The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our results of operation and financial condition. You should read this analysis in conjunction with our audited consolidated financial statements and related footnotes. This discussion and analysis contains statements of a forward-looking nature relating to future events or our future financial performance. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements, including those set forth in the Company's Form SB-2/A filed on October 5, 2007.

The following discussion and analysis should be read in conjunction with the unaudited financial statements contained in Part I, Item 1, and the related notes.

Overview

We have developed a proprietary thin film deposition technology for solar PV products that we believe will allow us to achieve a total module manufacturing cost per watt of less than $1.00, a cost that we expect to be competitive with the lowest in the solar PV industry. We are utilizing our proprietary deposition process to apply high-efficiency CIGS semiconductor material over large area substrates in a continuous fashion. Through our proprietary deposition process, we have achieved greater than 10% cell efficiencies on large area CIGS PV devices. We are developing a commercial scale proprietary deposition tool and intend to integrate this tool with commercially available thin film manufacturing equipment, which will provide us with a critically differentiated manufacturing process. We believe this approach will allow us rapidly to achieve commercial-scale production capacity with fewer potential line initialization difficulties.

We intend to manufacture monolithically integrated CIGS-on-glass modules to address near-term market opportunities, including grid-tied centralized utility markets, as well as grid-tied decentralized commercial and residential markets. In addition, we will seek to develop CIGS on foil packaged in flexible format for the emerging building integrated photovoltaic, or BIPV markets. We intend to begin installation of a 25MW manufacturing line at the beginning of 2008, with commercial shipments beginning in 2009. To facilitate our entry into the addressable solar PV market, we have entered into a contract with Blitzstrom GmbH that commits Blitzstrom to purchase a minimum of 50% of our production through 2011, subject to these products meeting defined performance criteria.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and the related disclosures. A summary of those accounting policies can be found in the notes to the consolidated financial statements set forth in our Annual Report on Form 10-KSB. Certain of our accounting policies are considered critical as they are both important to the portrayal of our financial condition and results of operations and require judgments on the part of management about matters that are uncertain. We have identified the following accounting policies that are important to the presentation of our financial condition and results of operations.

Revenue Recognition-We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 104, "Revenue Recognition," or SAB 104. SAB 104 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the seller's price to the buyer is fixed and determinable; and
(4) collectibility is reasonably assured. Since inception of the development stage on July 1, 2005, we have earned minimal amounts of product revenue.

Since inception of the development stage on July 1, 2005, our principal source of revenue has been from government funded research and development contracts and grants. Grant revenue is recognized when we fulfill obligations as set forth under the grant. Terms of the grant reflected in the accompanying financial statements require us to maintain specified employment criteria over a five year period. If we fail to meet the specified criteria, we must repay the unearned portion of the grant. As a result, we recorded deferred revenue of $300,000 as of September 30, 2007.

Property and Equipment-Property and equipment is stated at cost. Amounts received under grants which represent a reimbursement of property and equipment costs incurred are recorded as contra-assets against property and equipment. At September 30, 2007, there was $300,000 of grant funds included in property and equipment as contra-assets, of which $240,000 may need to be repaid should we fail to maintain certain employment criteria as specified in the grant. Depreciation is computed using straight-line and an accelerated method over estimated useful lives of 3 to 5 years. Expenditures for maintenance and repairs, which do not materially extend the useful lives of property and equipment, are charged to operations as incurred. When property or equipment is retired or otherwise disposed of, the property accounts are relieved of costs and accumulated depreciation and any resulting gain or loss is recognized.

Share-Based Compensation-Effective January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment," or SFAS 123(R), which requires the measurement and recognition of compensation expense for all share-based payment awards to employees and directors based on estimated fair values. Additionally, we follow the SEC's Staff Accounting Bulletin No. 107 "Share-Based Payment," issued in March 2005, which provides supplemental SFAS 123(R) application guidance based on the views of the SEC. We adopted SFAS 123(R) using the modified prospective transition method. Under this transition method, share-based compensation expense recognized in our consolidated statements of operations for the three months and nine months ended September 30, 2006 and 2007 included (a) compensation expense for all share-based awards granted prior to, but not yet vested, as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation expense for all share-based awards granted beginning January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R).

Derivative Stock Warrants-Certain terms in the convertible note and related documents issued on May 25, 2006 as well as subsequent agreements entered into on January 19, 2007, namely the potential for cash settlement, require that the warrants issued in conjunction with these documents be treated as a derivative instrument and, therefore, classified as a liability on the balance sheet. As such, the liability must be adjusted to fair value at the end of each reporting period, in accordance with No. SFAS 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), and any changes in fair value reported as a gain or loss on derivative liabilities in our consolidated statement of operations. The Black-Scholes option-pricing model is used to estimate the warrant fair values. Upon a change of control of our company, warrantholders having the right to purchase 600,003 shares of common stock would have the right to require us to repurchase the warrants from them at a purchase price equal to the Black-Scholes value of the unexercised portion of the warrants. Generally, this accounting treatment will result in a reported loss during any accounting period in which there is a reported increase in the sales price of our common stock on the Nasdaq Capital Market. Conversely, this accounting treatment generally will result in a reported gain during any accounting period in which there is reported decrease in the sales price of our common stock on the Nasdaq Capital Market.

Results of Operations

Comparison of the Three Months Ended September 30, 2007 and 2006

Certain reclassifications have been made to the 2006 financial information to conform to the 2007 presentation. Such reclassifications had no impact on net income / (loss).

Research and development expenses. Research and development expenses were $2,095,315 for the three months ended September 30, 2007 compared to $3,275,243 for the three months ended September 30, 2006, a decrease of $1,179,928 or 36%. These expenses decreased primarily due to the reduction in personnel and operations of our pilot line at our New York facility near the end of the second quarter of 2007. We will continue to engineer-to-scale our proprietary deposition tool at our California facility in order to manufacture and commercialize monolithically integrated CIGS-on-glass modules.

Selling, general and administrative expenses. Selling, general and administrative expenses were $1,247,491 for the three months ended September 30, 2007 compared to $1,490,177 for the three months ended September 30, 2006, a decrease of $242,686 or 16%. The decrease in selling, general and administrative expenses resulted primarily from a decrease in headcount and an overall reduction in operating expenditures during the period. The decrease in cash-related operating expenses was offset to a degree by an increase in certain non-cash expenses. Share-based compensation of $294,341 was included in selling, general and administrative expenses during the three months ended September 30, 2007, compared to $162,979 for the three months ended September 30, 2006.

Restructuring. There was $201,855 in restructuring expense for the three months ended September 30, 2007. There was no restructuring expense for the three months ended September 30, 2006. Our restructuring charges consist of professional fees and other expenses associated with the restructuring of the Note ("Note Restructuring"). Other restructuring charges relate to our change in business strategy, including the focus on development and manufacturing efforts for our initial commercial product, monolithically integrated CIGS-on-glass modules, as well as the relocation of certain key personnel and our corporate headquarters to California ("Business Strategy Restructuring"). The expenses during the three months ended September 30, 2007 were all Business Strategy Restructuring charges.

Depreciation and amortization expenses. Depreciation and amortization expenses were $769,735 for the three months ended September 30, 2007 compared to $502,315 for the three months ended September 30, 2006, an increase of $267,420. Depreciation and amortization expenses increased primarily as a result of the utilization of significant amounts of capital equipment in the development of our CIGS PV products and manufacturing processes.

Other income. Other income was $44,563 for the three months ended September 30, 2007 compared to $206,506 for the three months ended September 30, 2006, a decrease of $161,943. Other income primarily represents interest on investments.

Interest expense. Interest expense was $122,499 for the three months ended September 30, 2007 compared to $600,314 for the three months ended September 30, 2006, a decrease of $477,815. The decrease in interest expense was due primarily to the restructuring, sale and ultimate conversion to equity during the first quarter of 2007 of our Note which carried a 7.5% interest rate.

Amortization of note discount and financing costs. Amortization of note discount and financing costs was $94,813 for the three months ended September 30, 2007 compared to $2,517,082 for the three months ended September 30, 2006. The Note contained a beneficial conversion feature as well as warrants issued to the Original Note Holder. The aggregate fair value of the conversion feature and warrants represented a discount to the Note, totaling $5.3 million and was amortized using the effective interest method over the life of the Note. The financing costs related to the Note were capitalized and amortized over the life of the Note as well. As the Note was converted to common stock during the first quarter of 2007, all unamortized note discount and remaining deferred financing costs at the time of the conversion were expensed, resulting in a decrease in this expense for the three months ended September 30, 2007 as compared with 2006. The amounts included in amortization of note discount and financing costs during the three months ended September 30, 2007 were financing costs associated with the bridge financing in which we obtained funding in the form of a note payable to fund operations until we were able to complete a public offering of shares of our common stock on October 31, 2007.

Gain on derivative liabilities. Gain on derivative liabilities was $651,046 for the three months ended September 30, 2007 compared to $1,738,622 for the three months ended September 30, 2006. The warrants issued in conjunction with the Note are considered derivative liabilities and are therefore required to be adjusted to fair value each quarter. During the three months ended September 30, 2007, our Common Stock price decreased which caused a decrease in the fair value of the warrant liability. This resulted in a gain on derivative liabilities of $651,046 for the three months ended September 30, 2007. An increase in our stock price during the period results in an increase in the warrant liability and a loss on derivative liabilities. Conversely, a decrease in our stock price during the period would result in a decrease in the warrant liability and a gain on derivative liabilities.

Net loss. Net loss was $3,836,099 for the three months ended September 30, 2007 compared to a loss of $6,288,953 for the three months ended September 30, 2006. The decrease in net loss is due primarily to the decrease in non-cash expenses, including amortization of note discount and financing costs. Additionally, we have reduced expenditures related to the manufacture of CIGS on foil products in order to focus our efforts in the near term on the manufacture of our proprietary deposition tool in order to achieve commercialization, in the most efficient manner, of monolithically integrated CIGS-on-glass modules.

Comparison of the Nine Months Ended September 30, 2007 and 2006

Certain reclassifications have been made to the 2006 financial information to conform to the 2007 presentation. Such reclassifications had no impact on net income / (loss).

Research and development expenses. Research and development expenses were $6,806,478 for the nine months ended September 30, 2007 compared to $7,641,507 for the nine months ended September 30, 2006, a decrease of $835,029 or 11%. These expenses decreased primarily due to the reduction in personnel and operations of our pilot line at our New York facility near the end of the second quarter of 2007. We will continue to engineer-to-scale our proprietary deposition tool at our California facility in order to manufacture and commercialize monolithically integrated CIGS-on-glass modules.

Selling, general and administrative expenses. Selling, general and administrative expenses were $4,639,413 for the nine months ended September 30, 2007 compared to $4,056,378 for the nine months ended September 30, 2006, an increase of $583,035 or 14%. The increase in selling, general and administrative expenses resulted primarily from one-time charges incurred in accordance with transition agreements for certain former executives. Additionally, share-based compensation of $1,014,920 was included in selling, general and administrative expenses during the nine months ended September 30, 2007, compared to $523,905 for the nine months ended September 30, 2006.

Restructuring. There was $1,756,220 in restructuring expense for the nine months ended September 30, 2007. There was no restructuring expense for the nine months ended September 30, 2006. During the nine months ended September 30, 2007, Note Restructuring charges were $1,370,959 and Business Strategy Restructuring charges were $385,261.

Depreciation and amortization expenses. Depreciation and amortization expenses were $2,227,082 for the nine months ended September 30, 2007 compared to $994,035 for the nine months ended September 30, 2006, an increase of $1,233,047. Depreciation and amortization expenses increased primarily as a result of the utilization of significant amounts of capital equipment in the development of our CIGS PV products and manufacturing processes.

Other income. Other income was $129,322 for the nine months ended September 30, 2007 compared to $464,921 for the nine months ended September 30, 2006, a decrease of $335,599. Other income primarily represents interest on investments.

Interest expense. Interest expense was $250,825 for the nine months ended September 30, 2007 compared to $757,066 for the nine months ended September 30, 2006, a decrease of $506,241. The decrease in interest expense was due primarily to the restructuring, sale and ultimate conversion to equity during the first quarter of 2007 of our Note which carried a 7.5% interest rate.

Amortization of note discount and financing costs. Amortization of note discount and deferred financing costs was $4,162,312 for the nine months ended September 30, 2007 compared to $3,599,895 for the nine months ended September 30, 2006, an increase of $562,417. The Note contained a beneficial conversion feature as well as warrants issued to the Original Note Holder. The aggregate fair value of the conversion feature and warrants represented a discount to the Note, totaling $5.3 million and was amortized using the effective interest method over the life of the Note. The financing costs were capitalized and amortized over the life of the Note as well. The Note was converted to common stock during the first quarter of 2007 and all unamortized note discount and remaining deferred financing costs at the time of the conversion were expensed, resulting in an increase in this expense for the nine months ended September 30, 2007 as compared with the nine months ended September 30, 2006.

Gain (loss) on derivative liabilities. Loss on derivative liabilities was $2,305,293 for the nine months ended September 30, 2007 compared to a gain on derivative liabilities of $1,653,092 for the nine months ended September 30, 2006. The warrants issued in conjunction with the Note are considered derivative liabilities and are therefore required to be adjusted to fair value each quarter. During the nine months ended September 30, 2007, our common stock price increased which caused an increase in the fair value of the warrant liability. This resulted in a loss on derivative liabilities of $2,305,293 for the nine months ended September 30, 2007. An increase in our stock price during the period results in an increase in the warrant liability and a loss on derivative liabilities. Conversely, a decrease in our stock price during the period would result in a decrease in the warrant liability and a gain on derivative liabilities.

Loss on extinguishment of debt. Loss on extinguishment of debt was $6,091,469 for the nine months ended September 30, 2007. There was no loss on extinguishment of debt for the nine months ended September 30, 2006. The loss is due to the excess of the consideration we provided to the Original Note Holder in the form of cash payments, shares of common stock and additional Class A Warrants for payment of the outstanding principal and accrued interest on the Note.

Net loss. Net loss was $28,109,770 for the nine months ended September 30, 2007 compared to a loss of $14,749,818 for the nine months ended September 30, 2006. The increase in net loss is due primarily to the non-cash expenses recognized on the extinguishment of the Note, write-off of the remaining note discount and financing costs, and loss on derivative liabilities for the nine months ended September 30, 2007.

Liquidity and Capital Resources

Liquidity. At September 30, 2007, our cash and cash equivalents totaled $6,493,861. The net cash provided during the quarter was primarily the result of proceeds from bridge financing in the form of notes, prior to the completion of our public offering on October 31, 2007. We currently spend approximately $1.2 million per month on operating expenses for research and development, and selling, general and administrative costs. This spending rate excludes one-time restructuring costs and costs associated with financings. During the nine months ended September 30, 2007, we reported a net loss of approximately $28.1 million, which included non-cash expenses of $16.1 million, primarily associated with the Note and series of agreements entered into on January 19, 2007, resulting in the Note's ultimate conversion into common stock.

During the nine months ended September 30, 2007, we incurred significant one-time, non-cash expenses that substantially increased our reported operating losses. The following table summarizes the key components of our results of operations for the nine months ended September 30, 2007. This table is provided for informational purposes in order to present the cash and non-cash components of the line items included in our consolidated statement of operations, which is prepared in accordance with accounting principles generally accepted in the United States and included elsewhere in this Form 10-QSB.

                                                                    Nine Months Ended
Net Loss Summary For the Nine Months Ended September 30, 2007       September 30, 2007
Cash expenses:
Operating expenses                                                 $          9,931,648
Restructuring                                                                 1,415,620
Financing costs                                                                 527,873
Interest expense and other income                                               121,503

Total cash expenses                                                          11,996,644

Non-cash expenses:
Loss on extinguishment of debt                                                6,091,469
Amortization of note discount and financing costs                             3,634,439
Loss on derivative liabilities                                                2,305,293
Depreciation and amortization                                                 2,227,082
Share-based compensation                                                      1,514,243
Restructuring                                                                   340,600

Total non-cash expenses                                                      16,113,126

Reported net loss                                                  $         28,109,770

We are in the development stage, and as such, have historically reported net losses. We anticipate continuing to incur losses in the future as we transition to commercialization. We have experienced negative cash flows from operations since our inception and do not anticipate generating sufficient positive cash flows to fund our operations in the foreseeable future.

Our transition to commercialization has required a reduction of our New York-based resources as we focus efforts on building our first large scale production line in California. Effective June 1, 2007, we reduced our New York staff by approximately 20 people. This reduction in personnel was consistent with the commercialization operating plan to transition corporate headquarters from New York to California. This staffing reduction decreased our pilot production lines from three shifts to one, which will be maintained to continue product testing. The savings generated through this reduction in staff and other activities may be used to execute some of the activities needed to transition our corporate headquarters to California. Additionally, we will incur spending to execute our near-term plan to manufacture CIGS-on-glass mini modules in California. There is a possibility that the headquarters transition activities and the manufacture of mini modules may increase our estimated monthly cash burn to more than $1.2 million over the next few months.

On October 31, 2007, we completed a registered public offering in which we sold 17,250,000 shares of our common stock at $4.25 per share and generated net proceeds of approximately $68 million after deducting underwriting discounts and the estimated fees and expenses of the offering. Upon receipt of the proceeds from the offering, we re-paid in full $9.2 million of existing indebtedness. We will use the remaining net proceeds from this offering to engineer-to-scale and manufacture our proprietary deposition tool, for construction of the 25MW line, working capital and other general corporate purposes.

A substantial portion of the funds from the offering will be used towards the construction of the 25MW line in 2008. First commercial shipments from this line are currently expected to be made in the third quarter of 2009. We believe that the net proceeds of this offering will provide sufficient funds to complete our initial 25MW manufacturing line. In order to achieve profitability, however, we may have to expand our manufacturing capacity beyond our initial 25MW manufacturing line. Our current plan involves replicating our proposed initial 25MW line to build a 100MW facility, consisting of four 25MW lines with construction beginning in 2009. Expanding our manufacturing capacity from our initial 25MW line will require substantial funds beyond those provided by this offering. We believe that engineering-to-scale the commercial grade proprietary deposition tool, combined with the successful construction of our initial 25MW manufacturing line and the commercialization of our product will facilitate our ability to secure the required financing. Such financing may not be available to us on terms that are acceptable to us, if at all, and any new equity financing may be dilutive to stockholders. A wide variety of factors relating to our company and external conditions could adversely affect our ability to secure funding to expand our manufacturing capacity and the terms of any funding that we secure.

Capital Resources. We have historically financed our operations primarily from proceeds of the sale of equity securities and revenues or funds received under research and development contracts and grants. We presently do not have any bank lines of credit that provide us with an additional source of debt financing.

We received $5.0 million in gross proceeds from the issuance of 2,500,000 shares of common stock at $2.00 per share, on February 16, 2007.

On June 15, 2007, we entered into a note agreement with LC Capital Master Fund, Ltd. for a loan in the amount of $4.0 million. See Note 5, "Notes Payable," to our consolidated financial statements for further details on this transaction. We entered into an amendment and restatement of this loan agreement on September 14, 2007, increasing the aggregate principal amount of the loan to $9.0 million. These proceeds were to be used to fund business operations pending completion of our public offering. The agreement requires us to repay 102% of the principal amount outstanding, plus accrued interest, with proceeds from the offering.

On October 31, 2007, we completed a registered public offering in which we sold 17,250,000 shares of our common stock at $4.25 per share and generated net proceeds of approximately $68 million after deducting underwriting discounts and the estimated fees and expenses of the offering. Upon receipt of the proceeds . . .