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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549




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FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

OR

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

For the transition period from             to            .

COMMISSION FILE NUMBER 000-31687

EVERGREEN SOLAR, INC.


(Exact name of registrant as specified in its charter)


|                                                                       |  |                                               
|---------------------------------------------------------------------- |  | ----------------------------------------------
|DELAWARE(State or other jurisdiction of
incorporation or organization) |  | 04-3242254(I.R.S. Employer
Identification No.)
|                                                                       |  |                                               
|259 CEDAR HILL STREET                                                  |  | 01752                                         
|MARLBORO, MASSACHUSETTS                                                |  | (Zip Code)                                    
|(Address of principal executive offices)                               |  |                                               

Registrants telephone number, including area code: 508-357-2221

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 $.01 PER SHARE

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
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:

Yesx      Noo

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 the 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.o

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).

Yeso      Nox

As of February 27, 2003, there were 11,410,826 shares of the registrants
Common Stock, $.01 par value per share, outstanding. The aggregate market value
of the registrants voting stock held by non-affiliates as of June 28, 2002 was
approximately $15 million.

DOCUMENTS INCORPORATED BY REFERENCE

The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December 31,
2002. Portions of such proxy statement are incorporated by reference into Part
III of this Annual Report on Form 10-K.



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TABLE OF CONTENTS



|                                              |                                                                                                |  |  |  |  |  |  | 
|--------------------------------------------- | ---------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                       
|                                              | ITEM 1. BUSINESS:                                                                             
|                                              | ITEM 2. PROPERTIES:                                                                           
|                                              | ITEM 3. LEGAL PROCEEDINGS:                                                                    
|                                              | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:                                  
|PART II                                      
|                                              | ITEM 5. MARKET FOR THE COMPANYS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS:               
|                                              | ITEM 6. SELECTED FINANCIAL DATA:                                                              
|                                              | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
|                                              | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:                          
|                                              | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:                                          
|                                              | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE: 
|PART III                                     
|                                              | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:                                  
|                                              | ITEM 11. EXECUTIVE COMPENSATION:                                                              
|                                              | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:                      
|                                              | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:                                      
|                                              | ITEM 14. CONTROLS AND PROCEDURES:                                                             
|                                              | ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K:                     
|SIGNATURES                                   
|POWER OF ATTORNEY AND SIGNATURES             
|Ex-21.1 Subsidiaries of the Registrant       
|Ex-23.1 Consent of PricewaterhouseCoopers LLP
|Ex-99.1 Section 906 Certification            
|Ex-99.2 Section 906 Certification            



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PART I




ITEM 1. BUSINESS:

OVERVIEW

We develop, manufacture and market solar power products that are capable
of providing reliable and environmentally clean electric power throughout the
world. Our solar power products are targeted at the global solar power market.
We believe our proprietary and patented solar power technologies, including our
String RibbonTM technology, will offer significant design, cost and
manufacturing advantages over competing solar power technologies. We intend to
become a leading producer of high-quality solar power products by expanding our
manufacturing capacity, reducing our manufacturing costs, developing innovative
solar power products, increasing our distribution capabilities and pursuing
strategic relationships.

Since our formation in 1994, we have conducted research and development of
advanced process and product technologies and, between 1997 and June 2001, we
used pilot manufacturing facilities to refine our solar power products and
manufacturing processes. Also in 1997, we began shipping small quantities of
commercial products. In 2001, we expanded our manufacturing capacity by
relocating our operations to a 56,250 square foot facility in Marlboro,
Massachusetts. We are continuing to refine, develop and commercialize a number
of laboratory-demonstrated advancements in our solar power technologies,
including advanced String Ribbon crystal growth, more efficient solar cells and
improved solar panel designs. Through December 31, 2002, we shipped almost
30,000 solar panels for residential, commercial and industrial applications in
the United States and internationally. As we continue to increase production
volumes, we intend to actively expand existing and seek new distribution and
marketing arrangements.

FINANCING TRANSACTION

On March 21, 2003 we entered into the Stock and Warrant Purchase Agreement
with Perseus 2000, L.L.C., Nth Power Technologies Fund II, LP, Nth Power
Technologies Fund II-A, LP, RockPort Capital Partners, L.P., RP Co-Investment
Fund, I, Micro-Generation Technology Fund, LLC, UVCC Fund II, UVCC II Parallel
Fund, L.P., Caisse de dépôt et placement du Québec, CDP Capital  Technology
Ventures U.S. Fund 2002 L.P., Beacon Power Corporation, Massachusetts
Technology Park Corporation, Zero Stage Capital VII, L.P., Zero Stage Capital
(Cayman) VII, L.P., Zero Stage Capital SBIC VII, L.P., IMPAX Environmental
Markets plc, Merrill Lynch New Energy Technology Fund, MLIIF New Energy Fund,
PNE Invest Limited, Odyssey Fund, SAM Private Equity Energy Fund LP, SAM
Sustainability Private Equity LP and SAM Smart Energy pursuant to which we
have agreed to issue, and the purchasers have agreed to purchase from
us, $29,375,000 of Series A convertible preferred stock at a
per share purchase price to be calculated as of the closing date. The per share purchase price to be
paid for the shares of Series A convertible preferred stock will be 85% of the
60-day trading average closing price of our common stock for the period ending two
trading days prior to the closing date of the private placement. However, in no
event will the per share price exceed $1.12 (which is 85% of the 60-day trading average
of the closing bid prices of our common stock for the period ending on March 17,
2003), or be less than $0.68. Additionally, we agreed to issue, and Beacon
Power Corporation agreed to purchase for a purchase price of $100,000, a
warrant to purchase 2,400,000 shares of common stock at an exercise price equal
to the per share purchase price of the Series A convertible preferred stock paid by the
purchasers, plus $2.25. The shares of Series A convertible preferred stock
will be initially convertible into shares of common stock on a 1-to-1 basis
(subject to adjustment to account for the payment of dividends, to take into
account certain changes to our capital structure and to account for future
dilutive issuances). Depending upon the final per share price paid by the
purchasers for such shares, the Series A convertible preferred stock will, when
issued, represent between 70% and 79% of the currently issued and outstanding
shares of our capital stock. The closing of the transactions contemplated by
the purchase agreement is subject to certain conditions, including, among other things, obtaining stockholder approval.
If approved by stockholders, it is anticipated that the closing of the private
placement would occur as soon as practicable thereafter.

Interest of Certain Persons in the Matter to Be Acted Upon

Micro-Generation Technology Fund, LLC, UVCC Fund II, and UVCC II Parallel Fund,
L.P., each of which is an investment entity affiliated with Dr. Robert W. Shaw,
Jr., the chairman of our board of directors, have agreed to invest $3.5 million
in the aggregate in the private placement in return for shares of Series A
convertible preferred stock on terms identical to those afforded to each other
purchaser, except that Arete Corporation, as one of the five purchasers who
signed the initial term sheet with respect to the private placement, will have
the right to designate a member of our board of directors and will be eligible
to receive a break-up fee under certain circumstances if the private placement
does not close. Dr. Shaw is the President of Arete Corporation, which is the
manager of Micro-Generation Technology Fund, LLC. Dr. Shaw is a general partner
of Arete Venture Investors II, L.P., which is the general partner of UVCC Fund
II. Dr. Shaw is also a general partner of Arete Ventures III, L.P., which is
the general partner of UVCC II Parallel Fund, L.P. As of March 1, 2003, these
entities and others affiliated with Dr. Shaw owned an aggregate of 840,453
shares of our common stock and Dr. Shaw, together with his wife, owned an
aggregate of 112,699 additional shares of our common stock in their individual
capacities. If the private placement is approved by our stockholders, and if
the private placement is consummated, Arete Corporation intends to designate
Dr. Shaw as its designee to our board of directors.

Dr. Shaw is a limited partner of Nth Power Management II, L.P., the general
partner of Nth Power Technologies Fund II, LP, and in such capacity provides
advice as requested to this entity. Dr. Shaw does not serve on this entitys
investment committee nor does he have any decision making authority with
respect thereto. Dr. Shaw has also agreed to become a member of, and perform
comparable services for, Nth Power Management II-A, LLC, the general partner of
Nth Power Technologies Fund II-A, L.P., and will have a similar advisory role
with that entity. As of March 1, 2003, Nth Power Technologies Fund, I, L.P., an
investment entity affiliated with Nth Power, LLC owned 1,016,914 shares of our
common stock. Nth Power Technologies Fund II, LP and Nth Power Technologies
Fund II-A, LP, each of which is an investment entity affiliated with Nth Power
Management II, L.P. and Nth Power Management II-A, LLC, have agreed to invest
$4 million in the aggregate in the private placement in return for shares of
Series A convertible preferred stock on terms identical to those afforded to
each other purchaser, except that Nth Power Technologies Fund II, LP, as one of
the five purchasers who signed the initial term sheet with respect to the
private placement, will have the right to designate a member of our board of
directors and will be eligible to receive a break-up fee under certain
circumstances if the private placement does not close. Dr. Shaw did not
participate in the decision of either of the two Nth Power-related entities to
invest in the private placement. Nth Power Technologies Fund II, LP intends to
designate Timothy Woodward, a Managing Director of Nth Power, LLC, as its
designee to our board of directors.

Dr. Shaw serves as a member of the investment committee of SAM Private Equity
Energy Fund L.P. and SAM Sustainability Private Equity Fund L.P. and he has a
limited partnership interest in SAM Private Equity Energy Fund L.P. These
entities and another affiliated entity, SAM Smart Energy, have agreed to invest
$3.25 million in the aggregate in the private placement in return for shares of
Series A convertible preferred stock on terms identical to those afforded to
each other purchaser. Dr. Shaw recused himself and did not participate in the
SAM investment committee decisions to invest in the private placement.

Dr. Shaw has no voting power or dispositive power over any Evergreen shares
held by the Nth Power investment entities or the SAM investment entities.

Dr. Shaw, as a result of his relationships with investors in the private
placement as described above, may have interests in the private placement that
are different from those of other Evergreen stockholders. Dr. Shaw is not a
member of, and did not participate in, any meetings of our financing committee
that negotiated the private placement and did not participate in any
discussions with the purchasers concerning the terms of the private placement.

Mason Willrich, one of our directors, was previously affiliated with Nth Power,
LLC. From 1996 through December 1999, Mr. Willrich served as a Principal of Nth
Power, LLC, a managerial role that entails reviewing investment candidates and
participating in day-to-day operations management, and from January 2000
through February 2002, he was a Special Limited Partner of Nth Power, LLC an
advisory role that entailed reviewing investment candidates and providing
insights into market trends and opportunities. As of March 1, 2003, Mr.
Willrich, together with his wife and a trust entity of which he is the sole
trustee, owned an aggregate of 19,503 shares of our common stock. If the
private placement is approved by our stockholders, and if the private placement
is consummated, Mr. Willrich intends to resign from our board.

Mr. Willrich, as a result of his relationship with an investor in the private
placement as described above, may have interests in the private placement that
are different from those of other Evergreen stockholders. Mr. Willrich was not
a member of, and did not participate in, any meetings of our financing
committee that negotiated the terms of the private placement and did not
participate in any discussions with the purchasers concerning the terms of the
private placement.

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HISTORICAL MILESTONES

We were incorporated in August 1994 and, to date, we have achieved the
following milestones along our product development and commercialization
schedule:

|         |  |  |      |  |  |                                                                                                      
|-------- |  |  | ---- |  |  | -----------------------------------------------------------------------------------------------------
|Date     |  |  |      |  |  | Historical Milestone                                                                                 
|         |  |  |      |  |  |                                                                                                      
|October  |  |  | 1994 |  |  | Evergreen Solar founded with four employees in a 2,500 square foot laboratory.                       
|October  |  |  | 1995 |  |  | First String Ribbon wafers produced.                                                                 
|April    |  |  | 1997 |  |  | 9,400 square foot pilot manufacturing facility operational.                                          
|October  |  |  | 1997 |  |  | First commercial sale of solar panels produced using String Ribbon technology.                       
|June     |  |  | 1999 |  |  | Total sales of solar panels of 2,500 units and 100 kilowatts achieved.                               
|December |  |  | 1999 |  |  | Kawasaki investment of $5 million and execution of a strategic distribution and marketing agreement. 
|March    |  |  | 2000 |  |  | Leased 56,250 square foot manufacturing and headquarters facility located in Marlboro, Massachusetts.
|August   |  |  | 2000 |  |  | Renovation of our Marlboro manufacturing facility and headquarters begun.                            
|June     |  |  | 2001 |  |  | First shipment of solar panels from our new Marlboro manufacturing facility.                         
|November |  |  | 2001 |  |  | New distribution relationships in the U.S. and Europe.                                               
|December |  |  | 2001 |  |  | Shipment of our
10,000th solar panel.                                                                
|June     |  |  | 2002 |  |  | Achieved first quarterly $1.0 million in product sales.                                              
|December |  |  | 2002 |  |  | Demonstration of double ribbon growth to boost productivity.                                         
|December |  |  | 2002 |  |  | Solar system installed on White House.                                                               

INDUSTRY BACKGROUND

The electric power industry is one of the worlds largest industries.
Furthermore, electricity accounts for a growing share of overall energy use.
We believe that deregulation and technological innovations are creating
significant opportunities for new entrants and technologies within the electric
power industry, just as these changes have created similar opportunities in
other regulated industries such as telecommunications, banking and
transportation.

We believe that distributed generation is one of the most 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, and employs technologies such as solar
power, microturbines and fuel cells. Distributed generation is expected to
provide greater portability, reliability, power quality and user control. We
believe capacity constraints, increased demand for power reliability and
quality, and new environmental initiatives will drive the demand for
distributed generation.

We further believe that environmentally benign, locally sourced power
generation will become increasingly more important for economic development,
environmental policy, and national security. Increasing attention to global
warming, global energy policy, and regional stability and development will
support the deployment of distributed generation, particularly renewable
energy.

SOLAR POWER APPLICATIONS AND BENEFITS

Unlike many other distributed generation technologies that have been under
development but not in widespread commercial use, solar power technology has
had a growing worldwide market for over 25 years in the following 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. On-grid
applications have been the fastest growing part of the solar power
market, largely 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 and building facades and are available for both new construction
and existing structures.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | - |  | 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 powering 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.                                                                                                                                                                                                                                         

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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:



| | - |  | Modular and scaleable. From tiny solar cells powering a hand-held
calculator to an array of roof panels powering an entire home to acres of
panels 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.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | - |  | Reliable. With no moving parts and no fuel supply required, solar power
systems reliably power some of the worlds most sensitive applications,
from space satellites to microwave stations in the mountains and other
remote, harsh environments. Solar panels typically carry warranties as
long as 25 years.                                                                                                                                                                                           
|
| | - |  | Dual use. Solar panels are expected to increasingly serve as both a
power generator and the skin of the building. Like architectural glass,
solar panels can be installed on the roofs or facades of residential and
commercial buildings.                                                                                                                                                                                                                                                                
|
| | - |  | Environmentally cleaner. Solar power systems consume no fuel and
produce no air or water emissions.                                                                                                                                                                                                                                                                                                                                                                                                       

THE SOLAR POWER CHALLENGE

Although solar power has been technically proven for over 25 years and is
widely cost-effective for off-grid applications, we believe the principal
challenge to widespread adoption of solar power is reducing manufacturing costs
without impairing product performance or 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 slicing silicon blocks by conventional crystalline
silicon technology.                                     
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | - |  | Simplified and continuous processing. Reduce reliance on expensive,
multi-step manufacturing processes.                                                                                               
|
| | - |  | 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.

We further believe the two principal solar power technologies, crystalline
silicon and thin films, have not adequately addressed this challenge:

Crystalline Silicon. Crystalline silicon technology was the earliest
practiced solar power technology and remains the foundation for most solar
power applications. Conventional crystalline silicon technology involves
slicing thin wafers from solid crystalline silicon blocks. Crystalline silicon
products are known for their reliability, performance and longevity; however,
factors such as high materials waste from slicing, and multi-step processing
procedures have limited the ability of conventional crystalline silicon
manufacturers to reduce manufacturing costs.

Thin Films. While most major solar power manufacturers currently rely on
crystalline silicon technology for the majority of their solar cell production,
many are also developing alternative thin film technologies to achieve lower
manufacturing costs. Thin film technology involves depositing several thin
layers of silicon or more complex materials on a substrate to make a solar
cell. Although thin film techniques may be able to use material more
efficiently than conventional crystalline silicon, we believe the commercial
acceptance of thin film technology is limited due to higher capital costs,
lower manufacturing yields, lower conversion efficiency, reduced product
performance and reliability, and, in some cases, concerns with toxic materials.
Recent curtailments of R&D programs as well as plant closures by some industry
participants, most notably BP Solar in 2002, highlight the commercial
challenges that thin films have faced.

OUR TECHNOLOGY SOLUTION

We believe our technologies and processes are unique among our
competitors. Both our technologies and processes have been designed to reduce
manufacturing costs while improving product design. We are developing
technology at the wafer, cell and panel stages of manufacturing, and we hold
patents and other intellectual property in all three areas. Our String Ribbon
wafer manufacturing technology is our core technology and we believe
it offers a substantial
opportunity to reduce cost and otherwise advance our business through reduced
materials cost, simpler processing and lower required economies of scale.

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In the String Ribbon technique, strings are pulled vertically through a
shallow pool of molten silicon, and the silicon solidifies between the strings
to form a continuous ribbon of crystalline silicon. The ribbon is then cut and
prepared for cell fabrication. The use of strings to aid in the simplified
growth of a silicon ribbon is what distinguishes our proprietary and patented
String Ribbon technology from other advanced crystalline silicon wafer
technologies that do not involve slicing. We believe our String Ribbon technology for the
growth of solar wafers has the following significant advantages:



| | - |  | Efficient materials use. Unlike conventional bulk crystalline silicon
wafer technology, in which solid blocks of silicon are sliced into thin
wafers at significant expense and silicon waste, our technology grows a
continuous, flat ribbon to the desired thickness. Since our technology
does not involve slicing solid blocks, we can use approximately half as
much silicon as conventional crystalline silicon techniques and we
believe we can reduce this amount to about one-fifth in the future
through production of thinner wafers.  
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | - |  | Continuous processing. Our technology permits the continuous growth of
crystalline silicon ribbon, which can lead to high automation, efficient
equipment use and improved productivity.                                                                                                                                                                                                                                                                                                                                                          
|
| | - |  | Modularity. String Ribbon furnaces individually have a capacity of
approximately 0.5 megawatts per year, whereas conventional bulk
technology typically has an individual machine capability of 3 megawatts
per year, and the trend has been to increase minimum unit size in recent
years. We expect that this modularity may enable us to achieve economies
of scale at a smaller scale than conventional technologies, which could
enable us to manufacture internationally in more numerous, smaller
factories to better serve global markets.

In addition to String Ribbon, we are developing and have patented advanced
approaches in cell and panel fabrication, including a technique to produce
wrap-around or back-contact solar cells, monolithic integration and
polymer-framed modules. While these technologies are not yet in commercial
production, they present an opportunity to further reduce cost and improve
products by simplifying processes and reducing materials use.

OUR PRODUCTS

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



| | - |  | Wafers. A crystalline silicon wafer is a flat piece of crystalline
silicon that can be processed into a solar cell. Our rectangular wafers
currently measure 81 millimeters by 150 millimeters and are approximately
as thick as a business card.                                                                                                                                                                                                                                                 
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | - |  | 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. Our solar cells produce approximately 1.5 watts of power each.                                                                                                                                                                                                                                                                                  
|
| | - |  | Panels. A solar panel is an assembly of solar cells that have been
electrically interconnected and laminated in a physically durable and
weather-tight package. A typical solar panel can produce from 20 to 150
watts of power and range in size from two to 15 square feet. A 100-watt
solar panel can power a standard 100-watt light bulb, or approximately 3%
of the power requirements of a typical home in the United States. Our
current solar panels range from 47 to 110 watts in power.
|
| | - |  | Systems. A solar system is an assembly of one or more solar panels that
have been physically mounted and electrically interconnected, often with
batteries and/or power electronics, to produce electricity. Typical
residential on-grid systems contain between 10-40 panels and produce 1-4
kW.                                                                                                                                                                                                 

We sell primarily solar panels, although we may in the future also sell
wafers, cells, or systems. We believe our panels are competitive with other products in
the marketplace, and some customers have commented that our panels have
benefits regarding appearance, electrical design capability, and ease of use.

Our solar panels are certified to international standards for safety and
quality. If our development programs are successful, we expect to continue to
increase the conversion efficiency and power of our solar panels as we expand
our manufacturing capacity.

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SALES AND MARKETING

Market Focus

We intend to primarily target the on-grid markets and the off-grid rural
electrification market, where we believe growth prospects are the largest and
where we expect our solar power technology will provide us the greatest
competitive advantage. These markets are characterized as follows:



| | - |  | On-grid. The on-grid market is currently the fastest growing solar
power market within which, we are focused primarily on U.S. and European
markets.                                                                                                                                                                                                                                                                                                                                        
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | - |  | Off-grid rural electrification. Within the off-grid market, we believe
that rural electrification has the largest potential but is the least
penetrated market as evidenced by the two billion people in the world
without conventional electricity. Marketing, financing, local
infrastructure and support are projected to remain the principal
challenges to greater expansion of this market. To date, we have
primarily pursued sales in Central and South America and the Pacific Rim.

Since inception, over 80% of our sales have been to on-grid market
segments, and over 50% of our sales have been exported from the U.S. The
majority of our export sales to date have been to Europe.

Distribution, Marketing and Other Strategic Relationships

We bring our solar power products to market using distributors, system
integrators and other value-added resellers. Our resellers often add value
through system design by incorporating our panels with batteries, associated
electronics, structures and wiring systems. Most of our resellers have a
geographic or applications focus. Our channel partners include companies that
are exclusively solar distributors as well as others for whom solar power is an
extension of their core business, such as, engineering design firms or other
energy product marketers.

We expect to collaborate closely with a relatively small number of
resellers throughout the world. We currently have less than 50 distributors
worldwide and are actively adding new accounts and channel partners. Our
distribution partners include Kawasaki Heavy Industries, a Japanese engineering
and construction company, Hutton Communications, a leading marketer and
distributor of wireless telecommunications and power products in North America,
and Krannich Solartechnik, a marketer and distributor of photovoltaic modules
and systems in Germany.

We intend to selectively pursue additional strategic relationships with
other companies worldwide for the joint marketing, distribution and
manufacturing of our products. These resellers are expected to range from
large, multinational corporations to small, development-stage companies, each
chosen for their particular expertise. We believe that these relationships will
enable us to leverage the marketing, manufacturing and distribution
capabilities of other companies, explore opportunities for additional product
development, and more easily and cost-effectively enter new geographic markets,
attract new customers and develop advanced solar power applications.

We currently work with a relatively small number of reseller partners who
have particular expertise in a selected geographic or applications market
segment. Sales to our ten largest resellers have accounted for approximately
90% of our total product revenues since inception. No single reseller has
accounted for more than 45% of total revenues over that period. As we continue
to expand manufacturing capacity and sales volumes, we anticipate developing
relationships with additional resellers. During fiscal year 2002, approximately
32% of our product sales were made to resellers in the United States, and all
of our research revenue was generated within the United States. During the
same period, revenue from the National Institute of Industry Standards, the
National Renewable Energy Laboratory, and Krannich Solartechnik accounted for
11%, 10% and 44% of total revenues, respectively.

In addition, we market our products through trade shows, on-going customer
communications, promotional material, our web site, direct mail and
advertising. Our staff provides customer service and applications engineering
support to our distribution partners while also gathering information on
current product performance and future product requirements. Our internal sales
force currently handles all solar power product sales. During 2002, we brought
on board a North American Sales Manager based in Marlboro, Massachusetts, as
well as a European Sales Manager based in Munich, Germany.

MANUFACTURING

Our principal manufacturing objective is to provide for large-scale
manufacturing of our solar power products at low costs that will enable us to
penetrate price-sensitive solar power markets. In March 2000, we signed a
lease agreement for a 56,250 square foot facility in Marlboro, Massachusetts,
which includes approximately 35,000 square feet of manufacturing space.

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This
facility includes a complete line of equipment to manufacture String Ribbon
wafers, fabricate and test solar cells, and laminate and test panels The first
of the facilitys two planned manufacturing lines entered service in 2001.
During 2002, we initiated the design and construction of the second production
line in our Marlboro facility. At the end of 2002, installation and
construction of equipment for parts of the cell processing and module
fabrication operations neared completion.

In addition to our current investment in our Marlboro, Massachusetts
facility, we intend to selectively pursue opportunities to establish local
manufacturing arrangements on a worldwide basis. Because the market opportunity
for solar power encompasses numerous applications in both developed and
developing nations worldwide, we expect a significant portion of our sales will
be made outside of the United States. Despite these opportunities,
manufacturing of solar power products has remained largely concentrated in the
United States, Europe and Japan due to factors such as reduced economies of
scale and technical process complexities of establishing local manufacturing
facilities.

In spite of these barriers, we believe there are several advantages to
local manufacturing, including enhanced brand recognition in local markets,
avoidance of import tariffs and access to local private or public sector
financing. We believe that our String Ribbon technology and our innovative
manufacturing techniques offer greater advantages than other competing
technologies, which we believe will enable us to establish fully integrated
factories at a smaller scale that can better grow in concert with market
demands. Consequently, we expect to pursue local manufacturing of our products
in selected target markets. We also expect that our technologies will allow us
to efficiently scale our production to take advantage of market opportunities
as they arise.

RESEARCH AND DEVELOPMENT

Because we believe continuously improving our technology is an important
part of our overall strategy, we have maintained and intend to maintain a
strong research and development effort. To this end, our Marlboro,
Massachusetts facility has approximately 6,000 square feet dedicated to
research and development and contains equipment to support the development,
fabrication and evaluation of new solar power products and technologies.

We intend to continue our policy of selectively pursuing contract
research, product development and market development programs funded by various
agencies of the United States, state and international governments to
complement and enhance our own resources. The percentage of our total revenues
derived from government-related contracts was approximately 21% for the year
ended December 31, 2002. We currently have two active research contracts with
total estimated revenues of approximately $5.0 million, $2.75 million of which
has been authorized by the sponsoring agencies and $2.1 million of which has
been recorded as revenue as of December 31, 2002. We expect the remaining $2.9
million of revenue will be recognized over the remaining life of each of the
contracts, which expire on October 31, 2003 and May 31, 2005.

These and other research contracts we have obtained generally provide for
development of advanced materials and methods for wafer, cell and panel
manufacturing, product development and market development. In all cases to
date, we retain all rights to any intellectual property and technological
developments resulting from the government funding, with the exception of
government march-in rights to practice the technology on its own behalf and
certain rights universities retain for work they perform under subcontract to
us. These contracts usually require the submission of technical progress
reports, most of which may become publicly available. These contracts are
generally cost-shared between the funding agency and us with our share of the
total contract cost historically ranging from approximately 30% to 70%. The
contracts normally expire between six months and three years from their
initiation. We have recognized research revenues of $1.8 million in 2000,
$932,000 in 2001, and $1.4 million in 2002 from several government-sponsored
research contracts. We have recorded research and development expenditures,
including the cost of research revenue, of $3.3 million in 2000, $2.9 million
in 2001 and $3.6 million in 2002. The following table summarizes research
revenues received from various government agencies as a percentage of total
revenues:

|                                               |  |      |    |      |  |      |    |   |  |  |    |  
|---------------------------------------------- |  | ---- | -- | ---- |  | ---- | -- | - |  |  | -- | -
|                                               |  | 2000 |    | 2001 |  | 2002
|                                               |  |      |    |      |  |     
|Commonwealth of Massachusetts                  |  |      | 10 | %    |  |      | 0  | % |  |  | 0  | %
|National Institute of Standards and Technology |  |      | 20 | %    |  |      | 24 | % |  |  | 11 | %
|National Renewable Energy Laboratory           |  |      | 49 | %    |  |      | 15 | % |  |  | 10 | %
|                                               |  |      |    |      |  |      |    |   |  |  |    |  
|                                               |  |      | 79 | %    |  |      | 39 | % |  |  | 21 | %

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INTELLECTUAL PROPERTY RIGHTS

Patents

We believe that our commercial success will significantly depend on our
ability to protect our intellectual property rights underlying our proprietary
technologies. We seek United States and international patent protection for
major components of our technology platform, including our crystalline silicon
wafers, solar cells and solar panels. We own or have licensed 19 issued United
States patents and 2 issued foreign patents in the solar power field, which
expire beginning in 2003 and ending in 2019. In addition, we have 7 United
States patent applications pending. We decide whether and in what foreign
countries to file counterparts of our United States patent applications. We
devote substantial resources to building a strong patent position, and we
intend to continue to file additional United States and foreign patent
applications to seek protection for technology we deem important to our
commercial success.

Crystalline Silicon Wafers. Dr. Emanuel Sachs, a tenured Professor of
Mechanical Engineering at the Massachusetts Institute of Technology, developed
our core String Ribbon technology. Dr. Sachs has been awarded three issued
United States patents for the String Ribbon technology. An additional issued
patent for a related technology, invented by two employees of the United States
National Renewable Energy Laboratory, formerly the Solar Energy Research
Institute, was assigned to Dr. Sachs in 1984.

In September 1994, Dr. Sachs granted us an irrevocable, worldwide,
royalty-bearing license to practice the String Ribbon technology and related
patents under a license and consulting agreement. The patents underlying this
agreement begin to expire in 2003. This agreement permits us to sublicense any
of our license and other rights under the agreement. The license is exclusive
worldwide, subject only to nonexclusive, nontransferable rights held by the
United States Department of Energy to practice the String Ribbon technology on
its own behalf. Dr. Sachs continues to actively consult with Evergreen Solar on
new technological developments.

We have been awarded 3 issued United States patents and have filed 5
patent applications on our own, internally-developed inventions related to
String Ribbon and wafer fabrication, which are method inventions relating to
automated, high-yield production techniques.

Solar Cell Fabrication. We have been awarded 5 issued United States
patents relating to our solar cell processing technology. The issued United
States patents relate to the method for forming wrap-around contacts on solar
cells and a method for processing solar cells.

Solar Panels. We have been awarded 7 issued United States patents and have
filed 2 additional United States patent applications relating to advanced solar
panel designs. The 7 issued United States patents relate to solar cell modules
with an improved backskin, solar cell modules with an interface mounting
system, an encapsulant material for solar cell modules and a solar cell roof
tile system. The pending patent applications relate to new materials for
encasing the panel, which we believe will lower cost, extend panel life and
enhance panel performance.

The long-term status of patents in our industry, as well as others, are
generally uncertain and involve complex legal and factual questions.
Furthermore, even if patents are licensed or issued to us, others may design
around the patented technologies. In addition, we could incur substantial costs
in litigation if we are required to initiate patent litigation to enforce our
patent rights, and the outcome of any patent litigation is uncertain. The
following may impair our patent positions:



| | - |  | our pending patent applications may not result in issued patents;                                                                                                                     
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | - |  | the claims of patents which are issued may not provide meaningful protection;                                                                                                         
|
| | - |  | we may not develop additional proprietary technologies that are patentable;                                                                                                           
|
| | - |  | patents licensed or issued to us may not provide a basis for
commercially viable products or may not provide us with competitive
advantages and may be challenged by third parties; or
|
| | - |  | patents of others may have an adverse effect on our ability to do
business.                                                                                                           

Although we do not believe that our technologies infringe the rights of
third parties, third parties could in the future assert infringement claims
against us, which may result in costly litigation or require us to obtain a
license to third-party intellectual property rights. We may be unable to obtain
required licenses or obtain these licenses on terms that are acceptable to us,
either of which would substantially impair our business.

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Trade Secrets and Other Rights

With respect to proprietary know-how that is not patentable and for
processes for which patents are difficult to enforce, we rely on trade secret
protection and confidentiality agreements to protect our interests. We believe
that several elements of our solar power products and manufacturing processes
involve proprietary know-how, technology or data, which are not covered by
patents or patent applications including selected materials, technical
processes, equipment designs, algorithms and procedures. We have taken security
measures to protect proprietary know-how and technologies and confidential
data, and we continue to explore additional methods of protection. While we
require all employees, key consultants and other third parties to enter into
confidentiality agreements with us, we cannot be assured that proprietary
information will not be disclosed inappropriately, that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets, or that we can
meaningfully protect our trade secrets. Any material leak of confidential
information into the public domain or to third parties could result in the loss
of a competitive advantage in the solar power market.

COMPETITION

The market for solar power products is intensely competitive. There are
over 20 companies in the world that produce solar power products, including BP
Solar, Kyocera Corporation, Royal Dutch Shell, Sharp Corporation, and
AstroPower, Inc. All of these solar power product producers, as well as several
others, have historically derived all or a majority of their solar power
product sales from conventional manufacturing technology that involves using
wafers made from slicing solid blocks of crystalline silicon. In addition, some
of these companies are developing advanced crystalline silicon or thin film
technologies, including technologies such as advanced crystalline sheet and
ribbon technologies and thin films of amorphous silicon, cadmium telluride and
copper indium diselenide, and project future cost savings similar to or greater
than ours. We believe several of our competitors are developing and are
currently producing products based on crystalline silicon wafer technologies
that, like String Ribbon, do not involve slicing silicon blocks.

We believe the technologies used in our current solar power products have
some similarities with those employed in our competitors products. However,
because our solar power products are made from crystalline silicon, we believe
they may be more reliable than those made from thin film technologies which
often use materials, such as amorphous silicon, which we believe may be less
stable.

Solar power has certain advantages and disadvantages when compared to
other conventional energy sources. 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. However, unlike most conventional energy generators, which can
produce power on demand, solar power cannot generate power when sunlight is not
available. In addition, based on current technology, the upfront cost,
including installation, of conventional energy generators is often lower than
that of solar power products. However, we believe that the relative cost of
power produced over the lifetime of solar products as compared with
conventional energy generators often depends on the application. For example,
solar power products may be more cost-effective over the long-term for remote
applications that are not connected to the utility grid and that have smaller
power requirements, while conventional power sources may be more cost effective
for larger, grid-connected applications.

Many of our competitors have substantially greater financial resources,
research and development staff, manufacturing facilities, sales and marketing
experience, distribution channels and human resources than we do. In order to
compete effectively against these companies, we will need to demonstrate to
potential customers and partners that our solar power products perform better,
or are less expensive than those of our competitors.

In addition, we believe that the market for solar power specifically, and
electric power in general, may be subject to rapid technological development.
This rapid development may result in some of our solar power products becoming
obsolete before we can recover development expenses. We also expect that future
competition will come not only from existing competitors, but also from new
entrants to the market with new technological solutions. We may be unable to
compete successfully against present and future competitors and our failure to
successfully compete could significantly reduce our market share, our revenues
and our prospects for profitability.

ENVIRONMENTAL REGULATIONS

We use, generate and discharge toxic, volatile or otherwise hazardous
chemicals and wastes in our research and development and manufacturing
activities. We are subject to a variety of federal, state and local
governmental regulations

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related to the storage, use and disposal of hazardous
materials. If we fail to comply with present or future environmental
regulations, we could be subject to fines, suspension of production or a
cessation of operations.

We believe that we have all environmental permits necessary to conduct our
business. We believe that we have properly handled our hazardous materials and
wastes and have not contributed to any contamination at any of our past or
current premises. We are not aware of any environmental investigation,
proceeding or action by federal or state agencies involving our past or current
facilities. Any failure by us to control the use of or to restrict adequately
the discharge of hazardous substances could subject us to substantial financial
liabilities, operational interruptions and adverse publicity, any of which
could materially and adversely affect our business, results of operations and
financial condition. In addition, under some federal
and state statutes and regulations, a governmental agency may seek
recovery and response costs from operators of property where releases of
hazardous substances have occurred or are ongoing, even if the operator was not
responsible for the release or otherwise was not at fault.

EMPLOYEES

As of December 31, 2002, we had 132 full-time employees, including 16
engaged in research and development and 105 engaged in manufacturing. Nineteen
of our employees have advanced degrees, including 4 with Ph.D.s. None of our
employees are represented by any labor union nor are they organized under a
collective bargaining agreement. We have never experienced a work stoppage and
believe that our relations with our employees are good.

WEBSITE

Our Internet address is www.evergreensolar.com.




ITEM 2. PROPERTIES:

Our headquarters is currently located in a leased space in Marlboro,
Massachusetts, where we currently occupy approximately 56,250 square feet of
administrative, laboratory and manufacturing space. Our lease expires on June
30, 2010.




ITEM 3. LEGAL PROCEEDINGS:

We are not a party to any material legal proceedings.




ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:

No matters were submitted to a vote of security holders during the quarter
ended December 31, 2002.

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PART II




ITEM 5. MARKET FOR THE COMPANYS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS:

Market for Our Common Stock

Our common stock is traded on the Nasdaq National Market under the symbol
ESLR. The following table sets forth for the calendar periods indicated, the
high and low sales price of our common stock on the Nasdaq National Market.

|      |                |  |      |       |     |  |   |      | 
|----- | -------------- |  | ---- | ----- | --- |  | - | ---- | 
|      |                |  | High |       | Low
|      |                |  |      |       |    
|2001: |                |  |      |       |     |  |   |     
|      | First Quarter  |  | $    | 13.63 |     |  | $ | 6.38 | 
|      | Second Quarter |  | $    | 15.00 |     |  | $ | 8.17 | 
|      | Third Quarter  |  | $    | 11.00 |     |  | $ | 3.25 | 
|      | Fourth Quarter |  | $    | 3.90  |     |  | $ | 1.90 | 
|2002: |                |  |      |       |     |  |   |     
|      | First Quarter  |  | $    | 4.79  |     |  | $ | 2.06 | 
|      | Second Quarter |  | $    | 3.48  |     |  | $ | 1.32 | 
|      | Third Quarter  |  | $    | 1.70  |     |  | $ | 0.65 | 
|      | Fourth Quarter |  | $    | 1.68  |     |  | $ | 0.44 | 

On February 27, 2003 there were approximately 132 stockholders of record
of our common stock. We have never declared or paid cash dividends. If the
proposed financing is consummated, holders of shares of Series A convertible
preferred stock will be entitled to a quarterly dividend at an annual rate of
10% payable in cash or, at our option, we may accrete the Series A convertible
preferred stock 10% dividend to the conversion price and liquidation
preference of the series A convertible preferred stock. Apart from the
dividend on the Series A convertible preferred stock, we intend to retain any
earnings for use in our business.

Use of Proceeds

On October 31, 2000, the Securities and Exchange Commission declared effective
our registration statement on Form S-1 (file number 333-43140), relating to the
initial public offering of 3,000,000 shares of our common stock, $.01 par value
per share, at a price to the public of $14.00 per share. The offering commenced
on November 2, 2000 and closed on November 7, 2000. The managing underwriters
of the offering were Banc of America Securities LLC, CIBC World Markets and
FAC/Equities. The aggregate offering price to the public of the initial public
offering was $42.0 million. The proceeds to us, net of underwriting discounts
and commissions of $2.9 million and offering expenses of $1.3 million, were
approximately $37.7 million. Through December 31, 2002, approximately $29.2
million of the net offering proceeds was spent, of which $7.7 million was spent
on capital equipment and the remainder on general operations. We have invested
all of such proceeds in investment grade, interest-bearing securities. Other
than for compensation and reimbursement of expenses incurred in the normal
course of business, none of the net proceeds from the offering were used to
pay, directly or indirectly, directors, officers, persons owning ten percent or
more of our equity securities, or affiliates.

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ITEM 6. SELECTED FINANCIAL DATA:

You should read the data set forth below in conjunction with our financial
statements and related notes and Managements Discussion and Analysis of
Financial Condition and Results of Operations appearing elsewhere in this
filing. The statement of operations data presented below for the fiscal years
ended December 31, 2000, 2001, and 2002 and the balance sheet data at December
31, 2001, and 2002 have been derived from our financial statements which have
been audited by PricewaterhouseCoopers LLP, independent accountants, and which
appear elsewhere in this filing. The statement of operations data presented
below for the years ended December 31, 1998 and 1999, and the balance sheet
data at December 31, 1998, 1999 and 2000 have been derived from our financial
statements that have been audited by PricewaterhouseCoopers LLP and are not
included in this filing.

|                                                                                      |                                                                        |   |                         |       |      |   |                                           |       |      |   |        |       |  |   |         |       |  |   |         |        | 
|------------------------------------------------------------------------------------- | ---------------------------------------------------------------------- | - | ----------------------- | ----- | ---- | - | ----------------------------------------- | ----- | ---- | - | ------ | ----- |  | - | ------- | ----- |  | - | ------- | ------ | 
|                                                                                      |                                                                        |   | Year Ended December 31,
|                                                                                      |                                                                        |   |                        
|                                                                                      |                                                                        |   | 1998                    |       | 1999 |   | 2000                                      |       | 2001 |   | 2002  
|                                                                                      |                                                                        |   |                         |       |      |   |                                           |       |      |   |       
|                                                                                      |                                                                        |   |                         |       |      |   | (in thousands, except for per share data) |       |      |   |       
|STATEMENT OF OPERATIONS DATA:                                                         |                                                                        |   |                         |       |      |   |                                           |       |      |   |        |       |  |   |         |       |  |   |         |       
|Product revenues                                                                      |                                                                        | $ | 163                     |       |      | $ | 189                                       |       |      | $ | 419    |       |  | $ | 1,546   |       |  | $ | 5,296   |       
|Research revenues                                                                     |                                                                        |   | 1,395                   |       |      |   | 2,113                                     |       |      |   | 1,753  |       |  |   | 932     |       |  |   | 1,448   |       
|                                                                                      |                                                                        |   |                         |       |      |   |                                           |       |      |   |        |       |  |   |         |       |  |   |         |       
|                                                                                      | Total revenues                                                         |   |                         | 1,558 |      |   |                                           | 2,302 |      |   |        | 2,172 |  |   |         | 2,478 |  |   |         | 6,744  | 
|Operating Expenses:                                                                   |                                                                        |   |                         |       |      |   |                                           |       |      |   |        |       |  |   |         |       |  |   |         |       
|                                                                                      | Cost of product revenues                                               |   |                         | 955   |      |   |                                           | 997   |      |   |        | 2,795 |  |   |         | 9,649 |  |   |         | 12,405 | 
|                                                                                      | Research and development expenses, including
cost of research revenues |   |                         | 2,373 |      |   |                                           | 3,091 |      |   |        | 3,382 |  |   |         | 3,063 |  |   |         | 3,692  | 
|                                                                                      | Selling, general and administrative expenses                           |   |                         | 917   |      |   |                                           | 1,309 |      |   |        | 2,505 |  |   |         | 4,088 |  |   |         | 4,520  | 
|                                                                                      |                                                                        |   |                         |       |      |   |                                           |       |      |   |        |       |  |   |         |       |  |   |         |       
|Total operating expenses                                                              |                                                                        |   | 4,245                   |       |      |   | 5,397                                     |       |      |   | 8,682  |       |  |   | 16,800  |       |  |   | 20,617  |       
|Operating loss                                                                        |                                                                        |   | (2,687                  | )     |      |   | (3,095                                    | )     |      |   | (6,510 | )     |  |   | (14,322 | )     |  |   | (13,873 | )     
|Net interest income                                                                   |                                                                        |   | 165                     |       |      |   | 163                                       |       |      |   | 1,305  |       |  |   | 1,845   |       |  |   | 674     |       
|                                                                                      |                                                                        |   |                         |       |      |   |                                           |       |      |   |        |       |  |   |         |       |  |   |         |       
|Net loss                                                                              |                                                                        |   | (2,522                  | )     |      |   | (2,932                                    | )     |      |   | (5,205 | )     |  |   | (12,477 | )     |  |   | (13,199 | )     
|Accretion of redeemable convertible preferred stock                                   |                                                                        |   | (953                    | )     |      |   | (1,231                                    | )     |      |   | (2,283 | )     |  |   |        |       |  |   |        |       
|                                                                                      |                                                                        |   |                         |       |      |   |                                           |       |      |   |        |       |  |   |         |       |  |   |         |       
|Net loss attributable to common stockholders                                          |                                                                        | $ | (3,475                  | )     |      | $ | (4,163                                    | )     |      | $ | (7,488 | )     |  | $ | (12,477 | )     |  | $ | (13,199 | )     
|                                                                                      |                                                                        |   |                         |       |      |   |                                           |       |      |   |        |       |  |   |         |       |  |   |         |       
|Net loss per common share (basic and diluted)                                         |                                                                        | $ | (4.33                   | )     |      | $ | (5.18                                     | )     |      | $ | (2.96  | )     |  | $ | (1.10   | )     |  | $ | (1.16   | )     
|Weighted average shares used in computing basic and
diluted net loss per common share |                                                                        |   | 803                     |       |      |   | 803                                       |       |      |   | 2,530  |       |  |   | 11,304  |       |  |   | 11,405  |       

|                                                  |  |                         |        |      |  |      |         |      |  |      |        |  |  |   |        |  |  |   |        | 
|------------------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------- | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                                  |  | Year Ended December 31,
|                                                  |  |                        
|                                                  |  | 1998                    |        | 1999 |  | 2000 |         | 2001 |  | 2002
|                                                  |  |                         |        |      |  |      |         |      |  |     
|                                                  |  | (in thousands)         
|BALANCE SHEET DATA:                               |  |                         |        |      |  |      |         |      |  |      |        |  |  |   |        |  |  |   |        | 
|Cash, cash equivalents and short-term investments |  | $                       | 4,805  |      |  | $    | 14,455  |      |  | $    | 45,994 |  |  | $ | 26,263 |  |  | $ | 8,483  | 
|Working capital                                   |  |                         | 4,985  |      |  |      | 14,982  |      |  |      | 46,056 |  |  |   | 26,591 |  |  |   | 12,544 | 
|Total assets                                      |  |                         | 5,893  |      |  |      | 16,318  |      |  |      | 55,783 |  |  |   | 44,861 |  |  |   | 31,963 | 
|Total redeemable convertible preferred stock      |  |                         | 15,014 |      |  |      | 29,293  |      |  |      |       |  |  |   |       |  |  |   |       | 
|Total stockholders equity (deficit)              |  |                         | (9,357 | )    |  |      | (13,502 | )    |  |      | 54,143 |  |  |   | 43,055 |  |  |   | 29,913 | 

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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:

We caution readers that statements in this Annual Report on Form 10-K that
are not strictly historical statements, including, but not limited to:
statements reflecting our expectations regarding the timing, cost, and success
of our manufacturing scale-up at our new facility in Marlboro, Massachusetts
and future manufacturing expansion and production, as well as related financing
requirements; future financial performance; our technology and product
development, cost and performance; our current and future strategic
relationships and future market opportunities; and our other business and
technology strategies and objectives, constitute forward-looking statements
which are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. These statements may be identified with such
words as we expect, we believe, we anticipate or similar indications of
future expectations. These statements are neither promises nor guarantees and
involve risks and uncertainties, which could cause our actual results to differ
materially from such forward-looking statements. Such risks and uncertainties
may include, among other things, those risks and uncertainties described in
this Annual Report and in our other filings with the Securities and Exchange
Commission, copies of which may be accessed through the SECs Web Site at
http://www.sec.gov. We caution readers not to place undue reliance on any
forward-looking statements contained in this Annual Report, which speak only as
of the date of this Annual Report. We disclaim any obligation to publicly
update or revise any such statements to reflect any change in our expectations,
or events, conditions, or circumstances on which any such statements may be
based, or that may affect the likelihood that actual results will differ from
those set forth in such forward-looking statements.

OVERVIEW

We develop, manufacture and market solar power products for the global
marketplace. Solar cells are semiconductor devices that convert sunlight into
electricity and form the building block for all solar power products. To date,
our product sales have been primarily solar panels, which have been used to
generate electricity for on-grid and off-grid applications. Off-grid
applications have included the electrification of rural homes, lighting for
small, rural schools and power supplies for water pumping. More recently, an
increasing percentage of our products have been used by on-grid customers as a
clean, renewable source of alternative or supplemental electricity.

As more fully described in Part I of this report under the heading
Overview, on March 21, 2003, we entered into a definitive
purchase agreement with certain investors to raise $29,475,000 through the
issuance of up to approximately 43,200,000 shares of series A convertible
preferred stock and the sale of a warrant to purchase 2,400,000 shares of our
common stock. Consummation of the transactions contemplated by the purchase
agreement is subject to obtaining stockholder approval and other closing
conditions.

Product revenues. Product revenues consist of revenues from the sale of
solar cells, panels and systems. Product revenues represented 78.5% of total
revenues for the year ended December 31, 2002, 62.4% of total revenues for the
year ended December 31, 2001 and 19.3% of total revenues for the year ended
December 31, 2000. International product sales accounted for approximately 68%,
35% and 93% of total product revenues for the periods ended December 31, 2002,
2001 and 2000, respectively. During 2002, product sales to a European
distributor accounted for approximately 57% of product revenue. During 2001,
sales to a U.S. distributor and a Japanese distributor accounted for
approximately 52% and 22% of product revenue, respectively. During 2000, sales
to a Japanese distributor accounted for approximately 90% of product revenue.
We anticipate that international sales will continue to account for a
significant portion of our product revenues for the foreseeable future.
Currently, all product revenues are denominated in United States dollars.
Foreign exchange rate fluctuations have impacted the relative competitiveness
of our products in international markets, but we have not had any direct
foreign exchange exposure.

Research revenues. Research revenues consist of revenues from various
state and federal government agencies to fund our ongoing research,
development, testing and enhancement of our products and manufacturing
technology. We have not in the past, nor is it our intention in the future, to
pursue contracts that are not part of our ongoing research activities. We
recognize research revenues as services are rendered.

Cost of product revenues. Cost of product revenues consists primarily of
salaries and related personnel costs, materials expenses, depreciation
expenses, maintenance, rent, royalties on licensed technology, warranty costs
and other support expenses associated with the manufacture of our solar power
products. We expect to continue to experience costs in excess of product
revenues unless we are able to achieve greater manufacturing efficiencies,
higher yields and higher production levels.

Research and development expenses, including cost of research revenues.
Research and development expenses, including cost of research revenues, consist
primarily of salaries and related personnel costs, consulting expenses and
prototype costs

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related to the design, development, testing and enhancement of
our products and manufacturing technology. We expense our research and
development expenses as incurred. We believe that research and development is
critical to our strategic objectives of enhancing our technology, reducing
manufacturing costs and meeting the changing requirements of our customers. As
a result, we expect that our total research and development expenses will
increase in the future.

Selling, general and administrative expenses. Selling, general and
administrative expenses consist primarily of salaries and related personnel
costs, professional fees, rent, insurance and other sales expenses. We expect
that selling expenses will increase substantially in absolute dollars as we
increase
our sales efforts, hire additional sales personnel and initiate additional
marketing programs. We expect that general and administrative expenses will
increase as we add personnel and incur additional costs related to the growth
of our business.

Stock-based compensation expense. Prior to December 31, 2000, we recorded
total cumulative deferred compensation of approximately $1.3 million
representing the difference between fair market value of the common stock and
the exercise price on the option grant date. These amounts were presented as a
reduction of stockholders equity and are being amortized ratably over the
vesting period of the options, which is generally four years. The amortization
resulted in charges to operations of $289,000, $290,000, and $294,000 for the
years ended December 31, 2002, 2001, and 2000, respectively, and is reflected
in operating expenses. We expect to recognize stock-based compensation expense
for these past grants of approximately $290,000 for the year ending December
31, 2003, and $70,000 for the year ending December 31, 2004.

Net interest income. Net interest income consists primarily of interest
earned on the holding of short-term, high quality commercial paper, corporate
bonds and United States government-backed securities, less any bond premium
amortization.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of consolidated financial statements in accordance with
generally accepted accounting principals requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. We base
our estimates on historical experience and on various other assumptions that
are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions. We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements:

Revenue Recognition and Allowance for Doubtful Accounts

We recognize product revenue if persuasive evidence of an arrangement
exists, shipment has occurred, risk of loss has transferred to the customer,
sales price is fixed or determinable, and collectibility is reasonably assured.
The market for solar power products is emerging and rapidly evolving. We
currently sell our solar power products primarily to distributors, system
integrators and other value-added resellers within and outside of North
America, which typically resell our products to end users throughout the world.
For new customers requesting credit, we evaluate creditworthiness based on
credit applications, feedback from provided references, and credit reports from
independent agencies. For existing customers, we evaluate creditworthiness
based on payment history and known changes in their financial condition.

We also evaluate the facts and circumstances related to each sales
transaction and consider whether risk of loss has not passed to the customer
upon shipment. We consider whether our customer is purchasing our product
for stock, and whether contractual or implied rights to return the product
exist or whether our customer has an end user contractually committed. To
date, we have not offered rights to return our products other than for normal
warranty conditions.

We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. If the
financial condition of our customers were to deteriorate, such that their
ability to make payments was impaired, additional allowances could be required.

Revenue from research grants is recognized as services are rendered to the
extent of allowable costs incurred.

Inventory

Inventory is valued at the lower of cost or market. Certain factors may
impact the realizable value of our inventory including, but not limited to,
technological changes, market demand, changes in product mix strategy, new
product introductions and significant changes to our cost structure. Given our
current production levels and the market value of our products, we currently
sell our inventory at prices that are below the sum of our fixed and variable
costs per unit. Accordingly,

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we write down our inventory to realizable value
equal to the difference between the cost of inventory and the estimated market
value. In addition, estimates of reserves are made for obsolescence based on
the current product mix on hand and its expected net realizability. If actual
market conditions are less favorable or other factors arise that are
significantly different than those anticipated by management, additional
inventory write-downs or increases in obsolescence reserves may be required.
We treat lower of cost or market adjustments and inventory reserves as an
adjustment to the cost basis of the underlying inventory. Accordingly,
favorable changes in market conditions are not recorded to inventory in
subsequent periods.

Warranty

We provide for the estimated cost of product warranties at the time
revenue is recognized. Given our limited operating history, we use historical
industry solar panel failure rates as the basis for our warranty provision
calculation. While we engage in product quality programs and processes,
including monitoring and evaluating the quality of our component suppliers, our
warranty obligation is affected by product failure rates and material usage and
service delivery costs incurred in correcting a product failure. If our actual
product failure rates, material usage or service delivery costs differ from our
estimates, revisions to the estimated warranty liability would be required.
Since we have a limited operating history and our manufacturing process differs
from industry standards, our experience may be different from the industry data
used as a basis for our estimate. While our methodology takes into account
these uncertainties, adjustments in future periods may be required as our
products mature.

Long-lived Assets

Our policy regarding long-lived assets is to evaluate the recoverability
or usefulness of these assets when the facts and circumstances suggest that
these assets may be impaired. This analysis relies on a number of factors,
including changes in strategic direction, business plans, regulatory
developments, economic and budget projections, technological improvements, and
operating results. The test of recoverability or usefulness is a comparison of
the asset value to the undiscounted cash flow of its expected cumulative net
operating cash flow over the assets remaining useful life. Any write-downs
would be treated as permanent reductions in the carrying amount of the asset
and an operating loss would be recognized. To date, we have had recurring
operating losses and the recoverability of our long-lived assets is contingent
upon executing our business plan that includes further reducing our
manufacturing costs and significantly increasing sales. If we are unable to
execute our business plan, we may be required to write down the value of our
long-lived assets in future periods.

COMPARISON OF YEARS ENDED DECEMBER 31, 2002 AND 2001

Revenues. Our product revenues for the year ended December 31, 2002 were
$5.3 million, an increase of $3.8 million, or 243%, from $1.5 million for the
same period in 2001. The increase in product revenues was due to the increased
production capacity of our manufacturing facility in Marlboro, Massachusetts,
and our increased marketing and sales activities. Research revenues for the
year ended December 31, 2002 were $1.4 million, an increase of $516,000, or
55%, from $932,000 for the same period in 2001. The increase in research
revenues reflects revenue recognized on a newly awarded research contract with
the National Renewable Energy Laboratory.

Cost of product revenues. Our cost of product revenues for the year ended
December 31, 2002 was $12.4 million, an increase of $2.8 million, or 29%, from
$9.6 million for the same period in 2001. This increase was associated with
increased production at our Marlboro facility. Approximately a third of the
increase was due to higher depreciation expense resulting from equipment placed
in service at our Marlboro manufacturing facility, approximately half of the
increase was due to increases in materials purchased due to increased
production, and most of the remainder was due to increases in salaries
associated with additional personnel. We expect our cost of product revenues
to decline as a percentage of product revenues in 2003, as we increase our
product revenues, but to remain negative unless we achieve greater
manufacturing efficiencies, higher yields and higher production levels.

Research and development expenses, including cost of research revenues.
Our research and development expenses, including cost of research revenues, for
the year ended December 31, 2002 were $3.7 million, an increase of $629,000, or
21%, from $3.1 million for the same period in 2001. The increase was due
primarily to the addition of employees and increased spending on both contract
related and non-contract related research and development projects.

Selling, general and administrative expenses. Our selling, general and
administrative expenses for the year ended December 31, 2002 were $4.5 million,
an increase of $432,000, or 11%, from $4.1 million in 2001. Approximately 20%
of the increase was due to increases in insurance costs, approximately 33% of
the increase was due to increases in salary and other costs associated with the
establishment of our Germany sales office, and the remainder of the increase
was due to higher depreciation and professional service fees.

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Stock-based compensation expense. Our stock-based compensation expense,
which is included in operating expenses, for the year ended December 31, 2002
was $289,000, a decrease of $1,000 from $290,000 for the same period in 2001.
The decrease in stock-based compensation expense for the year ended December
31, 2002 was due to employment terminations during 2002 of employees with
non-vested balances of stock options granted before our initial public
offering.

Net interest income. Our net interest income for the year ended December
31, 2002 was $674,000, a decrease of $1.2 million, or 63%, from $1.8 million
for the same period in 2001. The decrease in interest income was due to
declining cash and investment balances resulting from capital equipment
purchases and funding of operations.

COMPARISON OF YEARS ENDED DECEMBER 31, 2001 AND 2000

Revenues. Our product revenues for the year ended December 31, 2001 were
$1.5 million, an increase of $1.1 million, or 269%, from $419,000 for the same
period in 2000. Our increase in product revenues was due to increases in
production volumes resulting from our move to our new Marlboro manufacturing
facility, Massachusetts, which enabled us to increase commercial sales to key
customers. Research revenues for the year ended December 31, 2001 were
$932,000, a decrease of $821,000, or 47%, from $1.8 million for the same period
in 2000. The decline in research revenues reflects reduced expenditures on our
research contracts, as two of three multi-year contracts were completed in the
second quarter of 2001.

Cost of product revenues. Our cost of product revenues for the year ended
December 31, 2001 was $9.6 million, an increase of $6.8 million, or 245%, from
$2.8 million for the same period in 2000. The increase in cost of product
revenues was associated with the expansion of our pilot manufacturing
operations, and the relocation, preparation and start-up of our manufacturing
operations in our Marlboro facility. Approximately one-quarter of the increase
was due to increases in materials expense, one-third was caused by increases in
salary expense, and one-third was caused by increases in consulting fees, with
the remainder mainly caused by increases in warranty, depreciation and royalty
expense.

Research and development expenses, including cost of research revenues.
Our research and development expenses, including cost of research revenues, for
the year ended December 31, 2001 were $3.1 million, a decrease of $319,000, or
9%, from $3.4 million for the same period in 2000. The decrease was due
primarily to a decrease in consulting fees associated with designing and
developing new processes and equipment for our manufacturing operations, and
reduced expenditures on our research contracts, as two of three multi-year
contracts were completed in the second quarter of 2001.

Selling, general and administrative expenses. Our selling, general and
administrative expenses for the year ended December 31, 2001 were $4.1 million,
an increase of $1.6 million, or 63%, from $2.5 million in 2000. The increase is
nearly evenly divided among increases in rent expense, salary expense and
professional fees. The increase in salary expense represents both additional
personnel and salary increases and bonuses. The increase in professional fees
was principally due to increased legal and auditing fees associated with our
increased requirements in these areas as a newly public company.

Stock-based compensation expense. Our stock-based compensation expense,
which is included in operating expenses, for the year ended December 31, 2001
was $290,000, a decrease of $4,000, or 1%, from $294,000 for the same period in
2000. The decrease in stock-based compensation expense for the year ended
December 31, 2001 was due to employment terminations during 2001 of employees
with non-vested balances of stock options granted before our initial public
offering.

Net interest income. Our net interest income for the year ended December
31, 2001 was $1.8 million, an increase of $540,000, or 41%, from $1.3 million
for the same period in 2000. The increase in net interest income was due to
higher average cash balances that resulted from the completion of our initial
public offering in November 2000.

LIQUIDITY AND CAPITAL RESOURCES

We have historically financed our operations and met our capital
expenditures requirements primarily through sales of our capital stock and, to
a lesser extent, research and product revenues. At December 31, 2002, we had
working capital of $12.5 million, including cash, cash equivalents and
short-term investments of $8.5 million.

Net cash used in operating activities was $14.3 million for the year ended
December 31, 2002, $11.4 million for the year ended December 31, 2001, and $4.2
million for the year ended December 31, 2000. The increase in net cash used in
operating activities was primarily due to increases in our net loss and current
assets associated with our inventory build up and an increase in receivables
due to higher sales. As of December 31, 2002, Days Sales Outstanding (DSO) was
approximately 111 days, versus approximately 51 days as of December 31, 2001.
The increase in DSO is attributed to a shift in the mix of customers where 68%
of product revenue in 2002 related to international customers versus 35% in
2001. International customers are commonly offered longer payment terms than
domestic customers due to established business practices. In addition, a
significant portion of sales in 2001 was with a significant customer that took
advantage of early payment discounts

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and this customer did not purchase
significant quantities in 2002. DSO was also negatively impacted by the volume
of sales activity near the end of 2002, which significantly increased as
compared to the same period of 2001.

Net cash provided by investing activities was $12.9 million for the year
ended December 31, 2002, compared to net cash used in investing activities of
$16,000 for the year ended December 31, 2001, and $27.1 million for the year
ended December 31, 2000. Net cash was provided by maturing and selling
short-term investments as required to fund operations and purchases of
equipment since relocating to our Marlboro manufacturing facility. Net cash
used in investing activities primarily represents capital expenditures, and
also includes purchases, sales and maturities of high quality corporate paper,
corporate bonds and United States government-backed obligations with
contractual maturities typically less than one year.

Net cash provided by financing activities was $10,000 for the year ended
December 31, 2002, $812,000 for the year ended December 31, 2001, and $43.0
million for the year ended December 31, 2000. During 2002 and 2001, cash
provided by financing activities represents proceeds from common stock shares
issued under our Employee Stock Purchase Plan, and proceeds from the exercise
of options and warrants to purchase common stock. For the year ended December
31, 2000, cash provided by financing activities represents proceeds of private
placements of redeemable convertible preferred stock and the sale of common
stock in our initial public offering.

Capital expenditures were $2.9 million for the year ended December 31,
2002, $9.4 million for the year ended December 31, 2001, and $7.1 million for
the year ended December 31, 2000. Capital expenditures for the year ended
December 31, 2002 were primarily for equipment needed for our manufacturing
facility. As of December 31, 2002, our outstanding commitments for capital
expenditures were approximately $500,000. Nearly all of our commitments for
capital expenditures are associated with infrastructure improvements and
equipment purchases for our manufacturing facility. The first of the Marlboro
facilitys two manufacturing lines became operational in 2001. During the
first part of 2002, we began engineering and authorized capital expenditures
for equipment for a second manufacturing line. We have also entered into
agreements to purchase and have purchased some of the longer-lead time
equipment for the second manufacturing line. We will fund our current capital
commitments with the proceeds from our initial public offering, which closed in
November 2000. In addition to the current capital commitments, substantial
further capital expenditures will be required over the next twelve months to
increase the total capacity at our manufacturing facility to our target level
of 10 to 14 megawatts for both lines. However, our current cash, cash
equivalents and short-term investments will not be sufficient to fund this
capacity expansion or our operations through fiscal year 2003 and, as a result,
we will need to raise significant additional financing in order to successfully
build out our manufacturing capacity and fund our operations. As more fully
described in Part I of this report under the heading Financing Transaction, on March 21,
2003, we entered into a definitive purchase agreement with
certain investors to raise $29,475,000 through the issuance of up to a
maximum of approximately 43,200,000 shares of series A convertible preferred
stock and the sale of a warrant to purchase 2,400,000 shares of
our common stock. Consummation of the transactions contemplated by the purchase
agreement is subject to obtaining stockholder approval and other closing
conditions. If we are able to complete this financing in a timely manner, we
expect the second manufacturing line to become operational in late 2003 and in
2004. If we are not able to complete a financing in a timely manner, we will
need to implement fundamental changes to our business and operations which will
likely include substantially reducing, suspending, or terminating our capacity
expansion and substantially reducing our daily operating expenditures from
current levels, in which case we believe our cash, cash equivalents and
short-term investments will then be sufficient to fund our operations through
the end of fiscal year 2003.

In addition, we may need additional financing to execute our business plan
sooner if we need to respond to business contingencies such as the need to
enhance our operating infrastructure, respond to competitive pressures and
acquire complementary businesses or necessary technologies. We do not know
whether we will be able to raise additional financing on terms favorable to us.
If adequate funds are not available or are not available on acceptable terms,
our ability to fund our operations, develop and expand our manufacturing
operations and distribution network, or otherwise respond to competitive
pressures would be significantly limited.

We currently do not have any special purpose entities or off-balance sheet
financing arrangements.

The following table summarizes our contractual obligations as of December
31, 2002 and the effect such obligations are expected to have on our liquidity
and cash flow in future periods:

|                                   |                                    |   |           |           |           |   |           |           |           |   |               |           |  |   |           |           |  |   |         |         | 
|---------------------------------- | ---------------------------------- | - | --------- | --------- | --------- | - | --------- | --------- | --------- | - | ------------- | --------- |  | - | --------- | --------- |  | - | ------- | ------- | 
|                                   |                                    |   | Total     |           | Less than |   |           |           |           |   |               |           |  |   |           |           | 
|                                   |                                    |   | Years     |           | 1 Year    |   | 1-3 Years |           | 4-5 Years |   | After 5 Years
|                                   |                                    |   |           |           |           |   |           |           |           |   |              
|Non-cancelable operating lease     |                                    | $ | 3,705,469 |           |           | $ | 488,672   |           |           | $ | 1,501,172     |           |  | $ | 1,047,656 |           |  | $ | 667,969 |        
|Minimum future royalty payments    |                                    |   | 50,000    |           |           |   | 25,000    |           |           |   | 25,000        |           |  |   |           |           |  |   |         |        
|Capital expenditure obligations    |                                    |   | 500,000   |           |           |   | 500,000   |           |           |   |               |           |  |   |           |           |  |   |         |        
|Raw materials purchase commitments |                                    |   | 1,750,000 |           |           |   | 1,750,000 |           |           |   |               |           |  |   |           |           |  |   |         |        
|                                   |                                    |   |           |           |           |   |           |           |           |   |               |           |  |   |           |           |  |   |         |        
|                                   | Total contractual cash obligations |   | $         | 6,005,469 |           |   | $         | 2,763,672 |           |   | $             | 1,526,172 |  |   | $         | 1,047,656 |  |   | $       | 667,969 | 
|                                   |                                    |   |           |           |           |   |           |           |           |   |               |           |  |   |           |           |  |   |         |        

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INCOME TAXES

As of December 31, 2002, we had federal and state net operating loss
carryforwards totaling approximately $35.1 million and $29.6 million,
respectively, available to reduce future taxable income and tax liabilities
which expire at various dates between 2003 and 2023. In addition, as of
December 31, 2002 we had federal and state research and development tax credit
carryforwards of approximately $735,000 and $456,000, respectively, available
to reduce future taxable income and tax liabilities which expire at various
dates between 2009 and 2023. Under provisions of the Internal Revenue Code,
substantial changes in our ownership may limit the amount of net operating loss
carryforwards and research and development credit carryforwards, which can be
used in future years. We have evaluated the positive and negative evidence
bearing upon the realizability of its deferred tax assets. We have considered
our history of losses and, in accordance with the applicable accounting
standards, have fully reserved the deferred tax asset.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This Statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and replaces Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). This Statement is effective for exit or disposal activities
initiated after December 31, 2002, with early application encouraged.
Management does not believe SFAS No. 146 will have a material impact on our
financial position and results of operations.

In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based CompensationTransition and Disclosure, which amends SFAS No. 123,
Accounting for Stock-Based Compensation. SFAS No. 148 provides specific
guidance for companies choosing to transition from employee stock option
accounting under the provisions of APB No. 25 to employee stock option
accounting under SFAS No. 123. We currently account for employee stock option
grants under APB No. 25 and will continue to do so during fiscal 2003. In
addition, the provisions of SFAS No. 148 require that, in all annual and
interim financial statements, companies disclose for each period for which an
income statement is presented an accounting policy footnote that includes the
method of accounting for stock options, total stock compensation cost (which is
recognized in the income statement and would have been recognized had SFAS No.
123 been adopted for recognition purposes as of its effective date), and pro
forma net income and earnings per share (where applicable) that would have been
reported had SFAS No. 123 been adopted for recognition purposes as of its
effective date. We currently provide SFAS No. 123 disclosures in the footnotes
to our annual financial statements and, commencing in 2003, we will be required
to disclose this information in our interim financial statements as well.

In November 2002, the FASB issued FIN No. 45 Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others an interpretation of SFAS No. 5, 57, and 107 and
rescission of FASB Interpretation No. 34. The Interpretation requires that a
guarantor recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken by issuing the guarantee. The Interpretation
also requires additional disclosures to be made by a guarantor in its interim
and annual financial statements about its obligations under certain guarantees
it has issued. The accounting requirements for the initial recognition of
guarantees are applicable on a prospective basis for guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective for
all guarantees outstanding, regardless of when they were issued or modified.
Accounting policies and disclosures regarding our product warranty liability
and other indemnification agreements that are required under FIN No. 45 are
reflected in our notes to the consolidated financial statements.

CERTAIN FACTORS WHICH MAY AFFECT FUTURE RESULTS

RISKS RELATING TO OUR FINANCIAL RESULTS

Evaluating our business and future
prospects may be difficult due to our limited operating history.

We are at an early stage of development and there is limited historical
information available upon which you can base your evaluation of our business
and prospects. We were formed in 1994 to research and develop crystalline
silicon technology for use in manufacturing solar power products. Although we
began shipping product from our pilot manufacturing facility in 1997, the
primary objective of our pilot production line was the technical development
and further refinement of our String Ribbon technology and related
manufacturing processes. We shipped our first commercial products from our
Marlboro manufacturing facility in June 2001. We have shipped only a limited
number of solar power panels, almost 30,000, as of December 31, 2002 and have
recognized limited revenues since our inception.

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In addition, our earlier stage of development means that we have less
insight into how market and technology trends may affect our business. The
revenue and income potential of our business is unproven and the market we are
addressing is rapidly evolving. You should consider our business and prospects
in light of the risks, expenses and challenges that we will face as an
early-stage company seeking to develop and manufacture new products in a
growing and rapidly evolving market.

We have a history of losses, expect to incur substantial further losses and may
not achieve or maintain profitability in the future, which may decrease the
market value of our stock.

Since our inception, we have incurred significant net losses, including
net losses of $13.2 million for the year ended December 31, 2002. As a result
of ongoing operating losses, we had a cumulative net loss of $41.4 million as
of December 31, 2002. We expect to incur substantial losses for the foreseeable
future, and may never become profitable. Even if we do achieve profitability,
we may be unable to sustain or increase our profitability in the future, which
could materially decrease the market value of our common stock. We expect to
continue to incur significant capital expenditures and anticipate that our
expenses will increase substantially in the foreseeable future as we seek to:



| | - |  | expand our manufacturing operations;                                             
| | - |  | ---------------------------------------------------------------------------------
|
| | - |  | develop our distribution network;                                                
|
| | - |  | continue to research and develop our products and manufacturing technologies;    
|
| | - |  | implement internal systems and infrastructure in conjunction with our growth; and
|
| | - |  | hire additional personnel.                                                       

We do not know whether our revenues will grow at all or grow rapidly enough to
absorb these expenses, and our limited operating history makes it difficult to
assess the extent of these expenses or their impact on our operating results.

Our stock price could fall substantially if our quarterly revenue or operating
results fluctuate or are disappointing.

Our quarterly revenue and operating results have fluctuated significantly
in the past and may fluctuate significantly from quarter to quarter in the
future due to a variety of factors, many of which are discussed elsewhere in
this section.

We anticipate that our operating expenses will continue to increase
significantly. If sales in any quarter do not increase correspondingly, our net
losses for that period will increase. For these reasons, quarter-to-quarter
comparisons of our results of operations are not necessarily meaningful and you
should not rely on results of operations in any particular quarter as an
indication of future performance. If our quarterly revenue or results of
operations fall below the expectations of investors or public market analysts
in any quarter, the market value of our common stock would likely decrease, and
could decrease rapidly and substantially.

RISKS RELATING TO OUR INDUSTRY, PRODUCTS AND OPERATIONS

If solar power technology is not suitable for widespread adoption or sufficient
demand for solar power products does not develop or takes longer to develop
than we anticipate, our sales would not significantly increase and we would be
unable to achieve or sustain profitability.

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 would be unable to generate enough revenues
to achieve and sustain profitability. In addition, demand for solar power
products in the markets and geographic regions we target may not develop or may
develop more slowly than we anticipate. Many factors will influence the
widespread adoption of solar power technology and demand for solar power
products, including:



| | - |  | 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 alternative distributed generation technologies such as fuel cells, wind power and microturbines;                

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| | - |  | 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;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | - |  | continued deregulation of the electric power industry and broader energy industry; and                                                                                                                         
|
| | - |  | availability of government subsidies and incentives.                                                                                                                                                           

Problems with product quality or product performance may cause us to incur
warranty expenses and may damage our market reputation and prevent us from
achieving increased sales and market share.

As is consistent with standard practice in our industry, the duration of
our product warranties is lengthy relative to expected product life and has
recently been increasing. Our current standard product warranty includes a one
or two-year warranty period for defects in material and workmanship and a
25-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 revenues. Although we have sold almost
30,000 solar panels since 1997, none of these panels has been operating more
than six years, and over 50% of them have been operating less than one year.
The possibility of future product failures could cause us to incur substantial
expense to repair or replace defective product. Furthermore, widespread
product failures may damage our market reputation and reduce our market share
and cause sales to decline.

We may fail to successfully bring to market our new solar power products under
development, which may prevent us from achieving increased sales and market
share.

Although we have been selling our solar power products since 1997, we
expect to derive a substantial portion of our revenues from sales of our new
solar power products which are under development and not yet commercially
available. Many of these new products are derived from our innovative cell
fabrication and advanced panel design technologies, which are under
development. If we fail to successfully develop our new solar power products or
technologies, we will likely be unable to recover the losses we will have
incurred to develop these products and technologies and may be unable to
increase our sales and market share and to become profitable. Many of our new
product and manufacturing technologies are novel and represent a departure from
conventional solar power technologies, and it is difficult to predict whether
we will be successful in completing their development. Our manufacturing
technologies have been tested only in our pilot manufacturing facility and, in
most cases, only limited pre-production prototypes of our new products have
been field-tested.

Our solar power products may not gain market acceptance, which would prevent us
from achieving increased sales and market share.

The development of a successful market for our solar power products may be
adversely affected by a number of factors, many of which are beyond our
control, including:



| | - |  | our failure to produce solar power products which compete favorably
against other solar power products on the basis of cost, quality and
performance;                                                                          
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | - |  | our failure to produce solar power products which compete favorably
against conventional energy sources and alternative distributed
generation technologies, such as fuel cells, on the basis of cost,
quality and performance;
|
| | - |  | whether customers accept our new panel designs under development and
the techniques we are developing to mount them; and                                                                                                       
|
| | - |  | our failure to develop and maintain successful relationships with
distributors, systems integrators and other resellers, as well as
strategic partners.                                                                        

If our solar power products fail to gain market acceptance, we would be unable
to increase our sales and market share and to achieve and sustain
profitability.

Technological changes in the solar power industry could render our solar power
products obsolete, which could reduce our market share and cause our sales to
decline.

Our failure to further refine our technology and develop and introduce new
solar power products could cause our products to become obsolete, which could
reduce our market share and cause our sales to decline. The solar power
industry is rapidly

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evolving and competitive. We will need to invest
significant financial resources in research and development to keep pace with
technological advances in the solar power industry and to effectively compete
in the future. We believe that there are a variety of competing solar power
technologies under development by other companies that could result in lower
manufacturing costs than those expected for our solar power products. Our
development efforts may be rendered obsolete by the technological advances of
others, and other technologies may prove more advantageous for the
commercialization of solar power products.

The build-out of our manufacturing facility may take longer and cost more than
we expect, which would likely result in lower revenues and earnings than
anticipated.

If we fail to successfully complete the build-out of our Marlboro
manufacturing facility, our business and results of operations would likely be
materially impaired. The first of the Marlboro facilitys two manufacturing
lines entered service in 2001. We recently began engineering and authorized
capital expenditures for longer lead-time equipment for the second
manufacturing line, which we expect to become operational in late 2003 and in
2004 if we are able to raise the funds necessary to finance its construction.
Completing the build-out of this facility to capacity will require a
significant investment of capital and substantial engineering expenditures, and
is subject to significant risks, including risks of cost overruns, lack of
available financing, delays, equipment problems and other start-up and
operating difficulties. Our manufacturing processes also use custom-built
equipment that may not be delivered and installed in our new facility in a
timely manner. In addition this equipment may take longer and cost more to
debug than planned and may never operate as designed. We plan to incorporate
first-time equipment designs and technology improvements, which we expect to
lower unit capital and operating costs, but this new technology may not be
successful, which would increase cost, limit capacity, and prevent us from
achieving increases in sales. If we experience any of these or similar
difficulties, we may be unable to complete the build-out of the facility, our
manufacturing capacity could be substantially constrained and our revenues and
earnings would likely be materially impaired.

We may not be able to manufacture our solar power products in sufficient
quantities or at acceptable costs to meet customer demand.

To date, we have focused primarily on research and development of our
solar power products and have limited experience manufacturing large volumes of
our solar power products on a commercial basis. Furthermore, we may not be able
to achieve our manufacturing cost targets, which could prevent us from ever
becoming profitable. If we cannot achieve our targeted production volumes or
capacity or if we experience capacity constraints, quality control problems or
other disruptions, we may not be able to manufacture our products in large
volumes or at acceptable costs and may be unable to satisfy the demand of our
customers, which would reduce our market share and revenues and may harm our
reputation. The expansion of our manufacturing operations to achieve targeted
production volumes will require the successful deployment of advanced equipment
and technology utilizing manufacturing processes and components, which we are
currently developing.

Our ability to increase market share and sales depends on our ability to
successfully maintain our existing distribution relationships and expand our
distribution channels.

We currently sell our solar power products primarily to distributors,
system integrators and other value-added resellers within and outside of North
America, which typically resell our products to end users on a global basis.
Through December 31, 2002, we sold our solar power products to approximately 20
distributors, system integrators and other value-added resellers. If we are
unable to successfully maintain our existing distribution relationships and
expand our distribution channels, our revenues and future prospects will be
materially harmed. As we seek to grow our sales by entering new markets in
which we have little experience selling our solar power products, our ability
to increase market share and sales will depend substantially on our ability to
expand our distribution channels by identifying, developing and maintaining
relationships with resellers both within and outside of North America. We may
be unable to enter into relationships with resellers in the markets we target
or on terms and conditions favorable to us, which could prevent us from
entering these markets or entering these markets in accordance with our plans.
Our ability to enter into and maintain relationships with resellers will be
influenced by the relationships between these resellers and our competitors,
market acceptance of our solar power products and our low brand recognition as
a new entrant.

We face risks associated with the marketing, distribution and sale of our solar
power products internationally, and if we are unable to effectively manage
these risks, it could impair our ability to expand our business abroad.

From our inception through December 31, 2002, approximately 60% of our
product sales have been made to resellers outside North America. We expect that
our sales both to resellers and distributors outside of North America and
through our resellers and distributors to end users outside of North America
will continue to be significant in the future. We will require significant
management attention and financial resources to successfully develop our
international sales channels. In addition, the marketing, distribution and sale
of our solar power products internationally exposes us to a number of risks
with which we

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have limited experience. If we are unable to effectively manage
these risks, it could impair our ability to grow our business abroad. These
risks include:



| | - |  | difficult and expensive compliance with the commercial and legal
requirements of international markets, with which we have only limited
experience;                                                                                   
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | - |  | inability to obtain intellectual property protection;                                                                                                                                                                                 
|
| | - |  | encountering trade barriers such as export requirements, tariffs, taxes
and other restrictions and expenses, which could affect the competitive
pricing of our solar power products and reduce our market share in some
countries; and
|
| | - |  | difficulty of enforcing revenue collection internationally.                                                                                                                                                                           

We expect that our international sales will be generally denominated in
United States dollars. As a result, increases in the value of the United States
dollar relative to foreign currencies would cause our products to become less
competitive in international markets and could result in limited, if any, sales
and profitability. To the extent that we denominate sales in foreign
currencies, we will be exposed to increased risks of currency fluctuations.

Our strategy includes establishing local manufacturing facilities in
international markets, although we have not yet done so. As we implement our
strategy, we may encounter legal and commercial restrictions and incur taxes
and other expenses to establish our manufacturing facilities in certain
countries. In addition, we may potentially forfeit, voluntarily or
involuntarily, foreign assets due to economic or political instability in the
countries where our local manufacturing facilities are located.

Our dependence on a small number of resellers may cause significant
fluctuations or declines in our product revenues.

From our inception through December 31, 2002, our three largest resellers
accounted for approximately 67% of our product sales and our 10 largest
resellers accounted for approximately 90% of our product sales. We anticipate
that sales of our solar power products to a limited number of key resellers
will continue to account for a significant portion of our total product
revenues for the foreseeable future. Consequently, any one of the following
events may cause significant fluctuations or declines in our product revenues:



| | - |  | reduction, delay or cancellation of orders from one or more of our significant resellers;                           
| | - |  | --------------------------------------------------------------------------------------------------------------------
|
| | - |  | selection by one or more of our significant resellers of products competitive with ours;                            
|
| | - |  | loss of one or more of our significant resellers and our failure to recruit additional or replacement resellers; and
|
| | - |  | failure of any of our significant resellers to make timely payment of our invoices.                                 

Our dependence on a limited number of third party suppliers for raw materials,
key components for our solar power products and custom-built equipment for our
operations could prevent us from delivering our products to our customers
within required timeframes and we may experience order cancellation and loss of
market share.

We manufacture all of our solar power products using materials and
components procured from a limited number of third-party suppliers. If we fail
to develop or maintain our relationships with these or our other suppliers, we
may be unable to manufacture our products or our products may be available only
at a higher cost or after a long delay, which could prevent us from delivering
our products to our customers within required time frames and we may experience
order cancellation and loss of market share. We currently do not have contracts
with many of our suppliers and may not be able to procure sufficient quantities
of the materials and components necessary to manufacture our products on
acceptable commercial terms or at all. To the extent the processes that our
suppliers use to manufacture materials and components are proprietary, we may
be unable to obtain comparable materials and components from alternative
suppliers. The failure of a supplier to supply materials and components in a
timely manner, or to supply materials and components that meet our quality,
quantity and cost requirements could impair our ability to manufacture our
products and/or increase their costs, particularly if we are unable to obtain
substitute sources of these materials and components on a timely basis or on
terms acceptable to us. In addition, our manufacturing processes utilize
custom-built equipment that is currently produced by a limited number of
suppliers. A suppliers failure to supply this equipment in a timely manner,
with adequate quality and on terms acceptable to us could delay our capacity
expansion to our manufacturing facility and otherwise, disrupt our production
schedule or increase our costs of production.

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Our use of forecasts to manage our inventory could result in insufficient
quantities to meet reseller demand or excess inventory.

We generally do not obtain long-term contracts or purchase orders prior to
the production of our solar power products. Instead, we rely on forecasts to
determine the timing of our production schedules and the volume of product to
be manufactured. The level and timing of orders placed by our resellers may
vary for many reasons. As a result, at any particular time, we may not have
enough inventory to meet demand or we may have excess inventory, each of which
could negatively impact our operating results. In addition, as we manufacture
more solar power products without related purchase orders, we increase our risk
of loss of revenues due to the obsolescence of products held in inventory for
which we have already incurred production costs.

The success of our business depends on the continuing contributions of our key
personnel and our ability to attract and retain new qualified employees in a
competitive labor market.

We have attracted a highly skilled management team and specialized
workforce, including scientists, engineers, researchers, and manufacturing and
marketing professionals. If we were to lose the services of Mark A. Farber, our
Chief Executive Officer, President and a director, or any of our other
executive officers and key employees, our business could be materially and
adversely impacted. We had 132 employees as of December 31, 2002, and
anticipate that we will need to hire a significant number of new highly-skilled
technical, manufacturing, sales and marketing, and administrative personnel if
we are to successfully develop and market our products, develop our
distribution network, and operate our expanded manufacturing facility.
Competition for personnel is intense, and qualified technical personnel are
likely to remain a limited resource for the foreseeable future. Locating
candidates with the appropriate qualifications, particularly in the desired
geographic location, can be costly and difficult. We may not be able to hire
the necessary personnel to implement our business strategy, or we may need to
provide higher compensation or training to our personnel than we currently
anticipate. Moreover, any officer or employee can terminate his or her
relationship with us at any time.

Our management team may not be able to successfully implement our business
strategies because it has limited experience managing a rapidly growing
company.

The existing members of our management team have had only limited
experience managing a rapidly growing company on either a public or private
basis. In connection with the planned expansion of our manufacturing capacity,
we have undergone and anticipate undergoing further rapid growth in the scope
of our operations and the number of our employees, which is likely to place a
significant strain on our senior management team and other resources. In
addition, we may encounter difficulties in effectively managing the budgeting,
forecasting and other process control issues presented by this rapid growth. We
may seek to augment or replace members of our management team or we may lose
key members of our management team, and we may not be able to attract new
management talent with sufficient skill and experience. If our management team
is unable to manage the rapid growth of our business operations, then our
product development, the expansion of our manufacturing operations and
distribution network, and our sales and marketing activities would be
materially and adversely affected.

We require additional financing to fund our planned manufacturing capacity
expansion and may not be able to raise additional financing or financing on
favorable terms.

We believe that our current cash, cash equivalents and short-term
investments will not be sufficient to fund our planned manufacturing capacity
expansion and operating expenditures over the next twelve months. As a result,
we will need to raise significant additional financing if we are to
successfully build out our manufacturing capacity and continue operating
expenditures at current levels. As more fully described in Part I of this
report under the heading Financing Transaction, on March 21, 2003, we
entered into a definitive purchase agreement with certain investors to raise
$29,475,000 through the issuance of up to approximately 43,200,000 shares
of series A convertible preferred stock and the sale of a warrant to purchase 2,400,000 shares of our common stock. Consummation of the
transactions contemplated by the purchase agreement is subject to our obtaining stockholder approval and other closing conditions. If we are able to raise this
financing on time, we expect the second manufacturing line to become
operational during late 2003 and in 2004. If we are not able to complete a
financing in a timely manner, we will need to implement fundamental changes to
our business and operations which will likely include substantially reducing,
suspending, or terminating our capacity expansion and substantially reducing
our daily operating expenditures from current levels, in which case we believe
our cash, cash equivalents and short-term investments will then be sufficient
to fund our operations through the end of fiscal year 2003. In addition, we
may need additional financing to execute our business plan sooner if we need to
respond to business contingencies such as the need to enhance our operating
infrastructure, respond to competitive pressures and acquire complementary
businesses or necessary technologies. We do not know whether we will be able to
raise additional financing or financing on terms favorable to us. If adequate
funds are not available or are not available on acceptable terms, our ability
to fund our operations, develop and expand our manufacturing operations and
distribution network, or otherwise respond to competitive pressures would be

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significantly limited. In addition, if we raise additional funds through the
issuance of equity or convertible debt securities, the percentage ownership of
our existing stockholders will be reduced. These newly issued securities may
have rights, preferences and privileges senior to those of existing
stockholders.

We face intense competition from other companies producing solar power and
other energy generation products. If we fail to compete effectively, we may be
unable to increase our market share and sales.

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 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. There are over 20 companies in the world that produce solar
power products, including BP Solar, Kyocera Corporation, Royal Dutch Shell,
Sharp Corporation, and AstroPower, Inc. All of these solar power product
producers, as well as several others, have historically derived all or a
majority of their sales from conventional manufacturing technology that
involves using wafers made from slicing solid blocks of crystalline silicon. In
addition, some of these companies are developing advanced crystalline silicon
or thin film technologies, including technologies such as advanced crystalline
sheet and ribbon technologies and thin films of amorphous silicon, cadmium
telluride and copper indium diselenide, and project future cost savings similar
to or greater than ours. Other existing and potential competitors in the solar
power market include universities and research institutions. 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 they believe will ultimately have costs similar to, or lower
than, our projected costs.

Most of our competitors are substantially larger than we are, have longer
operating histories and have substantially greater financial, technical,
manufacturing and other resources than we do. Many also have greater name
recognition, a more established distribution network and a larger installed
base of customers. In addition, many of our competitors have well-established
relationships with our current and potential customers and have extensive
knowledge of our target markets. As a result, our competitors may be able to
devote greater resources to the research, development, promotion and sale of
their products and respond more quickly to evolving industry standards and
changing customer requirements than we can.

If we are unable to protect our intellectual property adequately, we could lose
our competitive advantage in the solar power market.

Our ability to compete effectively against competing solar power
technologies will depend, in part, on our ability to protect our current and
future proprietary technology, product designs and manufacturing processes
through a combination of patent, copyright, trademark, trade secret and unfair
competition laws. We may not be able to adequately protect our intellectual
property and may need to defend our intellectual property against infringement
claims, either of which could result in the loss of our competitive advantage
in the solar power market and materially harm our business and profitability.
We face the following risks in protecting our intellectual property:



| | - |  | we cannot be certain that our pending United States and foreign patent
applications will result in issued patents or that the claims allowed are
or will be sufficiently broad to protect our technology or processes;                                                                                                                                                        
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | - |  | our license, but not our right, to practice the String Ribbon
technology terminates upon expiration of the underlying patents which
begin to expire in 2003 and our historical operating experience with
String Ribbon and our related patented and proprietary manufacturing
processes may not adequately protect our competitive advantage after
these patents have expired;
|
| | - |  | third parties may design around our patented technologies or seek to challenge or invalidate our patented technologies;                                                                                                                                                                                                                                                       
|
| | - |  | we may incur significant costs and diversion of management resources in prosecuting or defending patent infringement suits;                                                                                                                                                                                                                                                   
|
| | - |  | we may not be successful in prosecuting or defending patent
infringement suits and, as a result, may need to seek to obtain a license
of the third partys intellectual property rights; however, a license may
not be available to us or may not be available to us on commercially
reasonable terms; and                                                                    
|
| | - |  | the contractual provisions we rely on to protect our trade secrets and
proprietary information, such as our confidentiality and non-disclosure
agreements with our employees, consultants and other third parties, may
be breached and our trade secrets and proprietary information disclosed
to the public.                                                                 

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Existing regulations and changes resulting from electric utility deregulation
may present technical, regulatory and economic barriers to the purchase and use
of solar power products, which may significantly reduce demand for our
products.

The market for electricity generation products is heavily influenced by
federal, state and local government regulations and policies concerning the
electric utility industry, as well as internal policies and regulations
promulgated by electric utilities. These regulations and policies often relate
to electricity pricing and technical interconnection of customer-owned
electricity generation. In the United States and in a number of other
countries, these regulations and policies are being modified and may continue
to be modified. Customer purchases of, or further investment in the research
and development 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 potential demand for our solar power
products.

We anticipate that our solar power products and their 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. Any new government
regulations or utility policies pertaining to our solar power products may
result in significant additional expenses to us, our resellers and their
customers and, as a result, could cause a significant reduction in demand for
our solar power products.

The reduction or elimination of government subsidies and economic incentives
for on-grid applications could cause our sales to decline.

We believe that the growth of some of our target markets, including the
market for on-grid applications, depends in part on the availability and size
of government subsidies and economic incentives. Accordingly, the reduction or
elimination of government subsidies and economic incentives may adversely
affect the growth of these markets, which could cause our sales to decline.
Today, the cost of solar power substantially exceeds the cost of power
furnished by the electric utility grid. As a result, federal, state and local
governmental bodies in many countries, most notably the United States, Japan
and Germany, 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 to promote the use of solar energy in
on-grid applications and to reduce dependency on other forms of energy. These
government subsidies and economic incentives could be reduced or eliminated
altogether.

The lack or inaccessibility of financing for off-grid solar power applications
could cause our sales to decline.

One of our key markets is off-grid solar power applications to developed
and developing countries. In some developing countries, government agencies and
the private sector have, from time to time, provided subsidies or financing on
preferred terms for rural electrification programs. We believe that the
availability of financing could have a significant effect on the level of sales
of off-grid solar power applications, particularly in developing countries
where users may not have sufficient resources or credit to otherwise acquire
solar power systems. If existing financing programs for off-grid solar power
applications are eliminated or if financing is inaccessible, the growth of the
market for off-grid applications may be adversely affected, which could cause
our sales to decline.

Our reliance on government contracts to partially fund our research and
development programs could impair our ability to commercialize our solar power
technologies and would increase our research and development expenses.

We intend to continue our policy of selectively pursuing contract
research, product development, and market development programs funded by
various agencies of the United States, state and international governments to
complement and enhance our own resources. The percentage of our total revenues
derived from government-related contracts was approximately 21% for the year
ended December 31, 2002. We currently have two active research contracts with
total estimated revenues of approximately $5.0 million, $2.75 million of which
has been authorized by the sponsoring agencies and $2.1 million of which has
been recorded as revenue as of December 31, 2002. The remaining $2.9 million of
revenue will be recognized over the remaining life of each of the contracts,
which expire on October 31, 2003 and May 31, 2005. These government agencies
may not continue their commitment to programs to which our development projects
are applicable. Moreover, we may not be able to compete successfully to obtain
funding through these or other programs. A reduction or discontinuance of these
programs or of our participation in these programs would increase our research
and development expenses, which could impair our ability to develop our solar
power technologies.

In addition, contracts involving government agencies may be terminated at
the convenience of the agency. Other risks include potential disclosure of our
confidential information to third parties and the exercise of march-in rights
by the government. Our government-sponsored research contracts require that we
provide regular written technical updates on a monthly, quarterly or annual
basis, and, at the conclusion of the research contract, a final report on the
results of our technical

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research. Because these reports are generally
available to the public, third parties may obtain some aspects of our sensitive
confidential information. March-in rights refer to the right of the United
States government or government agency to require us to grant a license to the
technology to a responsible applicant or, if we refuse, the government may
grant the license itself. The government can exercise its march-in rights if it
determines that action is necessary because we fail to achieve practical
application of the technology, because action is necessary to alleviate health
or safety needs, to meet requirements of federal regulations, or to give the
United States industry preference. Funding from government contracts also may
limit when and how we can deploy our technology developed under those
contracts.

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

We are required to comply with all federal, state and local regulations
regarding protection of the environment. If more stringent regulations are
adopted in the future, the costs of compliance with these new regulations could
be substantial. We believe that we have all necessary permits to conduct our
business as it is presently conducted. If we fail to comply with present or
future environmental regulations, however, we may be required to pay
substantial fines, suspend production or cease operations. We use, generate and
discharge toxic, volatile and otherwise hazardous chemicals and wastes in our
research and development and manufacturing activities. Any failure by us to
control the use of, or to restrict adequately the discharge of, hazardous
substances could subject us to potentially significant monetary damages and
fines. In addition, under some federal and state statutes and regulations, a
governmental agency may seek recovery and response costs from operators of
property where releases of hazardous substances have occurred or are ongoing,
even if the operator was not responsible for such release or otherwise at
fault.

Product liability claims against us could result in adverse publicity and
potentially significant monetary damages.

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 we sell results in
injury. Since our products are electricity producing devices, it is possible
that consumers could be injured or killed by our products, whether by product
malfunctions, defects, improper installation or other causes. In addition,
since sales of our existing products have been modest and the products we are
developing incorporate new technologies and use new installation methods, we
cannot 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, 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. If our insurance protection is
inadequate, the successful assertion of product liability claims against us
could result in potentially significant monetary damages.

RISKS ASSOCIATED WITH THE MARKET FOR OUR COMMON STOCK

Our officers and directors control 18% of our common stock and may be able to
significantly influence corporate actions.

As of March 1, 2003, our executive officers, directors and entities
affiliated with them controlled approximately 18% of our common stock. As a
result, these stockholders, acting together, may be able to significantly
influence all matters requiring approval by our stockholders, including the
election of directors, the approval of charter and by-law amendments, and the
approval of mergers or other business combinations. If we complete the
financing transaction as described in this report, our executive officers,
directors and entities affiliated with them would control approximately 56% of
our common stock on an as converted basis.

The price of our common stock may be volatile.

The stock market has, from time to time, experienced extreme price and
trading volume fluctuations, and the market prices of technology companies such
as ours have been extremely volatile. Our operating performance will
significantly affect the market price of our common stock. The proposed
financing may add to the volatility of our common stock. To the extent we are
unable to compete effectively and gain market share or the other factors
described in this section affect us, our stock price will likely decline. The
market price of our common stock also may be adversely impacted by broad market
and industry fluctuations regardless of our operating performance, including
general economic and technology trends. In addition, companies that have
experienced volatility in the market price of their stock have been the subject
of securities class action litigation. We may be involved in securities class
action litigation in the future. This litigation often results in substantial
costs and a diversion of managements attention and resources.

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The large number of shares eligible for public sale could cause our stock price
to decline.

The market price of our common stock could decline as a result of sales by
our existing stockholders of a large number of shares of our common stock in
the market or the perception that these sales could occur. These sales also
might make it more difficult for us to sell equity securities in the future at
a time and price that we deem appropriate.

We are subject to anti-takeover provisions in our charter and by-laws and under
Delaware law that could delay or prevent an acquisition of our company, even if
the acquisition would be beneficial to our stockholders.

Provisions of our certificate of incorporation, our by-laws and Delaware
law could make it more difficult and expensive for a third party to pursue a
tender offer, change in control transaction or takeover attempt, which is
opposed by our board of directors. Stockholders who wish to participate in
these transactions may not have the opportunity to do so. We also have a
staggered board of directors, which makes it difficult for stockholders to
change the composition of our board of directors in any one-year. If a tender
offer, change in control transaction, takeover attempt or change in our board
of directors is prevented or delayed, the market price of our common stock
could decline.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:

INTEREST RATE RISK

We do not use derivative financial instruments. We generally place our
marketable security investments in high credit quality instruments. We do not
expect any material loss from our marketable security investments and therefore
believe that our potential interest rate exposure is not material.

FOREIGN CURRENCY EXCHANGE RATE RISK

All of our sales are denominated in United States dollars. Accordingly, we have
not been directly exposed to fluctuations in currency exchange rates. However,
since we sell a significant percentage of our products internationally, the
relative competitiveness of our products is impacted by foreign currency
exchange rates. As we expand our manufacturing operations and distribution
network internationally, our exposure to fluctuations in currency exchange
rates may increase.




ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:

The Companys Financial Statements and related Notes and Report of Independent
Accountants are included beginning on page F-1 of this Annual Report on Form
10-K.




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

Not applicable.




PART III




ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:

The information required under this item may be found under the sections
captioned Election of Directors, Occupations of Directors and Executive
Officers, and Section 16(a) Beneficial Ownership Reporting Compliance in our
Proxy Statement (the 2002 Proxy Statement), which will be filed with the
Securities and Exchange Commission not later than 120 days after the close of
our fiscal year ended December 31, 2002, and is incorporated herein by
reference.




ITEM 11. EXECUTIVE COMPENSATION:

The information required under this item may be found under the section
captioned Compensation and Other Information Concerning Directors and
Officers in the 2002 Proxy Statement, and is incorporated herein by reference.




ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:

The information required under this item may be found under the section
captioned Securities Ownership of Certain Beneficial Owners and Management in
the 2002 Proxy Statement, and is incorporated herein by reference.




ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:

The information required under this item may be found under the caption
Certain Relationships and Related Transactions in the 2002 Proxy Statement,
and is incorporated herein by reference.




ITEM 14. CONTROLS AND PROCEDURES:

(a)  Evaluation of disclosure controls and procedures.

The principal executive officer and principal financial officer have evaluated
the disclosure controls and procedures as of a date within 90 days before the
filing date of this annual report. Based on this evaluation they conclude that
the Companys disclosure controls and procedures effectively ensure that
information required to be disclosed in our filings and submissions under the
Exchange Act is recorded, processed, summarized, and reported within the time
periods specified in the Securities and Exchange Commissions rules and forms.

(b)  Changes in internal controls.

28



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##### Table of Contents



There have been no significant changes in our internal controls or in other
factors that could significantly affect those controls subsequent to their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.




ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K:

(a)  The following documents are filed as part of this Annual Report on Form
10-K:

1. Consolidated Financial Statements. The financial statements included in
Item 8 of Part II which appear beginning on page 30 of this Annual Report on
Form 10-K.

2.
Financial Statement Schedules. Schedule II - Valuation and Qualifying
Accounts appears on page 47 of this Annual Report on Form 10-K.

3. Exhibits. The following exhibits:

|          |  |                                                                                                                                          
|--------- |  | -----------------------------------------------------------------------------------------------------------------------------------------
|Exhibit   |  |                                                                                                                                          
|Number    |  | Description                                                                                                                              
|          |  |                                                                                                                                          
|3.1 (1)   |  | Third Amended and Restated Certificate of Incorporation of the Registrant. (Exhibit 3.2)                                                 
|          |  |                                                                                                                                          
|3.2 (1)   |  | Second Amended and Restated By-laws of the Registrant. (Exhibit 3.4)                                                                     
|          |  |                                                                                                                                          
|10.1 (1)* |  | 1994 Stock Option Plan. (Exhibit 10.1)                                                                                                   
|          |  |                                                                                                                                          
|10.2 (1)* |  | 2000 Stock Option and Incentive Plan. (Exhibit 10.2)                                                                                     
|          |  |                                                                                                                                          
|10.3 (1)* |  | 2000 Employee Stock Purchase Plan. (Exhibit 10.3)                                                                                        
|          |  |                                                                                                                                          
|10.4 (1)  |  | Lease between Registrant and 211 Second Avenue Realty L.P. dated as of September 15, 1995, as
amended. (Exhibit 10.4)                    
|          |  |                                                                                                                                          
|10.5 (1)  |  | Lease Agreement between Registrant W9/TIB Real Estate Limited Partnership dated as of January
31, 2000, as amended (Exhibit 10.5)        
|          |  |                                                                                                                                          
|10.6 (1)+ |  | Distribution and Marketing Agreement between Registrant and Kawasaki Heavy Industries, Ltd.
dated as of December 24, 1999. (Exhibit 10.6)
|          |  |                                                                                                                                          
|10.7 (1)+ |  | Agreement between Registrant and Emanuel M. Sachs dated as of September 30, 1994, as amended.
(Exhibit 10.7)                             
|          |  |                                                                                                                                          
|10.8 (1)  |  | Series D Preferred Stock Purchase Agreement dated as of December 28, 1999. (Exhibit 10.8)                                                
|          |  |                                                                                                                                          
|10.9 (1)  |  | Form of Indemnification Agreement between Registrant and each of its directors and executive
officers. (Exhibit 10.9)                    
|          |  |                                                                                                                                          
|10.10 (2) |  | Stock and Warrant Purchase Agreement dated as of March 21, 2003                                                                          
|          |  |                                                                                                                                          
|10.11 (2) |  | Form of Registration Rights Agreement                                                                                                    
|          |  |                                                                                                                                          
|10.12 (2) |  | Voting Agreement dated as of March 21, 2003                                                                                              
|          |  |                                                                                                                                          
|21.1      |  | Subsidiaries of the Registrant. (filed herewith).                                                                                        
|          |  |                                                                                                                                          
|23.1      |  | Consent of PricewaterhouseCoopers LLP, independent accountants. (filed herewith)                                                         
|          |  |                                                                                                                                          
|24.1      |  | Power of Attorney (included on Page II-2)                                                                                                
|          |  |                                                                                                                                          
|99.1      |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith). 
|          |  |                                                                                                                                          
|99.2      |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith). 

+ Confidential treatment granted as to certain portions.

* Indicates a management contract or compensatory plan, contract or arrangement.



| | (1) |  | Incorporated herein by reference to the exhibits to the Companys
Registration Statement on Form S-1, as amended (file No. 333-43140). The
number given in parenthesis indicates the corresponding exhibit number
in such Form S-1.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | Incorporated herein by reference to the exhibits to the Companys
Current Report on Form 8-K filed on March 24, 2003                                                                                                               
|
| |     |  | (b)Reports on
Form 8-K:                                                                                                                                                                                                            
|
| |     |  | No reports on
Form 8-K were filed during the fiscal quarter ended December 31,
2002.                                                                                                                                               
|
| |     |  | (c)Exhibits:                                                                                                                                                                                                                       

The Company hereby files as part of this Annual Report on Form 10-K the
exhibits listed in Item 15(a)(3) set forth above. Exhibits which are
incorporated herein by reference may be inspected and copied at the public
reference facilities maintained by the SEC at the SECs Public Reference Room
at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SECs regional
offices located at 233 Broadway, New York, New York 10279, and at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60611-2511.
Copies of such material may be obtained by mail from the
Public Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. The public may obtain
information on the operation of the Public Reference Room by calling
1-800-SEC-0330. The SEC also maintains a web site that contains reports, proxy
and information statements and other information regarding registrants that
file electronically with the SEC at the address http://www.sec.gov.

29



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INDEX TO FINANCIAL STATEMENTS

|                                                                                                               |  |      |    | 
|-------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                               |  | Page
|Report of Independent Accountants                                                                              |  |      | 31 | 
|Consolidated Balance Sheets as of December 31, 2001 and 2002                                                   |  |      | 32 | 
|Consolidated Statements of Operations for the years ended December 31, 2000, 2001 and 2002                     |  |      | 33 | 
|Consolidated Statements of Stockholders Equity (Deficit) for the years ended December 31, 2000,
2001 and 2002 |  |      | 34 | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2000, 2001 and 2002                     |  |      | 35 | 
|Notes to Financial Statements                                                                                  |  |      | 36 | 
|Schedule II - Valuation and Qualifying Accounts                                                                |  |      | 47 | 

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REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of Evergreen Solar, Inc.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders equity (deficit), and
of cash flows present fairly, in all material respects, the financial position
of Evergreen Solar, Inc. and its subsidiary at December 31, 2002 and 2001, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2002, 2001 and 2000 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 15(a) on page 29 presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
consolidated financial statements. These financial statements and financial
statement schedule 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 of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
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, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

PRICEWATERHOUSECOOPERS LLP

Boston, Massachusetts
February 27, 2003, except as to Note 13, for which the date is March 21, 2003

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EVERGREEN SOLAR, INC.
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2001 AND 2002
(IN THOUSANDS, EXCEPT SHARE DATA)

|                                                                                                                                                     |  |              |         |              |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | ------------ |  | - | ------- | -
|                                                                                                                                                     |  | December 31, |         | December 31,
|                                                                                                                                                     |  | 2001         |         | 2002        
|                                                                                                                                                     |  |              |         |             
|Assets                                                                                                                                               |  |              |         |              |  |   |         |  
|Current assets:                                                                                                                                      |  |              |         |              |  |   |         |  
|Cash and cash equivalents                                                                                                                            |  | $            | 2,554   |              |  | $ | 1,194   |  
|Short-term investments                                                                                                                               |  |              | 23,709  |              |  |   | 7,289   |  
|Accounts receivable, net of allowance for doubtful accounts of $13 and $140
at December 31, 2001 and 2002, respectively                              |  |              | 488     |              |  |   | 2,848   |  
|Interest receivable                                                                                                                                  |  |              | 389     |              |  |   | 57      |  
|Inventory                                                                                                                                            |  |              | 999     |              |  |   | 2,194   |  
|Other current assets                                                                                                                                 |  |              | 258     |              |  |   | 1,012   |  
|                                                                                                                                                     |  |              |         |              |  |   |         |  
|Total current assets                                                                                                                                 |  |              | 28,397  |              |  |   | 14,594  |  
|Restricted cash                                                                                                                                      |  |              | 464     |              |  |   | 464     |  
|Fixed assets, net                                                                                                                                    |  |              | 16,000  |              |  |   | 16,905  |  
|                                                                                                                                                     |  |              |         |              |  |   |         |  
|Total assets                                                                                                                                         |  | $            | 44,861  |              |  | $ | 31,963  |  
|                                                                                                                                                     |  |              |         |              |  |   |         |  
|Liabilities and stockholders equity                                                                                                                 |  |              |         |              |  |   |         |  
|Current liabilities:                                                                                                                                 |  |              |         |              |  |   |         |  
|Accounts payable                                                                                                                                     |  | $            | 858     |              |  | $ | 861     |  
|Accrued employee compensation                                                                                                                        |  |              | 514     |              |  |   | 569     |  
|Accrued warranty                                                                                                                                     |  |              | 138     |              |  |   | 326     |  
|Other accrued expenses                                                                                                                               |  |              | 296     |              |  |   | 294     |  
|                                                                                                                                                     |  |              |         |              |  |   |         |  
|Total current liabilities                                                                                                                            |  |              | 1,806   |              |  |   | 2,050   |  
|Stockholders equity:                                                                                                                                |  |              |         |              |  |   |         |  
|Preferred stock; $.01 par value, 1,000,000 shares authorized,
no shares issued or outstanding at December 31, 2001 and 2002, respectively            |  |              |        |              |  |   |        |  
|Common stock, $.01 par value, 30,000,000 shares authorized,
11,397,947 and 11,410,826 issued and outstanding at December 2001 and 2002, respectively |  |              | 114     |              |  |   | 114     |  
|Additional paid-in capital                                                                                                                           |  |              | 71,498  |              |  |   | 71,508  |  
|Accumulated other comprehensive income                                                                                                               |  |              | 249     |              |  |   | 7       |  
|Accumulated deficit                                                                                                                                  |  |              | (28,157 | )            |  |   | (41,356 | )
|Deferred compensation                                                                                                                                |  |              | (649    | )            |  |   | (360    | )
|                                                                                                                                                     |  |              |         |              |  |   |         |  
|Total stockholders equity                                                                                                                           |  |              | 43,055  |              |  |   | 29,913  |  
|                                                                                                                                                     |  |              |         |              |  |   |         |  
|Total liabilities and stockholders equity                                                                                                           |  | $            | 44,861  |              |  | $ | 31,963  |  
|                                                                                                                                                     |  |              |         |              |  |   |         |  

The accompanying notes are an integral part of these consolidated financial statements.

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EVERGREEN SOLAR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

|                                                                                                                                                                                                        |                                |   |                         |        |      |   |         |         |   |   |         |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------ | - | ----------------------- | ------ | ---- | - | ------- | ------- | - | - | ------- | ------- | -
|                                                                                                                                                                                                        |                                |   | Year Ended December 31,
|                                                                                                                                                                                                        |                                |   |                        
|                                                                                                                                                                                                        |                                |   | 2000                    |        | 2001 |   | 2002   
|                                                                                                                                                                                                        |                                |   |                         |        |      |   |        
|Revenues:                                                                                                                                                                                               |                                |   |                         |        |      |   |         |         |   |   |         |        
|                                                                                                                                                                                                        | Product revenues               |   | $                       | 419    |      |   | $       | 1,546   |   |   | $       | 5,296   |  
|                                                                                                                                                                                                        | Research revenues              |   |                         | 1,753  |      |   |         | 932     |   |   |         | 1,448   |  
|                                                                                                                                                                                                        |                                |   |                         |        |      |   |         |         |   |   |         |        
|Total revenues                                                                                                                                                                                          |                                |   | 2,172                   |        |      |   | 2,478   |         |   |   | 6,744   |        
|Operating expenses:                                                                                                                                                                                     |                                |   |                         |        |      |   |         |         |   |   |         |        
|Cost of product revenues (including stock-based compensation of $38, $72, and $81 for
the years ended December 31, 2000, 2001, and 2002, respectively)                                                  |                                |   | 2,795                   |        |      |   | 9,649   |         |   |   | 12,405  |        
|Research and development expenses, including cost of research revenues
(including stock-based compensation of $116, $147, and $122 for the years ended
December 31, 2000, 2001, and 2002, respectively) |                                |   | 3,382                   |        |      |   | 3,063   |         |   |   | 3,692   |        
|Selling, general and administrative expenses (including stock-based compensation
of $140, $71, and $86 for the years ended December 31, 2000, 2001, and 2002, respectively)                             |                                |   | 2,505                   |        |      |   | 4,088   |         |   |   | 4,520   |        
|                                                                                                                                                                                                        |                                |   |                         |        |      |   |         |         |   |   |         |        
|                                                                                                                                                                                                        | Total operating expenses       |   |                         | 8,682  |      |   |         | 16,800  |   |   |         | 20,617  |  
|                                                                                                                                                                                                        | Operating loss                 |   |                         | (6,510 | )    |   |         | (14,322 | ) |   |         | (13,873 | )
|Interest income                                                                                                                                                                                         |                                |   | 1,305                   |        |      |   | 1,845   |         |   |   | 674     |        
|                                                                                                                                                                                                        |                                |   |                         |        |      |   |         |         |   |   |         |        
|Net loss                                                                                                                                                                                                |                                |   | (5,205                  | )      |      |   | (12,477 | )       |   |   | (13,199 | )      
|Accretion of redeemable convertible preferred stock                                                                                                                                                     |                                |   | (2,283                  | )      |      |   |        |         |   |   |        |        
|                                                                                                                                                                                                        |                                |   |                         |        |      |   |         |         |   |   |         |        
|Net loss attributable to common stockholders                                                                                                                                                            |                                | $ | (7,488                  | )      |      | $ | (12,477 | )       |   | $ | (13,199 | )      
|                                                                                                                                                                                                        |                                |   |                         |        |      |   |         |         |   |   |         |        
|Other comprehensive income:                                                                                                                                                                             |                                |   |                         |        |      |   |         |         |   |   |         |        
|                                                                                                                                                                                                        | Unrealized gain on investments |   |                         |       |      |   |         | 249     |   |   |         | 7       |  
|                                                                                                                                                                                                        |                                |   |                         |        |      |   |         |         |   |   |         |        
|Comprehensive loss attributable to common stockholders                                                                                                                                                  |                                | $ | (7,488                  | )      |      | $ | (12,228 | )       |   | $ | (13,192 | )      
|                                                                                                                                                                                                        |                                |   |                         |        |      |   |         |         |   |   |         |        
|Net loss per common share (basic and diluted)                                                                                                                                                           |                                | $ | (2.96                   | )      |      | $ | (1.10   | )       |   | $ | (1.16   | )      
|Weighted average shares used in computing basic and diluted
net loss per common share                                                                                                                   |                                |   | 2,530                   |        |      |   | 11,304  |         |   |   | 11,405  |        

The accompanying notes are an integral part of these consolidated financial statements.

33



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EVERGREEN SOLAR, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
(IN THOUSANDS)

|                             |                                                           |  |              |       |            |   |          |    |              |   |           |        |               |   |               |      |                  |   |         |         |   |   |              |        |             |   |     |      |   |   |         |         |  
|---------------------------- | --------------------------------------------------------- |  | ------------ | ----- | ---------- | - | -------- | -- | ------------ | - | --------- | ------ | ------------- | - | ------------- | ---- | ---------------- | - | ------- | ------- | - | - | ------------ | ------ | ----------- | - | --- | ---- | - | - | ------- | ------- | -
|                             |                                                           |  |              |       |            |   |          |    |              |   |           |        |               |   |               |      |                  |   |         |         |   |   | Accretion of |        |             |   |     |      |   |   |        
|                             |                                                           |  |              |       |            |   |          |    |              |   |           |        |               |   |               |      |                  |   |         |         |   |   | Redeemable   |        | Accumulated |   |     |      |  
|                             |                                                           |  | Common Stock |       | Additional |   |          |    |              |   |           |        |               |   | Convertible   |      | Other            |   | Total  
|                             |                                                           |  |              |       | Paid-In    |   | Deferred |    | Accumulated  |   | Preferred |        | Comprehensive |   | Stockholders
|                             |                                                           |  | Shares       |       | Amount     |   | Capital  |    | Compensation |   | Deficit   |        | Stock         |   | Income        |      | Equity (Deficit)
|                             |                                                           |  |              |       |            |   |          |    |              |   |           |        |               |   |               |      |                 
|Balance at December 31, 1999 |                                                           |  | 803          |       |            | $ | 8        |    |              | $ | 400       |        |               | $ | (300          | )    |                  | $ | (10,475 | )       |   | $ | (3,135       | )      |             | $ |    |      |   | $ | (13,502 | )      
|                             | Issuance of common stock pursuant to IPO                  |  |              | 3,000 |            |   |          | 30 |              |   |           | 37,737 |               |   |               |      |                  |   |         |         |   |   |              |        |             |   |     |      |   |   |         | 37,767  |  
|                             | Issuance of common stock pursuant to exercise of options  |  |              | 119   |            |   |          | 1  |              |   |           | 102    |               |   |               |      |                  |   |         |         |   |   |              |        |             |   |     |      |   |   |         | 103     |  
|                             | Issuance and revaluation of stock options to consultants  |  |              |       |            |   |          |    |              |   |           | 176    |               |   |               |      |                  |   |         |         |   |   |              |        |             |   |     |      |   |   |         | 176     |  
|                             | Deferred compensation                                     |  |              |       |            |   |          |    |              |   |           | 953    |               |   |               | (953 | )                |   |         |         |   |   |              |        |             |   |     |      |   |   |         |        |  
|                             | Compensation expense associated with stock options        |  |              |       |            |   |          |    |              |   |           |        |               |   |               | 294  |                  |   |         |         |   |   |              |        |             |   |     |      |   |   |         | 294     |  
|                             | Conversion of preferred to common                         |  |              | 7,248 |            |   |          | 72 |              |   |           | 31,303 |               |   |               |      |                  |   |         |         |   |   |              | 5,418  |             |   |     |      |   |   |         | 36,793  |  
|                             | Accretion of redeemable convertible preferred stock       |  |              |       |            |   |          |    |              |   |           |        |               |   |               |      |                  |   |         |         |   |   |              | (2,283 | )           |   |     |      |   |   |         | (2,283  | )
|                             | Net loss                                                  |  |              |       |            |   |          |    |              |   |           |        |               |   |               |      |                  |   |         | (5,205  | ) |   |              |        |             |   |     |      |   |   |         | (5,205  | )
|                             |                                                           |  |              |       |            |   |          |    |              |   |           |        |               |   |               |      |                  |   |         |         |   |   |              |        |             |   |     |      |   |   |         |        
|Balance at December 31, 2000 |                                                           |  | 11,170       |       |            |   | 111      |    |              |   | 70,671    |        |               |   | (959          | )    |                  |   | (15,680 | )       |   |   |             |        |             |   |    |      |   |   | 54,143  |        
|                             | Issuance of common stock pursuant to exercise of options  |  |              | 19    |            |   |          | 1  |              |   |           | 11     |               |   |               |      |                  |   |         |         |   |   |              |        |             |   |     |      |   |   |         | 12      |  
|                             | Issuance of common stock pursuant to exercise of warrants |  |              | 209   |            |   |          | 2  |              |   |           | 798    |               |   |               |      |                  |   |         |         |   |   |              |        |             |   |     |      |   |   |         | 800     |  
|                             | Compensation expense associated with stock options        |  |              |       |            |   |          |    |              |   |           | 37     |               |   |               | 290  |                  |   |         |         |   |   |              |        |             |   |     |      |   |   |         | 327     |  
|                             | Terminated options                                        |  |              |       |            |   |          |    |              |   |           | (19    | )             |   |               | 20   |                  |   |         |         |   |   |              |        |             |   |     |      |   |   |         | 1       |  
|                             | Other comprehensive income                                |  |              |       |            |   |          |    |              |   |           |        |               |   |               |      |                  |   |         |         |   |   |              |        |             |   |     | 249  |   |   |         | 249     |  
|                             | Net loss                                                  |  |              |       |            |   |          |    |              |   |           |        |               |   |               |      |                  |   |         | (12,477 | ) |   |              |        |             |   |     |      |   |   |         | (12,477 | )
|                             |                                                           |  |              |       |            |   |          |    |              |   |           |        |               |   |               |      |                  |   |         |         |   |   |              |        |             |   |     |      |   |   |         |        
|Balance at December 31, 2001 |                                                           |  | 11,398       |       |            | $ | 114      |    |              | $ | 71,498    |        |               | $ | (649          | )    |                  | $ | (28,157 | )       |   | $ |             |        |             | $ | 249 |      |   | $ | 43,055  |        
|                             |                                                           |  |              |       |            |   |          |    |              |   |           |        |               |   |               |      |                  |   |         |         |   |   |              |        |             |   |     |      |   |   |         |        
|                             | Issuance of common stock pursuant to exercise of options  |  |              | 12    |            |   |          |   |              |   |           | 10     |               |   |               |      |                  |   |         |         |   |   |              |        |             |   |     |      |   |   |         | 10      |  
|                             | Compensation expense associated with stock options        |  |              |       |            |   |          |    |              |   |           |        |               |   |               | 289  |                  |   |         |         |   |   |              |        |             |   |     |      |   |   |         | 289     |  
|                             | Other comprehensive income (loss)                         |  |              |       |            |   |          |    |              |   |           |        |               |   |               |      |                  |   |         |         |   |   |              |        |             |   |     | (242 | ) |   |         | (242    | )
|                             | Net loss                                                  |  |              |       |            |   |          |    |              |   |           |        |               |   |               |      |                  |   |         | (13,199 | ) |   |              |        |             |   |     |      |   |   |         | (13,199 | )
|                             |                                                           |  |              |       |            |   |          |    |              |   |           |        |               |   |               |      |                  |   |         |         |   |   |              |        |             |   |     |      |   |   |         |        
|Balance at December 31, 2002 |                                                           |  | 11,410       |       |            | $ | 114      |    |              | $ | 71,508    |        |               | $ | (360          | )    |                  | $ | (41,356 | )       |   | $ |             |        |             | $ | 7   |      |   | $ | 29,913  |        
|                             |                                                           |  |              |       |            |   |          |    |              |   |           |        |               |   |               |      |                  |   |         |         |   |   |              |        |             |   |     |      |   |   |         |        

The accompanying notes are an
integral part of these consolidated financial statements.

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EVERGREEN SOLAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

|                                                 |                                                                                      |                                                             |                                       |         |                         |        |        |         |       |         |       |         |       |         |  
|------------------------------------------------ | ------------------------------------------------------------------------------------ | ----------------------------------------------------------- | ------------------------------------- | ------- | ----------------------- | ------ | ------ | ------- | ----- | ------- | ----- | ------- | ----- | ------- | -
|                                                 |                                                                                      |                                                             |                                       |         | Year Ended December 31,
|                                                 |                                                                                      |                                                             |                                       |         |                        
|                                                 |                                                                                      |                                                             |                                       |         | 2000                    |        | 2001   |         | 2002 
|                                                 |                                                                                      |                                                             |                                       |         |                         |        |        |         |      
|Cash flows for operating activities:             |                                                                                      |                                                             |                                       |         |                         |        |        |         |       |         |       |        
|                                                 | Net loss                                                                             |                                                             | $                                     | (5,205  | )                       |        | $      | (12,477 | )     |         | $     | (13,199 | )    
|                                                 | Adjustments to reconcile net income (loss) to net
cash used in operating activities: |                                                             |                                       |         |                         |        |        |         |       |         |       |         |      
|                                                 |                                                                                      | Depreciation expense                                        |                                       |         | 286                     |        |        |         | 1,003 |         |       |         | 1,968 |        
|                                                 |                                                                                      | Bad debt expense                                            |                                       |         | 3                       |        |        |         |      |         |       |         | 127   |        
|                                                 |                                                                                      | Amortization of bond premiums                               |                                       |         |                        |        |        |         |      |         |       |         | 331   |        
|                                                 |                                                                                      | Write-off of fixed assets                                   |                                       |         |                        |        |        |         |      |         |       |         | 43    |        
|                                                 |                                                                                      | Compensation expense associated with employee stock options |                                       |         | 294                     |        |        |         | 290   |         |       |         | 289   |        
|                                                 |                                                                                      | Issuance of stock options to consultants                    |                                       |         | 176                     |        |        |         | 37    |         |       |         |      |        
|                                                 |                                                                                      | Changes in operating assets and liabilities:                |                                       |         |                         |        |        |         |       |         |       |         |       |        
|                                                 |                                                                                      |                                                             | Inventory                             |         |                         | (274   | )      |         |       | (591    | )     |         |       | (1,195  | )
|                                                 |                                                                                      |                                                             | Other current assets                  |         |                         | (20    | )      |         |       | (113    | )     |         |       | (754    | )
|                                                 |                                                                                      |                                                             | Interest receivable                   |         |                         |       |        |         |       | (189    | )     |         |       | 332     |  
|                                                 |                                                                                      |                                                             | Accounts receivable                   |         |                         | (557   | )      |         |       | 461     |       |         |       | (2,487  | )
|                                                 |                                                                                      |                                                             | Accounts payable                      |         |                         | 408    |        |         |       | 197     |       |         |       | 3       |  
|                                                 |                                                                                      |                                                             | Accrued expenses                      |         |                         | 705    |        |         |       | (31     | )     |         |       | 241     |  
|                                                 |                                                                                      |                                                             |                                       |         |                         |        |        |         |       |         |       |         |      
|                                                 |                                                                                      |                                                             | Net cash used in operating activities |         |                         | (4,184 | )      |         |       | (11,413 | )     |         |       | (14,301 | )
|Cash flow for investing activities:              |                                                                                      |                                                             |                                       |         |                         |        |        |         |       |         |       |        
|                                                 | Purchases of fixed assets                                                            |                                                             |                                       | (7,100  | )                       |        |        | (9,380  | )     |         |       | (2,916  | )    
|                                                 | Purchases of investments                                                             |                                                             |                                       | (38,423 | )                       |        |        | (87,041 | )     |         |       | (10,762 | )    
|                                                 | Proceeds from sale and maturity of investments                                       |                                                             |                                       | 18,389  |                         |        |        | 96,405  |       |         |       | 26,609  |      
|                                                 |                                                                                      |                                                             |                                       |         |                         |        |        |         |       |         |       |         |      
|                                                 | Net cash provided by (used in) investing activities                                  |                                                             |                                       | (27,134 | )                       |        |        | (16     | )     |         |       | 12,931  |      
|Cash flow from financing activities:             |                                                                                      |                                                             |                                       |         |                         |        |        |         |       |         |       |        
|                                                 | Restricted cash                                                                      |                                                             |                                       | (464    | )                       |        |        |        |       |         |       |        |      
|                                                 | Proceeds from issuance of Redeemable Convertible Preferred Stock                     |                                                             |                                       | 5,617   |                         |        |        |        |       |         |       |        |      
|                                                 | Proceeds from the issuance of common stock for IPO                                   |                                                             |                                       | 37,767  |                         |        |        |        |       |         |       |        |      
|                                                 | Proceeds from the exercise of stock options and warrants                             |                                                             |                                       | 103     |                         |        |        | 812     |       |         |       | 10      |      
|                                                 |                                                                                      |                                                             |                                       |         |                         |        |        |         |       |         |       |         |      
|                                                 | Net cash flow provided by financing activities                                       |                                                             |                                       | 43,023  |                         |        |        | 812     |       |         |       | 10      |      
|                                                 |                                                                                      |                                                             |                                       |         |                         |        |        |         |       |         |       |         |      
|                                                 | Net (decrease) increase in cash and cash equivalents                                 |                                                             |                                       | 11,705  |                         |        |        | (10,617 | )     |         |       | (1,360  | )    
|Cash and cash equivalents at beginning of period |                                                                                      |                                                             | 1,466                                 |         |                         |        | 13,171 |         |       |         | 2,554 |        
|                                                 |                                                                                      |                                                             |                                       |         |                         |        |        |         |       |         |       |         |      
|Cash and cash equivalents at end of period       |                                                                                      | $                                                           | 13,171                                |         |                         | $      | 2,554  |         |       | $       | 1,194 |        
|                                                 |                                                                                      |                                                             |                                       |         |                         |        |        |         |       |         |       |         |      
|Supplemental cash flow information:              |                                                                                      |                                                             |                                       |         |                         |        |        |         |       |         |       |        
|Taxes paid                                       |                                                                                      |                                                             | 6                                     |         |                         |        | 50     |         |       |         | 32    |        
|Non-cash transactions:                           |                                                                                      |                                                             |                                       |         |                         |        |        |         |       |         |       |        
|                                                 |                                                                                      | Deferred compensation                                       |                                       |         | 953                     |        |        |         |      |         |       |         |      |        
|                                                 |                                                                                      | Termination of stock options                                |                                       |         |                        |        |        |         | 20    |         |       |         |      |        

The accompanying notes are an integral part of these consolidated financial statements.

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EVERGREEN SOLAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. |  | NATURE OF BUSINESS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Evergreen Solar, Inc. (the Company), incorporated in August 1994, develops,
manufactures and markets solar power products, including solar cells, panels
and systems. In April 1997 the Company commenced product sales. The Company
has incurred losses since inception and has an accumulated deficit, which has
been funded by issuing debt and equity securities. In November 2000, the
Company completed an initial public offering of 3,000,000 common shares at
$14.00 per share. After deducting underwriting commissions and other offering
expenses totaling $4.3 million, the Company received $37.7 million from this
offering.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | The Company will fund its current capital commitments with the proceeds from
its initial public offering, which closed in November 2000. In addition to
the current capital commitments, substantial further capital expenditures
will be required over the next twelve months to increase the total capacity
at the Companys manufacturing facility to its target level of 10 to 14 megawatts for
both lines. However, the Companys current cash, cash equivalents and
short-term investments will not be sufficient to fund this capacity expansion
or its operations through fiscal year 2003 and, as a result, the Company will
need to raise significant additional financing in order to successfully build
out its manufacturing capacity and fund its operations. As more fully
described in Part I of this report under the heading Financing
Transaction, on March 21,
2003, the Company entered into a definitive purchase
agreement with certain investors to raise $29,475,000 through the
issuance of up to approximately 43,200,000 shares of series A convertible
preferred stock and the sale of a warrant to purchase 2,400,000 shares
of our common stock. Consummation of the transactions contemplated by the
purchase agreement is subject to the Company obtaining stockholder approval and other closing conditions. If the Company is able to complete this financing in a
timely matter, the Company expects the second manufacturing line to become
operational in late 2003 and in 2004. If the Company is not able to complete
a financing in a timely manner, the Company will need to implement
fundamental changes to its business and operations which will likely include
substantially reducing, suspending, or terminating its capacity expansion and
substantially reducing its daily operating expenditures from current levels,
in which case the Company believes its cash, cash equivalents and short-term
investments will then be sufficient to fund its operations through the end of
fiscal year 2003.
|  
|   |  | In addition, the Company may need additional financing to execute its
business plan sooner if the company needs to respond to business
contingencies such as the need to enhance its operating infrastructure,
respond to competitive pressures and acquire complementary businesses or
necessary technologies. The Company does not know whether it will be able to
raise additional financing or favorable financing terms. If adequate funds
are not available or are not available on acceptable terms, the Companys
ability to fund its operations, develop and expand its manufacturing
operations and distribution network, or otherwise respond to competitive
pressures would be significantly limited.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|   |  | The Company is subject to risks common to companies in the high technology
and energy industries including, but not limited to, development by the
Company or its competitors of new technological innovations, dependence on
key personnel, protection of proprietary technology and compliance with
government regulations. Any delay in the Companys plan to scale up to full
capacity may result in increased costs and could impair business operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|2. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|   |  | A summary of the major accounting policies followed by the Company in the
preparation of the accompanying financial statements is set forth below.
Certain previously reported amounts may have been reclassified to conform to
the current method of presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | BASIS OF PRESENTATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | The consolidated financial statements include the accounts of the Companys
wholly owned subsidiary, Evergreen Solar Securities, Inc. All material
intercompany accounts and transactions have been eliminated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | REVERSE STOCK SPLIT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | In September 2000, the Companys board of directors declared a reverse stock
split of 1 share for every 2.165 shares of common stock then outstanding. The
reverse stock split became effective at the date the Companys registration
statement for its initial public offering was declared effective.
Accordingly, the accompanying financial statements and footnotes have been
restated to reflect the stock split for all periods presented.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

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| |  | CASH AND INVESTMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Cash and cash equivalents consist of cash and highly liquid investments with
maturities of three months or less from the date of purchase and whose
carrying amount approximates fair value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | The Companys investments are classified as available-for-sale. At December
31, 2001 and 2002 the Company held US government agency bonds, treasury
notes, municipal bonds, corporate bonds and commercial paper. The investments
generally mature within one year from the date of purchase and are carried at
market value. During 2002, there were realized gains of $91,000. At December
31, 2002, there were unrealized gains of $7,000, which is reported as part of
stockholders equity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | CONCENTRATION OF CREDIT RISK                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments and
accounts receivable. The Company places its cash investments with a highly
quality financial institution. With respect to accounts receivable, such
receivables are primarily from distributors and integrators in the solar
power industry located in the United States and throughout the world. The
Company performs ongoing credit evaluations of its customers financial
conditions. One individual customer accounted for approximately 67%, 46% and
83% of total accounts receivable as of December 31, 2002, 2001 and 2000,
respectively. The Companys five largest individual customers accounted for
85%, 85% and 95% of total accounts receivable of December 31, 2002, 2001, and
2000, respectively. Separately, one individual customer accounted for
approximately 57%, 8% and 0% of product revenue for the years ended December
31, 2002, 2001 and 2000, respectively. The Companys five largest individual
customers accounted for 80%, 94% and 99% of product revenue in 2002, 2001,
and 2000, respectively.                                                                                                                                                                                
|
| |  | INVENTORY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Inventory is stated at the lower of cost (determined on a first-in, first-out
basis) or market. Certain factors may impact the realizable value of the
Companys inventory including, but not limited to, technological changes,
market demand, changes in product mix strategy, new product introductions and
significant changes to its cost structure. Given the Companys current
production levels and the market value of its products, the Company currently
sells its inventory at prices that are below the sum of its fixed and
variable costs per unit. Accordingly, the Company writes down its inventory
to realizable value equal to the difference between the cost of inventory and
the estimated market value. In addition, estimates of reserves are made for
obsolescence based on the current product mix on hand and its expected net
realizability. If actual market conditions are less favorable or other
factors arise that are significantly different than those anticipated by
management, additional inventory write-downs or increases in obsolescence
reserves may be required. The company treats lower of cost or market
adjustments and inventory reserves as an adjustment to the cost basis of the
underlying inventory. Accordingly, favorable changes in market conditions
are not recorded to inventory in subsequent periods.
|
| |  | GUARANTOR ARRANGEMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | In November 2002, the FASB issued FIN No. 45 Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others an interpretation of FASB Statements No. 5, 57, and
107 and rescission of FASB Interpretation No. 34. The Interpretation
requires that a guarantor recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken by issuing the
guarantee. The Interpretation also requires additional disclosures to be made
by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees it has issued. The accounting
requirements for the initial recognition of guarantees are applicable on a
prospective basis for guarantees issued or modified after December 31, 2002.
The disclosure requirements are effective for all guarantees outstanding,
regardless of when they were issued or modified, during the first quarter of
fiscal 2003. The adoption of FIN No. 45 did not have a material effect on the
Companys consolidated financial statements. The following is a summary of
the Companys agreements that we have determined is within the scope of FIN
No. 45.                                                                                                                             
|
| |  | Product warranty                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | The Company provides for the estimated cost of product warranties at the time
revenue is recognized. Given the Companys limited operating history, they
use historical industry solar panel failure rates as the basis for the
warranty provision calculation. While the Company engages in product quality
programs and processes, including monitoring and evaluating the quality of
component suppliers, its warranty obligation is affected by product failure
rates and material usage and service delivery costs incurred in correcting a product
failure. If the Companys actual product failure rates, material                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

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| |  | usage or
service delivery costs differ from estimates, revisions to the estimated
warranty liability would be required. Since the Company has a limited
operating history and its manufacturing process differs from industry
standards, their experience may be different from the industry data used as a
basis for its estimate. While the Companys methodology takes into account
these uncertainties, adjustments in future periods may be required as its
products mature. The following table summarizes the activity regarding the
Companys warranty accrual:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                 |  |   |         | 
|------------------------------------------------ |  | - | ------- | 
|Balance at January 1, 2002                       |  | $ | 138,000 | 
|Accruals for warranties issued during the period |  |   | 188,000 | 
|Settlements made during the period               |  |   |        | 
|                                                 |  |   |         | 
|Balance at the end of the period                 |  | $ | 326,000 | 
|                                                 |  |   |         | 



| |  | Indemnification agreements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company enters into standard indemnification agreements in its ordinary
course of business. Pursuant to these agreements, the Company indemnifies,
holds harmless, and agrees to reimburse the indemnified party for losses
suffered or incurred by the indemnified party, generally our business
partners, customers, directors and officers. The term of these
indemnification agreements is generally perpetual any time after execution of
the agreement. The maximum potential amount of future payments the Company
could be required to make under these indemnification agreements is
unlimited. However, the Company has never incurred costs to defend lawsuits
or settle claims related to these indemnification agreements. Furthermore,
the Company has a Director and Officer insurance policy that limits its
exposure with indemnification agreements specifically with its directors and
officers, which enables the Company to recover a portion of any future
amounts paid. As a result of the Companys insurance policy coverage, the
Company believes the estimated fair value of these indemnification agreements
is minimal. The Company believes the estimated fair value of agreements with
parties other than its directors and officers is minimal as well.
|
| |  | FIXED ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Fixed assets are recorded at cost. Provisions for depreciation are based on
their estimated useful lives using the straight-line method over three to
seven years for all laboratory and manufacturing equipment, computers, and
office equipment. Leasehold improvements are depreciated over the shorter of
the remainder of the leases term or the life of the improvements. Upon
retirement or disposal, the cost of the asset disposed of and the related
accumulated depreciation are removed from the accounts and any gain or loss is
reflected in income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | IMPAIRMENT OF LONG-LIVED ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | The Companys policy regarding long-lived assets is to evaluate the
recoverability or usefulness of these assets when the facts and circumstances
suggest that these assets may be impaired. This analysis relies on a number
of factors, including changes in strategic direction, business plans,
regulatory developments, economic and budget projections, technological
improvements, and operating results. The test of recoverability or usefulness
is a comparison of the asset value to the undiscounted cash flow of its
expected cumulative net operating cash flow over the assets remaining useful
life. Any write-downs would be treated as permanent reductions in the
carrying amount of the asset and an operating loss would be recognized. To
date, the Company has had recurring operating losses and the recoverability of
its long-lived assets is contingent upon executing its business plan that
includes further reducing its manufacturing costs and significantly
increasing sales. If the Company is unable to execute its business plan, the
Company may be required to write down the value of its long-lived assets in
future periods. No impairments were required to be recognized during the years
ended December 31, 2000, 2001 and 2002.             
|
| |  | REVENUE RECOGNITION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | The Companys revenue recognition policy complies with SAB 101. The Company
recognizes revenue if persuasive evidence of an arrangement exists, shipment
has occurred, risk of loss has transferred to the customer, sales price is
fixed or determinable, and collectibility is reasonably assured. The market
for solar power products is emerging and rapidly evolving. The Company
currently sells its solar power products primarily to distributors, system
integrators and other value-added resellers within and outside of North
America, which typically resell its products to end users throughout the
world. For new customers requesting credit, the Company evaluates
creditworthiness based on credit applications, feedback from provided
references, and credit reports from independent agencies. For existing
customers, the Company evaluates creditworthiness based on payment history and
known changes in their financial condition.                                                                                                                                                                                                                                                                                                                               

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| |  | The Company also evaluates the facts and circumstances related to each sales
transaction and consider whether risk of loss has not passed to the customer
upon shipment. The Company considers whether its customer is purchasing its
product for stock, and whether contractual or implied rights to return the
product exist or whether its customer has an end user contractually committed.
The Company does not offer rights to return its product other than for normal
warranty conditions and has had no history of product returns.                                                                                 
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | At the time revenue is recognized, the Company provides for the estimated cost
of product warranties and reduces revenue for estimated product returns, if
any.                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Revenue from research grants is recognized as services are rendered to the
extent of allowable costs incurred. While the Companys accounting for
research contract costs are subject to audit by the sponsoring agency, in the
opinion of management, no material adjustments are expected as a result of
such audits.                                                                                                                                                                                                                                                                                                      
|
| |  | RESEARCH AND DEVELOPMENT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | All research and development costs are expensed as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | INCOME TAXES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | The Company accounts for income taxes under the liability method, which
requires recognition of deferred tax assets, subject to valuation allowances,
and liabilities for the expected future tax consequences of events that have
been included in the financial statements or tax returns. Deferred income
taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting and income
tax purposes. A valuation allowance is established if it is more likely than
not that all or a portion of the net deferred tax assets will not be realized.
|
| |  | COMPREHENSIVE INCOME                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | The Company adopted SFAS No. 130, Reporting Comprehensive Income, effective
January 1, 1998. Comprehensive income consists of unrealized gains on
available-for-sale securities, which totaled $7,000 and $249,000 in 2002 and
2001, respectively, and is reflected in the Companys Consolidated Statement
of Operations and the Consolidated Statement of Shareholders Equity.                                                                                                                                                                                                                                          
|
| |  | STOCK-BASED COMPENSATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | The Company applies the accounting provisions of Accounting Principles Board
(APB) Opinion 25 and related interpretations and has elected the
disclosure-only alternative permitted under Statement of Financial Accounting
Standards Board (SFAS) No. 123, Accounting for Stock-Based Compensation. The
Company has disclosed herein pro forma net income (loss) in the footnotes
using the fair value based method. All stock-based awards to non-employees are
accounted for at their fair market value, as calculated using the
Black-Scholes model in accordance with SFAS No. 123.                                 
|
| |  | The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plan. Had compensation expense for the
employee stock option plan been determined based on the fair value at the
grant dates for options granted under the plan consistent with the method of
SFAS 123, the net income (loss) would have been as follows (in thousands,
except per share data):                                                                                                                                                                                                                        

|                                                                                                                    |  |              |        |          |  |              |       |          |  |              |         |          |  |   |       |   |  |   |         |   |  |   |       |  
|------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------ | -------- |  | ------------ | ----- | -------- |  | ------------ | ------- | -------- |  | - | ----- | - |  | - | ------- | - |  | - | ----- | -
|                                                                                                                    |  | 2000         |        | 2001     |  | 2002        
|                                                                                                                    |  |              |        |          |  |             
|                                                                                                                    |  | Net Loss     |        | Net Loss |  | Net Loss     |       | Net Loss |  | Net Loss     |         | Net Loss
|                                                                                                                    |  | Attributable |        | Per      |  | Attributable |       | Per      |  | Attributable |         | Per     
|                                                                                                                    |  | To Common    |        | Common   |  | To Common    |       | Common   |  | To Common    |         | Common  
|                                                                                                                    |  | Stockholders |        | Share    |  | Stockholders |       | Share    |  | Stockholders |         | Share   
|                                                                                                                    |  |              |        |          |  |              |       |          |  |              |         |         
|As reported                                                                                                         |  | $            | (7,488 | )        |  | $            | (2.96 | )        |  | $            | (12,477 | )        |  | $ | (1.10 | ) |  | $ | (13,199 | ) |  | $ | (1.16 | )
|Add: Stock-based employee compensation expense included in reported results                                         |  |              | 294    |          |  |              | 0.12  |          |  |              | 290     |          |  |   | 0.03  |   |  |   | 289     |   |  |   | 0.03  |  
|Deduct: Total stock-based employee compensation expense determined under
the fair-value-based method for all awards |  |              | (481   | )        |  |              | (0.19 | )        |  |              | (1,283  | )        |  |   | (0.12 | ) |  |   | (1,177  | ) |  |   | (0.10 | )
|                                                                                                                    |  |              |        |          |  |              |       |          |  |              |         |          |  |   |       |   |  |   |         |   |  |   |       |  
|Pro forma                                                                                                           |  | $            | (7,675 | )        |  | $            | (3.03 | )        |  | $            | (13,470 | )        |  | $ | (1.19 | ) |  | $ | (14,087 | ) |  | $ | (1.23 | )
|                                                                                                                    |  |              |        |          |  |              |       |          |  |              |         |          |  |   |       |   |  |   |         |   |  |   |       |  

40



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##### Table of Contents





| |  | The fair value of employee options at the date of grant were estimated using
the minimum value option pricing model with the following assumptions for the
years ended December 31, 2000, 2001 and 2002:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                        |  |      |             |      |  |      |      |  |  |  |      | 
|----------------------- |  | ---- | ----------- | ---- |  | ---- | ---- |  |  |  | ---- | 
|                        |  | 2000 |             | 2001 |  | 2002
|                        |  |      |             |      |  |      |      | 
|Expected options term   |  |      | 7           |      |  |      | 7    |  |  |  | 7    | 
|Risk-free interest rate |  |      | 5.0 - 6.4%  |      |  |      | 4.0% |  |  |  | 4.0% | 
|Expected dividend yield |  |      | None        |      |  |      | None |  |  |  | None | 
|Volatility              |  |      | None - 125% |      |  |      | 90%  |  |  |  | 90%  | 



| |  | Because the determination of the fair value of all options granted after the
Company became a public entity includes an expected volatility factor,
additional option grants are expected to be made and most options will vest
over several years, the above effects of applying SFAS 123 in this pro forma
disclosure are not likely to be representative of the effects on reported net
income for future years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Through December 31, 2000, the Company recorded $953,000 of deferred
compensation related to stock option grants to employees. The deferred
compensation represents differences between the estimated fair value of common
stock on the date of grant and the exercise price. The deferred compensation
is being amortized and charged to operations over the vesting period of the
related options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | In 2001 and 2002, the Company reduced deferred compensation into stockholders
equity by $20,000 and $0, respectively due to the termination of stock
options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | NET INCOME (LOSS) PER COMMON SHARE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | The Company computes net income (loss) per common share by dividing net income
(loss) attributable to common stockholders by the weighted average number of
common shares outstanding. The calculation of diluted net income (loss) per
common share for the years ended December 31, 2000, 2001 and 2002 does not
include 1,375,673, 1,525,246 and 1,146,378 potential shares of common stock
equivalents outstanding at December 31, 2000, 2001 and 2002, respectively, as
their inclusion would be antidilutive. Common stock equivalents include
outstanding common stock options, common stock warrants and redeemable
convertible preferred stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | SEGMENT REPORTING                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | The Company operates in a single segment: the sale of solar panels that
generate electricity. The Company has no organizational structure dictated by
product lines, geography or customer type. Major customer and geographic area
revenue disclosures are presented in Note 12.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | RECENT PRONOUNCEMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and replaces Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring). This
Statement is effective for exit or disposal activities initiated after
December 31, 2002, with early application encouraged. Management does not
believe SFAS No. 146 will have a material impact on the Companys financial
position and results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
CompensationTransition and Disclosure, which amends SFAS No. 123,
Accounting for Stock-Based Compensation. SFAS No. 148 provides specific
guidance for companies choosing to transition from employee stock option
accounting under the provisions of APB No. 25 to employee stock option
accounting under SFAS No. 123. The Company currently accounts for employee
stock option grants under APB No. 25 and will continue to do so during fiscal
2003. In addition, the provisions of SFAS No. 148 require that, in all annual
and interim financial statements, companies disclose for each period for which
an income statement is presented an accounting policy footnote that includes
the method of accounting for stock options, total stock compensation cost
(which is recognized in the income statement and would have been recognized
had SFAS No. 123 been adopted for recognition purposes as of its effective
date), and pro forma net income and earnings per share (where applicable) that
would have been reported had SFAS No. 123 been adopted for recognition
purposes as of its effective date. The Company currently provides SFAS No. 123
disclosures in the footnotes to the annual financial statements and,
commencing in 2003, will be required to disclose this information in the
interim financial statements as well.

40



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##### Table of Contents



In November 2002, the FASB issued FIN No. 45 Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others an interpretation of SFAS No. 5, 57, and 107 and
rescission of FASB Interpretation No. 34. The Interpretation requires that a
guarantor recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken by issuing the guarantee. The
Interpretation also requires additional disclosures to be made by a guarantor
in its interim and annual financial statements about its obligations under
certain guarantees it has issued. The accounting requirements for the initial
recognition of guarantees are applicable on a prospective basis for guarantees
issued or modified after December 31, 2002. The disclosure requirements are
effective for all guarantees outstanding, regardless of when they were issued
or modified. The adoption of FIN No. 45 did not have a material effect on the
Companys consolidated financial statements.



|3. |  | INVENTORY
|-- |  | ---------

A summary of inventories is as follows:

|                |  |              |         |              |  |   |           | 
|--------------- |  | ------------ | ------- | ------------ |  | - | --------- | 
|                |  | December 31, |         | December 31,
|                |  | 2001         |         | 2002        
|                |  |              |         |             
|Raw materials   |  | $            | 816,000 |              |  | $ | 1,236,000 | 
|Work-in-process |  |              |        |              |  |   | 148,000   | 
|Finished goods  |  |              | 183,000 |              |  |   | 810,000   | 
|                |  |              |         |              |  |   |           | 
|                |  | $            | 999,000 |              |  | $ | 2,194,000 | 
|                |  |              |         |              |  |   |           | 



|4. |  | FIXED ASSETS
|-- |  | ------------

Fixed assets consisted of the following at December 31, 2001 and 2002 (in
thousands):

|                                       |  |                     |  |              |        |      |        |   |        |   |        |  
|-------------------------------------- |  | ------------------- |  | ------------ | ------ | ---- | ------ | - | ------ | - | ------ | -
|                                       |  | Useful              |  | December 31,
|                                       |  | Life                |  | 2001         |        | 2002
|                                       |  |                     |  |              |        |     
|Laboratory and manufacturing equipment |  | 3-7 years           |  | $            | 10,121 |      |        | $ | 10,997 |  
|Computer and office equipment          |  | 3-7 years           |  |              | 238    |      |        |   | 245    |  
|Leasehold improvements                 |  | Lesser of 15 to 20  |  |              |        |      |        |   |        |  
|                                       |  | years or lease term |  |              | 5,799  |      |        |   | 6,273  |  
|Assets under construction              |  |                     |  |              |        |      | 2,028  |   |        |   | 2,769  |  
|                                       |  |                     |  |              |        |      |        |   |        |   |        |  
|                                       |  |                     |  |              |        |      | 18,186 |   |        |   | 20,284 |  
|Less accumulated depreciation          |  |                     |  |              |        |      | (2,186 | ) |        |   | (3,379 | )
|                                       |  |                     |  |              |        |      |        |   |        |   |        |  
|                                       |  |                     |  |              |        | $    | 16,000 |   |        | $ | 16,905 |  
|                                       |  |                     |  |              |        |      |        |   |        |   |        |  

Depreciation expense for the years ended December 31, 2000, 2001 and 2002 was
$286,000, $1.0 million and $2.0 million, respectively. During 2002, the
Company disposed of assets that were no longer in service that had a cost of
$817,133 and associated accumulated depreciation of $774,382. Many of these
assets were associated with older pilot manufacturing equipment that has been
replaced. The asset disposal resulted in a loss of $42,751 to operations. As
of December 31, 2002, the Company had outstanding commitments for capital
expenditures of approximately $500,000.



|5. |  | INCOME TAXES
|-- |  | ------------

Income taxes computed using the federal statutory income tax rate differ from
the Companys effective tax rate primarily due to the following for the years
ended December 31, 2000, 2001 and 2002:

|                                                              |  |      |            |      |  |      |            |   |  |   |            |  
|------------------------------------------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                                                              |  | 2000 |            | 2001 |  | 2002
|                                                              |  |      |            |      |  |     
|Income tax expense (benefit) at US federal statutory tax rate |  | $    | (1,770,000 | )    |  | $    | (4,242,000 | ) |  | $ | (4,488,000 | )
|State income taxes, net of federal tax effect                 |  |      | (162,000   | )    |  |      | (786,000   | ) |  |   | (661,000   | )
|Permanent items                                               |  |      | 77,000     |      |  |      | 101,000    |   |  |   | 102,000    |  
|Other                                                         |  |      | (147,000   | )    |  |      | (78,000    | ) |  |   | (52,000    | )
|Change in deferred tax asset valuation allowance              |  |      | 2,002,000  |      |  |      | 5,005,000  |   |  |   | 5,099,000  |  
|                                                              |  |      |            |      |  |      |            |   |  |   |            |  
|                                                              |  | $    |           |      |  | $    |           |   |  | $ |           |  
|                                                              |  |      |            |      |  |      |            |   |  |   |            |  

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As of December 31, 2002, we had federal and state net operating loss
carryforwards totaling approximately $35.1 million and $29.6 million,
respectively, available to reduce future taxable income and tax liabilities
which expire at various dates between 2003 and 2023. In addition, as of
December 31, 2002 we had federal and state research and development tax credit
carryforwards of approximately $735,000 and $456,000, respectively, available
to reduce future taxable income and tax liabilities which expire at various
dates between 2009 and 2023. Under provisions of the Internal Revenue Code,
substantial changes in our ownership may limit the amount of net operating
loss carryforwards and research and development credit carryforwards, which
can be used in future years. Management of the Company has evaluated the
positive and negative evidence bearing upon the realizability of its deferred
tax assets. Management has considered the Companys history of losses and, in
accordance with the applicable accounting standards, has fully reserved the
deferred tax asset.

Deferred tax assets consist of the following at December 31, 2001 and 2002:

|                                |                                               |      |            |             |   |   |            |             |  
|------------------------------- | --------------------------------------------- | ---- | ---------- | ----------- | - | - | ---------- | ----------- | -
|                                |                                               | 2001 |            | 2002       
|                                |                                               |      |            |            
|Gross deferred tax assets       |                                               | $    | 10,700,000 |             |   | $ | 13,796,000 |            
|                                | Net operating loss carryforwards              |      | $          | 10,700,000  |   |   | $          | 13,796,000  |  
|                                | Research and development credit carryforwards |      |            | 961,000     |   |   |            | 1,036,000   |  
|                                | Capitalized R&D expenses                      |      |            |            |   |   |            | 2,364,000   |  
|                                | Accrued expenses and deferred compensation    |      |            | 464,000     |   |   |            | 604,000     |  
|                                | Other                                         |      |            | 54,000      |   |   |            | 199,000     |  
|                                |                                               |      |            |             |   |   |            |             |  
|Total gross deferred tax assets |                                               |      | 12,179,000 |             |   |   | 17,999,000 |            
|                                |                                               |      |            |             |   |   |            |             |  
|Gross deferred tax liabilities  |                                               |      |            |             |   |   |            |            
|                                | Depreciation                                  |      | (127,000   | )           |   |   | (847,000   | )          
|                                | Deferred tax valuation allowance              |      |            | (12,052,000 | ) |   |            | (17,152,000 | )
|                                |                                               |      |            |             |   |   |            |             |  
|Net deferred tax asset          |                                               | $    |           |             |   | $ |           |            
|                                |                                               |      |            |             |   |   |            |             |  



|6. |  | STOCKHOLDERS EQUITY
|-- |  | --------------------

The Company has two classes of capital stock: common and preferred. At
December 31, 2001 and 2002, there were 3,340,212 and 2,859,771, respectively,
of shares of common stock reserved for grant under both the Companys 1994
Stock Option Plan and the Companys 2000 Stock Option and Incentive Plan. In
August 2000, 120,000 shares were authorized for issuance under the Companys
2000 Employee Stock Purchase Plan.

In November 2000, the Company completed an initial public offering of
3,000,000 common shares at $14.00 per share. After deducting underwriting
commissions and other offering expenses totaling $4.3 million, the Company
received net proceeds of $37.7 million from this offering. Upon the closing of
the initial public offering, the Company increased the authorized common stock
to 30,000,000 shares.

From December 1999 to February 2000, the Company closed its Series D
Redeemable Convertible Preferred Stock financing of 10,000,000 authorized
shares, resulting in the issuance of 7,343,323 shares at $2.50 per share for
$18,358,308 cash proceeds. In 1998, 3,442,547 shares of Series C Redeemable
Convertible Preferred Stock were issued at $2.00 per share. In 1996, 2,781,666
shares of Series B Redeemable Convertible Preferred Stock were issued at $1.50
per share. Upon the closing of the initial public offering the preferred
stockholders authorized the conversion of all shares of preferred stock into
common stock in a 2.165 to 1 ratio.



|7. |  | STOCK BASED COMPENSATION
|-- |  | ------------------------

On October 24, 1994, the Board of Directors approved the Companys 1994 Stock
Option Plan (the 1994 Plan), whose purpose is to encourage employees and
other individuals who render services to the Company, by providing
opportunities to purchase stock in the Company. The 1994 Plan authorizes the
issuance of incentive stock options and nonqualified stock options. The 1994
Plan was terminated as to all new issuances of options effective as of the
closing of the Companys initial public offering. All options granted will
expire ten years from their date of issuance. Incentive stock options granted
generally have a four-year vesting period from their date of issuance and
nonqualified options granted vest immediately upon their issuance.

In August 2000, the Board of Directors and stockholders approved the Companys
2000 Stock Option and Incentive Plan (the 2000 Plan), which became effective
on the closing of the Companys initial public offering. The purpose is to
encourage employees and other individuals who render services to the Company,
by providing opportunities to purchase stock in the Company. The 2000 Plan
authorizes the issuance of incentive stock options and nonqualified stock
options. All options granted will expire ten years from their date of
issuance. Incentive stock options granted generally have a four-year vesting
period from their date of issuance and nonqualified options granted vest
immediately upon their issuance.

42



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##### Table of Contents



The following is a summary of stock option activity:

|                                 |            |  |           |          |                |   |           |      | 
|-------------------------------- | ---------- |  | --------- | -------- | -------------- | - | --------- | ---- | 
|                                 |            |  |           |          |                |   | Weighted-
|                                 |            |  |           |          |                |   | Average  
|                                 |            |  | Shares    |          | Exercise Price
|                                 |            |  |           |          |               
|Outstanding at December 31, 1999 |            |  | 432,043   |          |                | $ | 0.78      |     
|                                 | Granted    |  |           | 427,151  |                |   |           | 7.52 | 
|                                 | Exercised  |  |           | (119,550 | )              |   |           | 0.86 | 
|                                 | Terminated |  |           |         |                |   |           |     | 
|                                 |            |  |           |          |                |   |           |     
|Outstanding at December 31, 2000 |            |  | 739,644   |          |                |   | 4.66      |     
|                                 | Granted    |  |           | 400,100  |                |   |           | 5.14 | 
|                                 | Exercised  |  |           | (19,391  | )              |   |           | 0.95 | 
|                                 | Terminated |  |           | (5,041   | )              |   |           | 3.23 | 
|                                 |            |  |           |          |                |   |           |     
|Outstanding at December 31, 2001 |            |  | 1,115,312 |          |                |   | 4.94      |     
|                                 | Granted    |  |           | 60,000   |                |   |           | 1.86 | 
|                                 | Exercised  |  |           | (11,429  | )              |   |           | 0.84 | 
|                                 | Terminated |  |           | (17,505  | )              |   |           | 3.34 | 
|                                 |            |  |           |          |                |   |           |     
|Outstanding at December 31, 2002 |            |  | 1,146,378 |          |                | $ | 4.84      |     
|                                 |            |  |           |          |                |   |           |     

Summarized information about stock options outstanding is as follows:

|                  |  |          |       |             |  |              |   |           |  |             |       |          |  |  |           |         |  |                     |      |                     |  |   |       |  |  |          |         |  |  |   |       | 
|----------------- |  | -------- | ----- | ----------- |  | ------------ | - | --------- |  | ----------- | ----- | -------- |  |  | --------- | ------- |  | ------------------- | ---- | ------------------- |  | - | ----- |  |  | -------- | ------- |  |  | - | ----- | 
|                  |  |          |       |             |  |              |   |           |  |             |       |          |  |  |           |         |  | Options Outstanding |      | Options Exercisable
|                  |  |          |       |             |  |              |   |           |  |             |       |          |  |  |           |         |  |                     |      |                    
|                  |  |          |       |             |  |              |   |           |  |             |       |          |  |  |           |         |  | Weighted            |      |                     |  |   |       |  |  |          |         |  |  |  
|                  |  |          |       |             |  |              |   |           |  |             |       |          |  |  |           |         |  | Average             |      | Weighted            |  |   |       |  |  | Weighted
|                  |  | Range of |       |             |  |              |   | Remaining |  | Average     |       |          |  |  |           | Average
|                  |  | Exercise |       | Number      |  | Contractual  |   | Exercise  |  | Number      |       | Exercise
|                  |  | Prices   |       | Outstanding |  | Life (Years) |   | Price     |  | Exercisable |       | Price   
|                  |  |          |       |             |  |              |   |           |  |             |       |         
|                  |  | $        | 0.22  |             |  |              |  |           |  | $           | 0.81  |          |  |  | 35,082    |         |  |                     | 7.46 |                     |  | $ | 0.68  |  |  |          | 25,082  |  |  | $ | 0.63  | 
|                  |  |          | 0.87  |             |  |              |  |           |  |             | 0.87  |          |  |  | 262,269   |         |  |                     | 6.42 |                     |  |   | 0.87  |  |  |          | 201,983 |  |  |   | 0.87  | 
|                  |  |          | 1.00  |             |  |              |  |           |  |             | 1.69  |          |  |  | 12,000    |         |  |                     | 9.68 |                     |  |   | 1.37  |  |  |          | 12,000  |  |  |   | 1.37  | 
|                  |  |          | 2.17  |             |  |              |  |           |  |             | 2.17  |          |  |  | 140,412   |         |  |                     | 7.03 |                     |  |   | 2.17  |  |  |          | 71,127  |  |  |   | 2.17  | 
|                  |  |          | 2.32  |             |  |              |  |           |  |             | 2.50  |          |  |  | 17,000    |         |  |                     | 9.97 |                     |  |   | 2.41  |  |  |          | 9,000   |  |  |   | 2.36  | 
|                  |  |          | 2.59  |             |  |              |  |           |  |             | 2.59  |          |  |  | 182,600   |         |  |                     | 8.94 |                     |  |   | 2.59  |  |  |          | 45,650  |  |  |   | 2.59  | 
|                  |  |          | 2.63  |             |  |              |  |           |  |             | 5.00  |          |  |  | 157,825   |         |  |                     | 8.39 |                     |  |   | 4.47  |  |  |          | 74,742  |  |  |   | 4.39  | 
|                  |  |          | 6.38  |             |  |              |  |           |  |             | 9.60  |          |  |  | 124,171   |         |  |                     | 7.93 |                     |  |   | 7.21  |  |  |          | 65,804  |  |  |   | 7.11  | 
|                  |  |          | 10.00 |             |  |              |  |           |  |             | 12.65 |          |  |  | 72,000    |         |  |                     | 8.11 |                     |  |   | 10.83 |  |  |          | 34,500  |  |  |   | 10.91 | 
|                  |  |          | 14.00 |             |  |              |  |           |  |             | 19.00 |          |  |  | 143,019   |         |  |                     | 7.84 |                     |  |   | 14.56 |  |  |          | 74,506  |  |  |   | 14.74 | 
|                  |  |          |       |             |  |              |   |           |  |             |       |          |  |  |           |         |  |                     |      |                     |  |   |       | 
|December 31, 2002 |  | $        | 0.22  |             |  |              |  |           |  | $           | 19.00 |          |  |  | 1,146,378 |         |  |                     | 7.73 |                     |  | $ | 4.84  |  |  |          | 614,394 |  |  | $ | 4.51  | 
|                  |  |          |       |             |  |              |   |           |  |             |       |          |  |  |           |         |  |                     |      |                     |  |   |       | 

At December 31, 2000, 2001 and 2002, options exercisable were 169,947,
342,622, and 614,394, respectively. Estimated weighted average fair value of
options granted in fiscal years 2000, 2001 and 2002 were $9.97, $4.05 and
$1.86, respectively, on the date of grant.



|8. |  | EMPLOYEE STOCK PURCHASE PLAN
|-- |  | ----------------------------

In September 2000, the Companys Board of Directors adopted a non-compensatory
Employee Stock Purchase Plan (the ESPP). Under the ESPP, eligible employees
of the Company who elect to participate are granted options to purchase common
stock at a 15 percent discount from the market value of such stock. The ESPP
permits an enrolled employee to make contributions to purchase shares of
common stock by having withheld from their salary an amount between 0.1
percent and 10 percent of compensation, and a maximum of 25 shares per
employee can be issued during each six-month payment period. The total number
of shares of common stock that may be issued pursuant to options granted under
the ESPP is 120,000. As of December 31, 2002, there were 1,450 shares issued
under the ESPP.



|9. |  | WARRANTS
|-- |  | --------

On April 30, 1998 and May 29, 1998, pursuant to the Series C Redeemable
Convertible Preferred Stock financing, the Company granted the purchasers of
Series C Redeemable Convertible Preferred Stock warrants to purchase an
aggregate of 636,027 shares of common stock at a ratio of one warrant for
every $10.83 invested. The warrants were exercisable at $4.33 per share.

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Effective April 30, 2001, a shareholder exercised in full a warrant to
purchase up to 16,904 shares of the Companys Common Stock at an exercise
price equal to $4.33 per share. Pursuant to the warrants cashless exercise
feature, the Company issued to the shareholder 9,728 shares of the Companys
Common Stock. Effective May 3, 2001, a second shareholder exercised in full a
warrant to purchase up to 9,237 shares of the Companys Common Stock at an
exercise price equal to $4.33 per share. Pursuant to the warrants cashless
exercise feature, the Company issued to the second shareholder 5,843 shares of
the Companys Common Stock. Effective May 23, 2001, a third shareholder
exercised in full a warrant to purchase up to 184,757 shares of the Companys
Common Stock at an exercise price equal to $4.33 per share. The Company made
such issuances in reliance upon an exemption from the registration provisions
of the Securities Act of 1933 set forth in Section 4(2) thereof as a
transaction by an issuer not involving a public offering. Effective July 30,
2001, a fourth shareholder exercised in full a warrant to purchase up to
15,195 shares of the Companys Common Stock at an exercise price equal to
$4.33 per share. Pursuant to the warrants cashless exercise feature, the
Company issued to the fourth shareholder 8,476 shares of the Companys Common
Stock. The Company made such issuances in reliance upon an exemption from the
registration provisions of the Securities Act of 1933 set forth in Section
4(2) thereof as a transaction by an issuer not involving a public offering.

As of December 31, 2002, there were no warrants outstanding, as any
unexercised warrants expired on December 22, 2002.



|10. |  | EMPLOYEES SAVINGS PLAN
|--- |  | -----------------------

The Company established a 401(k) plan in 1996 for eligible employees. Under
the provisions of the plan, eligible employees may voluntarily contribute a
portion of their compensation up to the statutory limit. In addition, the
Company can make a matching contribution at its discretion. The Company has
not made any contribution to the plan.



|11. |  | COMMITMENTS
|--- |  | -----------

LEASE

On March 13, 2000, the Company entered into a ten-year lease commencing July
1, 2000, for office and manufacturing space in Marlboro, Massachusetts.
Pursuant to the terms of the lease agreement, the Company will pay annual rent
ranging from $464,000 in the first year to $534,000 during the last year of
the lease. Rent is payable on the first day of each month and is
collateralized by a $464,000 standby letter of credit. In connection with this
arrangement, the Company invested in a certificate of deposit pledged to a
commercial bank. This certificate of deposit was classified as restricted
cash on the December 31, 2001 and 2002 balance sheet. The following is a
schedule, by year, of future minimum rental payments required under the
ten-year lease that have remaining noncancelable lease terms in excess of one
year as of December 31, 2002:

|           |       |   |           |           | 
|---------- | ----- | - | --------- | --------- | 
|2003       |       | $ | 488,672   |          
|2004       |       |   | 492,188   |          
|2005       |       |   | 502,734   |          
|2006       |       |   | 506,250   |          
|2007       |       |   | 516,797   |          
|Thereafter |       |   | 1,198,828 |          
|           |       |   |           |          
|           | Total |   | $         | 3,705,469 | 

Rent expense was $563,738, $795,116, and $674,296 for the years ended December
31, 2000, 2001, and 2002.

LICENSE AGREEMENT

In September 1994, the Company signed an agreement to license String Ribbon
technology from a professor at Massachusetts Institute of Technology.
Concurrently, the Company hired the professor as a consultant. This agreement
provides the Company, its successors, assigns, and legal representatives an
irrevocable, worldwide right and license in and to the technology and licensed
patents, including the right to make, have made, use, lease, sub-license, and
sell products and to enforce any of the patent rights of the licensed patents.
The license is exclusive except for rights to the licensed patents held by the
U.S. Department of Energy. In exchange for these rights, the consultant will
earn royalties on sales of products through 2004. The Company incurred
$15,000, $25,000 and $25,000 in royalty expense for the years ended December
31, 2000, 2001 and 2002, respectively. The Company can, at any time, cease
utilization of the technology with no further royalty payments.

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|12. |  | SEGMENT INFORMATION
|--- |  | -------------------

The Company operates as one operating segment. The following table summarizes
the Companys concentration of total revenue:

|                   |                                          |      |              |      |  |  |     |    |   |  |     |    |  
|------------------ | ---------------------------------------- | ---- | ------------ | ---- |  |  | --- | -- | - |  | --- | -- | -
|                   |                                          |      | Year Ended  
|                   |                                          |      | December 31,
|                   |                                          |      |             
|% of Total Revenue |                                          | 2001 |              | 2002
|                   |                                          |      |              |     
|By geography:      |                                          |      |              |      |  |  |     |    |   |  |     |   
|                   | USA                                      |      |              |      |  |  |     | 73 | % |  |     | 46 | %
|                   | Germany                                  |      |              |      |  |  |     | 5  | % |  |     | 44 | %
|                   | Japan                                    |      |              |      |  |  |     | 14 | % |  |     | 2  | %
|                   | All other                                |      |              |      |  |  |     | 8  | % |  |     | 8  | %
|                   |                                          |      |              |      |  |  |     |    |   |  |     |    |  
|                   |                                          |      |              |      |  |  | 100 | %  |   |  | 100 | % 
|By customer:       |                                          |      |              |      |  |  |     |    |   |  |     |   
|                   | National Institute of Industry Standards |      |              |      |  |  |     | 48 | % |  |     | 11 | %
|                   | National Renewable Energy Laboratory     |      |              |      |  |  |     | 0  | % |  |     | 10 | %
|                   | European distributor                     |      |              |      |  |  |     | 5  | % |  |     | 44 | %
|                   | U.S. distributor                         |      |              |      |  |  |     | 33 | % |  |     | 4  | %
|                   | All other                                |      |              |      |  |  |     | 14 | % |  |     | 31 | %
|                   |                                          |      |              |      |  |  |     |    |   |  |     |    |  
|                   |                                          |      |              |      |  |  | 100 | %  |   |  | 100 | % 



|13. |  | SUBSEQUENT EVENT
|--- |  | ----------------

On March 21, 2003 the Company entered into the Stock and Warrant
Purchase Agreement with Perseus 2000, L.L.C., Nth Power Technologies Fund II,
LP, Nth Power Technologies Fund II-A, LP, RockPort Capital Partners, L.P., RP
Co-Investment Fund, I, Micro-Generation Technology Fund, LLC, UVCC Fund II,
UVCC II Parallel Fund, L.P., Caisse de dépôt et placement du Québec, CDP
Capital  Technology Ventures U.S. Fund 2002 L.P., Beacon Power Corporation,
Massachusetts Technology Park Corporation, Zero Stage Capital VII, L.P., Zero
Stage Capital (Cayman) VII, L.P., Zero Stage Capital SBIC VII, L.P., IMPAX
Environmental Markets plc, Merrill Lynch New Energy Technology Fund, MLIIF New
Energy Fund, PNE Invest Limited, Odyssey Fund, SAM Private Equity Energy Fund
LP, SAM Sustainability Private Equity LP and SAM Smart Energy pursuant to
which the Company have agreed to issue, and the purchasers has agreed to
purchase from the Company, $29,375,000 of Series A convertible preferred stock
at a per share purchase price to be calculated as of the closing date. The per
share purchase price to be paid for the shares of Series A convertible
preferred stock will be 85% of the 60-day trading average closing bid price of the
Companys common stock for the period ending two trading days prior to the
closing date of the private placement. However, in no event will the per share
price exceed $1.12 (which is 85% of the 60-day trading average of the closing prices
of the Companys common stock for the period ending on March 17, 2003), or be
less than $0.68. Additionally, the Company agreed to issue, and Beacon Power
Corporation agreed to purchase for a purchase price of $100,000, a warrant to
purchase 2,400,000 shares of common stock at an exercise price equal to the
per share price of the Series A convertible preferred stock paid by the
purchasers, plus $2.25. The shares of Series A convertible preferred stock
will be initially convertible into shares of common stock on a 1-to-1 basis
(subject to adjustment to account for the payment of dividends, to take into
account certain changes to the Companys capital structure and to account for
future dilutive issuances). Depending upon the final per share price paid by
the purchasers for such shares, the Series A convertible preferred stock will,
when issued, represent between 70% and 79% of the currently issued and
outstanding shares of the Companys capital stock. The closing of the
transactions contemplated by the purchase agreement is subject to
certain conditions, including, among other
things, obtaining stockholder approval. If approved by stockholders, it is anticipated
that the closing of the private placement would occur as soon as practicable
thereafter.



|14. |  | UNAUDITED QUARTERLY RESULTS
|--- |  | ---------------------------

The following tables set forth unaudited selected financial information for
the periods indicated. This information has been derived from unaudited
consolidated condensed financial statements, which, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such information. The
Companys independent accountants have not audited this information. The
results of operations for any quarter are not necessarily indicative of the
results to be expected for any future period.

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QUARTERLY STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED

|                                                                                      |                                              |   |         |       |         |   |         |       |         |   |         |       |         |   |         |       |         |   |        |       |  |   |        |       |   |   |        |       |   |   |        |       |  
|------------------------------------------------------------------------------------- | -------------------------------------------- | - | ------- | ----- | ------- | - | ------- | ----- | ------- | - | ------- | ----- | ------- | - | ------- | ----- | ------- | - | ------ | ----- |  | - | ------ | ----- | - | - | ------ | ----- | - | - | ------ | ----- | -
|                                                                                      |                                              |   | MAR 31, |       | JUN 30, |   | SEP 30, |       | DEC 31, |   | MAR 31, |       | JUN 30, |   | SEP 30, |       | DEC 31,
|                                                                                      |                                              |   | 2001    |       | 2001    |   | 2001    |       | 2001    |   | 2002    |       | 2002    |   | 2002    |       | 2002   
|                                                                                      |                                              |   |         |       |         |   |         |       |         |   |         |       |         |   |         |       |        
|Revenues:                                                                             |                                              |   |         |       |         |   |         |       |         |   |         |       |         |   |         |       |         |   |        |       |  |   |        |       |   |   |        |       |   |   |        |      
|                                                                                      | Product revenues                             | $ | 146     |       |         | $ | 212     |       |         | $ | 424     |       |         | $ | 764     |       |         | $ | 913    |       |  | $ | 1,075  |       |   | $ | 1,461  |       |   | $ | 1,847  |      
|                                                                                      | Research revenues                            |   | 331     |       |         |   | 348     |       |         |   | 153     |       |         |   | 100     |       |         |   | 236    |       |  |   | 207    |       |   |   | 641    |       |   |   | 364    |      
|                                                                                      |                                              |   |         |       |         |   |         |       |         |   |         |       |         |   |         |       |         |   |        |       |  |   |        |       |   |   |        |       |   |   |        |      
|Total revenues                                                                        |                                              |   | 477     |       |         |   | 560     |       |         |   | 577     |       |         |   | 864     |       |         |   | 1,149  |       |  |   | 1,282  |       |   |   | 2,102  |       |   |   | 2,211  |      
|Operating expenses:                                                                   |                                              |   |         |       |         |   |         |       |         |   |         |       |         |   |         |       |         |   |        |       |  |   |        |       |   |   |        |       |   |   |        |      
|                                                                                      | Cost of product revenues                     |   |         | 1,457 |         |   |         | 1,906 |         |   |         | 2,852 |         |   |         | 3,430 |         |   |        | 2,904 |  |   |        | 2,791 |   |   |        | 3,041 |   |   |        | 3,669 |  
|                                                                                      | Research and development expenses            |   |         | 920   |         |   |         | 903   |         |   |         | 596   |         |   |         | 644   |         |   |        | 854   |  |   |        | 989   |   |   |        | 935   |   |   |        | 915   |  
|                                                                                      | Selling, general and administrative expenses |   |         | 1,128 |         |   |         | 1,059 |         |   |         | 1,025 |         |   |         | 878   |         |   |        | 1,054 |  |   |        | 1,187 |   |   |        | 991   |   |   |        | 1,287 |  
|                                                                                      |                                              |   |         |       |         |   |         |       |         |   |         |       |         |   |         |       |         |   |        |       |  |   |        |       |   |   |        |       |   |   |        |      
|Total operating expenses                                                              |                                              |   | 3,505   |       |         |   | 3,868   |       |         |   | 4,473   |       |         |   | 4,952   |       |         |   | 4,812  |       |  |   | 4,967  |       |   |   | 4,967  |       |   |   | 5,871  |      
|Operating loss                                                                        |                                              |   | (3,028  | )     |         |   | (3,308  | )     |         |   | (3,896  | )     |         |   | (4,088  | )     |         |   | (3,663 | )     |  |   | (3,685 | )     |   |   | (2,865 | )     |   |   | (3,660 | )    
|Interest income                                                                       |                                              |   | 639     |       |         |   | 479     |       |         |   | 416     |       |         |   | 310     |       |         |   | 242    |       |  |   | 210    |       |   |   | 133    |       |   |   | 89     |      
|                                                                                      |                                              |   |         |       |         |   |         |       |         |   |         |       |         |   |         |       |         |   |        |       |  |   |        |       |   |   |        |       |   |   |        |      
|Net loss                                                                              |                                              |   | (2,389  | )     |         |   | (2,829  | )     |         |   | (3,480  | )     |         |   | (3,778  | )     |         |   | (3,421 | )     |  |   | (3,475 | )     |   |   | (2,732 | )     |   |   | (3,571 | )    
|Other comprehensive income (loss):                                                    |                                              |   |         |       |         |   |         |       |         |   |         |       |         |   |         |       |         |   |        |       |  |   |        |       |   |   |        |       |   |   |        |      
|                                                                                      | Unrealized
gain (loss) on investments        |   |         | 122   |         |   |         | (29   | )       |   |         | 159   |         |   |         | (3    | )       |   |        | 155   |  |   |        | (62   | ) |   |        | (46   | ) |   |        | (40   | )
|                                                                                      |                                              |   |         |       |         |   |         |       |         |   |         |       |         |   |         |       |         |   |        |       |  |   |        |       |   |   |        |       |   |   |        |      
|Comprehensive loss attributable to common stockholders                                |                                              | $ | (2,267  | )     |         | $ | (2,858  | )     |         | $ | (3,321  | )     |         | $ | (3,781  | )     |         | $ | (3,266 | )     |  | $ | (3,537 | )     |   | $ | (2,778 | )     |   | $ | (3,611 | )    
|                                                                                      |                                              |   |         |       |         |   |         |       |         |   |         |       |         |   |         |       |         |   |        |       |  |   |        |       |   |   |        |       |   |   |        |      
|Net loss per common share (basic and diluted)                                         |                                              | $ | (0.21   | )     |         | $ | (0.25   | )     |         | $ | (0.31   | )     |         | $ | (0.33   | )     |         | $ | (0.30  | )     |  | $ | (0.30  | )     |   | $ | (0.24  | )     |   | $ | (0.31  | )    
|Weighted average shares used in computing basic and diluted
net loss per common share |                                              |   | 11,173  |       |         |   | 11,261  |       |         |   | 11,385  |       |         |   | 11,394  |       |         |   | 11,398 |       |  |   | 11,404 |       |   |   | 11,408 |       |   |   | 11,410 |      

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SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

|                                                       |                                             |           |            |            |            |            |   |               |  |  |            |   |  |  |   |            | 
|------------------------------------------------------ | ------------------------------------------- | --------- | ---------- | ---------- | ---------- | ---------- | - | ------------- |  |  | ---------- | - |  |  | - | ---------- | 
|                                                       |                                             |           | Balance at |            |            |            |   |               |  |  |            |   |  |  |  
|                                                       |                                             |           | beginning  |            | Charged to |            |   |               |  |  | Balance at
|Description                                            |                                             | of period |            | operations |            | Deductions |   | end of period
|                                                       |                                             |           |            |            |            |            |   |              
|Year ended December 31, 2000                           |                                             |           |            |            |            |            |   |               |  |  |            |   |  |  |   |           
|Reserves and allowances deducted from assets accounts: |                                             |           |            |            |            |            |   |               |  |  |            |   |  |  |   |           
|                                                       | Valuation allowance for deferred tax assets |           | $          | 5,045,000  |            |            | $ | 2,002,000     |  |  | $          |  |  |  | $ | 7,047,000  | 
|                                                       | Allowance for doubtful accounts             |           |            | 10,000     |            |            |   | 3,000         |  |  |            |  |  |  |   | 13,000     | 
|                                                       | Accrued warranty reserve                    |           |            | 22,000     |            |            |   | 26,000        |  |  |            |  |  |  |   | 48,000     | 
|Year ended December 31, 2001                           |                                             |           |            |            |            |            |   |               |  |  |            |   |  |  |   |           
|Reserves and allowances deducted from assets accounts: |                                             |           |            |            |            |            |   |               |  |  |            |   |  |  |   |           
|                                                       | Valuation allowance for deferred tax assets |           | $          | 7,047,000  |            |            | $ | 5,005,000     |  |  | $          |  |  |  | $ | 12,052,000 | 
|                                                       | Allowance for doubtful accounts             |           |            | 13,000     |            |            |   |              |  |  |            |  |  |  |   | 13,000     | 
|                                                       | Accrued warranty reserve                    |           |            | 48,000     |            |            |   | 90,000        |  |  |            |  |  |  |   | 138,000    | 
|Year ended December 31, 2002                           |                                             |           |            |            |            |            |   |               |  |  |            |   |  |  |   |           
|Reserves and allowances deducted from assets accounts: |                                             |           |            |            |            |            |   |               |  |  |            |   |  |  |   |           
|                                                       | Valuation allowance for deferred tax assets |           | $          | 12,052,000 |            |            | $ | 5,100,000     |  |  | $          |  |  |  | $ | 17,152,000 | 
|                                                       | Allowance for doubtful accounts             |           |            | 13,000     |            |            |   | 127,000       |  |  |            |  |  |  |   | 140,000    | 
|                                                       | Accrued warranty reserve                    |           |            | 138,000    |            |            |   | 188,000       |  |  |            |  |  |  |   | 326,000    | 

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SIGNATURES

Pursuant to the requirements of 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 on this 27th day of March, 2003, thereunto duly
authorized.

| |                       |                                                               
| | --------------------- | --------------------------------------------------------------
| | EVERGREEN SOLAR, INC.
| |                       |                                                               
| | By:                   | /s/ MARK A. FARBER                                            
| |                       |                                                               
| |                       | Mark A. Farber
Chief Executive Officer,
President and Director

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POWER OF ATTORNEY AND SIGNATURES

We, the undersigned officers and directors of Evergreen Solar, Inc., hereby
severally constitute and appoint Mark A. Farber and Richard G. Chleboski, and
each of them singly, our true and lawful attorneys, with full power to both of
them and each of them singly, to sign for us and in our names in the capacities
indicated below, any amendments to this Annual Report on Form 10-K, and
generally to do all things in our names and on our behalf in such capacities to
enable Evergreen Solar, Inc. to comply with the provisions of the Securities
Exchange Act of 1934, as amended, and all the requirements of the Securities
and Exchange Commission.

Pursuant to the 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.

|                                              |  |                                                                                                                         |  |                   
|--------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------- |  | ------------------
|Name/s/ MARK A.  FARBER
Mark A.  Farber       |  | TitleChief Executive Officer,
President and Director
(Principal Executive Officer)                                      |  | DateMarch 27, 2003
|                                             
|                                              |  |                                                                                                                         |  |                   
|                                             
|/s/ RICHARD G.  CHLEBOSKIRichard G. Chleboski |  | Chief Financial Officer,
Treasurer, Secretary,
Director (Principal Financial
Officer, and Principal Accounting Officer) |  | March 27, 2003    
|                                             
|                                              |  |                                                                                                                         |  |                   
|                                             
|/s/ ROBERT W.  SHAW, JR.Robert W.  Shaw, Jr.  |  | Chairman of the Board of Directors                                                                                      |  | March 27, 2003    
|                                             
|                                              |  |                                                                                                                         |  |                   
|                                             
|/s/ WILLIAM P.  SOMMERSWilliam P.  Sommers    |  | Director                                                                                                                |  | March 27, 2003    
|                                             
|                                              |  |                                                                                                                         |  |                   
|                                             
|/s/ BROWN F.  WILLIAMSBrown F.  Williams      |  | Director                                                                                                                |  | March 27, 2003    
|                                             
|                                              |  |                                                                                                                         |  |                   
|                                             
|/s/ MASON WILLRICHMason Willrich              |  | Director                                                                                                                |  | March 27, 2003    

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Certifications

I, Mark A. Farber, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Evergreen Solar;                                                                                                                                                                                                                                                     
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                               



| | a) |  | designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants
auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: March 27, 2003

| |                                       
| | --------------------------------------
| | /s/ Mark A. Farber                    
| |                                       
| | Mark A. Farber
Chief Executive Officer

50



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##### Table of Contents



I, Richard G. Chleboski, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Evergreen Solar;                                                                                                                                                                                                                                                     
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                               



| | a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material weaknesses
in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: March 27, 2003

| |                                             
| | --------------------------------------------
| | /s/ Richard G. Chleboski                    
| |                                             
| | Richard G. Chleboski
Chief Financial Officer

51