintain profitability could be harmed.

The market for solar power products is emerging and rapidly evolving, and its future success is uncertain. If solar power technology proves unsuitable for widespread commercial deployment or if demand for solar power products fails to develop sufficiently, we may not be able to generate enough revenues to achieve and sustain profitability. The factors influencing the widespread adoption of solar power technology include but are not limited to:

	•		cost-effectiveness of solar power technologies as compared with conventional and non-solar alternative energy technologies;
	•		performance and reliability of solar power products as compared with conventional and non-solar alternative energy products;

	•		success of other alternative distributed generation technologies such as fuel cells, wind power and micro turbines;
	•		fluctuations in economic and market conditions which impact the viability of conventional and non-solar alternative energy sources, such as increases or decreases in the prices of oil and other fossil fuels; and
	•		availability of government subsidies and incentives.

If we do not obtain sufficient supply of solar cells and other components and materials to conduct our business, our revenues and operating results could suffer.

There are a limited number of solar cell suppliers. Our estimate regarding our supply needs may not be correct and our purchase orders may be cancelled by our suppliers. If our suppliers cancel our purchase orders or change the volume or pricing associated with these purchase orders, we may be unable to meet existing and future customer demand for our products, which could cause us to lose customers, market share and revenue.

Our component and materials suppliers may fail to meet our needs. We manufacture all of our solar power products using materials and components procured from a limited number of third-party suppliers. We do not currently have long-term supply contracts with our suppliers. This generally serves to reduce our commitment risk but does expose us to supply risk and to price increases that we may not be able to pass on to our customers. In some cases, supply shortages and delays in delivery may result in curtailed production or delays in production, which could contribute to a decrease in inventory levels and loss of profit. We expect that shortages and delays in deliveries of some components will occur from time to time. If we are unable to obtain sufficient components on a timely basis, we may experience manufacturing delays, which could harm our relationships with current or prospective customers and reduce our sales. We also depend on a select number of suppliers for certain supplies that we use in our business. If we are unable to continue to purchase components from these limited source suppliers or are unable to identify alternative suppliers, our business and operating results could be materially and adversely affected. In addition our competitors may be able to obtain better pricing.

The execution of our growth strategy is dependent upon the continued availability of third-party financing arrangements for our customers.

For many of our projects, our customers have entered into agreements to pay for solar energy over an extended period of time based on energy savings generated by our solar power systems, rather than paying us to purchase our solar power systems. For these types of projects, most of our customers choose to purchase solar electricity under a power purchase agreement with a financing company that purchases the system from us. These structured finance arrangements are complex and may not be feasible in some situations. In addition, customers opting to finance a solar power system may forgo certain tax advantages associated with an outright purchase on an accelerated basis which may make this alternative less attractive for certain potential customers. Due to the current global financial crisis, financing companies may be unwilling or unable to finance the cost of our products, or if the parties that have historically provided this financing cease to do so or only do so on terms that are substantially less favorable for us or these customers, our growth will be adversely affected.

Subsidies provided by foreign governments may impact the supply and price of solar cells and could make it difficult for us to compete effectively.

Several foreign countries, including Germany, Italy, Spain and Portugal, provide manufacturers of solar products with substantial subsidies to encourage their production of clean solar energy. In many instances, these subsidies are greater than the subsidies we are able to obtain in the U.S. for our operations, which increases the ability of solar product manufacturers in these countries to pay more than we can pay for solar cells while still remaining profitable. If worldwide demand for solar cells from companies located in countries with large solar subsidy programs increases, our suppliers may increase the price they charge to purchase solar cells and allocate available supplies of solar cells to manufacturers located in countries with higher solar subsidies than those provided in the U.S. This risk will increase if more countries implement policies to further subsidize solar technologies. These increased costs and supply constraints could materially and adversely affect our results of operations and our ability to compete effectively.

As polysilicon supply increases, the corresponding increase in the global supply of solar cells and panels may cause substantial downward pressure on the prices of our products, resulting in lower revenues and earnings.

Because of current global financial conditions, the surplus of polysilicon has resulted in a surplus of solar panel inventory. Decreases in polysilicon pricing and increases in solar panel production could each result in substantial downward pressure on the price of solar

cells and panels, including our products. Such price reductions could have a negative impact on our revenue and earnings, and materially adversely affect our business and financial condition.

If we do not achieve satisfactory yields or quality in manufacturing our solar modules or if our suppliers furnish us with defective solar cells, our sales could decrease and our relationships with our customers and our reputation may be harmed.

The success of our business depends upon our ability to incorporate high quality and yield solar cells into our products. We test the quality and yield of our solar products and the solar cells that we incorporate into our solar products, and we source our solar cells from manufacturers we believe are reputable. Nonetheless, our solar modules may contain defects that are not detected until after they are shipped or are installed because we cannot test for all possible scenarios. These defects could cause us to incur significant re-engineering costs, divert the attention of our engineering personnel from product development efforts and significantly affect our customer relations and business reputation. In addition, we may not be able to fulfill our purchase orders if we purchase a large number of defective solar cells. The number of solar cells that we purchase at any time is based upon expected demand for our products and an assumed ratio of defective to non-defective solar cells. If this ratio is greater than expected, we may not have an adequate number of non-defective solar cells to allow us to fulfill our purchase orders on time. If we do not fulfill orders for our products because we have a shortage of non-defective solar cells or deliver modules with errors or defects, or if there is a perception that these solar cells or solar modules contain errors or defects, our credibility and the market acceptance and sales of our products could be harmed.

Potential strategic acquisitions or alliances may not achieve our objectives.

We are currently exploring additional strategic acquisitions or alliances designed to enhance or complement our technology or to work in conjunction with our technology, increase our manufacturing capacity, provide additional know-how, components or supplies and develop, introduce and distribute products and services utilizing our technology and know-how. If we make any acquisitions we may assume unknown or contingent liabilities. Any future acquisitions by us also may result in significant write-offs or the incurrence of debt and contingent liabilities, any of which could harm our operating results. We may not identify or complete these transactions in a timely manner, on a cost-effective basis, or at all. Any strategic acquisitions or alliances entered into may not achieve our strategic objectives, and parties to our strategic acquisitions or alliances may not perform as contemplated.

We may not be able to efficiently integrate the operations of our acquisitions, products or technologies.

From time to time, we may acquire new and complementary technology, assets and companies. We do not know if we will be able to complete any acquisitions or if we will be able to successfully integrate any acquired businesses, operate them profitably or retain key employees. Integrating any other newly acquired business, product or technology could be expensive and time-consuming, disrupt our ongoing business and distract our management. We may face competition for acquisition targets from larger and more established companies with greater financial resources. In addition, in order to finance any acquisitions, we might be forced to obtain equity or debt financing on terms that are not favorable to us and, in the case of equity financing our stockholders interests may be diluted. If we are unable to integrate effectively any newly acquired company, product or technology, our business, financial condition and operating results could suffer.

Failure to optimize our manufacturing potential and cost structure could materially and adversely affect our business and operating results.

We have one manufacturing facility in China. We strive to fully utilize the manufacturing capacity of our facility but may not do so on a consistent basis. Our factory utilization will be dependent on predicting volatility, timing volume sales to our customers, balancing our productive resources with product mix, and planning manufacturing services for new or other products that we intend to produce. Demand for manufacturing of these products may not be as high as we expect, and we may fail to realize the expected benefit from our investment in our manufacturing facilities. Our profitability and operating results are also dependent upon a variety of other factors, including: utilization rates of our manufacturing lines, downtime due to product changeover, impurities in raw materials causing shutdowns, maintenance of operations and availability of power, water and labor resources.

The reduction or elimination of government and economic incentives could cause our revenue to decline.

We believe that the growth of the market for “on-grid” applications, where solar power is used to supplement a customer’s electricity purchased from the utility network, depends in large part on the availability and size of government-generated economic incentives. At present, the cost producing solar energy generally exceeds the price of electricity in the U.S. from traditional sources. As a result, to encourage the adoption of solar technologies, the U.S. government and numerous state governments have provided subsidies in the

form of cost reductions, tax write-offs and other incentives to end users, distributors, systems integrators and manufacturers of solar power products. Reduction, elimination and/or periodic interruption of these government subsidies and economic incentives because of policy changes, fiscal tightening or other reasons may result in the diminished competitiveness of solar energy, and materially and adversely affect the growth of these markets and our revenues. Electric utility companies that have significant political lobbying powers may push for a change in the relevant legislation in our markets. The reduction or elimination of government subsidies and economic incentives for on-grid solar energy applications, especially those in our target markets, could cause our revenues to decline and materially and adversely affect our business, financial condition and results of operations. The existing Federal Investment Tax Credit was renewed with passage of the 2008 economic stimulus package by the U.S. government. The current Federal Investment Tax Credit allows for a 30% tax credit for both commercial and residential solar installations with no cap and allows the credits to be monetized if it cannot be absorbed by a tax liability.

We face intense competition, and many of our competitors have substantially greater resources than we do.

We operate in a competitive environment that is characterized by price fluctuation and technological change. We compete with major international and domestic companies. Our major system integrator competitors include SunPower/Powerlight, SPG Solar, Akeena Solar, Sun Edison, Global Solar plus numerous other regional players, and other similar companies primarily located in California and New Jersey. Manufacturing competitors include multinational corporations such as BP Solar, Kyocera Corporation, Mitsubishi, Solar World AG, Sharp Corporation, SunPower/Powerlight and Sanyo Corporation. More specifically, our solar power system integrator competitors who have manufacturing facilities in Asia include SunPower/Powerlight. Some of our current and potential competitors have greater market recognition and customer bases, longer operating histories and substantially greater financial, technical, marketing, distribution, purchasing, manufacturing, personnel and other resources than we do. In addition, many of our competitors are developing and are currently producing products based on new solar power technologies that may ultimately have costs similar to, or lower than, our projected costs. As a result, they may be able to respond more quickly to changing customer demands or to devote greater resources to the development, promotion and sales of solar and solar-related products than we can.

Our business relies on sales of our solar power products and our competitors with more diversified product offerings may be better positioned to withstand a decline in the demand for solar power products. Some of our competitors own, partner with, have longer term or stronger relationships with solar cell providers which could result in them being able to obtain solar cells on a more favorable basis than us. It is possible that new competitors or alliances among existing competitors could emerge and rapidly acquire significant market share, which would harm our business. If we fail to compete successfully, our business would suffer and we may lose or be unable to gain market share.

Because our industry is highly competitive and has low barriers to entry, we may lose market share to larger companies that are better equipped to weather a deterioration in market conditions due to increased competition.

Our industry is highly competitive and fragmented, subject to rapid change and has low barriers to entry. We may in the future compete for potential customers with solar and HVAC systems installers and servicers, electricians, utilities and other providers of solar power equipment or electric power. Some of these competitors may have significantly greater financial, technical and marketing resources and greater name recognition than we have.

We believe that our ability to compete depends in part on a number of factors outside of our control, including:

	•		the ability of our competitors to hire, retain and motivate qualified personnel;
	•		the ownership by competitors of proprietary tools to customize systems to the needs of a particular customer;
	•		the price at which others offer comparable services and equipment;
	•		the extent of our competitors’ responsiveness to customer needs; and
	•		installation technology.

Competition in the solar power services industry may increase in the future, partly due to low barriers to entry, as well as from other alternative energy resources now in existence or developed in the future. Increased competition could result in price reductions, reduced margins or loss of market share and greater competition for qualified personnel. There can be no assurance that we will be able to compete successfully against current and future competitors. If we are unable to compete effectively, or if competition results in a deterioration of market conditions, our business and results of operations would be adversely affected.

Our growth plans depend in large part on our ability to identify, attract and retain qualified franchisees and to manage our proposed franchise business.

We expect to grow our business through franchise partners who will establish retail operations in defined geographic areas to market, sell and install photovoltaic systems. As a result, our future growth will depend on our ability to attract and retain qualified franchisees, the franchisees’ ability to execute our business concept, create and maintain brand recognition, develop retail stores and to market and install our products. We may not be able to recruit franchisees who have sufficient expertise in our business or financial resources necessary to effectively open, manage and operate retail stores, or who will conduct operations in a manner consistent with our concept and standards. Also, our franchisees may not be able to operate the retail stores in a profitable manner.

Federal Trade Commission rules require us to furnish prospective franchisees with a franchise disclosure document containing prescribed information before entering into a binding agreement or accepting any payment for the franchise. Numerous states, including California, also have state franchise sales or business opportunity laws which require us to add to the federal disclosure document additional state-specific disclosures and to register our offering with a state agency before we may offer franchises for locations in the state or to state residents. Applicable laws in these states vest state examiners with discretion to disapprove registration applications based on a number of factors. There can be no assurance that we will be successful in obtaining registration in all states where we intend to operate franchises or be able to continue to comply with these regulations, which could have a material adverse effect on our business and results of operations.

Finally, our franchise operations will be dependent upon our ability to:

	•		develop, maintain and enhance our brands;
	•		maintain satisfactory relations with our franchisees;
	•		develop consistency in installation, training and service among our franchisees;
	•		monitor and audit the reports and payments received from franchisees; and
	•		monitor the quality of the installations completed by our franchisees.

A few customers account for a significant portion of our sales, and the loss of any of these could harm our business.

For the fiscal year ended December 31, 2008, one customer contributed 47.9% of our total sales revenue. This compares to the similar period in fiscal 2007 when three customers contributed 53% of our total sales revenue, including one customer who contributed 34% to our revenue. The loss of these customers, without being able to replace them, could have a material adverse effect on our performance, liquidity and prospects.

We generally do not have long-term agreements with our customers and, accordingly, could lose customers without warning.

Our products are generally not sold pursuant to long-term agreements with customers, but instead are sold on a purchase order basis. We typically contract to perform large projects with no assurance of repeat business from the same customers in the future. Although cancellations on our purchase orders to date have been insignificant, our customers may cancel or reschedule purchase orders with us on relatively short notice. Cancellations or rescheduling of customer orders could result in the delay or loss of anticipated sales without allowing us sufficient time to reduce, or delay the incurrence of, our corresponding inventory and operating expenses. In addition, changes in forecasts or the timing of orders from these or other customers expose us to the risks of inventory shortages or excess inventory. This, in addition to the completion and non-repetition of large systems projects, in turn could cause our operating results to fluctuate.

Decrease in construction could adversely affect our business.

During 2008, the downturn in the U.S. economy and the uncertainty of the renewal of the Federal Investment Tax Credit caused a major reduction on our construction related revenues. While the Federal Investment Tax Credit has been renewed and enhanced, our ability to generate revenues from construction contracts will depend on the general and local economic conditions, changes in interest rates, lending standards and other factors. For example, the current housing slump and tightened credit markets have resulted in

availability of lending facilities for large commercial projects, higher interest rates for residential retrofits and a contracted new home construction industry.

We act as the general contractor for our customers in connection with the installations of our solar power systems and are subject to risks associated with construction, bonding, cost overruns, delays and other contingencies, which could have a material adverse effect on our business and results of operations.

We act as the general contractor for our customers in connection with the installation of our solar power systems. All essential costs are estimated at the time of entering into the sales contract for a particular project, and these are reflected in the overall price that we charge our customers for the project. These cost estimates are preliminary and may or may not be covered by contracts between us or the other project developers, subcontractors, suppliers and other parties to the project. In addition, we require qualified, licensed subcontractors to install most of our systems. Shortages of such skilled labor could significantly delay a project or otherwise increase our costs. Should miscalculations in planning a project or defective or late execution occur, we may not achieve our expected margins or cover our costs. Also, many systems customers require performance bonds issued by a bonding agency. Due to the general performance risk inherent in construction activities, it has become increasingly difficult recently to secure suitable bonding agencies willing to provide performance bonding. In the event we are unable to obtain bonding, we will be unable to bid on, or enter into, sales contracts requiring such bonding.

Delays in solar panel or other supply shipments, other construction delays, unexpected performance problems in electricity generation or other events could cause us to fail to meet these performance criteria, resulting in unanticipated and severe revenue and earnings losses and financial penalties. Construction delays are often caused by inclement weather, failure to timely receive necessary approvals and permits, or delays in obtaining necessary solar panels, inverters or other materials. The occurrence of any of these events could have a material adverse effect on our business and results of operations.

Existing regulations and policies of the electric utility industry and changes to these regulations and policies may present technical, regulatory and economic barriers to the purchase and use of our products, which may significantly reduce demand for our products.

The market for electricity generating products is strongly influenced by federal, state and local government regulations and policies concerning the electric utility industry, as well as policies promulgated by electric utilities. These regulations and policies often relate to electricity pricing and technical interconnection of customer-owned electricity generation. In the U.S., these regulations and policies are being modified and may continue to be modified. Customer purchases of alternative energy sources, including solar power technology, could be deterred by these regulations and policies, which could result in a significant reduction in the demand for our solar power products. For example, without a regulatory-mandated exception for solar power systems, utility customers are often charged interconnection or standby fees for putting distributed power generation on the electric utility grid. These fees could increase the cost to our customers and make our solar power products less desirable.

The failure to increase or restructure the net metering caps could adversely affect our business. Currently all grid-tied photovoltaic systems are installed with cooperation by the local utility providers under guidelines created through statewide net metering policies. These policies require local utilities to purchase from end users excess solar electricity for a credit against their utility bills. The amount of solar electricity that the utility is required to purchase is referred to as a net metering cap. If these net metering caps are reached and local utilities are not required to purchase solar power, or if the net metering caps do not increase in the locations where we install our solar product, demand for our products could decrease. The solar industry is currently lobbying to extend these arbitrary net metering caps, and replace them with either notably higher numbers, or with a revised method of calculation that will allow the industry to continue our expansion in a manner consistent with both the industry and state and federal desires.

Moreover, we anticipate that our solar power products and our installation will be subject to oversight and regulation in accordance with national and local ordinances relating to building codes, safety, environmental protection, utility interconnection and metering and related matters. It is difficult to track the requirements of individual states and design equipment to comply with the varying standards. Any new government regulations or utility policies pertaining to our solar power products may result in significant additional expenses to us, our resellers, and our customers and, as a result, could cause a significant reduction in demand for our solar power products.

Compliance with environmental regulations can be expensive, and noncompliance with these regulations may result in adverse publicity and potentially significant monetary damages and fines.

As our manufacturing processes generate noise, wastewater, gaseous and other industrial wastes, we are required to comply with all national and local regulations regarding protection of the environment. If we fail to comply with present or future environmental regulations, we may be required to pay substantial fines, suspend production or cease operations. In addition, our cost to comply with future regulations may increase, which could adversely impact the price of our products and our profitability.

If we do not retain key personnel, our business will suffer.

The success of our business is heavily dependent on the leadership of our key management personnel, specifically Stephen C. Kircher. In addition, the company currently relies on Todd Lindstrom’s construction experience and management for the installation of solar systems. If either of these people were to leave us, it would be difficult to replace them, and our business may be harmed. We will also need to retain additional highly-skilled individuals if we are to effectively grow our business. Our future success depends on our continuing ability to identify, hire, develop, motivate and retain highly skilled personnel for all areas of our organization. Competition in our industry for qualified employees is intense, and we anticipate that certain of our competitors may directly target our employees and officers, all of whom are at-will employees and not parties to employment agreements with us. Our continued ability to compete effectively depends on our ability to attract new qualified employees and to retain and motivate our existing employees and officers.

The growth of our business is dependent upon sufficient capitalization.

The growth of our business depends on our ability to finance new products and services. We operate in a rapidly changing industry. Technological advances, the introduction of new products and new design and manufacturing techniques could adversely affect our business unless we are able to adapt to the changing conditions. To remain competitive, we may incur additional costs in product development, equipment, facilities and integration resources. These additional costs may result in greater fixed costs and operating expenses. As a result, we could be required to expend substantial funds for and commit significant resources to the following:

	•		research and development activities on existing and potential product solutions;
	•		additional engineering and other technical personnel;
	•		advanced design, production and test equipment;
	•		manufacturing services that meet changing customer needs;
	•		technological changes in manufacturing processes;
	•		long cycle times for payment collection after incurring capital costs;
	•		manufacturing capacity; and
	•		developing a franchise network.

We generally recognize revenue on system installations on a “percentage of completion” basis and payments are due upon the achievement of contractual milestones and any delay or cancellation of a project could adversely affect our business.

We recognize revenue on our system installations on a “percentage of completion” basis and, as a result, our revenue from these installations is driven by the performance of our contractual obligations, which is generally driven by timelines for the installation of our solar power systems at customer sites. This could result in unpredictability of revenue and, in the near term, a revenue decrease. As with any project-related business, there is the potential for delays within any particular customer project. Variation of project timelines and estimates may impact our ability to recognize revenue in a particular period. In addition, certain customer contracts may include payment milestones due at specified points during a project. Because we must invest substantial time and incur significant expense in advance of achieving milestones and the receipt of payment, failure to achieve milestones could adversely affect our business and results of operations.

We are subject to particularly lengthy sales cycles in some markets.

Our focus on developing a customer base that requires our solar power products means that it may take longer to develop strong customer relationships or partnerships. Moreover, factors specific to certain industries also have an impact on our sales cycles. Some of our customers may have longer sales cycles that could occur due to the timing of various state and federal subsidies. These lengthy

and challenging sales cycles may mean that it could take longer before our sales and marketing efforts result in revenue, if at all, and may have adverse effects on our operating results, financial condition, cash flows and stock price.

Products we manufacture for third parties may contain design or manufacturing defects, which could result in customer claims.

We often manufacture products to our customers’ requirements, which can be highly complex and may at times contain design or manufacturing failures. Any defects in the products we manufacture, whether caused by a design, manufacturing or component failure or error, may result in returns, claims, delayed shipments to customers or reduced or cancelled customer orders. If these defects occur, we will incur additional costs and if in large quantity or too frequent, we may sustain loss of business, loss of reputation and may incur liability.

We may not be able to prevent others from using our trademarks in connection with our solar power products, which could adversely affect the market recognition of our brand names and our revenue.

We have filed applications to register the following trademarks related to our franchise business: Yes! Solar Solutions, Yes! Energy Series and Yes! Independence Series (the “Marks”) for use with our solar power products. There is no assurance that we will be successful in obtaining such marks. In addition, if someone else has already established trademark rights in the Marks, we may face trademark disputes and may have to market our products with other trademarks, which also could hurt our marketing efforts. Furthermore, we may encounter trademark disputes with companies using marks which are confusingly similar to our Marks which if not resolved favorably could cause our branding efforts to suffer. Trademark litigation carries an inherent risk and we cannot guarantee we will be successful in this type of litigation. In addition, we may have difficulty in establishing strong brand recognition with consumers if others use similar marks for similar products.

Our SkyMount^TM racking system is untested and may not be effective or patentable or may encounter other unexpected problems, which could adversely affect our business and results of operations.

Our SkyMount^TM racking system is new and has not been tested in installation settings for a sufficient period of time to prove its long-term effectiveness and benefits. The SkyMount^TM racking system may not be effective or other problems may occur that are unexpected and could have a material adverse effect on our business or results of operations. While we anticipate filing a patent application for our SkyMount^TM racking system technology, a patent may not be issued on such technology or we may not be able to realize the benefits from any patent that is issued.

Our competitive position depends in part on maintaining intellectual property protection.

Our ability to compete and to achieve and maintain profitability depends in part on our ability to protect our proprietary discoveries and technologies. We currently rely on a combination of copyrights, trademarks, trade secret laws and confidentiality agreements, to protect our intellectual property rights. We also rely upon unpatented know-how and continuing technological innovation to develop and maintain our competitive position.

From time to time, the United States Supreme Court, other federal courts, the U.S. Congress or the U.S. Patent and Trademark Office may change the standards of patentability and any such changes could have a negative impact on our business.

We may face intellectual property infringement claims that could be time-consuming and costly to defend and could result in our loss of significant rights and the assessment of damages.

If we receive notice of claims of infringement, misappropriation or misuse of other parties’ proprietary rights, some of these claims could lead to litigation. We cannot assure you that we will prevail in these actions, or that other actions alleging misappropriation or misuse by us of third-party trade secrets, infringement by us of third-party patents and trademarks or the validity of our patents, will not be asserted or prosecuted against us. We may also initiate claims to defend our intellectual property rights. Intellectual property litigation, regardless of outcome, is expensive and time-consuming, could divert management’s attention from our business and have a material negative effect on our business, operating results or financial condition. If there is a successful claim of infringement against us, we may be required to pay substantial damages (including treble damages if we were to be found to have willfully infringed a third party’s patent) to the party claiming infringement, develop non-infringing technology, stop selling our products or using technology that contains the allegedly infringing intellectual property or enter into royalty or license agreements that may not be available on acceptable or commercially practical terms, if at all. Our failure to develop non-infringing technologies or license the proprietary rights on a timely basis could harm our business. Parties making infringement claims on future issued patents may be able to obtain an

injunction that would prevent us from selling our products or using technology that contains the allegedly infringing intellectual property, which could harm our business.

We are exposed to risks associated with product liability claims in the event that the use or installation of our products results in injury or damage, and we have limited insurance coverage to protect against such claims and those losses resulting from business interruptions or natural disasters.

Since our products are electricity-producing devices, it is possible that users could be injured or killed by our products, whether by product malfunctions, defects, improper installation or other causes. As a manufacturer, distributor, and installer of products that are used by consumers, we face an inherent risk of exposure to product liability claims or class action suits in the event that the use of the solar power products we sell or install results in injury or damage. We commenced commercial shipment of our solar modules in 2007 and, due to our limited historical experience; we are unable to predict whether product liability claims will be brought against us in the future or the effect of any resulting adverse publicity on our business. Moreover, to the extent that a claim is brought against us we may not have adequate resources in the event of a successful claim against us. We rely on our general liability insurance to cover product liability claims and have not obtained separate product liability insurance. The successful assertion of product liability claims against us could result in potentially significant monetary damages and, if our insurance protection is inadequate, could require us to make significant payments which could have a materially adverse effect on our financial results. Any business disruption or natural disaster could result in substantial costs and diversion of resources.

Since we cannot test our solar panels for the duration of our standard 20-year warranty period, we may be subject to unexpected warranty expense; if we are subject to warranty and product liability claims, such claims could adversely affect our business and results of operations.

The possibility of future product failures could cause us to incur substantial expense to repair or replace defective products. We have agreed to indemnify our customers and our distributors in some circumstances against liability from defects in our solar cells. A successful indemnification claim against us could require us to make significant damage payments, which would negatively affect our financial results.

Our current standard product warranty for our solar panel systems include a 10-year warranty period for defects in materials and workmanship and a 20-year warranty period for declines in power performance. We believe our warranty periods are consistent with industry practice. Due to the long warranty period, we bear the risk of extensive warranty claims long after we have shipped product and recognized revenue. We have sold solar panels since September 2007. Any increase in the defect rate of our products would cause us to increase the amount of warranty reserves and have a corresponding negative impact on our results. Although we conduct accelerated testing of our solar panels, our solar panels have not and cannot be tested in an environment simulating the 20-year warranty period. As a result of the foregoing, we may be subject to unexpected warranty expense, which in turn would harm our financial results.

Like other retailers, distributors and manufacturers of products that are used by consumers, we face an inherent risk of exposure to product liability claims in the event that the use of the solar power products into which our solar panels are incorporated results in injury. We may be subject to warranty and product liability claims in the event that our solar power systems fail to perform as expected or if a failure of our solar power systems results, or is alleged to result, in bodily injury, property damage or other damages. Since our solar power products are electricity producing devices, it is possible that our products could result in injury, whether by product malfunctions, defects, improper installation or other causes. In addition, since we only began selling our solar panels in late 2007 and the products we are developing incorporate new technologies and use new installation methods, we cannot predict whether or not product liability claims will be brought against us in the future or the effect of any resulting negative publicity on our business. Moreover, we may not have adequate resources in the event of a successful claim against us. We have evaluated the potential risks we face and believe that we have appropriate levels of insurance for product liability claims. We rely on our general liability insurance to cover product liability claims and have not obtained separate product liability insurance. However, a successful warranty or product liability claim against us that is not covered by insurance or is in excess of our available insurance limits could require us to make significant payments of damages. In addition, quality issues can have various other ramifications, including delays in the recognition of revenue, loss of revenue, loss of future sales opportunities, increased costs associated with repairing or replacing products, and a negative impact on our goodwill and reputation, which could also adversely affect our business and operating results.

Warranty and product liability claims may result from defects or quality issues in certain third-party technology and components that we incorporate into our solar power systems, particularly solar cells and panels, over which we have no control. While our agreements with our suppliers generally include warranties, those provisions may not fully compensate us for any loss associated with third-party

claims caused by defects or quality issues in these products. In the event we seek recourse through warranties, we will also be dependent on the creditworthiness and continued existence of these suppliers.

We offer the industry standard of 20 years for our solar modules and industry standard five (5) years or inverters and balance of system components. Due to the warranty period, we bear the risk of extensive warranty claims long after we have completed a project and recognized revenues. Future product failures could cause us to incur substantial expenses to repair or replace defective products. While we generally pass through manufacturer warranties we receive from our suppliers to our customers, we are responsible for repairing or replacing any defective parts during our warranty period, often including those covered by manufacturers’ warranties. If the manufacturer disputes or otherwise fails to honor its warranty obligations, we may be required to incur substantial costs before we are compensated, if at all, by the manufacturer. Additionally, in September 2007 we began installing our own manufactured solar panels where the warranty responsibility will be borne by us. Furthermore, our warranties may exceed the period of any warranties from our suppliers covering components included in our systems, such as inverters.

Our failure to raise additional capital or generate the significant capital necessary to expand our operations and invest in new products could reduce our ability to compete and could harm our business.

We expect that our existing cash and cash equivalents, together with collections of our accounts receivable and cash flows from operations in 2009, will be sufficient to meet our anticipated cash needs for at least the next twelve months. However, the timing and amount of our working capital and capital expenditure requirements may vary significantly depending on numerous factors, including:

	•		the level and timing of product revenues;
	•		the costs and timing of expansion of product development efforts and the success of these development efforts;
	•		the extent to which our existing and new products gain market acceptance;
	•		the costs and timing of expansion of sales and marketing activities;
	•		competing technological and marketing developments;
	•		the extent of international operations;
	•		the need to adapt to changing technologies and technical requirements;
	•		the existence of opportunities for expansion and for acquisitions of, investments in, complementary businesses, technologies or product lines; and
	•		access to and availability of sufficient management, technical, marketing and financial personnel.

We may not be able to obtain additional financing on acceptable terms, if at all. If we raise additional equity financing, our shareholders may experience significant dilution of their ownership interests and the-per share value of our common stock could decline. If we engage in debt financing, we may be required to accept terms that restrict our ability to incur additional indebtedness and force us to maintain specified liquidity or other ratios, any of which could harm our business, operating results and financial condition. If we need additional capital and cannot raise it on acceptable terms, we may not be able to, among other things:

	•		develop or enhance our products and services;
	•		continue to expand our product development sales and marketing organizations;
	•		acquire complementary technologies, products or businesses;
	•		expand operations, in the United States or internationally;
	•		hire, train and retain employees; or
	•		respond to competitive pressures or unanticipated working capital requirements.

Our failure to do any of these things could seriously harm our business, operating results and financial condition.

We must effectively manage our growth.

Failure to manage our growth effectively could adversely affect our operations. We may increase the number of our manufacturing facilities and products and may plan to expand further the number and diversity of our products in the future and may further increase the number of locations from which we manufacture and sell. Our ability to manage our planned growth will depend substantially on our ability to:

	•		enhance our operational, financial and management systems;
	•		maintain adequate capital resources to pay our production costs before our customers pay us;
	•		expand usage of our facilities and equipment;
	•		successfully integrate our franchise operations while effectively managing our related expenses; and
	•		successfully hire, train and motivate additional employees, including the technical personnel necessary to operate our production facilities and staff our installation teams.

An expansion and diversification of our product range, manufacturing and sales and franchise locations and customer base may result in increases in our overhead and selling expenses. We may also be required to increase staffing and other expenses as well as our expenditures on plant, equipment and property in order to meet the anticipated demand of our customers. Any increase in expenditures in anticipation of future orders that do not materialize would adversely affect our profitability. Customers may require rapid increases in design and production services that place an excessive short-term burden on our resources.

We may not be able to increase or sustain our recent growth rate, and we may not be able to manage our future growth effectively.

We may not be able to continue to expand our business or manage future growth. To do so will require successful execution of expanding our existing manufacturing facilities, developing new manufacturing facilities, ensuring delivery of adequate solar cells, developing more efficient solar power systems, maintaining adequate liquidity and financial resources, and continuing to increase our revenues from operations. Expanding our manufacturing facilities or developing facilities may be delayed by difficulties such as unavailability of equipment or supplies or equipment malfunction. Ensuring delivery of adequate solar cells is subject to many market risks including scarcity, significant price fluctuations and competition. Maintaining adequate liquidity is dependent upon a variety of factors including continued revenues from operations and compliance with our indentures and credit agreements. If we are unsuccessful in any of these areas, we may not be able to achieve our growth strategy and increase production capacity as planned during the foreseeable future.

Our recent expansion has placed, and our planned expansion and any other future expansion will continue to place, a significant strain on our management, personnel, systems and resources. We plan to purchase additional equipment to significantly expand our manufacturing capacity and to hire additional employees to support an increase in manufacturing, research and development and our sales and marketing efforts. We anticipate that we will need to hire a significant number of highly skilled technical, manufacturing, sales, marketing, administrative and accounting personnel. The competition for qualified personnel is intense in our industry. We may not be successful in attracting and retaining sufficient numbers of qualified personnel to support our anticipated growth. To successfully manage our growth and handle the responsibilities of being a public company, we believe we must effectively:

	•		hire, train, integrate and manage additional qualified engineers for research and development activities, sales and marketing personnel, and financial and information technology personnel;
	•		retain key management and augment our management team, particularly if we lose key members;
	•		continue to enhance our customer resource management and manufacturing management systems;
	•		implement and improve additional and existing administrative, financial and operations systems, procedures and controls, including the need to update and integrate our financial internal control systems as well as our ERP system in our China facility with those of our Roseville, California headquarters;

	•		expand and upgrade our technological capabilities; and
	•		manage multiple relationships with our customers, suppliers and other third parties.

We may encounter difficulties in effectively managing the budgeting, forecasting and other process control issues presented by rapid growth. If we are unable to manage our growth effectively, we may not be able to take advantage of market opportunities, develop new solar modules and other products, satisfy customer requirements, execute our business plan or respond to competitive pressures.

We may be unable to achieve our goal of reducing the cost of installed solar systems, which may negatively impact our ability to sell our products in a competitive environment, resulting in lower revenues, gross margins and earnings.

To reduce the cost of installed solar systems, as compared against the current cost, we will have to achieve cost savings across the entire value chain from designing to manufacturing to distributing to selling and ultimately to installing solar systems. We have identified specific areas of potential savings and are pursuing targeted goals. However, such cost savings are especially dependent upon decreasing silicon prices and lowering manufacturing costs. Additionally, we are increasing production capacity at our existing manufacturing facilities while seeking to improve efficiencies. We also expect to develop additional manufacturing capacity. As a result, we expect these improvements will decrease our per unit production costs. However, if we are unsuccessful in our efforts to lower the cost of installed solar systems, our revenues, gross margins and earnings may be negatively impacted in the competitive environment and particularly in the event that governmental and fiscal incentives are reduced or an increase in the global supply of solar cells and solar panels causes substantial downward pressure on prices of our products.

Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price.

We are required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires annual management assessments of the effectiveness of our internal control over financial reporting for our fiscal year ended December 31, 2008 and a report by our independent registered public accounting firm that attests to the effectiveness of our internal control over financial reporting beginning with our fiscal year ending December 31, 2009. Testing and maintaining internal control can divert our management’s attention from other matters that are important to our business. We expect to incur increased expense and to devote additional management resources to Section 404 compliance. We may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 or our independent registered public accounting firm may not be able or willing to issue an unqualified report on the effectiveness of our internal control over financial reporting. If we conclude that our internal control over financial reporting is not effective, we cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or their effect on our operations since there is presently no precedent available by which to measure compliance adequacy. If either we are unable to conclude that we have effective internal control over financial reporting or our independent registered public accounting firm is unable to provide us with an unqualified report, then investors could lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock.

Risks Related to Operations in China

We are dependent on our Chinese manufacturing operations.

Our current manufacturing operations are located in China and our sales and administrative offices are in the U.S. The geographical distances between these facilities create a number of logistical and communications challenges. In addition, because of the location of the manufacturing facilities in China, we could be affected by economic and political instability there, including problems related to labor unrest, lack of developed infrastructure, variances in payment cycles, currency fluctuations, overlapping taxes and multiple taxation issues, employment and severance taxes, compliance with local laws and regulatory requirements, and the burdens of cost and compliance with a variety of foreign laws. Moreover, inadequate development or maintenance of infrastructure in China, including adequate power and water supplies, transportation, raw materials availability or the deterioration in the general political, economic or social environment could make it difficult, more expensive and possibly prohibitive to continue to operate our manufacturing facilities in China.

We may not be able to retain, recruit and train adequate management and production personnel.

Our continued operations are dependent upon our ability to identify, recruit and retain adequate management and production personnel in China. We require trained graduates of varying levels and experience and a flexible work force of semi-skilled operators. Many of our current employees come from the more remote regions of China as they are attracted by the wage differential and prospects afforded by our operations. With the growth currently being experienced in China and competing opportunities for our personnel, there can be no guarantee that a favorable employment climate will continue and that wage rates where we manufacture our products in China will continue to be internationally competitive.

The Chinese government could change its policies toward, or even nationalize, private enterprise, which could harm our operations.

All of our manufacturing is conducted in China. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. Over the past several years, the Chinese government has pursued economic reform policies, including the encouragement of private economic activities and decentralization of economic regulation. The Chinese government may not continue to pursue these policies or may significantly alter them to our detriment from time to time without notice. Changes in policies by the Chinese government resulting in changes in laws or regulations, our interpretation of laws or regulations, or the imposition of confiscatory taxation, restrictions on currency conversion or imports and sources of supply could materially and adversely affect our business and operating results. The nationalization or other expropriation of private enterprises by the Chinese government could result in the total loss of our investment in China.

Our results could be harmed if compliance with new environmental regulations becomes too burdensome.

Our manufacturing processes may result in the creation of small amounts of hazardous and/or toxic wastes, including various gases, epoxies, inks, solvents and other organic wastes. We are subject to Chinese governmental regulations related to the use, storage and disposal of such hazardous wastes. The amounts of our hazardous waste may increase in the future as our manufacturing operations increase, and therefore, our cost of compliance is likely to increase. In addition, sewage produced by dormitory facilities which house our labor force is coming under greater environmental legislation. Although we believe we are operating in compliance with applicable environmental laws, there is no assurance that we will be in compliance consistently as such laws and regulations, or our interpretation and implementation, change. Failure to comply with environmental regulation could result in the imposition of fines, suspension or halting of production or closure of manufacturing operations. Additionally, we may incur substantial costs to comply with future regulations, which could adversely impact our results of operations.

The Chinese legal system has inherent uncertainties that could materially and adversely impact our ability to enforce the agreements governing our operations.

We conduct our manufacturing through our wholly owned Chinese subsidiary, IAS Electronics (Shenzhen) Co., Ltd. We lease the actual factory. The performance of the agreements and the operations of our factory are dependent on our relationship with the local government. Our operations and prospects would be materially and adversely affected by the failure of the local government to honor our agreements or an adverse change in the laws governing us. In the event of a dispute, enforcement of these agreements could be difficult in China. China tends to issue legislation which is subsequently followed by implementing regulations, interpretations and guidelines that can render immediate compliance difficult. Similarly, on occasion, conflicts are introduced between national legislation and implementation by the provinces that take time to reconcile. These factors can present difficulties in our compliance. Unlike the U.S., China has a civil law system based on written statutes in which judicial decisions have limited precedential value. The Chinese government has enacted laws and regulations to deal with economic matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, the Chinese government experience in implementing, interpreting and enforcing these laws and regulations is limited, and our ability to enforce commercial claims or to resolve commercial disputes is therefore unpredictable. These matters may be subject to the exercise of considerable discretion by agencies of the Chinese government, and forces and factors unrelated to the legal merits of a particular matter or dispute may influence our determination, which may limit legal protections available to us. In addition, any litigation in China may result in substantial costs and diversion of resources and management attention.

Because our operations are international, we are subject to significant worldwide political, economic, legal and other uncertainties.

We are incorporated in the United States and have subsidiaries in the U.S., Hong Kong S.A.R. and the Peoples’ Republic of China. Because we manufacture all of our products in China, substantially all of the net book value of our fixed assets is located there. Although we currently sell our products only to customers in the U.S., we may sell our products to customers located outside of the U.S. in the future. Protectionist trade legislation in the U.S. or foreign countries, such as a change in export or import legislation, tariff

or duty structures, or other trade policies, could adversely affect our ability to sell products in these markets, or even to purchase raw materials or equipment from foreign suppliers. Moreover, we are subject to a variety of U.S. laws and regulations, changes to which may affect our ability to transact business with non-U.S. customers or in certain product categories.

We are also subject to numerous national, state and local governmental regulations, including environmental, labor, waste management, health and safety matters and product specifications. We are subject to laws and regulations governing our relationship with our employees, including: wage and hour requirements, working and safety conditions, citizenship requirements, work permits and travel restrictions. These include local labor laws and regulations, which may require substantial resources for compliance. We are subject to significant government regulation with regard to property ownership and use in connection with our leased facility in China, import restrictions, currency restrictions and restrictions on the volume of domestic sales and other areas of regulation, all of which impact our profits and operating results.

We are exposed to the limit of the availability and price of electricity.

The primary energy supply to our operations in China is electricity from the local power company. There is not an extensive and resilient connection to a national or regional power grid. Thus, we may be exposed to power outages and shut downs which our standby generators would only partially mitigate. Fluctuations in world oil prices and supply could affect our supply and cost of electricity. The electricity producers that supply us with electricity in our facility in China generate their electricity from oil, and our back-up generators create electricity from diesel fuel. Accordingly, fluctuations in world oil product prices and supply could affect our supply and cost of electricity at our manufacturing facilities.

We face risks associated with international trade and currency exchange.

We transact business in a variety of currencies including the U.S. dollar and the Chinese Yuan Renminbi, or RMB. Although we make all sales in U.S. dollars, we incur approximately 20% of our operating expenses, such as payroll, land rent, electrical power and other costs associated with running our facilities in China, in RMB. Changes in exchange rates would affect the value of deposits of currencies we hold. In July 2005 the Chinese government announced that the RMB would be pegged to a basket of currencies, making it possible for the RMB to rise and fall relative to the U.S. dollar. We do not currently hedge against exposure to currencies. We cannot predict with certainty future exchange rates and thus their impact on our operating results. We do not have any long-term debt valued in RMB. Movements between the U.S. dollar and the RMB could have a material impact on our profitability.

Changes to Chinese tax incentives and heightened efforts by the Chinese tax authorities to increase revenues could subject us to greater taxes.

Under applicable Chinese law, we have been afforded profits tax concessions by Chinese tax authorities on our operations in China for specific periods of time, which has lowered our cost of operations in China. However, the Chinese tax system is subject to substantial uncertainties with respect to interpretation and enforcement. Recently, the Chinese government has attempted to augment its revenues through heightened tax collection efforts. Continued efforts by the Chinese government to increase tax revenues could result in revisions to or changes to tax incentives or new interpretations by the Chinese government of the tax benefits we should be receiving currently, which could increase our future tax liabilities or deny us expected concessions or refunds.

Future outbreaks of severe acute respiratory syndrome or other communicable diseases may have a negative impact on our business and operating results.

In 2003, several economies in Asia, including China, where our operations are located, were affected by the outbreak of severe acute respiratory syndrome, or SARS. Although there have been no recent outbreaks of SARS or other communicable diseases, if there is a recurrence of an outbreak of SARS, or similar infectious or contagious diseases such as avian flu, it could adversely affect our business and operating results. For example, a future SARS outbreak could result in quarantines or closure to our factory, and our operations could be seriously disrupted as the majority of our work force is housed in one dormitory. In addition, an outbreak could negatively affect the willingness of our customers, suppliers and managers to visit our facilities.

Risks Related to our Common Stock

We have not paid and are unlikely to pay cash dividends in the foreseeable future.

We have not paid any cash dividends on our common stock and may not pay cash dividends in the future. Instead, we intend to apply earnings, if any, to the expansion and development of the business. Thus, the liquidity of your investment is dependent upon active trading of our stock in the market.

Any future financings and subsequent registration of common stock for resale will result in a significant number of shares of our common stock available for sale, and such sales could depress our common stock price. Further, no assurances can be given that we will not issue additional shares which will have the effect of diluting the equity interest of current investors. Moreover, sales of a substantial number of shares of common stock in any future public market could adversely affect the market price of our common stock and make it more difficult to sell shares of common stock at times and prices that either you or we determine to be appropriate.

We expect our stock price to be volatile.

Should a public market develop, the trading price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including:

	•		the depth and liquidity of the market for the common stock;
	•		developments generally affecting the energy industry;
	•		investor perceptions of the business;
	•		changes in securities analysts’ expectations or our failure to meet those expectations;
	•		actions by institutional or other large stockholders;
	•		terrorist acts;
	•		actual or anticipated fluctuations in results of operations;
	•		announcements of technological innovations or significant contracts by us or our competitors;
	•		introduction of new products by us or our competitors;
	•		our sale of common stock or other securities in the future;
	•		changes in market valuation or earnings of our competitors;
	•		changes in the estimation of the future size and growth rate of the markets;
	•		results of operations and financial performance; and
	•		general economic, industry and market conditions.

In addition, the stock market in general often experiences substantial volatility that is seemingly unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock, should a public market develop.

Any sale of a substantial amount of our stock could cause our stock price to drop.

As part of the terms of private placements, we registered for resale approximately 26,056,825 shares of our common stock, including 2,289,580 shares underlying warrants, with the SEC, representing approximately 69% of our outstanding common stock as of December 31, 2008. Gerald Moore beneficially owns approximately 2,787,031, or approximately 7.4% of the issued and outstanding shares of our common stock. None of these shareholders are obligated to retain our shares. Any sale by these or other holders of a substantial amount of common stock in any future public market, or the perception that such a sale could occur, could have an adverse effect on the market price of our common stock. Such an effect could be magnified if our stock is relatively thinly traded.

There may not be an active public market for our common stock in the near term and you may have to hold your common stock for an indefinite period of time.

Although our common stock is trading on the OTC Bulletin Board, there currently is a limited trading market for the common stock, and we cannot assure you that any market will further develop or be sustained. Because our common stock is expected to be thinly traded, you cannot expect to be able to liquidate your investment in case of an emergency or if you otherwise desire to do so. It may be difficult for you to resell a large number of your shares of common stock in a short period of time or at or above their purchase price.

Our stock may be governed by the “penny stock rules,” which impose additional requirements on broker-dealers who make transactions in our stock.

SEC rules require a broker-dealer to provide certain information to purchasers of securities traded at less than $5.00, which are not traded on a national securities exchange or quoted on The NASDAQ Stock Market. Since our common stock is not currently traded on an “exchange,” if the future trading price of our common stock is less than $5.00 per share, our common stock will be considered a “penny stock,” and trading in our common stock will be subject to the requirements of Rule 15g-9 under the Securities Exchange Act of 1934 (the “Penny Stock Rules”). The Penny Stock Rules require a broker-dealer to deliver a standardized risk disclosure document prepared by the SEC that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer must also give bid and offer quotations and broker and salesperson compensation information to the prospective investor orally or in writing before or with the confirmation of the transaction. In addition, the Penny Stock Rules require a broker-dealer to make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction before a transaction in a penny stock. These requirements may severely limit the liquidity of securities in the secondary market because few broker-dealers may be likely to undertake these compliance activities. Therefore, unless an exemption is available from the Penny Stock Rules, the disclosure requirements under the Penny Stock Rules may have the effect of reducing trading activity in our common stock, which may make it more difficult for investors to sell.

Our shareholders may experience future dilution.

Our charter permits our board of directors, without shareholder approval, to authorize shares of preferred stock. The board of directors may classify or reclassify any preferred stock to set the preferences, rights and other terms of the classified or reclassified shares, including the issuance of shares of preferred stock that have preference rights over the common stock with respect to dividends, liquidation, voting and other matters or shares of common stock having special voting rights. Further, substantially all shares of common stock for which our outstanding stock options are exercisable are, once they have been purchased, eligible for immediate sale in the public market.

The issuance of additional shares of our capital stock or the exercise of stock options or warrants could be substantially dilutive to your shares and may negatively affect the market price of our common stock.

If we do not meet the listing standards established by The NASDAQ Stock Market or other similar markets, our common stock may not become listed for trading on one of those markets.

As soon as reasonably practicable, we intend to apply to list our common stock for trading on The NASDAQ Stock Market, on either the NASDAQ Global Market tier or The NASDAQ Capital Market tier. The NASDAQ Stock Market has established certain quantitative criteria and qualitative standards that companies must meet in order to become and remain listed for trading on these markets. We cannot guarantee that we will be able to meet all necessary requirements for listing; therefore, we cannot guarantee that our common stock will be listed for trading on The NASDAQ Stock Market or other similar markets.

ITEM 2 — PROPERTIES

      Our manufacturing facilities consist of 123,784 square feet, including 101,104 square feet of factories and 23,680 square feet of dorms, situated in an industrial suburb of Shenzhen, Southern China known as Long Gang. Only the state may own land in China. Therefore, we lease the land under our facilities, and our lease agreement gives us the right to use the land until July 31, 2009 at an annual rent of $193,350. We have an option to renew this lease for 3 additional years on the same terms.

      Our corporate headquarters are located in Roseville, California in a space of approximately 19,000 square feet. The five year lease commenced on August 1, 2007 and expires in July 2012. The rent is currently $342,972 per year for the first year, $351,540 for the second year, $360,336 for the third year, $369,336 for the fourth year and $378,576 for the remainder of the lease. The Company has an option to renew for an additional five years.

ITEM 3 — LEGAL PROCEEDINGS

      We are not a party to any pending legal proceeding. In the normal course of operations, we may have disagreements or disputes with employees, vendors or customers. These disputes are seen by our management as a normal part of business especially in the construction industry, and there are no pending actions currently or no threatened actions that management believes would have a significant material impact on our financial position, results of operations or cash flows.

ITEM 4 — SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      None.

PART II

ITEM 5 — MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

     Our common stock began trading on the Over the Counter Bulletin Board (OTCBB) under the symbol “SOPW.OB” on September 25, 2007. The quarterly high and low bid information in U.S. dollars on the OTCBB of our common shares during the periods indicated are as follows:

		High Bid				Low Bid
Fiscal Year Ending December 31, 2008
Fourth Quarter to December 31, 2008		$	1.43			$	0.41
Third Quarter to September 30, 2008		$	1.72			$	1.04
Second Quarter to June 30, 2008		$	1.80			$	1.05
First Quarter to March 31, 2008		$	4.44			$	0.95
Fiscal Year Ending December 31, 2007
Fourth Quarter to December 31, 2007		$	4.65			$	2.65
From September 25, 2007 to September 30, 2007		$	5.00			$	2.83

     These Over-the-Counter Bulletin Board bid quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. On December 31, 2008 and 2007, the last reported sale price for our common stock was $0.47 and $3.80 per share, respectively.

     We registered 18,753,334 shares of our common stock under the Securities Act of 1933, as amended for sale to certain stockholders who also hold certain registration rights, including 800,000 shares of our common stock that are issuable upon the exercise of an outstanding warrant by our placement agent, Roth Capital Partners, LLC. The shares were registered on Form SB-2 with the SEC effective September 14, 2007.

     We registered 7,303,491 shares of our common stock under the Securities Act of 1933, as amended for sale to certain stockholders who also hold certain registration rights, including 1,489,580 shares of our common stock that are issuable upon the exercise of outstanding warrants. The outstanding warrants included 135,417 issued to our placement agent, Needham & Company, LLC. The shares and underlying warrants were registered on Form SB-2 effective with the SEC on January 22, 2008.

Stockholders

     As of March 12, 2009 we had approximately 235 holders of record of our common stock.

Dividends

     We have paid no dividends on our common stock since our inception and may not do so in the future.

Recent Sales of Unregistered Securities

     On August 28, 2008, the Company issued 6,000 shares of its common stock pursuant to a resolution of the Company’s Board of Directors, on August 20, 2008, as a gift to the children of a deceased employee. The shares were fair-valued at $1.30, the closing price of the Company’s common stock on August 20, 2008 and the Company recorded approximately $8,000 in expense related to this transaction.

     On June 4, 2008, in connection with consulting services, we issued to Janice Lin 10,000 shares of our common stock fair-valued at $1.50 per share.

     On December 20, 2007, in connection with our private placement of 4,513,911 shares of our common stock, we issued to the participants in the private placement warrants to purchase 1,354,163 shares of our common stock at $3.90 per share until December 20, 2012 and for services provided by Needham & Company, LLC we issued a warrant to purchase 135,417 shares of our common stock at $3.90 per share until December 20, 2012.

     On September 1, 2007, in connection with consulting services provided to the Company we issued to Steven Kay a warrant to purchase 50,000 shares of our common stock at $1.00 until September 1, 2012. This warrant was exercised by payment of $50,000 to the Company and 50,000 shares of the Company’s common stock were issued on November 26, 2007

     On August 2007, we issued 42,500 shares of our common stock in settlement of an obligation. The shares were fair-valued at $1.00.

     On August 30, 2007, in settlement of an obligation, we issued the share holders of Sundance Technologies warrants to purchase 76,722 shares of our common stock at $1.00 until August 30, 2012.

     On April 9, 2007, we completed a private placement of 500,000 shares of common stock at a purchase price of $1.00 per share to a foreign accredited investor.

     On February 15, 2007, we issued 31,435 shares of our common stock in settlement of an obligation. The shares were fair-valued at $1.00.

Securities Authorized for Issuance under Equity Compensation Plans

     On November 15, 2006, subject to approval of the Stockholders, the Company adopted the 2006 Equity Incentive Plan reserving nine percent of the outstanding shares of common stock of the Company (“2006 Plan”). On February 7, 2007, our stockholders approved the 2006 Plan reserving nine percent of the outstanding shares of common stock of the Company pursuant to the Definitive Proxy on Schedule 14C filed with the Commission on January 22, 2007.

     As of December 31, 2008, we have outstanding 2,156,900 service-based and 200,000 performance-based stock options to purchase shares of our common stock issued under the 2006 Plan. The service-based and performance-based options have an exercise price from $1.00 to $3.45 and are subject to vesting schedules and terms. As of December 31, 2008, we had 2,670,267 service-based, performance-based options and restricted stock awards outstanding. The following table provides aggregate information as of December 31, 2008 with respect to all compensation plans (including individual compensation arrangements) under which equity securities are authorized for issuance.

(a) Number of

Number of securities

securities to be

remaining available for

issued upon

future issuance under

exercise of

Weighted-average

equity compensation

of outstanding

exercise price of

plans (excluding

options, warrants

outstanding options,

securities reflected

Plan Category

and rights

warrants and rights

in column (a))

Equity Compensation Plans approved by security holders

2,356,900

$

1.28

1,408,578

(1)

Equity Compensation Plans not approved by security holders

—

Total

2,356,900

$

1.28

1,408,578

(1)

Issuer Purchase of Equity Securities

     None

ITEM 7 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion highlights what we believe are the principal factors that have affected our financial condition and results of operations as well as our liquidity and capital resources for the periods described. This discussion should be read in conjunction with our financial statements and related notes appearing elsewhere in this Annual Report. This discussion contains “forward-looking statements,” which can be identified by the use of words such as “expects,” “plans,” “will,” “may,” “anticipates,” “believes,” “should,” “intends,” “estimates” and other words of similar meaning. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied by these forward-looking statements. Such risks and uncertainties include, without limitation, the risks described in Part I on page 3 of this Annual Report, and the risks described in Item 1A above.

     The following discussion is presented on a consolidated basis, and analyzes our financial condition and results of operations for the years ended December 31, 2008 and 2007.

     Unless the context indicates or suggests otherwise reference to “we”, “our”, “us” and the “Company” in this section refers to the consolidated operations of Solar Power, Inc., a California corporation, DRCI and Solar Power, Inc., a Nevada corporation (formerly Welund Fund, Inc.) on a post-Reincorporation basis, and references to “SPI-Nevada” refers to Solar Power, Inc., a Nevada corporation (formerly Welund Fund, Inc.) prior to the Merger and Reincorporation.

Overview

     We manufacture photovoltaic panels or modules and balance of system components in our Shenzhen, China manufacturing facility. We sell these products through three distinct sales channels; 1) direct product sales to international markets, 2) our own use in building commercial and residential solar projects in the U.S., and 3) it is our intent to sell our products to a network of franchisees who will serve the U.S. residential market through our wholly-owned franchise company Yes! Solar, Inc. In addition to our solar revenue, we generate revenue from our legacy cable, wire and mechanical assemblies segment. Our cable wire and mechanical assembly products are also manufactured in our China facility and sold into the transportation and telecommunications markets. Currently, the factory has an annual production capacity of approximately 50 megawatts of photovoltaic solar modules and balance of system products. The un-utilized capacity is being reserved for photovoltaic module and balance of system expansion.

     Our business is conducted through our wholly-owned subsidiaries, SPIC, Inc. (“SPIC”), Yes! Solar, Inc. (“YES”), Yes! Construction Services, Inc. (“YCS”), International Assembly Solutions Limited (a Hong Kong company) (“IASHK”) and IAS Electronics (Shenzhen) Co., Ltd. (“IAS Shenzhen”).

     SPIC and YCS are engaged in the business of design, sales and installation of photovoltaic (“PV”) solar systems for commercial, industrial and residential markets. YCS is also a company-owned franchise territory.

     YES is engaged in the sale and administration of our franchise operations. In March 2008, the Company entered into its first franchise sale agreement. As of December 31, 2008, YES completed franchise sales of five franchise territories.

     IASHK is engaged in sales of our cable, wire and mechanical assemblies business.

     IAS Shenzhen is engaged in manufacturing our solar modules, will manufacture our balance of products and continues to be engaged in our cable, wire and mechanical assemblies business.

Background and Corporate History

     We became the registrant through a reverse merger with Solar Power, Inc., a Nevada corporation (formerly Welund Fund, Inc.), on December 29, 2006, and we are considered the accounting acquirer and registrant following that merger. Welund Fund, Inc. was originally incorporated in the State of Delaware on July 16, 2002 under that name, and effective January 2006, pursuant to authorization of its stockholders, it changed its domicile from the State of Delaware to the State of Nevada through a merger with and into its then wholly-owned subsidiary, which was a Nevada corporation. On October 4, 2006, it changed its name from Welund Fund, Inc. to Solar Power, Inc., and it affected a one-for-three reverse stock split. For purposes of discussion and disclosure, we refer to the

predecessor as Solar Power, Inc., a Nevada Corporation (formerly Welund Fund, Inc.), to distinguish it from the registrant and accounting acquirer, Solar Power, Inc., a California corporation.

     On August 6, 2006, Solar Power, Inc., a California corporation, entered into share exchange agreement with all the shareholders of International Assembly Solutions, Limited (“IAS-HK”), which was incorporated in Hong Kong on January 18, 2005 with limited liability. Solar Power, Inc. a California corporation was originally incorporated in the State of California to facilitate creation of a U.S. holding company for IAS-HK operations and to engage in sales, installation and integration of photovoltaic systems in the U.S. Pursuant to the share exchange agreements, the equity owners of IAS-HK transferred all their equity interest in IAS HK in exchange for a total of 14,000,000 shares of Solar Power, Inc. a California corporation, in November 2006. As a result, IAS-HK became a wholly-owned subsidiary of Solar Power, Inc., a California corporation. There were a total of sixteen shareholders in IAS Hong Kong including our CEO, Stephen Kircher.

     On August 23, 2006, Solar Power, Inc., a California corporation entered into an Agreement and Plan of Merger with Welund Acquisition Corp., a Nevada corporation (“Merger Sub”) a wholly-owned subsidiary of Solar Power, Inc., a Nevada corporation (formerly Welund Fund, Inc.). On December 29, 2006, Solar Power, Inc., a California corporation, merged with Merger Sub and Solar Power, Inc., a California corporation became a wholly-owned subsidiary of Solar Power, Inc., a Nevada corporation (formerly Welund Fund, Inc.). In connection with the Merger Solar Power, Inc., a Nevada corporation (formerly Welund Fund, Inc.) issued the existing shareholders of Solar Power, Inc., a California corporation an aggregate of 14,500,000 shares of Solar Power, Inc., a Nevada corporation (formerly Welund Fund, Inc.) restricted common stock and substituted 2,000,000 restricted stock awards and options of Solar Power, Inc., a California corporation with Solar Power, Inc., a Nevada corporation (formerly Welund Fund, Inc.) restricted stock awards and options to purchase shares of Solar Power, Inc., a Nevada corporation (formerly Welund Fund, Inc.) common stock. On February 15, 2007, we re-domiciled in the State of California.

     In February 2005 Dale Renewables Consulting, Inc., (“DRCI”), a California corporation was formed to engage in the business of solar modules and systems installation, integration and sales. In May 2006, Solar Power, Inc., a California corporation, and Dale Stickney Construction, Inc. (“DSCI”), the parent of DRCI, agreed in principle on the acquisition of DRCI by Solar Power, Inc., a California corporation, and entered into an operating agreement with DRCI providing that Solar Power, Inc., a California corporation would effectively be responsible for all current operations, liabilities, and revenues, effective June 1, 2006, as contemplated by the proposed merger agreement.

     In August 2006, Solar Power, Inc., a California corporation, and DRCI completed the Agreement and Plan of Merger (the “Merger Agreement”), including the Assignment and Interim Operating Agreement (the “Operating Agreement”) which was an exhibit to the Merger Agreement. The Operating Agreement obligated Solar Power, Inc., a California corporation, to provide all financing necessary for DRCI’s operations subsequent to June 1, 2006 until the consummation of the acquisition in exchange for all the revenues generated from its operations. The Operating Agreement also provided that Solar Power, Inc., a California corporation, was to provide all management activities of DRCI on its behalf from June 1, 2006 until the consummation of the acquisition.

     On November 15, 2006, the Company completed the acquisition of DRCI, paying $1,115,373 in cash in exchange for 100% of the outstanding shares of DRCI. The acquisition of DRCI provided Solar Power, Inc., a California corporation, with an experienced photovoltaic sales and installation team.

     The Company has allocated the purchase price of $1,115,373 to estimated fair values of the acquired assets as follows:

Inventories		$	35,341
Other current assets			637,089
Plant and equipment			7,995
Goodwill			434,948
Total		$	1,115,373

     On April 12 and 17, 2007 the Company issued standby letters of credit totaling $800,000 to two suppliers, Sharp Electronics and Kyocera Solar. The letters of credit were issued in support of the Company’s line of credit with these suppliers. These suppliers have no interest in the Company and are not considered related parties. The term of the letters of credit are twelve months and are collateralized by $800,000 of the Company’s cash deposits. These letters of credit were released by Sharp Electronics and Kyocera Solar and cancelled in January 2008.

     On May 7, 2007, the Company entered into a lease for the location of the Company’s first energy outlet. The store is located in Roseville, California and has approximately 2,000 square feet. The term of the lease is sixty three months commencing on October 20, 2007, with an initial rent of approximately $78,000 per year and has an option to renew for an additional five years.

     On June 5, 2007, the Company entered into a capitalized lease agreement with California First Leasing Corporation to finance the purchase of approximately $581,000 of software and hardware. The term of the lease is thirty-six months; the Company paid an initial security deposit of approximately $9,000 and secured the lease with a letter of credit of $450,825 collateralized by an equal amount of the Company’s cash deposits. As of December 31, 2008, the Company owed approximately $388,000 on this lease agreement.

     On June 8, 2007, the Company issued a standby letter of credit in the amount of $1,000,000 in favor of China Merchants Bank as collateral for the line of credit of its subsidiary, IAS Electronics (Shenzhen) Co., Ltd. The letter of credit is for a term of one year and is secured by the Company’s cash deposits. In June, 2008, the line of credit was repaid in full and the letter of credit was released by China Merchants Bank.

     On June 20, 2007, the Company issued a standby letter of credit to California First Leasing Corporation in the amount of $284,367 as security for a capital lease agreement. The term of the letter of credit is one year and is secured by the Company’s cash deposits. On July 31, 2007 this letter of credit was increased to $601,100 to secure an increase to principal and interest to the capital lease agreement. Under the terms of the lease with California First Leasing Corporation the required amount of the letter of credit is reduced annually as the outstanding balance of the lease decrease. On October 1, 2008 the amount of the letter of credit was reduced to approximately $450,825 for an additional twelve months. At December 31, 2008 the amount outstanding on the letter of credit to California First Leasing Corporation was $450,825 collateralized by an equal amount of the Company’s cash deposits.

     On June 25, 2007, the Company entered into an agreement with China Merchants Bank for a working capital line of credit through its wholly-owned subsidiary, IAS Electronics (Shenzhen) Co., Ltd. in the amount of $900,000. The term of the agreement is one year with an annual interest rate of 6.75 percent. The line is secured by a $1,000,000 standby letter of credit collateralized by the Company’s cash deposits. In June 2008, this working capital line of credit was repaid in full and the letter of credit released by China Merchants Bank.

     On July 25, 2007, the Company entered into an office lease for the relocation of the Company headquarters. The building is located at 1115 Orlando Avenue in the city of Roseville, California and has approximately 19,000 square feet. The term of the lease is five years commencing on August 1, 2007, with an initial rent of approximately $343,000 per year and has an option to renew for an additional five years.

     On August 14, 2007, through its wholly-owned subsidiary Yes! Solar, Inc., the Company filed with the State of California Department of Corporations a Uniform Franchise Offering Circular (“UFOC”) for approval and Solar Power, Inc. executed a Guarantee of Performance of Yes! Solar, Inc. to the State of California Department of Corporations. The Company has received approval of the UFOC on November 21, 2007. As of December 31, 2008, the Company had completed five franchise territory sales.

     On December 13, 2007, the Company and its wholly-owned subsidiary, Yes! Solar, Inc. (“YES”) entered into a Retailer Program Agreement (the “Agreement”) with GE Money Bank to provide to YES retail customers a vehicle to finance solar systems purchased from YES. The agreement provides that the Company will provide a standby letter of credit equal to the greater of $50,000 or one percent of sales under the Agreement. A standby letter of credit in the amount of $50,000 was issued on November 14, 2007 as a condition to the execution of the Agreement. The term of the letter of credit was renewed for an additional year on November 14, 2008. As of December 31, 2008 there were no sales under this Agreement.

     Management is considering the impact of the following industry trends as they impact the manufacturing of complete photovoltaic systems and planned business model:

•

Solar cell pricing trends around the world: Recently the key material in the production of solar cells (silicon) has been decreasing in price due to the global financial crisis. Solar cells are the major component cost in a photovoltaic module. The Company has responded by seeking longer-term supply agreements for solar cells at current market rates. To date the Company has entered into one long-term supply agreement for solar cells at which the price is fixed, but there is no financial commitment on the part of the Company to take delivery of cells. Our intent is secure ample solar cell supply to meet our growth needs and to avoid the risk of long-term contract pricings with suppliers whose products are expected to see a decline in the average selling price. Industry experts believe that additional planned expansion of silicon processing factories coming on

			line will produce enough raw materials to create an oversupply on projected demand. Failure to effectively manage our supply will hinder our expected growth and our component costs may have an adverse affect on the Company’s profitability.
	•		Government subsidies: Federal and State subsidies relating directly to solar installations are an important factor in the planned growth of the solar industry. These subsidies are very important to growing the market for photovoltaic systems because they provide a significant economic incentive to all buyers. Without these incentives, industry growth would likely stall. These regulations are constantly being amended and will have a direct effect on our rollout of our planned franchise network among those states that offer superior incentives to the solar industry.
	•		Global economic conditions: While there has been deterioration in the global economic condition of the financial markets, affecting most segments of industry and commerce, the Company is positioned in the renewable energy segment which remains strong. Since our customers may depend on financial markets for financing of solar installations, the Company is responding by seeking financing sources for its customers. Failure to secure these sources may have an adverse affect on the Company’s business opportunities and profitability.

Critical Accounting Policies and Estimates

     Inventories — Certain factors could impact the realizable value of our inventory, so we continually evaluate the recoverability based on assumptions about customer demand and market conditions. The evaluation may take into consideration historic usage, expected demand, anticipated sales price, product obsolescence, customer concentrations, product merchantability and other factors. The reserve or write-down is equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, inventory reserves or write-downs may be required that could negatively impact our gross margin and operating results.

     Goodwill — Goodwill resulted from our acquisition of Dale Renewables Consulting, Inc. We perform a goodwill impairment test on an annual basis and will perform an assessment between annual tests in certain circumstances. The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment at many points during the analysis. In estimating the fair value of our business, we make estimates and judgments about our future cash flows. Our cash flow forecasts are based on assumptions that are consistent with the plans and estimates we use to manage our business.

     Revenue recognition — The Company’s three primary business segments include photovoltaic installation, integration and sales, franchise operations and cable, wire and mechanical assemblies.

          Photovoltaic Installation, integration and sales — In our photovoltaic systems installation, integration and product sales segment, revenue on product sales is recognized when there is evidence of an arrangement, title and risk of ownership have passed (generally upon delivery), the price to the buyer is fixed or determinable and collectability is reasonably assured. Customers do not have a general right of return on products shipped therefore we make no provisions for returns. During the quarter ended March 31, 2008, the Company did recognize one product sale on a bill and hold arrangement. There have been no subsequent bill and hold sales recognized by the Company. In this instance the customer did not have sufficient facilities to store the product and asked that we store the product for them. Since all criteria for revenue recognition had been met the Company recognized revenue on this sale.

Revenue on photovoltaic system construction contracts is recognized using the percentage of completion method of accounting. At the end of each period, the Company measures the cost incurred on each project and compares the result against its estimated total costs at completion. The percent of cost incurred determines the amount of revenue to be recognized. Payment terms are generally defined by the contract and as a result may not match the timing of the costs incurred by the Company and the related recognition of revenue. Such differences are recorded as costs and estimated earnings in excess of billings on uncompleted contracts or billings in excess of costs and estimated earnings on uncompleted contracts. The Company determines its customer’s credit worthiness at the time the order is accepted. Sudden and unexpected changes in customer’s financial condition could put recoverability at risk.

In our solar photovoltaic business, contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs. Selling and general and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Profit incentives are included in revenues when their realization is reasonably assured.

The assets, “Costs and estimated earnings in excess of billings on uncompleted contracts” represents revenues recognized in excess of amounts billed. The liability, “Billings in excess of costs and estimated earnings on uncompleted contracts,” represents billings in excess of revenues recognized.

          Franchise Operations — The Company began selling franchise territories in fiscal 2008. The Company did not recognize any franchise revenue in its fiscal 2008 financial statements. The Company has adopted the provisions of Statement of Financial Accounting Standards No. 45 (as amended) “Accounting for Franchise Fee Revenue” (“SFAS 45”) which requires that revenue shall be recognized when all the material services or conditions relating to the sale have been substantially met. The Company has determined that when the franchisee places its first order for a solar installation all the material services or conditions will be deemed to have been met. At December 31, 2008 the Company had $350,000 of deferred revenue included in its financial statements from franchise fees.

          Cable, wire and mechanical assemblies — In our cable, wire and mechanical assemblies business the Company recognizes the sales of goods when there is evidence of an arrangement, title and risk of ownership have passed (generally upon delivery), the price to the buyer is fixed or determinable and collectability is reasonably assured. Generally there are no formal customer acceptance requirements or further obligations related to our assembly services once we ship our products. Customers do not have a general right of return on products shipped therefore we make no provisions for returns. We make determination of our customer’s credit worthiness at the time we accept their order.

     Product Warranties — We offer the industry standard of 20 years for our solar modules and industry standard five (5) years on inverter and balance of system components. Due to the warranty period, we bear the risk of extensive warranty claims long after we have shipped product and recognized revenue. In our wire and mechanical assembly business, historically our warranty claims have not been material. In our solar photovoltaic business our greatest warranty exposure is in the form of product replacement. Until the third quarter of fiscal 2007, the Company purchased its solar panels from third-party suppliers and since the third-party warranties are consistent with industry standards we considered our financial exposure to warranty claims immaterial. Certain photovoltaic construction contracts entered into during the year ended December 31, 2007 included provisions under which the Company agreed to provide warranties to the buyer, and during the quarter ended September 30, 2007, the Company began installing its own manufactured solar panels. In our cable, wire and mechanical assembly business our current standard product warranty for our mechanical assembly product ranges from one to five years. The Company records the provision for the estimated warranty exposure on these contracts within cost of sales. Since the Company does not have sufficient historical data to estimate its exposure, we have looked to historical data reported by other solar system installers and manufacturers. The accrual for warranty claims consisted of the following at December 31, 2008 and 2007 (in thousands):

		2008				2007
Beginning balance		$	103			$	—
Provision charged to warranty expense			641				103
Less: warranty claims			(1	)			—
Ending balance		$	743			$	103

     Stock based compensation — Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment.” (“SFAS No. 123(R)”) which requires the Company to measure the stock-based compensation costs of share-based compensation arrangements based on the grant-date fair value and recognizes the costs in the financial statements over the employee requisite service period. Stock-based compensation expense for all stock-based compensation awards granted was based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). Prior to 2006 the Company had not issued stock options or other forms of stock-based compensation.

Determining the appropriate fair value model and calculating the fair value of share-based payment awards require the input of highly subjective assumptions, including the expected life of the share-based payment awards and stock price volatility. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the stock-based compensation expense could be significantly different from what we have recorded in the current period.

     Allowance for doubtful accounts — The Company regularly monitors and assesses the risk of not collecting amounts owed to the Company by customers. This evaluation is based upon a variety of factors including: an analysis of amounts current and past due along with relevant history and facts particular to the customer. It requires the Company to make significant estimates, and changes in facts and circumstances could result in material changes in the allowance for doubtful accounts. At December 31, 2008 and 2007 the Company has an allowance of approximately $49,000 and $48,000, respectively.

     Income taxes — We account for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax reporting bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Realization of deferred tax assets is dependent upon the weight of available evidence, including expected future earnings. A valuation allowance is recognized if it is more likely than not that some portion, or all, of a deferred tax asset will not be realized. Should we determine that we would be able to realize deferred tax assets in the future in excess of the net recorded amount, we would record an adjustment to the deferred tax asset valuation allowance. This adjustment would increase income in the period such determination is made.

Our operations include manufacturing activities outside of the United States. Profit from non-U.S. activities is subject to local country taxes but not subject to United States tax until repatriated to the United States. It is our intention to permanently reinvest these earnings outside the United States. The calculation of tax liabilities involves dealing with uncertainties in the application of complex global tax regulations. We recognize potential liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If the estimate of tax liabilities proves to be less than the ultimate tax assessment, a further charge to expense would result.

     Foreign currency translation — The consolidated financial statements of the Company are presented in U.S. dollars and the Company conducts substantially all of their business in U.S. dollars.

All transactions in currencies other than functional currencies during the year are translated at the exchange rates prevailing on the transaction dates. Related accounts payable or receivable existing at the balance sheet date denominated in currencies other than the functional currencies are translated at period end rates. Gains and losses resulting from the translation of foreign currency transactions are included in income. Translations adjustments as a result of the process of translating foreign financial statements from functional currency to U.S. dollars are disclosed and accumulated as a separate component of equity.

Aggregate net foreign currency transaction gains included in the income statement were approximately $228,000 and $214,000 for the years ended December 31, 2008 and 2007, respectively.

     Reclassification — Certain amounts from prior periods have been reclassified to conform to current period presentation

Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. With respect to the acquisition of DRCI by Solar Power, Inc., a California corporation, in fiscal year 2006, the Company estimated the fair value of contracts acquired based on certain assumptions to be approximately $637,000. The Company estimated the value of each contract opportunity acquired by estimating the percentage of contracts that would be signed and by applying a comparable acquisition cost to each contract based on the Company’s current sales subcontractor commission rates.

Segment Information

     The Company has three reportable segments: (1) photovoltaic installation, integration and solar panel sales (“Photovoltaic installation, integration and sales”), (2) Franchise operations and (3) cable, wire mechanical assemblies and processing sales (“Cable, wire and mechanical assemblies”). The Company’s reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies.

     The accounting policies of the segments are the same as those described in the summary of significant accounting policies.

Recent Accounting Pronouncements

     In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109,” Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006, with earlier adoption permitted. The adoption of this pronouncement did not have a material impact our financial position, results of operations or cash flows.

     In September 2006, the FASB issued Statement of Financial Accounting Standards (“FAS”) No. 157, “Fair Value Measurements.” SFAS No. 157 establishes a common definition for fair value to be applied to accounting principles generally accepted in the United States of America guidance requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. FAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In February 2008 FASB issued Staff Position No. 157-2 that defers the effective date of FAS 157 for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed a fair value in financial statements on a recurring basis, for fiscal years beginning after November 15, 2008. In addition, FASB also agreed to exclude from scope of FAS 157 fair value measurements made for purposes of applying FAS No. 13 “Accounting for Leases” and related interpretive accounting pronouncements. The adoptions of FAS No. 157 for financial assets and liabilities did not have a material effect on the consolidated financial statements. The Company does not expect the adoption of FAS No. 157 for non-financial assets and liabilities to have a material impact on the consolidated financial statements.

     In February 2007, the FASB issued FAS No. 159, “ The Fair Value Option for Financial Assets and Financial Liabilities —Including an amendment of FASB Statement No. 115”, (“FAS 159”) which permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. A business entity is required to report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. This statement is expected to expand the use of fair value measurement. FAS 159 is effective for financial statements issued for fiscal years beginning after July 1, 2008, and interim periods within those fiscal years, and is applicable beginning in the first quarter of 2008. The adoption of FAS No. 159 did not have a material effect on the consolidated financial statements.

     In December 2007, the FASB issued FAS No. 141(R), “Business Combinations” (“FAS No. 141(R)”) which requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. FAS No. 141(R) is prospectively effective to business combinations for which the acquisition is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The impact of FAS No. 141(R) on the Company’s consolidated financial statements will be determined in part by the nature and timing of any future acquisitions completed by it.

     In December 2007, the FASB issued FAS No. 160, “Non-Controlling Interests in Consolidated Financial Statements (as amended)” (“FAS No. 160”) which improves the relevance, comparability, and transparency of financial information provided to investors by requiring all entities to report non-controlling (minority) interests in subsidiaries in the same way as equity consolidated financial statements. Moreover, FAS No. 160 eliminates the diversity that currently exists in accounting from transactions between an entity and non-controlling interests by requiring they be treated as equity transactions. FAS No.160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008; earlier adoption is prohibited. The Company is currently evaluating the impact that FAS No. 160 will have on its consolidated financial statements.

     In March 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 161, “Disclosures about Derivatives Instruments and Hedging Activities, an Amendment of FASB Statement No. 133 (“SFAS No. 161”)”. SFAS No. 161 requires enhanced disclosures about a company’s derivative and hedging activities. SFAS No. 161 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact of the adoption of SFAS No. 161 and does not expect adoption to have a material impact on results of operations, cash flows or financial position.

     In April 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (FSP) FAS No. 142-3, “Determination of the Useful Life of Intangible Assets.” The FSP amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under SFAS No. 142, “Goodwill and

Other Intangible Assets.” The FSP must be applied prospectively to intangible assets acquired after the effective date. The Company will apply the guidance of the FSP to intangible assets acquired after January 1, 2009.

Results of Operations

Comparison of the year ended December 31, 2008 to the year ended December 31, 2007

     Net sales — Net sales for the year ended December 31, 2008 increased 161.4% to approximately $47,421,000 from approximately $18,144,000 for the year ended December 31, 2007.

     Net sales in the photovoltaic installation, integration and product sales segment increased 203.0% to approximately $44,670,000 from approximately $14,744,000 for the year earlier comparative period. The Company began manufacturing its own solar panels in the third quarter of 2007. The Company began selling panels to other integrators in Asia and Europe, which accounted for most of the increase in revenue during fiscal 2008. The Company expects that these types of panel sales will continue to be an increased source of revenue in fiscal 2009.

     There were no sales in our franchise operations segment for the years ended December 31, 2008 and 2007.

     Net sales in the cable, wire and mechanical assemblies segment decreased 19.1% to approximately $2,751,000 from approximately $3,400,000 for the year earlier comparative period. This is the legacy segment of the Company’s business. The Company expects to continue to service the customers it has in this segment as it continues to develop its solar segment, but is not actively seeking new customers.

     Cost of goods sold — Cost of goods sold were approximately $43,844,000 (92.5% of net sales) and approximately $15,816,000 (87.2% of net sales) for the years ended December 31, 2008 and 2007, respectively.

     Cost of goods sold in the photovoltaic installation, integration and product sales segment was approximately $41,819,000 (93.6% of sales) for the year ended December 31, 2008 compared to approximately $13,876,000 (94.1% of net sales) for the year ended December 31, 2007. While the Company has experienced significant growth in sales for this segment in fiscal 2008, higher than anticipated solar cell costs in the third and fourth quarters eroded construction margins in our photovoltaic segment. Due to decreasing cell costs in fiscal 2009, the Company expects that margins will improve in fiscal 2009.

     There were no cost of goods sold in our franchise operations segment for the years ended December 31, 2008 and 2007.

     Cost of goods sold in the cable, wire and mechanical assembly segment were approximately $2,025,000 (73.6% of net sales) for the year ended December 31, 2008 compared to approximately $1,940,000 (57.1% of net sales) for the year ended December 31, 2007. The increase is attributable to product mix, increased shipping costs due to fuel surcharges and increased material costs due to the increase in copper wire pricing, a key component in the cable wire segment. The Company does not expect margins to materially improve in this segment.

General and administrative expenses — General and administrative expenses were approximately $8,981,000 for the year ended December 31, 2008 and approximately $7,196,000 for the year ended December 31, 2007 an increase of 24.8%. As a percentage of net sales, general and administrative expenses were 18.9% and 39.7%, for the years ended December 31, 2008 and 2007, respectively. The increase in actual cost is primarily due to the increase in employee related expense, infrastructure costs and professional fees associated with the continued development of our photovoltaic solar business and start up of our franchise operations. Significant elements of general and administrative expenses for the year ended December 31, 2008 include employee related expense of approximately $4,223,000, information technology costs of approximately $171,000, insurance costs of approximately $171,000, professional and consulting fees of approximately $1,573,000, rent of approximately $583,000, travel and lodging costs of $197,000, stock compensation expense of $359,000 and bad debt expense of $264,000. The bad debt expense pertains primarily to one commercial installation project on which the owner was unable to complete financing on the project and had to terminate installation. The Company expects general and administrative expenses to continue to decline as a percentage of revenue.

     Sales, marketing and customer service expense — Sales, marketing and customer service expenses were approximately $2,618,000 for the year ended December 31, 2008 and $2,254,000 for the year ended December 31, 2007. As a percentage of net sales, sales, marketing and customer service expenses were 5.5% and 12.4% for the years ended December 31, 2008 and 2007, respectively. The increase in cost is primarily due to increases in payroll, marketing costs and commission costs associated required to development of our photovoltaic solar business. Significant elements of sales, marketing and customer service expense for the year ended December 31, 2008 were payroll related expenses of approximately $1,209,000, advertising and trade show expenses of

approximately $430,000, commission expense of approximately $451,000 stock-based compensation costs of approximately $110,000 and travel and lodging costs of approximately $62,000.

     Engineering, design and product management expense — Engineering, design and product management expenses were approximately $559,000 and $199,000 for the year ended December 31, 2008 and 2007, respectively. As a percentage of sales, product development expenses were 1.2% and 1.1% for the years ended December 31, 2008 and 2007, respectively. Significant elements of engineering, design and product management expense for the year ended December 31, 2008 were payroll and related expenses of approximately $261,000, product certification and testing of approximately $255,000 and stock-based compensation expense of $34,000. The Company expects these expenses to continue in 2009 as the Company expands its product lines and sales activity in global markets.

     Interest income / expense — Interest income, net was approximately $20,000 and $180,000 for the years ended December 31, 2008 and 2007, respectively. As a percentage of net sales, interest income, net was 0% and 1.0% for the years ended December 31, 2008 and 2007, respectively. Interest income, net consisted of interest income of approximately $135,000 from earnings on the Company’s idle cash offset by interest expense of approximately $115,000 on the Company’s short term borrowings in fiscal year 2008. Interest income, net consisted of interest income of approximately $286,000 from the earnings on the Company’s idle cash offset by interest expense of approximately $106,000 in fiscal 2007.

     Other income / expense — Other expense, net for the year ended December 31, 2008 was approximately $10,000. Other income for the year ended December 31, 2007 was approximately $8,000. Other expense, net consisted primarily of expenses of $17,000 related to the sub-lease of the Company’s former corporate headquarters offset by $7,000 generated from the sale of scrap.

     Net loss — The net loss was approximately $8,738,000 and $7,194,000 for the years ended December 31, 2008 and 2007, respectively. The significant costs incurred to continue development of our photovoltaic solar business and franchise operations were the drivers of the increased operating loss in 2008.

Liquidity and Capital Resources

     A summary of the sources and uses of cash and cash equivalents is as follows:

		Year ended December				Year ended December
(in thousands)		31, 2008				31, 2007
Net cash used in operating activities		$	(577	)		$	(13,064	)
Net cash used in investing activities			(766	)			(1,034	)
Net cash provided by financing activities			404				9,544
Net decrease in cash and cash equivalents		$	(939	)		$	(4,554	)

     From our inception until the closing of our private placement on October 4, 2006, we financed our operations primarily through short-term borrowings. We received net proceeds of approximately $14,500,000 from the private placement made by Solar Power, Inc., a Nevada corporation (formerly Welund Fund, Inc.) when we completed our reverse merger with them in December 2006.

     In December 2007, we completed a private placement of 4,513,911 shares of our comment stock with proceeds approximately $10,185,000, net of expenses of approximately $1,551,000.

     As of December 31, 2008, we had approximately $5,915,000 in cash and cash equivalents.

     Net cash used in operating activities of approximately $577,000 for the year ended December 31, 2008 was primarily a result of a net loss of approximately $8,738,000, plus non-cash items included in net income, including depreciation of approximately $700,000 related to property and equipment, stock-based compensation expense of approximately $548,000, bad debt expense of approximately $264,000, stock issued for services of approximately $22,000 and income tax expense of approximately $167,000. Also contributing to cash used in operating activities were decreases in accounts payable of approximately $1,248,000 resulting from prepayment requirements of our cell suppliers, decreased income taxes payable of approximately $7,000 offset by decreases in accounts receivable of approximately $1,870,000 resulting from collection of our sales of solar panels upon shipment, decreases in costs and estimated earnings in excess of billings on uncompleted contracts of approximately $1,914,000 resulting from decreased installation revenues in the fourth quarter of

fiscal 2008, decreases in inventories of approximately $2,433,000 resulting from decreased solar panel inventory, decreased prepaid expenses and other current assets of approximately $326,000 resulting from decreased supplier deposit requirements, increases in billings in excess of costs and estimated earnings on uncompleted contracts of approximately $157,000 resulting from billings primarily on residential solar installations not yet underway in fiscal 2008 and increases in accrued liabilities of approximately $665,000 resulting, increases in deferred revenue of approximately $350,000 resulting from deferred franchise fees and increased warranty reserve of approximately $640,000.

     Net cash used in operating activities of approximately $13,064,000 for the year ended December 31, 2007 was primarily a result of a net loss of approximately $7,194,000, plus non-cash items included in net income, including depreciation of approximately $330,000 related to property and equipment, amortization of intangibles of approximately $684,000, stock-based compensation expense of approximately $541,000, bad debt expense of approximately $118,000, stock issued for services of approximately $50,000, warrants issued for services of approximately $12,000 and income tax expense of approximately $61,000. Also contributing to cash used in operating activities were an increase in our accounts receivable of approximately $4,157,000 as a result of increased sales in our solar photovoltaic business segment, an increase in costs and estimated earnings in excess of billings on uncompleted contracts of approximately $2,088,000, an increase in our inventories of approximately $4,659,000 primarily related to our solar photovoltaic business and increases in prepaid expenses and other current assets of approximately $410,000, a decrease in income taxes payable of approximately $6,000, a decrease in billings in excess of costs and estimated earnings on uncompleted contracts of approximately $123,000 offset by an increase in our accounts payable of approximately $2,839,000 related to our increased inventory, and an increase in accrued liabilities of approximately $938,000 resulting primarily from increased sales tax liability of approximately $557,000, accrued job costs of approximately $212,000 and accrued warranty costs of approximately $103,000.

     Net cash used in investing activities of approximately $766,000 for the year ended December 31, 2008 primarily relates to acquisition of property, plant and equipment. Property, plant and equipment acquired was primarily for the expansion of the solar panel assembly line in our China manufacturing facility and computer equipment required for our franchise operations.

     Net cash used in investing activities of approximately $1,034,000 for the year ended December 31, 2007 primarily relates to acquisition of property, plant and equipment.

     Net cash generated from financing activities was approximately $404,000 for the year ended December 31, 2008 and is comprised of approximately $1,668,000 from the release of restricted cash collateralizing cancelled letters of credit and $69,000 from issuance of our common stock from the exercise of employee stock options offset by approximately $976,000 used to repay the line of credit to China Merchants Bank, approximately $343,000 of principal payments on notes and capital leases and approximately $14,000 of additional costs related to our private placement in December 2007.

     Net cash generated from financing activities was approximately $9,544,000 for the year ended December 31, 2007 and is comprised of approximately $11,517,000 of net proceeds from the issuance of common stock and warrants, net of issuance costs, and $931,000 from proceeds of our PRC line of credit, offset by approximately $389,000 of principal payments on notes and capital leases and approximately $320,000 of principal payments on loans from related parties and restricted cash collateralizing letters of credit of approximately $2,195,000.

     In the short-term we do not expect any material change in the mix or relative cost of our capital resources. As of December 31, 2008, we had approximately $5,915,000 in cash and cash equivalents and approximately $527,000 of restricted cash collateralizing standby letters of credit we issued to support our capital lease and a financing obligation of our subsidiary, Yes! Solar, Inc. Our plan and focus will be to continue the development of our solar panel manufacturing facility, manufacturing our branded solar system products, generating new customers, and organizing a distribution model through the development of our franchise network. With our current level of cash on hand and collection of accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts, we believe we have sufficient working capital to satisfy our working capital requirements to fund operations at their current levels.

     On July 24, 2008, the Company signed a four-year supply agreement which obligates the Company to purchase a specific quantity of solar panels over the four year term of the agreement or pay a cancellation penalty of as much as $6.5 million. As of December 31, 2008 the Company has purchased approximately $541,000 solar panels under this supply agreement.

     We may be required to raise capital to fund our anticipated future growth. Due to the current global financial crisis there is no assurance that if we are required to raise capital that it will be available to us. Future cash forecasts are based on assumptions regarding operational performance, and assumptions regarding working capital needs associated with increasing customer orders and supply chain agreements.

     Contractual Obligations

     Operating leases — The Company leases premises under various operating leases. Rental expense under operating leases included in the statement of operations was approximately $834,000 and $502,000 for the years ended December 31, 2008 and 2007, respectively.

     The Company was obligated under operating leases requiring minimum rentals as follows (in thousands):

Years ending December 31,
2009		$	626
2010			454
2011			459
2012			310
Total minimum payments		$	1,849

     The Company was obligated under notes payable requiring minimum payments as follows (in thousands):

Years ending December 31,
2009		$	51
2010			52
2011			44
2012			6
			153
Less current portion			(50	)
Long-term portion		$	103

     The notes payable are collateralized by trucks used in the Company’s solar photovoltaic business, bear interest rates between 1.9% and 2.9% and are payable over sixty months.

     The Company leases certain equipment under capital leases. The leases expire from January to October 2010. The Company was obligated for the following minimum payments (in thousands):

Years ending December 31,
2009		$	327
2010			216
			543
Less amounts representing interest			(43	)
Present value of net minimum lease payments			500
Less current portion			(292	)
Long-term portion		$	208

     On July 24, 2008, the Company and Solyndra Inc., a Delaware corporation (“Solyndra”) signed a First Amendment to Agreement for Sale of Photovoltaic Panels (“Modified Agreement”) which amends an Agreement for Sale of Photovoltaic Panels, dated February 19, 2007. The first agreement did not obligate the Company to any specific terms or conditions only reserved its right to panel production once Solyndra began manufacturing its product.

     The Modified Agreement between the Company and Solyndra, Inc. is a contract for the sale of photovoltaic panels intended for large flat rooftops, optimized for high energy density production produced by Solyndra for Solar Power. The Modified Agreement as amended obligates the Company to purchase a specific quantity of solar panels over the four year term of the Modified Agreement or pay a cancellation penalty of as much as $6.5 Million. In fiscal 2009, the cancellation penalty could be as much as $740,000. The final selling price to the Company is dependent upon the price that Solyndra, Inc. sells the same product to other third-party customers and is expected to decline over the term of the agreement.

     On December 13, 2007, the Company and its wholly-owned subsidiary, Yes! Solar, Inc. (“YES”) entered into a Retailer Program Agreement (the “Agreement”) with GE Money Bank to provide to YES retail customers a vehicle to finance solar systems purchased from YES. The agreement provides that the Company will provide a standby letter of credit equal to the greater of $50,000 or one percent of sales under the Agreement. A standby letter of credit in the amount of $50,000 was issued on November 14, 2007 as a condition to the execution of the Agreement. The term of the letter of credit was renewed for an additional year on November 14, 2008. As of December 31, 2008 there were no sales under this Agreement.

Off-Balance Sheet Arrangements

     At December 31, 2008, we did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.

ITEM 8 — FINANCIAL STATEMENTS

     The Financial Statements that constitute Item 8 are included at the end of this report beginning on page F-1.

ITEM 9 — CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     None

ITEM 9A(T) — CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

     In connection with the preparation of our Annual Report on Form 10-K, an evaluation was carried out by our management, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (Exchange Act)) as of December 31, 2008. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

     Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Annual Report, our disclosure controls and procedures were effective.

     Our management has concluded that the financial statements included in this Form 10-K present fairly, in all material respects our financial position, results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles.

     It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events.

Management’s Report on Internal Control Over Financial Reporting

     Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles.

     Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) as set forth in Internal Control - Integrated Framework. Based on our evaluation under the framework in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2008.

     This annual report does not include an audit or attestation report of our registered public accounting firm regarding our internal control over financial reporting. Our management’s report was not subject to audit or attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this annual report.

     Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

ITEM 9B — OTHER INFORMATION

     None

PART III

ITEM 10 — DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by Item 10 of Part III is incorporated by reference to the registrant’s proxy statement, to be filed within 120 days of the registrant’s fiscal year end.

ITEM 11 — EXECUTIVE COMPENSATION

The information required by Item 11 of Part III is incorporated by reference to the registrant’s proxy statement, to be filed within 120 days of the registrant’s fiscal year end.

ITEM 12 — SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by Item 12 of Part III is incorporated by reference to the registrant’s proxy statement, to be filed within 120 days of the registrant’s fiscal year end.

ITEM 13 — CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by Item 13 of Part III is incorporated by reference to the registrant’s proxy statement, to be filed within 120 days of the registrant’s fiscal year end.

ITEM 14 — PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by Item 14 of Part III is incorporated by reference to the registrant’s proxy statement, to be filed within 120 days of the registrant’s fiscal year end.

PART IV

ITEM 15 — EXHIBITS

Exhibit No.				Description
	2.1			Agreement and Plan of Merger dated as of January 25, 2006 between Welund Fund, Inc. (Delaware) and Welund Fund, Inc. (Nevada) (1)
	2.2			Agreement and Plan of Merger by and among Solar Power, Inc., a California corporation, Welund Acquisition Corp., a Nevada corporation, and Welund Fund, Inc. a Nevada corporation dated as of August 23, 2006(2)
	2.3			First Amendment to Agreement and Plan of Merger dated October 4, 2006(3)
	2.4			Second Amendment to Agreement and Plan of Merger dated December 1, 2006(4)
	2.5			Third Amendment to Agreement and Plan of Merger dated December 21, 2006(5)
	2.6			Agreement and Plan of Merger by and between Solar Power, Inc., a California corporation and Dale Renewables Consulting, Inc., a California corporation, and James M. Underwood, Ronald H. Stickney and Todd Lindstrom, dated as of August 20, 2006, as amended by the First Amendment to Agreement and Plan of Merger dated October 31, 2006, and further amended by the Second Amendment to Agreement and Plan of Merger dated November 15, 2006(17)
	2.7			Agreement of Merger by and between Solar Power, Inc., a California corporation, Dale Renewables Consulting, Inc., a California corporation, and James M. Underwood, Ronald H. Stickney and Todd Lindstrom dated November 15, 2006(17)
	2.8			Agreement of Merger by and between Solar Power, Inc., a California corporation, Solar Power, Inc., a Nevada corporation and Welund Acquisition Corp., a Nevada corporation dated December 29, 2006(17)
	2.9			Agreement of Merger by and between Solar Power, Inc., a Nevada corporation and Solar Power, Inc., a California corporation, dated February 14, 2007 (6)
	3.1			Amended and Restated Articles of Incorporation(6)
	3.2			Bylaws(6)
	3.3			Specimen (17)
	4.1			Form of Subscription Agreement(7)
	4.2			Form of Registration Rights Agreement(7)
	10.1			Share Purchase Agreement for the Purchase of Common Stock dated as of April 1, 2004, by and between Kevin G. Elmore and Mr. T. Chong Weng(8)
	10.2			Share Purchase Agreement for the Purchase of Common Stock dated as of June 9, 2004, by and between Kevin G. Elmore and Liberty Associates Holdings, LLC(9)

Exhibit No.				Description
	10.3			Purchase and Servicing Agreement between Welund Fund, Inc. and Village Auto, LLC, dated March 30, 2005(10)
	10.4			Demand Promissory Note issued by Paxton Energy Corp. (11)
	10.5			Engagement Letter with Roth Capital Partners, dated August 29, 2006(12)
	10.6			Credit Facility Agreement by and between the Company and Solar Power, Inc., a California corporation effective September 19, 2006(12)
	10.7			Security Agreement by and between the Company and Solar Power, Inc., a California corporation effective September 19, 2006(12)
	10.8			Secured Promissory Note issued by Solar Power, Inc., a California corporation in favor of the Company(12)
	10.9			First Amendment to the Credit Facility Agreement dated November 3, 2006(13)
	10.10			Securities Purchase Agreement dated September 19, 2006 (12)
	10.11			Registration Rights Agreement dated September 19, 2006(12)
	10.12			Securities Purchase Agreement dated October 4, 2006 (14)
	10.13			Registration Rights Agreement dated October 4, 2006(14)
	10.14			Roth Capital Warrant(14)
	10.15			Subordination Agreement by and between Steve Kircher, the Company and Solar Power, Inc., a California corporation dated August 31, 2006(14)
	10.16			Addendum to Subordination Agreement dated September 6, 2006(14)
	10.17			Unsecured Promissory Note for $150,000 issued by Solar Power, Inc., a California corporation in favor of the Company dated August 31, 2006(14)
	10.18			Unsecured Promissory Note for $50,000 issued by Solar Power, Inc., a California corporation dated September 6, 2006(14)
	10.19			Secured Promissory Note for $975,000 issued by Solar Power, Inc., a California corporation in favor of Solar Power, Inc, a Nevada corporation (formerly Welund Fund, Inc.), dated September 19, 2006(14)
	10.20			Secured Promissory Note for $100,000 issued by Solar Power, Inc., a California corporation in favor of Solar Power, Inc., a Nevada corporation (formerly Welund Fund, Inc.), dated September 25, 2006(14)
	10.21			Secured Promissory Note for $130,000 issued by Solar Power, Inc., a California corporation in favor of Solar Power, Inc., a Nevada corporation (formerly Welund Fund, Inc.), dated September 27, 2006(14)

Exhibit No.				Description
	10.22			Secured Promissory Note for $75,000 issued by Solar Power, Inc., a California corporation in favor of Solar Power, Inc., an Nevada corporation (formerly Welund Fund, Inc.), dated October 6, 2006(14)
	10.23			Secured Promissory Note for $340,000 issued by Sola Power, Inc., a California corporation in favor of Solar Power, Inc., a Nevada corporation (formerly Welund Fund, Inc.), dated October 16, 2006(14)
	10.24			Secured Promissory Note for $235,000 issued by Solar Power, Inc., a California corporation in favor of Solar Power, Inc., a Nevada corporation (formerly Welund Fund, Inc.), dated October 30, 2006(14)
	10.25			Secured Promissory Note $445,000 issued by Solar Power, Inc., a California corporation in favor of Solar Power, Inc., a Nevada corporation (formerly Welund Fund, Inc.), dated November 7, 2006 (14)
	10.26			Demand Note $1,446,565 issued by Solar Power, Inc., a California corporation in favor of the Company dated November 15, 2006 (14)
	10.27			2006 Equity Incentive Plan (17)
	10.28			Form of Nonqualified Stock Option Agreement(17)
	10.29			Form of Restricted Stock Award Agreement(17)
	10.30			Assignment and Interim Operating Agreement by and between Solar Power, Inc., a California corporation, Dale Stickney Construction, Inc., a California corporation, and Dale Renewables Consulting, Inc., a California corporation dated August 20, 2006(17)
	10.31			Restrictive Covenant Agreement by and between Solar Power, Inc., a California corporation, Todd Lindstrom, James M. Underwood and Ronald H. Stickney dated November 15, 2006(17)
	10.32			Receivables and Servicing Rights Purchase and Sale Agreement by and between the Company and Village Auto, LLC a California limited liability company dated December 29, 2006(15)
	10.33			Contract Revenues Agreement by and between Sundance Power, LLC, a Colorado limited liability company and Solar Power, Inc., a California corporation, dated September 5, 2006(18)
	10.34			Agreement for Sale of Photovoltaic Panels to Solar Power, Inc. dated February 19, 2007 (19)
	10.35			First Amendment to Agreement for Sale of Photovoltaic Panels, dated July 24, 2008 (19)
	14.1			Code of Ethics (20)
	16.1			Letter of Hansen Barnett & Maxwell(16)
	21.1			List of Subsidiaries(18)
	23			Consent of Independent Registered Accounting Firm*
	31.1			Rule 13(a) — 14(a)/15(d) — 14(a) Certification (Principal Executive Officer)*
	31.2			Rule 13(a) — 14(a)/15(d) — 14(a) Certification (Principal Financial Officer)*
	32			Section 1350 Certifications*

Footnotes to Exhibits Index

SIGNATURES

     In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

     Pursuant to requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

Signature		Capacity		Date
/s/ Stephen C. Kircher   Stephen C. Kircher		Director		March 24, 2009
/s/ Ronald A. Cohan   Ronald A. Cohan		Director		March 24, 2009
/s/ D. Paul Regan   D. Paul Regan		Director		March 24, 2009
/s/ Larry D. Kelley   Larry D. Kelley		Director		March 24, 2009
/s/ Timothy B. Nyman   Timothy B. Nyman		Director		March 24, 2009

Index to Financial Statements

		Page
Item 8. — Financial Statements of Solar Power, Inc., a California corporation
Report of Macias Gini & O’Connell LLP, an Independent Registered Public Accounting Firm			F-2
Consolidated Balance Sheets as of December 31, 2008 and 2007			F-3
Consolidated Statements of Operations for the years ended December 31, 2008 and 2007			F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2008 and 2007			F-5
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2008 and 2007			F-7
Notes to Consolidated Financial Statements			F-8

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
Solar Power, Inc.
Roseville, California

We have audited the accompanying consolidated balance sheets of Solar Power, Inc. (the “Company”) as of December 31, 2008 and 2007 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Solar Power, Inc. at December 31, 2008 and 2007, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ Macias Gini & O’Connell LLP

Sacramento, California

March 24, 2009

SOLAR POWER, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 2008 and 2007
(in thousands, except for share data)

		2008				2007
ASSETS
Current assets:
Cash and cash equivalents		$	5,915			$	6,840
Accounts receivable, net of allowance for doubtful accounts of $49 and $48 at December 31, 2008 and 2007, respectively			3,010				5,353
Costs and estimated earnings in excess of billings on uncompleted contracts			294				2,208
Inventories, net			4,665				6,945
Prepaid expenses and other current assets			771				967
Restricted cash			527				800
Total current assets			15,182				23,113
Goodwill			435				435
Restricted cash			—				1,395
Property, plant and equipment at cost, net			2,178				2,066
Total assets		$	17,795			$	27,009
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	3,916			$	4,957
Line of credit			—				931
Accrued liabilities			2,833				2,063
Deferred revenue			350				—
Income taxes payable			248				88
Billings in excess of costs and estimated earnings on uncompleted contracts			160				3
Loans payable and capital lease obligations			342				342
Total current liabilities			7,849				8,384
Loans payable and capital lease obligations, net of current portion			311				655
Total liabilities			8,160				9,039
Commitments and contingencies (Note 12)			—				—
Stockholders’ equity
Preferred stock, par $0.0001, 20,000,000 shares authorized, none issued and outstanding at December 31, 2008 and 2007			—				—
Common stock, par $0.0001, 100,000,000 shares authorized 37,771,325 and 37,573,263 shares issued and outstanding at December 31, 2008 and 2007, respectively			4				4
Additional paid in capital			28,029				27,404
Accumulated other comprehensive loss			(222	)			—
Accumulated deficit			(18,176	)			(9,438	)
Total stockholders’ equity			9,635				17,970
Total liabilities and stockholders’ equity		$	17,795			$	27,009

The accompanying notes are an integral part of these financial statements

SOLAR POWER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2008 and 2007
(in thousands, except for share data)

		2008				2007
Net sales		$	47,421			$	18,144
Cost of goods sold			43,844				15,816
Gross profit			3,577				2,328
Operating expenses:
General and administrative			8,981				7,196
Sales, marketing and customer service			2,618				2,254
Engineering, design and product management			559				199
Total operating expenses			12,158				9,649
Operating loss			(8,581	)			(7,321	)
Other income (expense):
Interest expense			(115	)			(106	)
Interest income			135				286
Other income (expense)			(10	)			8
Total other income (expense)			10				188
Loss before income taxes			(8,571	)			(7,133	)
Income tax expense			167				61
Net loss		$	(8,738	)		$	(7,194	)
Net loss per common share:
Basic and diluted		$	(0.23	)		$	(0.22	)
Weighted average number of shares used in computing per share amounts:			37,696,812				32,930,129

The accompanying notes are an integral part of these financial statements

SOLAR POWER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2008 and 2007
(in thousands)

		2008				2007
Cash flows from operating activities:
Net loss		$	(8,738	)		$	(7,194	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			700				330
Stock issued for services			22				50
Warrants issued for services			—				12
Stock-based compensation expense			548				541
Bad debt expense			264				118
Amortization			—				684
Income tax expense			167				61
Changes in operating assets and liabilities:
Accounts receivable			1,870				(4,157	)
Costs and estimated earnings in excess of billings on uncompleted contracts			1,914				(2,088	)
Inventories			2,433				(4,659	)
Prepaid expenses and other current assets			326				(410	)
Accounts payable			(1,248	)			2,839
Income taxes payable			(7	)			(6	)
Billings in excess of costs and estimated earnings on uncompleted contracts			157				(123	)
Deferred revenue			350				—
Accrued liabilities			665				938
Net cash used in operating activities			(577	)			(13,064	)
Cash flows from investing activities:
Acquisitions of property, plant and equipment			(766	)			(1,034	)
Net cash used in investing activities			(766	)			(1,034	)
Cash flows from financing activities:
Proceeds from issuance of common stock			69				12,282
Costs related to share registration			(14	)			(765	)
Decrease (increase) in restricted cash collateralizing letters of credit			1,668				(2,195	)
Principal payments on notes and capital leases payable			(343	)			(389	)
Net (payments on) proceeds from line of credit			(976	)			931
Principal payments (principal received) on loans from related parties			—				(320	)
Net cash provided by financing activities			404				9,544
Decrease in cash and cash equivalents			(939	)			(4,554	)
Cash and cash equivalents at beginning of period			6,840				11,394
Effect of exchange rate changes on cash			14				—
Cash and cash equivalents at end of period		$	5,915			$	6,840

The accompanying notes are an integral part of these financial statements

SOLAR POWER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2008 and 2007
(in thousands)

		2008				2007
Supplemental disclosure of cash flow information:
Cash paid for interest		$	115			$	91
Cash paid for income taxes		$	7			$	9
Supplemental disclosure of non-cash investing and financing activities:
Equipment acquired through notes payable and capital leases		$	—			$	1,141
Stock and warrants issued in settlement of an obligation			—				130
Stock issued for services			22				50
Warrants issued in conjunction with a private placement of common stock			—				283
Warrants issued for services			—				36
		$	22			$	1,640

The accompanying notes are an integral part of these financial statements

SOLAR POWER, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2008 and 2007
(in thousands, except for share data)

																			Accumulated
		Common Stock									Additional				Accumulated				other
		Shares					Amount				Paid-In Capital				Deficit				comprehensive loss				Total
Balance January 1, 2007			32,266,667				$	3			$	15,833			$	(2,244	)						$	13,592
Net loss																(7,194	)							(7,194	)
Costs related to share registration												(628	)											(628	)
Issuance of warrants related to private placement												283												283
Issuance of warrants for settlement of an obligation												56												56
Issuance of warrants for services												36												36
Stock-based compensation expense			—									441												441
Issuance of restricted stock			100,000					—				100												100
Issuance of stock for option and warrant exercises			68,750					—				50												50
Issuance of stock for services			50,000									50												50
Issuance of stock for settlement of an obligation			73,935					—				74												74
Issuance of stock, net of costs			5,013,911					1				11,090												11,091
Balance December 31, 2007			37,573,263					4				27,404				(9,438	)							17,970
Comprehensive loss
Net loss																(8,738	)							(8,738	)
Translation adjustment																				(222	)			(222	)
Total comprehensive loss																								(8,960	)
Costs related to share registration												(14	)											(14	)
Issuance of stock for services			16,000					—				22												22
Stock-based compensation expense												372												372
Issuance of restricted stock			113,367					—				176												176
Issuance of stock for option exercises			68,695					—				69												69
Balance December 31, 2008			37,771,325				$	4			$	28,029			$	(18,176	)		$	(222	)		$	9,635

The accompanying notes are an integral part of these financial statements

SOLAR POWER, INC.
(FORMERLY INTERNATIONAL ASSEMBLY SOLUTIONS, LIMITED)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Basis of Financial Statement Presentation

     Solar Power, Inc. and its subsidiaries, (collectively the “Company”) engage in sales, installation and integration of photovoltaic systems, markets its franchise operations and manufactures and sells solar panels and related hardware and cable, wire and mechanical assemblies.

     Solar Power, Inc. was incorporated in the State of California in 2006. In August 2006, the Company entered into a merger agreement with International Assembly Solutions, Limited (“IAS HK”) which was incorporated in Hong Kong in January 2005. Effective November 2006, the equity owners of IAS HK transferred all their equity interests to Solar Power, Inc. in exchange for a total of 14,000,000 shares of its common stock at a par value of $0.0001 each. There were a total of sixteen shareholders in IAS HK including the controlling shareholder Stephen Kircher, our CEO. This transaction was structured to create a U.S. holding company and there were not any new or different shareholders involved. As such, the commonality among shareholders was 100%. There was no other consideration paid to any shareholder in connection with the formation of the holding company. Because the merger was entered into among entities under common control, the accompanying consolidated financial statements presents the results of operations of the combined companies for the year ended December 31, 2006.

     In August 2006, the Company, Dale Renewable Consulting Inc. (DRCI) and Dale Stickney Construction, Inc., (DSCI) formalized an acquisition agreement (the Merger Agreement) and entered into an Assignment and Interim Operating Agreement (the “Operating Agreement”). As a result of the Operating Agreement the Company began consolidating the operations of DRCI from June 1, 2006.

     In February 2007, the Company issued 31,435 shares of its common stock as an additional payment under the agreement with Sundance Power, LLC. The shares were fair-valued at $1.00 per share.

     On August 30, 2007, the Company entered into Amendment #1 to the agreement settling its obligation to Sundance Power, LLC, issuing 42,500 shares of the Company’s common stock fair-valued at $1.00 per share and warrants to purchase 76,722 shares of our common stock at $1.00 per share with a fair-value of $55,777, offsetting expenses of $36,228 leaving a balance due to Sundance at December 31, 2007 of $9,060. At December 31, 2006 the Company determined that it was probable that the conditional payments would be made and recorded the estimated obligation in prepaid expenses and other current assets at $500,000 and recorded an accrued liability of $350,000. The asset was expensed to sales, marketing and customer service expenses during 2007 as the related revenue was recognized or as it was determined that the contracts were no longer viable. The life of the contract is based upon the underlying construction contracts. In exchange for these payments from the Company, Sundance relinquished its right to obtain any future payment constituting a share of the revenues of any Joint Contract or other Solar Power Contracts, relinquished its right to obtain any future payment from the sale or installation of solar electric power system goods and services, and transfers to the Company all of its rights to the service mark of Sundance. The Company has not and does not plan to use the service mark for any service branding. As a result, the Company has not allocated any value to Sundance’s service mark. The amounts paid under this agreement have been classified as sales, marketing and customer service because Sundance was only in a position to provide sales and marketing support and customer service support with utility interconnection, rebate processing and training for owner education. Sundance did not have the working capital to purchase hardware, specifically photovoltaic panels and inverters, needed for the four specified projects or any other projects that the Company secured.

     In December 2006, Solar Power, Inc. became a public company through its reverse merger with Solar Power, Inc. (formerly Welund Fund, Inc.). The accompanying consolidated financial statements reflect the results of the operations of Solar Power, Inc., its predecessor, International Assembly Solutions, Limited and their subsidiaries.

2. Summary of Significant Accounting Policies

     Basis of Presentation — The consolidated financial statements include the accounts of the Solar Power, Inc., its predecessor and their subsidiaries. Intercompany balances, transactions and cash flows are eliminated on consolidation.

     Cash and cash equivalents — Cash and cash equivalents include cash on hand, cash accounts and interest bearing savings accounts. At times, cash balances may be in excess of FDIC insurance limits. The Company has not experienced any losses with respect to bank balances in excess of government provided insurance. At December 31, 2008 and 2007, the Company held approximately $5,213,000 and $8,901,000 in bank balances in excess of the insurance limits.

     Inventories — Inventories are stated at the lower of cost, determined by the weighted average cost method, or market. Work-in-progress and finished goods inventories consist of raw materials, direct labor and overhead associated with the manufacturing process. Provisions are made for obsolete or slow-moving inventory based on management estimates. Inventories are written down based on the difference between the cost of inventories and the net realizable value based upon estimates about future demand from customers and specific customer requirements on certain projects.

     Anti-dilutive Shares — SFAS No. 128, “Earnings Per Share,” provides for the calculation of basic and diluted earnings per share. Basic earnings per share includes no dilution and is computed by dividing income attributable to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities by adding other common stock equivalents, including common stock options, warrants, and restricted common stock, in the weighted average number of common shares outstanding for a period, if dilutive. Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive. For the years ended December 31, 2008 and 2007 4,723,202 and 2,843,965 shares of common stock equivalents, respectively were excluded from the computation of diluted earnings per share since their effect would be anti-dilutive.

     Plant and equipment — Property, plant and equipment is stated at cost including the cost of improvements. Maintenance and repairs are charged to expense as incurred. Depreciation and amortization are provided on the straight line method based on the estimated useful lives of the assets as follows:

Plant and machinery		5 years
Furniture, fixtures and equipment		5 years
Computers and software		3 — 5 years
Equipment acquired under capital leases		3 — 5 years
Automobiles		3 years
Leasehold improvements		the initial lease term

     Goodwill — Goodwill is the excess of purchase price over the fair value of net assets acquired. The Company applies Statement of Financial Accounting Standards No. 142 “Goodwill and other Intangible Assets”, which requires the carrying value of goodwill to be evaluated for impairment on an annual basis, using a fair-value-based approach. No impairment of goodwill has been identified during any of the periods presented.

     Revenue recognition — The Company’s three primary business segments include photovoltaic installation, integration and sales, franchise operations and cable, wire and mechanical assemblies.

          Photovoltaic installation, integration and sales — In our photovoltaic systems installation, integration and product sales segment, revenue on product sales is recognized when there is evidence of an arrangement, title and risk of ownership have passed (generally upon delivery), the price to the buyer is fixed or determinable and collectability is reasonably assured. Customers do not have a general right of return on products shipped therefore we make no provisions for returns. During the quarter ended March 31, 2008, the Company did recognize one product sale on a bill and hold arrangement. In this instance the customer did not have sufficient facilities to store the product and asked that we store the product for them. Since all criteria for revenue recognition had been met the Company recognized revenue on this sale.

Revenue on photovoltaic system construction contracts is recognized using the percentage of completion method of accounting. At the end of each period, the Company measures the cost incurred on each project and compares the result against its estimated total costs at completion. The percent of cost incurred determines the amount of revenue to be recognized. Payment terms are generally defined by the contract and as a result may not match the timing of the costs incurred by the Company and the related recognition of revenue. Such differences are recorded as costs and estimated earnings in excess of billings on uncompleted contracts or billings in excess of costs and estimated earnings on uncompleted contracts. The Company determines its customer’s credit worthiness at the time the order is accepted. Sudden and unexpected changes in customer’s financial condition could put recoverability at risk.

In our solar photovoltaic business, contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs. Selling and general and administrative costs are

charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Profit incentives are included in revenues when their realization is reasonably assured.

The assets, “Costs and estimated earnings in excess of billings on uncompleted contracts” represents revenues recognized in excess of amounts billed. The liability, “Billings in excess of costs and estimated earnings on uncompleted contracts,” represents billings in excess of revenues recognized.

          Franchise Operations — The Company began selling franchise territories in fiscal 2008. The Company did not recognize any franchise revenue in its fiscal 2008 financial statements. The Company has adopted the provisions of Statement of Financial Accounting Standards No. 45 (as amended) “Accounting for Franchise Fee Revenue” (“SFAS 45”) which requires that revenue shall be recognized when all the material services or conditions relating to the sale have been substantially met. The Company has determined that when the franchisee places its first order for a solar installation all the material services or conditions will be deemed to have been met. At December 31, 2008 the Company had $350,000 of deferred revenue included in its financial statements from franchise fees.

          Cable, wire and mechanical assemblies — In our cable, wire and mechanical assemblies business the Company recognizes the sales of goods when there is evidence of an arrangement, title and risk of ownership have passed (generally upon delivery), the price to the buyer is fixed or determinable and collectability is reasonably assured. Generally there are no formal customer acceptance requirements or further obligations related to our assembly services once we ship our products. Customers do not have a general right of return on products shipped therefore we make no provisions for returns. We make determination of our customer’s credit worthiness at the time we accept their order.

     Allowance for doubtful accounts — The Company regularly monitors and assesses the risk of not collecting amounts owed to the Company by customers. This evaluation is based upon a variety of factors including: an analysis of amounts current and past due along with relevant history and facts particular to the customer. It requires the Company to make significant estimates, and changes in facts and circumstances could result in material changes in the allowance for doubtful accounts. At December 31, 2008 and 2007 the Company has recorded an allowance of approximately $49,000 and $48,000, respectively.

     Stock-based compensation — Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment.” (SFAS No. 123(R)”) which requires the Company to measure the stock-based compensation costs of share-based compensation arrangements based on the grant-date fair value and generally recognizes the costs in the financial statements over the employee requisite service period. Stock-based compensation expense for all stock-based compensation awards granted was based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). Prior to 2006 the Company had not issued stock options or other forms of stock-based compensation.

     Shipping and handling cost — Shipping and handling costs related to the delivery of finished goods are included in cost of goods sold. During the years ended December 31, 2008 and 2007, shipping and handling costs expensed to cost of goods sold were approximately $634,000 and $350,000, respectively.

     Advertising costs — Costs for newspaper, television, radio, and other media and design are expensed as incurred. The Company expenses the production costs of advertising the first time the advertising takes place. The costs for this type of advertising were approximately $293,000 and $337,000 during the years ended December 31, 2008 and 2007, respectively.

     Product Warranties — We offer the industry standard of 20 years for our solar modules and industry standard five (5) years on inverter and balance of system components. Due to the warranty period, we bear the risk of extensive warranty claims long after we have shipped product and recognized revenue. In our cable, wire and mechanical assemblies business, historically our warranty claims have not been material. In our solar photovoltaic business our greatest warranty exposure is in the form of product replacement. Until the third quarter of fiscal 2007, the Company purchased its solar panels from third-party suppliers and since the third-party warranties are consistent with industry standards we considered our financial exposure to warranty claims immaterial. Certain photovoltaic construction contracts entered into during the year ended December 31, 2007 included provisions under which the Company agreed to provide warranties to the buyer, and during the quarter ended September 30, 2007, the Company began installing its own manufactured solar panels. As a result, the Company recorded the provision for the estimated warranty exposure on these contracts within cost of sales. Since the Company does not have sufficient historical data to estimate its exposure, we have looked to historical data reported by other solar system installers and manufacturers. In our cable, wire and mechanical assemblies business our current standard product warranty for our mechanical assembly product ranges from one to five years. The Company has provided a warranty reserve of approximately $641,000 and $103,000 for the years ended December 31, 2008 and 2007, respectively.

     Income taxes — We account for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax reporting bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Realization of deferred tax assets is dependent upon the weight of available evidence, including expected future earnings. A valuation allowance is recognized if it is more likely than not that some portion, or all of a deferred tax asset will not be realized.

In June, 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48), which is intended to create a single model to address uncertainty in income tax positions. FIN 48 clarifies the accounting for uncertainty in income tax positions by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. In addition, FIN 48 clearly scopes out income taxes from Financial Accounting Standards Board Statement No. 5, “Accounting for Contingencies” (“SFAS 5”).

FIN 48 outlines a two step approach in accounting for uncertain tax positions. First is recognition, which occurs when the Company concludes that a tax position is more likely than not to be sustained upon examination based solely on its technical merits. FIN 48 specifically prohibits the use of a valuation allowance as a substitute for derecognition of tax positions. Second is measurement. Only after a tax position passes the first step of recognition will measurement be required. Under the measurement step, the tax benefit is measured as the largest amount of benefit that is more likely than not to be realized upon ultimate settlement. This is determined on a cumulative probability basis. The phrase “more likely than not” has the same meaning under FIN 48 as it does under Financial Accounting Standards Board Statement No 109 “Accounting for Income Taxes” (“FAS 109”) (i.e. a likelihood of occurrence greater than 50 percent).

Management intends to comply with FIN 48 and to provide adequate documentation of its efforts, judgments and conclusions related to any material uncertain tax positions. Management intends to conduct this task in as cost efficient manner as possible with an emphasis on items with the potential to have a material effect on the financial statements.

     Foreign currency translation — The consolidated financial statements of the Company are presented in U.S. dollars and the Company conducts substantially all of their business in U.S. dollars.

     All assets and liabilities in the balance sheets of foreign subsidiaries whose functional currency is other than U.S. dollars are translated at period-end exchange rates. All income and expenditure items in the income statements of foreign subsidiaries whose functional currency is other than U.S. dollars are translated at average annual exchange rates. Translation gains and losses arising from the translation of the financial statements of foreign subsidiaries whose functional currency is other than the U.S. dollar are not included in determining net income but are accumulated in a separate component of stockholders’ equity as a component of comprehensive income. The functional currency of the Company’s operations in the People’s Republic of China is the Renminbi.

     Gains and losses resulting from the translation of foreign currency transactions are included in income.

     Aggregate net foreign currency transaction income included in the income statement was approximately $228,000 and $214,000 for the years ended December 31, 2008 and 2007, respectively.

     Comprehensive income (loss) — Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income,” establishes standards for reporting comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income, as defined, includes all changes in equity during the period from non-owner sources. Examples of items to be included in comprehensive income, which are excluded from net income, include foreign currency translation adjustments and unrealized gain (loss) of available-for-sale securities. For the years ended December 31, 2008 and 2007, comprehensive loss was $8,960,000, composed of a net loss of approximately $8,738,000 and a foreign currency translation loss of $222,000 and $7,194,000 (equal to the net loss), respectively.

     Post-retirement and post-employment benefits — The Company’s subsidiaries which are located in the People’s Republic of China contribute to a state pension scheme on behalf of its employees. The Company recorded approximately $53,000 and $44,000 in expense related to its pension contributions for the years ended December 31, 2008 and 2007, respectively. Neither the Company nor its subsidiaries provide any other post-retirement or post-employment benefits.

     Use of estimates — The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. With respect to the acquisition of DRCI by Solar Power, Inc. a California corporation, the Company estimated the fair value of contracts acquired based on certain assumptions to be approximately $637,000. The Company estimated the value of each contract opportunity acquired by estimating the percentage of contracts that would be

signed and by applying a comparable acquisition cost to each contract based on the Company’s current sales subcontractor commission rates.

3. Recently Issued Accounting Pronouncements

     In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006, with earlier adoption permitted. The Company adopted the provisions of FIN 48, on January 1, 2007. This interpretation, among other things, creates a two-step approach for evaluating uncertain tax positions. Recognition occurs when an enterprise concludes that a tax position, based on its technical merits, is more-likely-than-not to be sustained upon examination. Measurement determines the amount of benefit that more-likely-than-not will be realized upon ultimate settlement. De-recognition of a tax position that was previously recognized would occur when a company subsequently determines that a tax position no longer meets the more-likely-than-not threshold of being sustained. FIN 48 specifically prohibits the use of a valuation allowance as a substitute for de-recognition of tax positions, and it has expanded disclosure requirements.

     As of December 31, 2008, we have unrecognized tax benefits of approximately $248,000. While the Company does not expect that the total amount of unrecognized benefit will significantly change over the next 12 months, it is reasonably possible that a change could occur. However, a reliable estimate cannot be made at this time.

     Effective January 1, 2007, the Company adopted the provisions of FIN 48, which prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. The Company had $248,000 and zero, respectively, of unrecognized tax benefits as of December 31, 2008 and 2007. The Company does not anticipate that any of the unrecognized tax benefits will increase or decrease significantly over the next twelve months.

Reconciliation of the unrecognized tax benefits for the years ended December 31, 2007 and 2008 is as follows (in thousands):

		2008				2007
Beginning Balance			—			$	—
Additions for current year tax positions		$	166				—
Reductions for current year tax positions			—				—
Additions for prior year tax positions			82				—
Reductions for prior year tax positions			—				—
Settlements			—				—
Reductions related to expirations of statute of limitations			—				—
Ending Balance		$	248			$	—

     We file a federal income tax return in the U.S., as well as income tax returns in California and Colorado, and certain other foreign jurisdictions. We are currently not the subject of any income tax examinations, however, all prior periods remain open to examination in the future.

     In September 2006, the FASB issued Statement of Financial Accounting Standards (“FAS”) No. 157, “Fair Value Measurements.” (“FAS 157”) FAS 157 establishes a common definition for fair value to be applied to accounting principles generally accepted in the United States of America guidance requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In February 2008 FASB issued Staff Position 157-2 that defers the effective date of FAS 157 for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed a fair

value in financial statements on a recurring basis, for fiscal years beginning after November 15, 2008. In addition, FAS also agreed to exclude from scope of FASB 157 fair value measurements made for purposes of applying FAS No. 13 “Accounting for Leases” and related interpretive accounting pronouncements. The adoption of FAS No. 157 for financial assets and liabilities did not have a material effect on the consolidated financial statements. The Company does not expect the adoption of FAS No. 157 for non-financial assets and liabilities to have a material impact on the consolidated financial statements.

     In February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115”, (“FAS 159”) which permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. A business entity is required to report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. This statement is expected to expand the use of fair value measurement. FAS 159 is effective for financial statements issued for fiscal years beginning after July 1, 2008. The adoption of FAS No. 159 did ot have a material effect on the consolidated financial statements.

     In December 2007, the FASB issued FAS No. 141(R), “Business Combinations” (“FAS No. 141(R)”) which requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. FAS No. 141(R) is prospectively effective to business combinations for which the acquisition is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The impact of FAS No. 141(R) on the Company’s consolidated financial statements will be determined in part by the nature and timing of any future acquisitions completed by it.

     In December 2007, the FASB issued FAS No. 160, “Non-controlling Interests in Consolidated Financial Statements (as amended)” (“FAS 160”) which improves the relevance, comparability, and transparency of financial information provided to investors by requiring all entities to report non-controlling (minority) interests in subsidiaries in the same way as equity consolidated financial statements. Moreover, FAS No. 160 eliminates the diversity that currently exists in accounting for transactions between an entity and non-controlling interests by requiring they be treated as equity transactions. FAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008; earlier adoption is prohibited. The Company is currently evaluating the impact that FAS 160 will have on its consolidated financial statements.

     In March 2008, the FASB issued FAS No. 161, “Disclosures about Derivatives Instruments and Hedging Activities, an Amendment of FASB Statement No. 133 (“FAS 161”)”. FAS 161 requires enhanced disclosures about a company’s derivative and hedging activities. FAS 161 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact of the adoption of FAS 161 and does not expect adoption to have a material impact on results of operations, cash flows or financial position.

     In April 2008, the FASB issued FASB Staff Position (FSP) FAS No. 142-3, “Determination of the Useful Life of Intangible Assets.” The FSP amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FAS No. 142, “Goodwill and Other Intangible Assets.” The FSP must be applied prospectively to intangible assets acquired after the effective date. The Company will apply the guidance of the FSP to intangible assets acquired after January 1, 2009.

4. Inventories

     Inventories consisted of the following at December 31 (in thousands):

		2008				2007
Raw material		$	2,184			$	2,036
Finished goods			2,538				4,927
Provision for obsolete stock			(57	)			(18	)
Total		$	4,665			$	6,945

5. Prepaid Expenses and Other Current Assets

     Prepaid expenses and other current assets at December 31 were (in thousands):

		2008				2007
Deferred costs		$	—			$	125
Rental, equipment and utility deposits			274				339
Deposits			158				118
Insurance			127				135
Advertising			124				166
Other			88				84
Total		$	771			$	967

6. Property, Plant and Equipment

     Property, plant and equipment at December 31 were (in thousands):

		2008				2007
Plant and machinery		$	661			$	787
Furniture, fixtures and equipment			260				215
Computers and software			754				261
Equipment acquired under capital leases			709				709
Automobiles			246				246
Leasehold improvements			610				198
Total cost			3,240				2,416
Less: accumulated depreciation and amortization			(1,062	)			(350	)
		$	2,178			$	2,066

Depreciation expense was approximately $700,000 and $330,000 for the years ended December 31, 2008 and 2007, respectively.

7. Other Accrued Liabilities

     Other accrued liabilities at December 31 were (in thousands):

		2008				2007
Accrued payroll		$	782			$	490
Sales tax payable			258				557
Warranty reserve			743				103
Customer deposits			718				399
Insurance premium financing			101				87
Accrued construction costs			162				212
Accrued interest payable			—				15
Other			69				200
		$	2,833			$	2,063

8. Stockholders’ Equity

     Issuance of common stock

     On August 28, 2008, the Company issued 6,000 shares of its common stock pursuant to a resolution of the Company’s Board of Directors, on August 20, 2008, as a gift to the children of a deceased employee. The shares were fair-valued at $1.30, the closing price of the Company’s common stock on August 20, 2008 and the Company recorded approximately $8,000 in expense related to this transaction.

     On August 20, 2008, the Company issued 50,000 shares of restricted common stock pursuant to the Company’s 2006 Equity Incentive Plan as a signing bonus to a new employee. The shares were fair-valued at $1.30, the closing price of the Company’s common stock on August 8, 2008, the date of grant. On the date of grant 25,000 shares vested. The remaining 25,000 shares will vest on August 8, 2009.

     On June 4, 2008, the Company issued 10,000 shares of its common stock pursuant to a consulting agreement for services rendered to the Company. The shares were fair-valued at $1.50, the closing price of the Company’s common stock on June 4, 2008 and the Company recorded $15,000 in expense related to this transaction.

     On April 15, 2008, the Company issued 50,000 shares of restricted common stock pursuant to the Company’s 2006 Equity Incentive Plan as a signing bonus to a new employee. The shares were fair-valued at $1.30, the closing price of the Company’s common stock on April 15, 2008, the date of grant. On the date of grant 25,000 shares vested. The remaining 25,000 shares will vest on April 15, 2009.

     On March 31, 2008, the Company issued 18,695 shares of its common stock through the exercise of stock options from its 2006 equity incentive plan. The shares were issued at an exercise price of $1.00 per share.

     On March 12, 2008, the Company issued 13,367 shares of its common stock to its independent directors. The shares were fair valued at $3.45 per share, the closing price of the Company’s common stock on December 24, 2007, the date of grant. The shares were fully vested.

     On February 28, 2008, the Company issued 50,000 shares of its common stock through the exercise of stock options from its 2006 equity incentive plan. The shares were issued at an exercise price of $1.00 per share.

     In December 2007, we completed a private placement of 4,513,911 shares of restricted common stock at a purchase price of $2.60 per share to 46 accredited investors. The accredited investors also received warrants to purchase 1,354,163 shares of common stock at an exercise price of $3.90 per share expiring on December 20, 2012. Additionally, our placement agent, Needham & Company, LLC additionally received warrants to purchase 135,417 shares to purchase our common stock at an exercise price of $3.90 per share expiring on December 20, 2012. The shares were offered and sold by us in reliance on Section 506 of Regulation D of the Securities Act, and comparable exemptions for sales under state securities laws.

     In November 2007, we issued 50,000 shares of our common stock pursuant to the exercise of a warrant issued for consulting services at an exercise price of $1.00 per share.

     In September 2007, we issued 50,000 shares of our common stock pursuant to the terms of a consulting agreement. The shares were fair-valued at $1.00 per share, the price of our most recent private placement since our shares were not trading publically at the time. The Company expensed $50,000 during the year ended December 31, 2007.

     In August 2007, we issued 42,500 shares of our common stock in settlement of an obligation. The shares were fair-valued at $1.00 per share.

     In April 2007, we entered into our standard Securities Purchase Agreement with E-Ton Solar Tech, Co., Ltd. (E-Ton) a foreign accredited investor as part of a private placement to raise $500,000 (the “Financing”). In connection with the Financing, we sold an aggregate of 500,000 shares of restricted common stock at a purchase price of $1.00 per share (the per share price of our most recent private placement) for an aggregate sale price of $500,000 to E-Ton.

     In February 2007, we issued 31,435 shares of our common stock in settlement of an obligation. The shares were fair-valued at $1.00.

     In December 2006, the Company issued 500,000 shares of its common stock in exchange for $425,000 in cash and the settlement of an obligation totaling $75,000.

     In December 2006, the Company affected a reverse merger with Solar Power, Inc., a Nevada Corporation (formerly Welund Fund, Inc.). The Company was determined to be the accounting acquirer for purposes of recording the transaction. Prior to the reverse merger the Company’s and Solar Power, Inc., a Nevada Corporation (formerly Welund Fund, Inc.) outstanding shares of common stock totaled 14,500,000 and 17,666,667, respectively. Subsequent to the reverse merger the Company issued 100,000 shares of restricted common stock. Accordingly, the outstanding shares of the Company at December 31, 2006 consist of the sum of the shares of the Company, Solar Power, Inc., a Nevada Corporation (formerly Welund Fund, Inc.) and the shares of restricted common stock. In conjunction with the reverse merger, the Company recorded the net assets of Solar Power, Inc., a Nevada Corporation (formerly Welund Fund, Inc.), less direct transaction costs, as an increase to its additional paid in capital. The assets and liabilities of Solar Power, Inc., a Nevada Corporation (formerly Welund Fund, Inc.) consisted primarily of cash and cash equivalents of $11,214,007 and was recorded at their historical values.

Issuance of warrants to purchase common stock

     In December 2007, in conjunction with our private placement, we issued warrants to purchase 1,354,163 shares of our common stock to participants of the private placement at an exercise price of $3.90 per share. In addition we issued a warrant to purchase 135,417 shares of our common stock at an exercise price of $3.90 as compensation for services to our placement agent, Needham & Company LLC. These warrants were fair-valued at $2.09 per share using the Black-Scholes model. The warrants expire on December 20, 2012.

     In September 2007, pursuant to a consulting agreement, we issued a warrant to purchase 50,000 shares of our common stock at an exercise price of $1.00 per share expiring on August 30, 2012. The warrant was fair-valued at $0.72 per share using the Black-Scholes model.

     In August 2007, we issued warrants to purchase 76,722 shares of our common stock in settlement of an obligation at an exercise price of $1.00 per share. These warrants were fair-valued at $0.73 per share using the Black-Scholes model.

     Prior to the reverse merger, in conjunction with a private placement, concluded on October 4, 2006, 800,000 warrants to purchase the Company’s common stock with an exercise price of $1.15 per share were issued to Roth Capital Partners for acting as the private placement agent. The terms of the warrants are five years, expiring on October 4, 2011. The warrants are transferable and are exercisable by the Holder at any time after the original date of issuance until and including the expiration date. The terms of the warrants provide for adjustment to the exercise price for common stock dividends, capital stock distributions, and stock splits. There is no performance requirements associated with these warrants. The Company treated the estimated fair value of these warrants as part of the cost of the private placement.

     Assumptions used in the determination of the fair value of warrants issued using the Black-Scholes model were as follows:

												Expected				Risk-free
				Exercise				Fair-Value				Term in				interest								Dividend
		Date Issued		Price				(in thousands)				years				rate				Volatility				Yield
In conjunction with private placement		10/4/2006		$	1.15			$	422				5.00				4.69	%			92	%			0	%
In settlement of an obligation		8/30/2007		$	1.00			$	56				5.00				4.21	%			92	%			0	%
For services rendered		9/1/2007		$	1.00			$	36				5.00				4.33	%			92	%			0	%
In conjunction with private placement		12/20/2007		$	3.90			$	3,113				5.00				3.39	%			83	%			0	%

9. Income Taxes

     Loss before provision for income taxes is attributable to the following geographic locations for the years ended December 31 (in thousands):

		Years Ended December 31
		2008				2007
United States		$	(11,972	)		$	(7,941	)
Foreign			3,401				808
		$	(8,571	)		$	(7,133	)

     The provision for income taxes consists of the following (in thousands):

		Years Ended December 31
		2008				2007
Current:
Federal		$	—			$	—
State			3				3
Foreign			164				58
			167				61
Deferred:
Federal			—				—
State			—				—
Foreign			—				—
			—				—
Total provision for income taxes		$	167			$	61

     The reconciliation between the actual income tax expense and income tax computed by applying the statutory U.S. Federal income tax rate to loss before provision for income taxes for the years ended December 31 are as follows (in thousands):

		Years Ended December 31
		2008				2007
Benefit for income taxes at U.S. Federal statutory rate		$	(3,001	)		$	(2,496	)
State taxes, net of federal benefit			2				1
Foreign taxes at different rate			(1,026	)			(225	)
Non-deductible expenses			18				10
Valuation allowance			4,184				2,776
Other			(8	)			(5	)
		$	169			$	61