**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM10-KSB**

**(Mark One)**
| **x**                                       | ** ** | **Annual Report Pursuant  to Section 13 or 15(d) of the Securities Exchange Act of 1934**     |
|---------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
| ** **                                  | ** ** | ** **                                                                                    |
| **For the  fiscal year ended May 31, 2007** |
| ** **                                  | ** ** | ** **                                                                                    |
| **OR**                                      |
| ** **                                  | ** ** | ** **                                                                                    |
| **o**                                       | ** ** | **Transition Report  Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934** |

 

**Commissionfile number 000-50450**

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**OPENENERGY CORPORATION**

(Name of smallbusiness issuer in its charter)

| **Nevada**                                        |   | **98-0370750**                        |
|---------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or |   | (I.R.S. Employer  Identification No.) |
| organization)                                     |   |                                  |
|                                              |   |                                  |
| **514 Via  de la Valle, Suite 200**               |   | ** **                            |
| **Solana  Beach, California**                     |   | **92075**                             |
| (Address of  principal executive offices)         |   | (Zip Code)                            |

 

**(858)794-8800**

(Issuer’s telephonenumber, including area code)

Securities registeredpursuant to Section 12 (b) of the Exchange Act:

 

|                          |   | **Name of  each exchange on** |
|--------------------------|--------|-------------------------------|
| **Title of  each class** |   | **which  registered**         |
| None                     |   | None                          |

 

Securitiesregistered pursuant to Section 12 (g) of the Exchange Act:

**CommonStock, par value $0.001 per share**

(Title of class)
| Indicate by check mark if the registrant is not required to file reports pursuant to  Section 13 or 15(d) of the Exchange Act.  Yes  o   No  x                                                                                                                                                                                                              |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                |
| Check  whether the issuer (1) filed all reports required to be filed by Section 13  or 15(d) of the Exchange Act during the past 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.  Yes  x   No  o                                 |
|                                                                                                                                                                                                                                                                                                                                                                                                |
| Check  if there is no disclosure of delinquent filers in response to Item 405 of  Regulation S-B contained in this form, and no disclosure will be contained,  to the best of registrant’s knowledge, in definitive proxy information  statements incorporated by reference in Part III of this Form 10-KSB or any  amendment to this Form 10-KSB or any amendment to this Form 10-KSB. o |
|                                                                                                                                                                                                                                                                                                                                                                                                |
| Indicate  by check mark whether the registrant is a shell company (as defined in Rule  12b-2 of the Exchange Act).       Yes  No  x                                                                                                                                                                                                               |
|                                                                                                                                                                                                                                                                                                                                                                                                |
| State  issuer’s revenues for its most recent fiscal year: $4,292,000                                                                                                                                                                                                                                                                                                                           |
|                                                                                                                                                                                                                                                                                                                                                                                                |
| The  aggregate market value of the voting and non-voting common equity on May 31,  2007 held by non-affiliates* of the registrant (based on the average bid and  asked price of such stock on such date) was approximately $47,955,000.   (See definition of affiliate in Rule 12b-2  of the Exchange Act.)                                                                               |
|                                                                                                                                                                                                                                                                                                                                                                                                |
| At  August 27, 2007, there were 121,878,623 shares outstanding of the issuer’s  common stock, the only class of common equity.                                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                                                                                                                                                |
| Transitional  Small Business Disclosure Format (Check one)   Yes   No  x                                                                                                                                                                                                                                                                                                   |

 

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*              Without acknowledging that any individual director ofregistrant is an affiliate, all directors have been included as affiliates withrespect to shares owned by them.

**DOCUMENTSINCORPORATED BY REFERENCE**

Portions of the information required by Part III of this Form 10-KSBare incorporated by reference from our definitive proxy statement to bedelivered to stockholders in connection with our 2007 Annual Meeting ofStockholders

 

Transitional Small Business Disclosure Format (check one Yes  o   No x

 

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**TABLEOF CONTENTS**
|              | ** **                                                                                                        | ** ** |
|--------------|-------------------------------------------------------------------------------------------------------------------|------------|
|         |                                                                                                              |       |
| **PART I**   | ** **                                                                                                        |
|         |                                                                                                              |       |
| ITEM 1.      | Description of  Business                                                                                          |       |
| ITEM 2.      | Description of  Property                                                                                          |       |
| ITEM 3.      | Legal Proceedings                                                                                                 |       |
| ITEM 4.      | Submission of  Matters to a Vote of Security Holders                                                              |       |
|         |                                                                                                              |       |
| **PART II**  | ** **                                                                                                        |
|         |                                                                                                              |       |
| ITEM 5.      | Market for  Common Equity, Related Stockholder Matters, and Small Business Issuer  Purchases of Equity Securities |       |
| ITEM 6.      | Management’s  Discussion and Analysis or Plan of Operation                                                   |       |
| ITEM 7.      | Financial  Statements                                                                                             |       |
| ITEM 8.      | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                             |       |
| ITEM 8A.     | Controls and  Procedures                                                                                          |       |
| ITEM 8B.     | Other Information                                                                                                 |       |
|         |                                                                                                              |       |
| **PART III** | ** **                                                                                                        |
|         |                                                                                                              |       |
| ITEM 9.      | Directors,  Executive Officers, Promoters and Control Persons; Compliance with Section  16(a) of the Exchange Act |       |
| ITEM 10.     | Executive  Compensation                                                                                           |       |
| ITEM 11.     | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                  |       |
| ITEM 12.     | Certain  Relationships and Related Transactions, and Director Independence                                        |       |
| ITEM 13.     | Exhibits                                                                                                          |       |
| ITEM 14.     | Principal  Accountant Fees and Services                                                                           |       |

 

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**PART I**

**SPECIALNOTE REGARDING FORWARD-LOOKING STATEMENTS**

This Annual Report onForm 10-KSB contains forward-looking statements within the meaning of Section27A of the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934. These forward-looking statements are subject to certain risks anduncertainties that could cause actual results to differ materially fromhistorical results or anticipated results, including those set forth under theheading “Risk Factors” and elsewhere in, or incorporated by reference into,this report. Other risks and uncertainties include such factors, among others,as market acceptance and market demand for the Company’s (as defined below)technologies and services, pricing, the changing regulatory environment, theeffect of the Company’s accounting policies, potential seasonality, industrytrends, adequacy of the Company’s financial resources to execute its businessplan, the Company’s ability to attract, retain and motivate key technical,marketing and management personnel, possible disruption in commercialactivities occasioned by terrorist activity and armed conflict, and other riskfactors detailed in the Company’s other SEC filings.

In some cases, you canidentify forward looking statements by terms such as “may,” “intend,” “might,” “will,”“should,” “could,” “would,” “expect,” “ believe, ” “ anticipate, ” “estimate,” “predict,”“potential,” or the negative of these terms, and similar expressions areintended to identify forward-looking statements. Such statements are subject tocertain risks and uncertainties, which could cause actual results to differmaterially from those projected. Readers are cautioned not to place unduereliance on these forward-looking statements, which speak only as of the datehereof. The Company undertakes no obligation to publicly release the result ofany revisions to these forward-looking statements, which may be made to reflectevents or circumstances after the date hereof or to reflect the occurrence ofunanticipated events. The forward-looking statements in this report are basedupon management’s current expectations and belief, which management believesare reasonable. These statements represent our estimates and assumptions onlyas of the date of this Annual Report on Form 10-KSB, and we undertake noobligation to publicly release the result of any revisions to anyforward-looking statement, which may be made to reflect events or circumstancesafter the date hereof or to reflect the occurrence of unanticipated events. Youare cautioned not to place undue reliance on any forward-looking statements.

In this report, unlessthe context indicates otherwise, the terms “Company,” “we,” “us,” and “our”refer to Open Energy Corporation, a Nevada corporation, and its subsidiaries.

You should be aware thatour actual results could differ materially from those contained in theforward-looking statements due to a number of factors, including:

·                  significantuncertainty inherent in the renewable energy industry;

·                  intenseand increasing competition from other “clean” renewable energy companies andconventional fossil fuel based energy companies; new competitors are likely toemerge and new technologies may further increase competition;

·                  ouroperating costs may increase beyond our current expectations and we may beunable to fully implement our current business plan;

·                  ourability to obtain future financing or funds when needed;

·                  ourability to successfully obtain a diverse customer base;

·                  ourability to protect our intellectual property through patents, trademarks,copyrights and confidentiality agreements;

·                  ourability to attract and retain a qualified employee base;

·                  ourability to respond to new developments in technology and new applications ofexisting technology before our competitors;

·                  acquisitions,business combinations, strategic partnerships, divestures, and othersignificant transactions may involve additional uncertainties;

·                  ourability to maintain and execute a successful business strategy; and

·                  we may faceother risks described from time to time in periodic and current reports we filewith the United States Securities and Exchange Commission, or SEC.

You also should considercarefully the statements under “Risks Related to Our Business” and othersections of this Report, which address additional factors that could cause ouractual results to differ from those set forth in the forward-looking statementsand could materially and adversely affect our business, operating results andfinancial condition. All subsequent written and oral forward-looking statementsattributable to us or persons acting on our behalf are expressly qualified intheir entirety by the applicable cautionary statements.

The forward-lookingstatements speak only as of the date on which they are made, and, except to theextent required by federal securities laws, we undertake no obligation toupdate any forward-looking statement to reflect events or circumstances afterthe date on which the statement is made or to reflect the occurrence ofunanticipated events. In addition, we cannot assess the impact of each factoron our business or the extent to which any factor, or combination of factors,or factors we are unaware of, may cause actual results to differ materiallyfrom those contained in any forward-looking statements.

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**ITEM1. DESCRIPTION OF****BUSINESS**

**General**

**CompanyHistory**

Open Energy Corporationis a renewable energy company focused on the development and commercializationof a portfolio of solar products and technologies capable of deliveringcompetitive power and related commodities for a wide range of residential,commercial and industrial applications. Our mission is to harness the power ofthe sun to meet the growing resource demands of sustainable 21st century development.

Our company wasoriginally incorporated in the State of Nevada on April 11, 2002 under the nameBarnabus Enterprises Ltd., and in May 2005 we changed our name to BarnabusEnergy, Inc. By 2005, we had acquired gas leases and a number of existing andproposed gas wells in Alberta, Canada. This network tied into a transportpipeline leading into the United States, where a premium for production couldbe obtained.

In June of 2005, we madea strategic business decision to shift our focus. Motivated by the growth inwind, solar and other renewable energy technologies and believing that marketforces and legislative incentives were in place to support the domestic solarindustry, we decided to transform the Company into a renewable energy company.

In August of 2005, wesigned an exclusive international license for SunConeTM CSP (concentrating solar power) technology.SunConeTM CSP was conceived by Dr. Melvin Prueitt, aphysicist, inventor and former senior research scientist at the Los AlamosNational Laboratory. SunCone CSP utilizes curved geometries andreflective surfaces to collect solar thermal energy, which can then be used toheat a working fluid. Potentially, this energy can drive a turbine to produceelectricity, or purify water using multi-stage flash distillation or membranefiltration devises. The first prototype was designed and built by HytecEngineering of Los Alamos, New Mexico, and initial testing of this prototypesystem was successful.

That same month, wesigned an agreement to acquire a controlling interest in Toronto-based SolarRoofing Systems, Inc. (SRS), which has a patent pending on SolarSaveTM  photovoltaic(PV) roofing membrane. SRS founder Norman Dodd subsequently joined our Board ofDirectors. In November of 2005, we signed an agreement to acquireCalifornia-based Connect Renewable Energy, Inc. (CRE)**,** which developed, patented, and is currently manufacturing PVintegrated roofing tiles, and CRE founder Ron Gangemi joined the Board. Bothcompanies produce light-weight, fire-rated, weather-resistant,building-integrated PV roofing materials. We also moved our corporate officesto Southern California, the most active solar marketplace in the U.S. OnDecember 8, 2005, we sold our oil and gas holdings.

In March 2006, wecompleted the acquisition of CRE and in April 2006, we acquired the remaininginterests in SRS. SRS and CRE provided our company with proprietary, nextgeneration photoelectric products, and expanded our manufacturing, marketing,sales and service capabilities. In February and March 2006, we signedagreements to obtain approximately $20 million through a series of financings,and on April 21, 2006 we changed our name to Open Energy Corporation to betterreflect our mission, vision and strategic objectives.

In December 2006, weacquired WaterEye, a Grass Valley, California based company with proprietary,web-enabled water monitoring software. Its founder, Tom Wolf, became our SeniorVP of Engineering and Development. WaterEye provided ongoing revenues, watertreatment expertise, and a technology platform for monitoring and displayingour PV installations.

In March 2007, we signeda master distribution agreement with privately held Eagle Roofing Products, oneof the largest manufacturers of cement tiles in North America. This strategicalliance provides our company with access to major home developers and roofingcontractors across the country. We intend to sell our residential tile productsthrough this distribution pipeline, and utilize the building trades as ourinstallation and service providers.

Realizing that the solarindustry was quickly becoming commoditized and that we would never becompetitive as a low-cost manufacturer, in May of 2007, we signed a memorandumof understanding with Suntech Power Holdings (NYSE: STP) to manufacture ourtile and PV glass products in China. We believe this relationship has thepotential to provide the production volume required to compete for asignificant share of the U.S. residential and commercial solar electricmarketplace.

We are currentlyevaluating alternatives to determine how to optimize capabilities at our SRSand CRE locations. Open Energy will concentrate on its core competencies as aleading edge designer of innovative products but will outsource the majority ofits manufacturing in order to remain competitive. No decision or dates have yetbeen established to shutdown operations at any location; however, over time wedo expect to eliminate the majority of our manufacturing operations.

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While Open Energy iscurrently developing its next generation commercial product, the Company hastemporarily suspended shipments of its current membrane product due to aproduct corrosion issue. As a result of the corrosion issue, we have recorded avaluation allowance totaling $2.5 million in SRS related to the finished goodsproduct in inventory, as well as the cost of replacing product under warrantywith our customers.

The company has performedannual impairment tests of the carrying value of goodwill and intangibles ofits SRS and CRE acquisitions as required under SFAS NO. 142 and SFAS NO. 144,respectively. The tests determined that indications of impairment existed forcertain purchased intangible assets and goodwill associated with itsacquisition of SRS. Based on these assessments, the company recorded charges inSRS of $3.5 million and $2.7 million to write-down the value of intangibleassets and goodwill, respectively. In addition, we have taken a goodwillwrite-off of $2.5 million for the acquisition of WaterEye. While it is ourintention to modify the WaterEye software to provide real time monitoring forfuture installations of our SunconeTM CSP product that is in development, thisproduct is not yet commercialized and we are not actively marketing theoriginal WaterEye product for water treatment monitoring.

**TheEnergy Industry**

***Continued Growth in Electricity Use IsExpected in All Sectors***

According to the Energy InformationAdministration’s “Annual Energy Outlook 2007,” total electricity sales areexpected to increase by 41 percent from 3,660 billion kilowatt hours in 2005 to5,168 billion kilowatt hours in 2030. The largest increase is in the commercialsector, as service industries continue to drive growth. The data in thissection is all derived from the Annual Energy Outlook 2007 report.

Electricity demand is projected to grow by39 percent from 2005 to 2030 in the residential sector, by 63 percent in thecommercial sector, and by 17 percent in the industrial sector. Growth inpopulation and disposable income is expected to lead to increased demand forproducts, services, and floorspace, with a corresponding increase in demand forelectricity for space heating and cooling and to power the appliances andequipment used by buildings and businesses. Population shifts to warmer regionswill also increase the need for cooling. Higher energy prices are expected toencourage investment in energy-efficient equipment and on-site electricitygeneration.

***Largest U.S. Capacity Additions Expectedin the Southeast and the West***

The United States is expected to requireapproximately 292 gigawatts of new generating capacity by 2030 to meet demandand to replace inefficient, older generating plants that are retired. Thelargest amounts of new capacity are expected in the Southeast and the West. Inthe Southeast, electricity demand represents a relatively large share of totalU.S. electricity sales, and its need for new capacity is greater than in otherregions.

Coal-fired capacity, which typically isexpensive to build but has relatively low operating costs, is expected toaccount for about 54 percent of the total capacity additions from 2006 to 2030.Natural-gas-fired plants, which generally are the least expensive capacity tobuild but have comparatively high fuel costs, are expected to represent 36percent of the projected additions. Renewable and nuclear plants, which havehigh investment costs and low operating costs, are expected to account for 6percent and 4 percent of total additions, respectively. These assumptions arebased on no dramatic changes in U.S. Government policies in regards torenewable energy.

*Technology Advances, TaxProvisions Increase Renewable Generation*

Despite technology improvements, risingfossil fuel costs, and public support for cleaner, greener alternatives, thecontribution of renewable energy to U.S. electricity supply is expected toremain relatively small at 9.0 percent of total generation in 2030—about thesame as their share in 2005. A dramatic change in national energy policy isneeded to change this trend. Although conventional hydropower remains the largestsource of renewable generation through 2030, environmental concerns and thescarcity of untapped large-scale sites limit its growth, and its share of totalgeneration is expected to fall from 6.6 percent in 2005 to 5.3 percent in 2030.Electricity generation from non-hydroelectric alternative fuels is expected toincrease, bolstered by technology advances and State and Federal supports. Theshare of non-hydropower renewable generation is expected to increase by 60percent, from 2.3 percent of total generation in 2005 to 3.6 percent in 2030.

*SolarResidential and Commercial Market- Distributed Generation*

An underlyingconsideration concerning the delivery of electricity is the location of thegeneration source relative to the location of the end-use consumption. Over thepast century, the economics of power plant construction supported larger andlarger central station sites linked to transmission lines spanning greatdistances to reach the ultimate consumer. Thus, the Energy InformationAdministration report is geared more towards centralized power generation. Theeconomic considerations of centralized power plants have been altered by theadvent of smaller scale technologies that can provide electricity atcompetitive prices near the place of consumption. The combination of economicfactors and of advances in generation technologies opens the market to anopportunity for “distributed generation” of electricity in combination withtraditional grid resources. Open Energy’s PV products are directed at this renewabledistributed generation environment.

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The market for PV modulesand cell shipments in the United States has undergone significant growth in thelast several years, expanding from 48,664 peak kilowatts in 2003, to 78,346 in2004, and to 134,465 in 2005, according to the U.S. Department of Energy.Today, solar represents an approximately $10 billion U.S. industry. Demand forresidential and commercial solar systems is dependent upon:  government policies and incentive programs;technological developments (i.e. higher cell efficiencies, lower systemcosts.); investment in manufacturing capacity (particularly polysiliconplants); market development; and consumer behavior. Based on a market analysisconducted by Navigant Consulting, if the installed cost per watt drops to $4.25to $5.30 per watt-DC, by 2010 the market in the United States alone would be666 megawatts or $3.2 billion. Prices for large thin-film ground mount systemsare being quoted at the high-end of this range today.

**U.S.Energy Policy & Pending Legislation**

Over the past decade,U.S., government regulators have strengthened air and water emissions controlrequirements. In addition, states have enacted Renewable Portfolio Standardsthat require a certain percentage of electricity produced be derived fromrenewable sources. In 2005, President Bush signed into law a major energy billthat includes federal tax credits, renewable portfolio standards and otherprograms designed to accelerate the adoption of renewable energy alternatives.All 50 States now have one or more renewable energy incentive programs,including net metering, renewable portfolio standards, tax credits, loans andgrant programs. In December of 2005, the California Public Utility Commissioncreated the largest solar energy bill in U.S. history, providing $3.2 billionin rebates over the next 11 years to support distributed generation solarsystems. However, due to the significant increase expected in electricitydemand in this country discussed above, these efforts are simply not enough.

Passage of the CLEAN(Creating Long-Term Energy Alternatives for the Nation) Energy Act of 2007(H.R. 6) would bring the country one step closer to a “greener” national energypolicy. The purposes of the new Energy Act are to:  1) Move the United States toward greaterenergy independence and security; 2) Increase the production of clean renewablefuels; 3) Protect consumers from price gouging; 4) Increase the energyefficiency of products, buildings, and vehicles; 5) Promote research on anddeploy greenhouse gas capture and storage options and 6) Improve the energyperformance of the Federal Government.

The House passed aversion that largely addressed changes to the royalty structures and tax breaksafforded to oil and gas companies and has other energy-related legislationpending. The final details of the legislation remains uncertain, but there isconsiderable political interest in reducing American dependence on foreign oil,while simultaneously taking steps to combat the effects of global warming andincreasing domestic energy efficiency.

**TheGlobal Solar Equipment Market**

According to a January2007 research report from Morgan Stanley, the $15 to $20 billion global solarmarket is projected to grow at 43% annually through 2010, with growth acceleratingin 2009 and 2010 as the silicon shortage subsides and lower cost “thin film”technologies gain greater market share. An estimated 80,000 tons of siliconproduction is expected to come on-line by 2010, with over 60% available for thesolar market. Non-traditional PV technologies, such as thin film, are expectedto grow even faster, reaching a 20% global market share in 2010 from 9% in2005. According to Morgan Stanley, the key growth drivers are the rising costsof oil, gas and electricity, consumer demand for clean energy alternatives,long term government subsidy programs, the desire for energy security, andindependence from foreign oil imports.

According to a report byNavigant consulting, the PV industry grew by a compound annual rate of 41% peryear since 2001. Growth in installed solar power systems has been stimulated bylong-term government subsidies, tax incentives and feed-in tariffs (requiringthe utilities to buy back excess power generated by privately owned PVsystems). The government subsidies have stimulated development of newtechnologies designed to reduce costs.

**PhotovoltaicSystems**

In 1953, Bell Laboratoryinvented the first PV cell, a thin sandwich of silicon and metal capable ofconverting sunlight directly into electricity. The advantages of these PV cellswere very compelling and included: high reliability, low maintenance,modularity and flexibility of design, and significant environmental benefits.PV also supports the trend toward distributed (point-of-use) power generation.We believe that capacity constraints, increased demand for power reliability,and the challenges of building new centralized power plants will increase thedemand for distributed generation in general and specifically for solarelectric systems.

One of the mostsignificant drawbacks of PV is the high initial system cost, which is duealmost entirely to the high cost of PV cells, which in turn is dependent uponthe cost and availability of semi-conductor grade silicon. Several new siliconprocessing plants are currently under construction, which are expected to easethe current silicon shortage. In 2005, 76% of U.S. module shipments were basedupon crystalline silicon cells, with the remaining 24% being thin-film.According to a Navigant consulting article in Renewable Energy World, in 2005,worldwide thin film technologies were 6% of total shipments.

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**Top 10Crystalline Solar Cell Manufacturers** (source: industrypublication *Renewable Energy World)*:
| **Company**          | ** ** | **2006  Shipments (%)** | ** ** |
|----------------------|------------|------------------------------|------------|
| Sharp                |       | 22                           | %          |
| Q-Cells              |       | 12                           | %          |
| Kyocera              |       | 9                            | %          |
| Suntech              |       | 8                            | %          |
| Sanyo                |       | 6                            | %          |
| Mitsubishi  Electric |       | 6                            | %          |
| Schott Solar         |       | 5                            | %          |
| Motech               |       | 5                            | %          |
| BP Solar             |       | 4                            | %          |
| Sunpower Corporation |       | 3                            | %          |

 

Although Sharp isexpected to retain the number one position in 2007, Q-Cells and Suntech havepublicly indicated their intent to significantly increase capacity.

**AlternativePhotovoltaic Technologies**

Open Energy currentlyutilizes crystalline silicon PV cells in its products. PV cells offer highpower generation per square foot. They are also highly reliable, with proven, longterm, power output performance. Despite billions of dollars pouring into solarPV in the form of government incentive programs, subsidies and privateinvestments, the industry remains less than 1% of the electrical power utilizedglobally today. Wide scale adoption of solar electric generation has beenhampered by two important limiting factors: a shortage of silicon, and the highcost per watt of manufacturing traditional PV. Several new technologies showpromise of overcoming these barriers. As they become commercially viable, OpenEnergy plans to incorporate them into our product designs as appropriate.

As a result, majorcorporations and research centers around the world are scrambling to developalternative “thin film” technologies that can reduce or eliminate the use ofpure grade silicon, and that can be scaled on continuous production lines. Byincreasing automation and reducing raw material and energy costs, the real goalbecomes making PV competitive with grid power. In many cases, this can be achievedat or below $3 per installed AC watt.

One of Open Energy’s keystrategies is to remain technology agnostic. As these alternative technologiesbecome commercially viable, we will incorporate them in products that providecustomers with better solutions for their energy needs.

The following are some ofthe technologies that may compete successfully with crystalline PV cells in thenear future:

**CdTeThin Films**

A number of companies arepursuing development and commercialization of Cadmium Telluride (CdTe) thinfilms, including **First Solar LLC**, **BP**, **Primestar**,**Calyxo (Q-Cell)**, **Antec** and **5NPlus**. The manufacturing process deposits ultra-thin (1-3) micronlayers of CdTe and Cds on glass or metal substrates at high speed. **First Solar** has produced a very interestingCdTe thin film product that produces high energy across a wide range ofclimatic conditions with excellent low light response and temperaturecoefficient. **First Solar** reportedmanufacturing costs as low as $1.25/watt and laboratory efficiencies as high as16.5%, a power output equal to that of many polysilicon cells. Their frameless,flexible modules are robust, cost effective and recyclable.

**CISand CIGS Thin Films**

Copper Indium di-Selinide(CIS) and Copper Indium Gallium Selenium (CIGS) are additional thin filmalternatives. Like CdTe thin films, they hold the promise of much lower costs,higher throughput, and more flexible building integrated products. In a labenvironment, these materials have demonstrated very high efficiencies (almost20%), but challenges regarding lack of homogeneity greatly lowers thisperformance. **Shell Solar**, **Nanosolar**, **Miasole**, **DayStar,**and **Global Solar Energy** are amongthe companies pursuing development and commercialization of this technology.

**StringRibbon Technology**

This production processutilizes polysilicon, but much more efficiently than growing ingots and slicingthem into thin wafers. Cells are made by growing silicon ribbons betweenstrings that are pulled from the melt. These wafers use one half the amount ofpolysilicon raw material. Less cutting is required, saving energy and reducingwaste. Laboratory efficiencies are fairly high (about 15%) **Evergreen Solar** has partnered with **Q-Cells** and polysilicon supplier **REC** in a joint venture called **Ever-Q** to pursue string ribbon technology.

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**AmorphousSilicon**

Amorphous silicon (a-Si)solar technology uses a lower grade of silicon to make a thin film, flexibleproduct. Silane gas is deposited on a substrate of glass or thin metal. Cellsrequired one or several junction points between the different layers ofmaterial in order to capture free electrons and generate electrical current.While triple junction cells with layers designed to absorb different portionsof the solar spectrum have been measured as high as 13%, currently producedmaterials are closer to 6% efficiency. The technology has potential for verylow cost, given the low material costs and high volume roll-to-rollmanufacturing capability. The resulting product is light weight, easilyinstalled, and can be laminated directly onto roofing membranes. **Uni-Solar**, a subsidiary of **Energy Conversion Devises**, is the leader inthis field. **Kaneka**, **Ersol**, **Sanyo**,**Suntech** and **Q-Cell** are also exploring a-Si products.

**OrganicThin Films**

A number of organicmaterials are in development for PV applications. Dye sensitive technologiesconsist of nanometer-scale titanium dioxide crystals (TiO) which are coatedwith light absorbing dyes and embedded in a liquid electrolyte solution betweenelectrodes. Some polymers can act as solar cells or diodes when doped withappropriate materials. Theoretically, they could be integrated with low costsubstrates of almost anything (think paints and coatings). **Konarka** and **Dyesol** are pursuing this science, but they are probably manyyears away from having commercial products.

**ConcentratingSolar Power (CSP)**

Concentrating solar power (CSP)technologies utilize reflective mirrors to focus sunlight on a target that isfilled with water or a working fluid. This collected thermal energy can then beused to generate industrial heating, to produce steam to turn a turbine andgenerate electricity, or even to desalinate water using multi-stage flashdistillation. The four principal CSP technologies are parabolic troughs,dish-Stirling engines, central tower receivers, and concentrating photovoltaic(CPV) systems. These systems generally operate during sunny, peak load periods,when natural-gas-fired combustion turbines and combined-cycle units with higherfuel costs (peaking plants) determine the avoided costs that can be offset by CSPinstallations. Thus, the market demand for CSP systems is dependent upon theirinstalled cost, the price of competitive fossil fuels, and federal or statefinancial incentives and portfolio standards supporting renewable energyinstallations.

Solar parabolic trough systemsutilize long rows of parabolic mirrors to focus sunlight on pipes through whichthe working fluid flows. These troughs track the sun along its axis. In mostsystems, the fluid transfers energy to a conventional steam turbine in order togenerate electricity. According to the U.S. Department of Energy, solar troughshave relatively low efficiency (10%-15%) and have high capital and maintenancecosts, but they are a proven, dependable renewable energy technology,particularly in arid or semi-arid regions of the world. The first commerciallyscaled CSP systems were built in Southern California in the mid-1980’s. Nineplants, totaling 354 MW, continue to deliver power to the Los Angeles basin.Since these first facilities were installed, generating costs have dropped from45 cents/kWh to 9-12 cents/kWh (competitive with peak power). According to anarticle in American Energy, CSP costs are expected to drop to 4-7 cents/kWh by2020. Currently, large scale CSP systems are being built in SouthernCalifornia, Spain, Israel and other sun-belt regions of the world.

Dish-Stirling solarsystems use a parabolic dish concentrator that continuously tracks the sun, andreflects the incoming solar rays onto the top dome of a Stirling engine. Theengine utilizes rapid cycles of heat and cooling to drive a piston, which thenturns a crank shaft and generates electricity. Stirling engines were inventedover 100 years ago and hold the promise of high efficiencies and very lowmaintenance costs. However, to date they have been expensive to build andrequire very accurate sun tracking devices in order to generate thetemperatures required for optimum energy production. However, significantimprovements are currently being made and advances are expected in the nearfuture.

Central receiver CSPsystems use large ground-mounted mirrors to reflect sunlight onto a centraltower, where working fluid or process gas is heated to produce steam that, inturn, drives a turbine to produce electricity. According to the U.S. Departmentof Energy, these tower systems are capable of achieving internal temperaturesof 567°C.

CPV systems use Fresnel lensesor mirrors to concentrate sunlight onto high-efficiency solar cells. Thesecells are typically more expensive than those used for flat-plate PV systems;therefore, they have been used primarily for space applications in the past.However, the concentration decreases the required cell area while increasingthe cell efficiency. If the cost of these systems can be reduced, the market potentialof these systems should be very promising. Concentrating PV technology offersthe potential for efficiencies greater than 40%, with no intervening heattransfer surface, and near-ambient operational temperature. Concentrating PVtechnology also has the following challenges: it is currently very expensive(especially the mirrors or lenses which can concentrate the sun onto the solarcells); reliable and accurate sun tracking is difficult; and the solar cellsmust be adequately cooled to maintain a high power output.

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In 2006, a 1 MW plant was builtfor Arizona Public Service, the first parabolic trough plant constructed innearly two decades. Solargenix-Acciona also broke ground on a 64 MW parabolictrough plant in Boulder City, Nevada. Stirling Energy Systems, a Phoenix-basedprovider of dish-Stirling engine systems, moved forward on development aftersigning Power Purchase Agreements (PPAs) for two large plants in SouthernCalifornia. Pacific Gas and Electric signed an MOU to buy at least 500 megawattsof CSP from solar thermal firm Luz II starting in 2010. CSP’s can provide safe,clean, economical, renewable power in either large-scale, grid-connectedinstallations, or remote off-grid locations. Combined with upgrades with theequivalent capacity of 24 MW that will be done at FPL Energy’s SEGS plants inthe Mojave Desert, total contracts in 2006 represent approximately 2,339 MW ofnew CSP capacity.

Outstanding requests forproposal for renewable energy issued by California utilities are expected to resultin power purchase agreements (PPAs) for significant additional CSP capacity. Agroup of Southwest utilities from Arizona, California, Colorado, Nevada and NewMexico are considering aggregating their future demand for CSP in order tobenefit from lower costs associated with larger plants.

**OurStrategy**

According to the U.S.Department of Energy, every hour of every day the earth receives enough solarenergy to meet mankind’s entire requirements for one year. It is this power weintend to utilize in order to deliver safe, clean, cost competitive energysolutions to our residential, commercial and industrial customers. Weparticipate in a marketplace that, while highly competitive, is expanding at acompounded annual growth rate of over 40% (Energy Information Agency/MorganStanley). We do so with superior products, an experienced leadership team, anda unique strategic focus that we believe will lead to growth and shareholdervalue.

We recently reformulated our overall corporate strategy based on threeprimary factors concerning our products and industry:

1.            Wehave proprietary building-integrated PV products that could be sold, installedand serviced through the building trades;

2.            Withthe recent influx of capital and explosion in PV capacity, the solar industrywas becoming increasingly commoditized and Open Energy determined it would beextremely difficult to compete as a manufacturer; and

3.            Solarinstallations are increasingly being financed through power purchaseagreements.

These business realities motivatedour company to re-evaluate our corporate strategies and undertake several keyinitiatives.

**1)  Utilize the traditional building trades as amarketing and service channel.**

In March of 2007, wesigned a joint marketing and distribution agreement with Eagle Roofing Company,the largest concrete tile manufacturer in North America. Our SolarSaveTM PVRoofing Tiles match the colors and edge profiles of Eagle’s most popular tiles,and can be installed by professional roofing contractors in association withregistered solar integrators or electricians, while they build out residentialand commercial projects. Eagle’s sales representatives are currently beingtrained to sell solar systems. Their extensive network of contractors andresidential home builders provide sales leads in geographic territoriesrepresenting the majority of all U.S. solar installations.

**2) Outsource manufacturing in order to remain price competitive.**

In May of 2007, OpenEnergy and Suntech Power Holdings Co., Ltd. (NYSE:STP), signed a letter ofintent for broad initiatives targeting the expansion of BIPV product sales inNorth America. It is anticipated that Suntech will supply their polycrystallinecells and provide cost effective production of the SolarSaveTM PV Tile products.

Suntech is currently theworld’s third largest PV cell manufacturer, and the number one solar modulemanufacturer. Their vertically integrated manufacturing sites employ over 4,000people and are located in Wuxi, Luoyang, Oingai and Shanghai, China. Suntechhas secured long term silicon supply agreements and is well positioned tobecome the low cost, high volume supplier of solar modules on a global basis.With the acquisition of a Japanese BIPV company, MSK, they have expertise inArchitectural PV glass, and will also provide OEM production of those specialtyproducts to Open Energy, as well.

**3) Offer financed solutions through long-term power purchase agreements.**

Thethird strategic initiative of the company is to leverage its proprietary BIPVproducts in order to drive its “solar solutions” business. In general,homeowners and builders do not buy power generating systems. They pay for powerthrough their monthly utility bills. Until recently, solar systems were veryexpensive. Although state rebates, federal tax incentives and other programshave reduced the costs of solar electricity, solar remains considerably moreexpensive than off-peak grid electricity.

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OpenEnergy has developed what it believes is a unique financial solution to thisdilemma. Together with a tax equity partner, we will install our products onthe rooftops of “solar communities.” We will coordinate the engineering,equipment procurement and construction of each project. We will contract withthird parties to maintain the rooftop systems, to read the meters, and to billthe homeowners.

Theequity investor will receive a secure internal rate of return, the benefits ofthe 30% Federal tax credit, and 5-year accelerated depreciation under the 2005U.S. Energy Bill. The builders will reduce their construction costs and,potentially, sell their homes more quickly. The homeowner will be guaranteed areduced monthly utility bill and receive the benefits of added home value at noextra expense or tax impact. We believe this strategy will enable Open Energyto sell more products and participate in long term utility revenue streams.

The foregoing threeinitiatives (utilization of the building trades, outsourcing manufacturing, andproviding financed solutions) will allow Open Energy to concentrate on its corecompetencies as a leading edge designer of innovative solar products andtechnologies, and as a customer-centric marketer of renewable energy solutions.

We will remain technologyagnostic. As thin film, nano-materials, vapor deposition and other innovationsbecome commercially viable on a cost per installed watt basis, we will utilizethem to develop commercial products and bring them to market. Unlike many ofour competitors, we are not tied to a particular product or distributionchannel. We aim to be virtually, not vertically, integrated in order to besuccessful in the rapidly changing business environment of renewable energy.

**OurProducts**

***SolarSaveTM Roofing Tiles***

SolarSaveTM PV RoofingTiles are primarily targeted for residential housing projects, where the use ofslate or ceramic tiles is prevalent. We have developed and are now producing aline of PV tiles that blend seamlessly with the colors and edge profiles of themost commonly used cement tiles. SolarSaveTM Roofing Tiles are waterproof,fire-rated building materials that require no external framing or roofpenetration. They can be safely and easily installed by professional roofingcontractors. SolarSaveTM Tiles have the following features and benefits:

·                  Easilyinstalled using Roof Tile Institute standards

·                  ClassA Fire Rated, Certified to UL 1703 standards

·                  25-yearwarranty to produce 80% power output

·                  Availablein colors that match traditional cement tiles

·                  Edgeprofiles naturally shed water

·                  Modular,expandable system

·                  200pound/foot snow load capacity

·                  125mph wind load rating with clips installed

***SolarSaveTM******Architectural Glass***

Open Energy Corporationalso designs and manufactures custom PV glass laminates to meet the aesthetic,performance and structural requirements of designers and architects. Sizes,shapes and configurations can be built to match virtually any specificationavailable today, allowing for a direct substitution for monolithic, laminatedor insulated glass panels. This product is ideally suited for LEEDcertification on green building projects.

SolarSaveTM ArchitecturalGlass, or “Glass,” offers both shading and electrical power generation, and isgeared towards glass canopies, skylights, atriums, vertical glass curtainwalls, and other architectural applications. It is often desirable to achieve translucencyin PV skylight applications. While a standard PV cell is an opaque 125 mmsquare, our cells can be arranged within clear glass panels to provideappropriate light levels and shading coefficients. A wide variety of colors,thickness, patterns, and shapes can be produced.

Our first majorarchitectural glass project is currently being installed at the CaliforniaAcademy of Sciences Museum in Golden Gate Park, California. The PV glasslaminates for this project were certified to UL 1703 standards using Sunpowercells.

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***SolarSaveTM******Roofing Membranes***

SolarSave® Roofing Membranes encapsulate crystallinesolar cells in composite materials which are laminated under pressure to createa lightweight, waterproof, Class A fire rated, and aesthetically appealingsolar roofing material for flat or low slope commercial, industrial andinstitutional roofing applications. The SolarSaveTM membrane has been ULapproved for use with Duro-last, IB, Fibertite, Sarnafil, Carlisle and Cooleyroofing membranes.

While Open Energy iscurrently developing its next generation commercial product, the Company hastemporarily suspended shipments of its current membrane product due to aproduct corrosion issue. The SolarSaveTM Roofing membrane product is exhibitingrandom corrosion post-installation. The corrosion occurrence and rate ofdevelopment may be exacerbated by heat, humidity, sunlight, and electricalcurrent.

We have engaged BodycoteTesting Laboratories (a worldwide testing agency with multiple facilities inToronto and surrounding areas) to determine the metallurgical and chemicalcomposition of the corrosion as well as conduct a polymer layer analysis, sothat we can: (1) Determine the cause; (2) Implement appropriate changes to themanufacturing and distribution processes to prevent future occurrences; (3)Determine appropriate corrective action if corrosion is detected on a module;(4) Initiate quality assurance procedures to evaluate our product including:work in process laminates in our plant; finished goods on hand in our plant;finished goods on hand in our customers’ warehouses; membranes that have beeninstalled on end user roofs.

As a result of thecorrosion issue, we have recorded a valuation allowance totaling $2.88 millionrelated to the finished goods product in inventory, as well as the cost ofreplacing product under warranty with our customers.

**Manufacturing**

Historically, thelaminates for our SolarSaveTM PV Tiles were manufactured by Sunpower Corporationin their Philippines factory. These laminates were shipped to our Grass Valleyfacility (formerly Connect Renewable Energy) where they were glued intoinjection molded composite frames, and fitted with junction boxes andconnective cables. However, when Sunpower acquired PowerLight, the combinedcompany became our biggest competitor. Furthermore, we realized that we couldnot manufacture our product as efficiently and economically as others. As aresult, in May of 2007 Open Energy signed a letter of intent with Suntech tooutsource our tile product to China. The Companies have agreed on initial termsfor the supply agreement, and are currently in negotiations on a definitivelong term OEM agreement.

SolarSaveTM ArchitecturalPV Glass is specified by architects and designers seeking to incorporate PVdirectly into skylights, glass canopies, or vertical glass curtain walls.Currently, the Company manufactures Architectural PV Glass in both Aurora,Ontario and Grass Valley, CA, which provides us flexibility for short runproduction. The Company is currently in negotiations with Suntech to providehigh volume manufacturing of a standard size architectural glass panel, withthe more specialized design and custom manufacturing being planned for theAurora and/or Grass Valley facilities.

We manufacture SolarSaveTMMembranes in a 9,950 sq. ft. facility in Aurora, Ontario, Canada (formerlySolar Roofing Systems). Open Energy has temporarily suspended shipments of itsmembrane product due to a corrosion issue that we are currently working to resolve.Concurrently, we are working on a combination of product enhancements andincorporating PV cells from alternate manufacturers. We are currently using thehighly skilled work force in this facility to manufacture the residentialroofing tile laminate and architectural glass product.

We are currentlyevaluating alternatives to determine how to optimize capabilities at ourAurora, Ontario, Canada and Grass Valley, California locations. Open Energywill concentrate on its core competencies as a leading edge designer ofinnovative products but will outsource the majority of its high volumemanufacturing in order to remain competitive. No decision or dates have yetbeen established to discontinue operations at any location and both arecurrently components of the Company’s goal of executing on the opportunitiesprovided by our strategic alliance with Eagle Roofing Products.

**Sales and Marketing Strategy**

**MarketSegmentation**

Open Energy divides itsmarketing and sales strategy into two separate, yet complimentary components.The first is product sales of SolarSaveTM Tiles, Membrane and Glass, as well asbalance of system (BOS) components such as inverters and SolarEye monitoringsoftware. The second component is our Open Energy Solar Communities business.The Solar Communities business represents the sale of solar electricity underlong term power purchase agreements (PPAs) where we develop, install, own andoperate systems in new residential multifamily developments. Both product salesand our Solar Communities businesses are aligned through the building productschannel, consistent with the notion of Building Integrated Photovoltaic (BIPV)products, which currently represent 100% of the Company’s product line.

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**ProductSales**

Product sales aresegmented by specific channels within the building products trade. For example,SolarSaveTM Tiles are predominantly sold via Eagle Roofing (Eagle) under amaster distribution agreement. Eagle is the largest manufacturer in the U.S. ofconcrete roofing tiles and has significant market share in the residentialroofing products market throughout the U.S. SolarSaveTM Membrane is solddirectly to large solar integrators and more importantly, cross-sold by majormanufacturers of PVC roofing membranes into the commercial roofing market.Lastly, Glass products are typically sold directly to end-users, includingarchitectural and design firms, or construction contractors.

**OpenEnergy Solar Communities**

The Company has developedan innovative, proprietary strategy geared to builders of new condominium andtown home communities. These developers are under increasing regulatorypressure to increase energy efficiency and incorporate renewable energyalternatives in their properties. Utilizing a traditional project finance modeland conventional legal structures, we plan to provide an opportunity for theinstallation of solar systems at no additional cost to the builder or thehomeowner, and a long term revenue stream from the electricity generated underlong term power purchase agreements.

A member of Open Energy’smanagement team previously successfully developed and financed distributedgeneration projects, with related Power Purchase Agreements or “PPAs”,Engineering, Procurement and Construction or “EPC” contracts and Operation andMaintenance or “O&M” agreements, and has developed a similar framework forproject financing multi-family dwellings. Over the next five years, weanticipate entering into agreements with major residential builders to provideits unique “Open Energy Solar Communities” package.

Open Energy will benefitfrom a development fee for each project, sales of our solar tiles, andparticipation in the long term revenue stream. The builder is anticipated toexperience reduced construction costs, an accelerated permitting process, andincreased sales velocity of new homes. The homeowner will benefit from areduced utility bill and an increase in the resale value of their property atno additional cost. It is a compelling value proposition.

Our goal is to own thebuilding products sales channels for solar and provide superior service to ourcustomers. Products and technologies will evolve, projects will come and go,but the customers remain largely the same. These relationships provide thefoundation necessary to build a long-term viable business. At the same time,they generate projects which fit our criteria for Open Energy Solar Communitieswhich will be financed under long-term power purchase agreements. In this way,Open Energy sells not only products, but power. Our ultimate goal is to becomea rooftop utility, owning a significant number of meters over the next fiveyears.

**MarketCriteria**

We currently focus ourdomestic marketing and sales efforts in territories that meet the followingcriteria:

·                  Strong solar incentives

·                  High retail electricity rates

·                  High electrical consumption

·                  Significantservice volatility

California is thedominant market in the United States for PV, with 73% of the grid-tiedinstallations. New Jersey is the second largest market, although growth thereslowed in the second half of 2006 due to state budget troubles that resulted inuncertainty about the payment mechanism and dampened demand. New York, Arizona,Colorado, Texas, Massachusetts, Nevada, Oregon, Connecticut and Pennsylvaniaall have PV incentive programs in place. A number of new states, includingFlorida, New Mexico, and Washington State, have recently announced favorable PVincentives as well.

**CustomerProfiles**

Open Energy hasidentified a number of potential customers by industry, sector, andapplication. Open Energy is initially focused on high-profile opportunitieswithin correlative industries and with the following sector applicationdemographics:

·                  Building Products Companies

·                  Residential Developers

·                  Architects and Interior Designers

·                  Public Administrators, City Planners

·                  Hotel & Resort Developers

·                  Educational Institutions

·                  GovernmentPurchasing Officers

Current marketopportunities are being realized in the new residential home building market,where solar has recently become a competitive advantage for the sale of newhomes by major national home builders. As an example, companies such as Lennar,Centex, and others are beginning to offer solar rooftops as a standard featurein many California communities.

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**Product Promotion**

SolarSaveTM Tiles,Membranes and Glass are sold on the basis of their features and associatedbenefits. They are lighter, stronger, easier to install and maintain, andaesthetically superior to most PV products available in the market today. Throughits web presence, public relations activities, industry advertising and tradeshow attendance, Open Energy Corporation has established a strong brand withina very competitive market environment. Open Energy and its SolarSaveTM productshave appeared in a number of industrial trade publications, in ads, articles,and product reviews. This publicity generates sales leads, which are enteredinto a data base and circulated to our network of distributors and integrators.

Open Energy has developeda sophisticated web site that includes corporate information and companyprofile, a complete product information section, a list of our distributors andsales relationships, pictures of our installations, as well as investor andpublic relations sections. The Company has invested in Website and SearchEngine Optimization through RenewableEnergyAccess.com, SolarBuzz.com, and linksto numerous industry sites and information sources. Our website address is **www.openenergycorp.com**. Information on suchwebsite is not incorporated into this annual report.

**Research& Development**

A core competency of theCompany is innovative design and development of next generation solar energyproducts and technologies. Under the direction of Tom Wolfe, our chieftechnology officer, we employ a team of mechanical, electrical and softwareengineers in Grass Valley, California who are responsible for this developmenteffort. A number of initiatives are currently under way.

**SolarEye®/****WaterEyeTM Monitoring Systems**

In December 2006, theCompany purchased WaterEye, a privately held California corporation withproprietary software that provides remote, secure, web-enabled, real-timemonitoring of water treatment facilities. We currently license systems to GEWater, Siemens/US Filter, Dow, DuPont and others. WaterEye founder, Tom Wolfe,has recently become our chief technology officer.

It is our intention tomodify this software to provide real time monitoring for future installationsof our SunconeTM CSP product that is in development. Benefits of thisproprietary software are:  1) It enablescustomers to display their system’s performance on their computers or displays;2) It enables Open Energy or our service providers to monitor and maintain ourinstallations; and 3) it will provide data on actual power or waterpurification performance.

**SolarThermTMRoofing Tile**

One of the impediments tothe performance of solar PV systems is degradation of power output with risingtemperature. The reality is that a rooftop in the Southwest can be a very hotplace to be. Open Energy has filed for patents on a product that would captureheat in a thin bladder embedded in the tile architecture, and channel thisthermal energy to the hot water heater or swimming pool.

The potential benefits ofsuch a system are impressive. A water heater can consume up to 40% of theenergy demand of a residential dwelling, so heating water with solar savesmoney. Lowering the temperature of the roof increases the energy production ofthe PV system and cools the home, thereby reducing the energy demands of theair conditioning system.

**PortablePower Products**

The product developmentteam in Aurora has been developing a portable PV array for both military andcivilian market applications. The product is an ultra-light, foldable, rapidlydeployable solar energy generator that can recharge batteries or powercommunications equipment under a variety of in-field conditions. There is alsoa significant market opportunity for this product format with backpackers,recreational vehicle and boat owners, and for disaster relief organizations.

**Suncone®CSP**

In July of 2005, OpenEnergy became the exclusive worldwide licensee of a solar thermal technologyinvented and patented by Dr. Melvin Prueitt, a physicist and research scientistfrom the Los Alamos National Laboratory. SunConeTM CSP (Concentrating Solar Power) utilizesnon-imaging optical cones made of reflective composites to concentrate sunlighton rods at the base of each cone. The cones stay relatively cool, but the fluidis superheated, and then used to produce steam to drive a turbine and produceelectricity. This same system can be coupled with reverse osmosis membranes orflash distillation equipment to produce fresh water from salt or brackishsources.

We believe that SunConeTM CSP has the potential to be less expensive tobuild, operate and maintain than competitive parabolic trough or dish systems.In 2006, we enlisted the services of Hytec Engineering of New Mexico to buildthe first full-scale SunConeTM CSP prototype. Initial testing of thisprototype system was successful. We have now redesigned SunconeTM CSP to achievea more cost effective design and plan to build a commercial prototype.

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**TheCompetition**

We face competition fromdomestic and international companies actively engaged in the manufacturing anddistribution of solar PV systems, as well as from emerging technologies thatmay become viable in the next several years. The best funded and most powerfulof these multi-national corporations produce PV cells as well as standardrack-mounted PV modules. The standard PV modules (framed arrays of PV cells)must be rack-mounted externally to the building, creating penetrations in theroof, generating maintenance problems, and detracting from their visualappearance. The manufacturers of these modules include: Sharp, Kyocera,Suntech, Sanyo, and Mitsubishi Electric, among others. While the standard PVmodules could be considered competition to our products, Open Energy istargeting the building-integrated market. We believe that ourbuilding-integrated solar products have significant advantages over most otherPV product offerings. We also compete with building integrated tilemanufacturers such as: Sharp, Kyocera, BP Solar, GE Solar, SunpowerCorporation/PowerLight, and integrated membrane manufacturers such as SolarIntegrated Technologies.

The market for solarpower products is competitive and continually evolving. We expect to faceincreased competition, which may result in price reductions or reduced margins.The solar power market in general competes with other sources of renewableenergy and conventional power generation. We may also face competition fromsome of our customers who may develop products or technologies internally whichare competitive with our products, or who may enter into strategicrelationships with or acquire existing solar power product providers. OpenEnergy also expects that future competition will include new entrants to thesolar power market offering new technological solutions.

Our current and futurecompetitors may have longer operating histories, greater name recognition andgreater financial, sales and marketing, technical and other resources than us,or may develop technologies superior to ours. Many of Open Energy’s competitorshave well-established relationships with Open Energy’s current and potentialdealers and their customers and have extensive knowledge of our target markets.As a result, our competitors may be able to devote greater resources to theresearch, development, promotion and sale of their products and respond morequickly to evolving industry standards and changing customer requirements thanwe can. Consolidation or strategic alliances among our competitors maystrengthen these advantages and may provide them greater access to customers ornew technologies.

***SolarSaveTM Roofing Tile Competition***

Our primary competitorsfor the SolarSaveTM Tile product are BP Solar, Sharp, Kyocera, GE Solar, andSunpower Corporation/Powerlight, all who have a version of abuilding-integrated tile product. However, we believe that SolarSaveTM  Tiles have a number of important advantages.Because they are made from injection molded composites, they can be made tomatch the colors and edge profiles of the most commonly used cement tiles usedin the domestic market today. Thus, their visual appearance is superior to ourcompetitors. They are a light weight, low voltage, Class A fire rated, ULcertified roofing product that is safer and easier to install than the competition.They can support a snow load up to 200 pounds per square foot, and winds up to120 mph with clips. The SolarSaveTM Tile is a true roof tile, designed to beinstalled by roofers with traditional roofing tools and methods.

***SolarSaveTM Architectural PV Glass Competition***

In the United States, ourprimary competitors for manufacturing solar glass products are Atlantis Energyand Spire Solar. Companies that market to the architectural community could beconsidered competitors from the standpoint that they may market solelycompeting manufacturer’s products; however, they could potentially become OpenEnergy dealers. Internationally, we compete with solar glass manufacturers suchas: GSS Solar (Germany), Schuko (Germany), Solar Nova (Germany), Swiss SustainableSystems (“3S” in Switzerland), and MSK (a subsidiary of Suntech, in Japan). Ourcurrent intention is to outsource production of much of our architectural glassproducts to China per our relationship with Suntech.

***SolarSaveTM Roofing Membrane Competition***

Our primary competitorsfor the SolarSaveTM  membrane product are:Solar Integrated Technologies (SIT) which integrates Uni-solar’s (United SolarOvonic) thin-film technology with a Sarnafil commercial roofing membrane; andNanosolar SolarPlyTM,****a building-integratedCIGS (Copper Indium Gallium Diselenide) thin film product that is integratedwith commercial roofing membranes. The SolarSaveTM roofing membrane product hassignificantly higher energy production per square foot of roof space (i.e.higher efficiency); primarily due to our use of high-efficiency crystalline PVcells rather than thin-film technology. SIT’s product currently generatesapproximately 6 watts per square foot, as compared to a SolarSaveTM SP450 ofapproximately 14 watts per square foot. In addition, the SolarSaveTM membranehas been UL approved for use with Duro-last, IB, Fibertite, Sarnafil, Carlisleand Cooley roofing membranes.

For commercialinstallations, we also compete with a number of companies that manufacturestandard PV modules, as discussed above. In addition, solar integrators and/orinstallers that market commercial solar products could be consideredcompetitors to the extent that they market solely competing manufacturers’products, such as:  Powerlight(Sunpower), Conergy Inc., Dome-Tech Group, Eastwood Energy, GE Energy (asubsidiary of General Electric Corporation), Global Solar Energy, Inc. (asubsidiary of Solon AG), SPG Solar, Inc., and Sun Edison LLC.

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***SunConeTM CSP Competition***

SunConeTM CSP will competewith manufacturers of parabolic trough solar collectors, such as:  EuroTrough, Solargenix Energy,****Solel, and Arizona Public Service Company;with manufacturers of dish sterling engine systems, such as: Stirling EnergySystems and Schlaich Bergermann und Partner (SBP); with manufacturers of solartower systems such as: Luz II and Boeing; and manufacturers of thin-film groundmount systems such as: Uni-Solar, First Solar and others. According to a studyconducted by Sargent & Lundy LLC, trough and tower technology installationcosts are projected to drop from 10 to 14 cents per kWh to 3.5 to 6 cents perkWh in 2020; therefore, we need to develop a product with installation costsbetter than or equal to the competition.

In addition tocentralized solar plants, there is a very large market for distributed CSPtechnologies that can operate reliably for loads ranging from 10 kW to severalmW. The majority of these applications are currently for remote power generationsuch as water pumping and village electrification where there is no utilitygrid. In these applications, diesel generators are the primary currentcompetition to CSP. Of growing interest to a number of utilities are domesticgrid-connected applications in which the system is sited at critical points onthe transmission and distribution (T&D) network, providing value not simplyfrom the energy produced but also in offsetting T&D losses and postponingthe need to upgrade the utility infrastructure to meet load growth. Smallgas-turbine systems will also compete with CSP and other renewable energytechnologies for this market. Key market criteria for distributed power systemsare: reliable operations, minimal service requirements, and low capital,installation and maintenance costs compared to other distributed powergeneration alternatives.

SunconeTM CSP alsocompetes directly with dish stirling engine systems that use dish technology.However, we believe SunconeTM CSP can be used to replace the dish component (theconcentrator) and be used in conjunction with stirling engines. The expectedadvantages of our system over dish systems are: lighter weight, lower capital,installation and maintenance costs, lower cost materials, eliminates the needfor a high-performance selective coating, and less complex tracking systems.Dish stirling technologies require much less land area than thin-film or troughsystems, which will reduce the land acquisition costs and make them moredesirable for smaller distributed generation systems. We believe that acombined Suncone/Stirling product has the potential to be extremely competitiveas compared to the install cost per watt of a fixed thin-film installation.

**IntellectualProperty**

We rely on a combinationof patent, copyright, trade secret, trademark and contractual protection toestablish and protect our intellectual property. We have filed trademarkregistration applications in the U.S. for SolarSaveTM and for other trademarks.We require our customers to enter into confidentiality and nondisclosureagreements before we disclose any sensitive aspects of our solar technologiesor strategic plans, and we typically enter into proprietary informationagreements with employees and consultants. Despite our efforts to protect ourproprietary rights, unauthorized parties may attempt to copy or otherwiseobtain and use our technology. It is difficult to monitor unauthorized use oftechnology, particularly in foreign countries where the laws may not protectour proprietary rights as fully as laws in the United States. In addition, ourcompetitors may independently develop products similar to ours. Our precautionsmay not prevent misappropriation or infringement of our intellectual property.

As of August 2007, in theUnited States we had two issued patents, three U.S. patent applicationspending, and one foreign patent application pending. Pursuant to an agreementwith Dr. Melvin Prueitt, we are the exclusive licensee of a provisional U.S.Patent application for the first version of Suncone that consisted of aninexpensive lightweight reflected film that is formed into one or more conesthat concentrate the sun’s rays to the base, and the collected energy can beused to heat a fluid. We have redesigned SunconeTM CSP to achieve a costeffective design with a more wind-resistant cone and have submitted our ownpatent application. Our issued patents will begin to expire in 2013. We intendto continue assessing appropriate opportunities for patent protection of thoseaspects of our technology that we believe provide significant competitiveadvantages to us, and for licensing opportunities of new technologies relevantto our business. WaterEye has three U.S. patents issued and three pending. Theycover the general method of remote monitoring as applied to advanced separationprocesses, water and wastewater treatment, including local data collection,internet interface, and database storage.

Although we apply forpatents to protect our technology, our revenue is not dependent on any onepatent we own, and we currently rely on trade secret rights to protect ourproprietary information and know-how. We also employ proprietary processes andcustomized equipment in manufacturing facilities. We do not know if our currentor future patent applications will result in patents being issued with thescope of the claims we seek, if at all, or whether any patents we may receivewill be challenged, invalidated or declared unenforceable.

**EnvironmentalRegulations**

We are subject to avariety of foreign, federal, state and local governmental laws and regulationsrelated to the purchase, storage, use and disposal of hazardous materials. Ifwe fail to comply with present or future environmental laws and regulations, wecould be subject to fines, suspension of production or a cessation ofoperations. In addition, under some foreign, federal, state and local statutesand regulations, a governmental agency may seek recovery and response costsfrom operators of property where releases of hazardous substances have occurredor are ongoing, even if the operator was not responsible for the release orotherwise was not at fault.

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We believe that we haveall environmental permits necessary to conduct our business. We believe that wehave properly handled our hazardous materials and wastes and have appropriatelyremediated any contamination at any of our premises. We are not aware of anypending or threatened environmental investigation, proceeding or action byforeign, federal, state or local agencies, or third parties involving ourcurrent facilities. Any failure by us to control the use of or to restrictadequately the discharge of, hazardous substances could subject us tosubstantial financial liabilities, operational interruptions and adversepublicity, any of which could materially and adversely affect our business,results of operations and financial condition.

**Employees**

Our current full-timeheadcount is 70 employees. Of that number, 8 are production-related in GrassValley, CA; 31 are production-related in Aurora, Ontario, Canada; 20 arecorporate, marketing, and administrative; 5 are product development; and 6 aresales. At the point in time that we decide to shut down or scale backproduction at any of our manufacturing facilities (due to our strategy tooutsource the majority of our high volume manufacturing), we will have acorresponding reduction in production-related personnel. In the next 12 months,we expect to add staff primarily in sales, technical support for sales, productdevelopment, and accounting. Our agreement with Eagle Roofing products requiresus to train their roofers on our tile product installation, process the solarrebate applications, and assist with sales quotations, among other items. Theseefforts will require significant additional personnel.

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**RISKSRELATED TO OUR BUSINESS**

*Investorsshould carefully consider the risks described below before deciding whether toinvest in our common stock. The risks described below are not the only ones weface. Additional risks not presently known to us or that we currently believeare immaterial may also impair our business operations and financial results.If any of the following risks actually occurs, our business, financialcondition or results of operations could be adversely affected. In such case,the trading price of our common stock could decline and you could lose all orpart of your investment. Our filings with the Securities and ExchangeCommission also contain forward-looking statements that involve risks anduncertainties. Our actual results could differ materially from thoseanticipated in these forward-looking statements as a result of certain factors,including the risks we face described below. See*“*Forward-Looking Statements.*”

***The execution of our business plan will require substantialfunds. If we are unable to acquire additional financing, we may be forced todiscontinue our operations.***

We will requiresubstantial additional funds to execute our revised business plan in additionto the bridge funds we recently closed in June and August of 2007. We plan toraise additional debt and/or equity financing to pay the 6/15/07 Note and the8/31/07 Note and fund continued operations. 

If we are unable to raisesubstantial funds in an upcoming financing, we may be unable to pay our debtsas they mature and we may be forced to discontinue our operations and liquidatethe company. In such event, holders of our common stock would likely lose allor substantially all of their investment in our shares. 

***Depending on our method of raising funds, now and in the future,your shares may be diluted***.

If we raise additionalfunds by selling additional shares of our capital stock, or securitiesconvertible into or exercisable for shares of our capital stock, the ownershipinterest of our stockholders may be diluted.

***New home construction in the U.S. is currently slowing, anddoing so fairly dramatically in several areas where the Company’s products areoffered. This building slow-down could negatively impact the Company’s sales.***

California representsover 70% of all PV installations in North America, and new home construction inCalifornia has slowed significantly. Arizona, Nevada, New Mexico and Floridaare also significant potential markets for the Company’s PV products and theytoo are experiencing down-turns in new home construction. If the residentialconstruction industry experiences an increase in unsold inventory, the newhousing market is likely to slow. This could affect solar installations,particularly for the Company’s building integrated PV roofing tiles.

***We have a history of losses and anticipate future losses andthe report from our independent registered public accounting firm includes agoing concern explanatory paragraph.***

We have incurredsignificant losses from operations. As shown in our consolidated financialstatements, for the fiscal year ended May 31, 2007, we have incurred a netloss of approximately $40 million. We are unsure if or when we will becomeprofitable. Furthermore, the report from our independent registered publicaccounting firm dated September 7, 2007 on our financial statements as of andfor the year ended May 31, 2007 included a going-concern explanatory paragraphin which they state that there is substantial doubt about the Company’s abilityto continue as a going-concern.

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***Our stock price is highly volatile, and the value of aninvestment in our common stock may be subject to sudden decreases.***

The trading price for ourcommon stock has been, and is expected to continue to be, volatile. During the52-week period ended August 27, 2007, the high and low closing prices of ashare of our common stock were $1.00 and $0.30, respectively. The price atwhich our common stock trades depends upon a number of factors, including themarket’s perception of the prospects for companies in our industry and generalmarket and economic conditions which are beyond our control. Factors such asfluctuations in our financial and operating results, changes in governmentregulations affecting product or service approvals or other aspects of ourbusiness, announcements of technological innovations or new commercial productsby our competitors, developments concerning our intellectual property rights,significant collaborations or strategic alliances and publicity regardingactual or potential performance of products under development by us or ourcompetitors could also cause the market price of our common stock to fluctuatesubstantially. Moreover, our common stock may be subject to greater pricevolatility than the stock market as a whole.

***Evaluating our business and future prospects may bedifficult due to the rapidly changing technological and market landscape.***

There is limitedhistorical information available about our company upon which you can base yourevaluation of our business and prospects. We first shipped renewable energycommercial products in December 2005. Relative to the entire solar industry, wehave shipped only a very small number of products.

The market we areaddressing is rapidly evolving and is experiencing technological advances andnew market entrants. Our future success will require us to outsource ourmanufacturing, and there is no guarantee we can do this at a price that iscompetitive with our competition, or that we can gain access to new, more costeffective solar technologies that may be developed by our competitors.Moreover, the SunConeTM CSP system is only in the early stages of developmentand we have limited experience upon which to predict whether it can besuccessfully commercialized.

***We face intense competition from other companies producingsolar power and other energy generation products. If we fail to competeeffectively, we may be unable to increase our market share and sales.***

The solar power market isintensely competitive and rapidly evolving. Our competitors are bettercapitalized, have established market positions more prominent than ours, and ifwe fail to attract and retain customers and establish a successful distributionnetwork for our solar products, we may be unable to achieve adequate sales andmarket share. There are a number of major multi-national corporations thatproduce solar power products, including BP Solar, Kyocera, Sharp, GE,Mitsubishi, Solar World AG and Sanyo. We also expect that future competitionwill include new entrants to the solar power market offering new technologicalsolutions. Further, many of our competitors are developing and are currentlyproducing products based on new solar power technologies that may have costssimilar to, or lower than, our projected costs.

Most of our competitorsare substantially larger than we are, have longer operating histories, and havesubstantially greater financial, technical, manufacturing and other resourcesthan we do. Our competitors’ greater sizes in some cases provides them withcompetitive advantages with respect to manufacturing costs due to their abilityto allocate fixed costs across a greater volume of production and purchase rawmaterials at lower prices. Many also have far greater name recognition, anestablished distribution network and an installed base of customers. Inaddition, many of our competitors have well-established relationships withcurrent and potential resellers, which have extensive knowledge of our targetmarkets. As a result, our competitors will be able to devote greater resourcesto research, development, promotion and sale of their products and may be ableto respond more quickly to evolving industry standards and changing customerrequirements than we can.

***There is a shortage of semi-conductor grade silicon and thePV cells made from this material, upon which our products depend, that mayconstrain our revenue growth. Additionally, we may not have sufficientfinancial resources to take advantage of supply opportunities as they mayarise.***

Silicon is an essentialraw material in the production of PV cells. There is currently an industry-wideshortage of silicon ingots, which has resulted in significant price increases.Increases in silicon prices may impact our manufacturing costs in the future.As demand for PV cells has increased, a number of manufacturers have announcedplans to add additional capacity. As this manufacturing capacity becomesoperational, it will increase the demand for silicon. Polysilicon is also usedin the semiconductor industry generally, and any increase in demand from thatsector will compound the shortage. The production of silicon is capitalintensive and adding additional capacity requires significant lead time. We donot believe that the supply imbalance will be remedied in the near term, and weexpect that silicon demand will continue to outstrip supply for the foreseeablefuture.

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***Our dependence on a limited number of third party suppliersfor raw materials and OEM vendors could prevent us from delivering our productsto our customers within required timeframes, which could result in ordercancellations and substantial harm to our business.***

We manufacture ourproducts using materials and components procured from a limited number ofthird-party suppliers and OEM vendors. In the past, we purchased all of our PVcells and tile laminates from a single vendor. This vendor has discontinuedsupplying us with cells and tile laminates. While we have executed a letter ofintent with Suntech, we have not executed a definitive agreement with Suntechfor the supply of cells, laminates or glass products. If we are unable toobtain supply from other cell manufacturers or OEM vendors, we may be unable tomanufacture our products or our products may be available only at a higher costor after a long delay. This could prevent us from delivering our products toour customers within required timeframes, and we may experience ordercancellations and our business may fail.

We currently do not havecontracts with vendors sufficient to meet our current sales projections, and wemay not be able to procure sufficient quantities of the raw materials and OEMcomponents necessary to manufacture our products on acceptable commercial termsor at all. To the extent the processes that our vendors use to manufacturematerials or OEM components are proprietary, we may be unable to obtaincomparable materials or OEM components from alternative vendors. The failure ofa vendor to supply materials or OEM components in a timely manner, or to supplymaterials or OEM components that meet our quality, quantity and costrequirements could impair our ability to manufacture our products or increasetheir costs, particularly if we are unable to obtain substitute sources ofthese materials or OEM components on a timely basis or on terms acceptable tous. In order to obtain required supplies, we may need to make large inventorypurchases on short notice, and prior to having purchase orders or deposits fromour customers. We may not have sufficient financial resources to make thesepurchases, which may exacerbate supply shortages.

***Our products may not gain market acceptance, which wouldprevent us from achieving sales and market share.***

The development of asuccessful market for our products may be adversely affected by a number offactors, some of which are beyond our control, including:

·                  ourfailure to produce products that compete favorably against other solar powerproducts on the basis of cost, quality and performance;

·                  ourfailure to produce products that compete favorably against conventional energysources and alternative distributed-generation technologies, such as wind,biomass and solar thermal, on the basis of cost, quality and performance;

·                  whethercustomers will accept our new designs under development; and

·                  ourfailure to develop and maintain successful relationships with distributors,systems integrators and other resellers, as well as strategic partners.

If our products fail togain market acceptance, we will be unable to achieve sales and market share.

***Technological changes in the solar power industry couldrender our products uncompetitive or obsolete, which could prevent us fromachieving market share and sales.***

Our failure to refine ourtechnology and to develop and introduce new products could cause our productsto become uncompetitive or obsolete, which could prevent us from achievingmarket share and sales. The solar power industry is rapidly evolving and highlycompetitive. We will need to invest significant financial resources in researchand development to keep pace with technological advances in the solar powerindustry and to compete in the future and we may be unable to secure suchfinancing. We believe that a variety of competing solar power technologies maybe under development by other companies that could result in lowermanufacturing costs or higher product performance than those expected for ourproducts. Our development efforts may be rendered obsolete by the technologicaladvances of others, and other technologies may prove more advantageous for thecommercialization of solar power products.

***The reduction or elimination of government economicincentives could prevent us from achieving sales and market share.***

We believe that thenear-term growth of the market for “on-grid” applications, where solar power isused to supplement a customer’s electricity purchased from the utility network,depends in large part on the availability and size of federal and stategovernment economic incentives. The reduction or elimination of governmenteconomic incentives may adversely affect the growth of this market or result inincreased price competition, which could prevent us from achieving sales andmarket share. In the United States, the 30% federal tax credit is currentlyscheduled to expire on December 31, 2008. If Congress does not extend the taxcredit, the Company and the industry in general will be severely and negativelyaffected.

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Today, the cost of solarpower exceeds the cost of power furnished by the electric utility grid in manylocations. As a result, federal, state and local government bodies in manycountries, most notably Germany and Japan, have provided incentives in the formof feed-in tariffs, cash rebates, tax credits, permitting preferences and otherincentives to promote the use of solar energy and to reduce dependency onfossil fuels. These government economic incentives could be reduced oreliminated altogether, which would significantly harm our business.

***Existing regulations and changes to such regulations maypresent technical, regulatory and economic barriers to the purchase and use ofsolar power products, which may significantly reduce demand for our products.***

The traditional energyand electrical utility industries are heavily regulated by foreign, federal,state and local governments. These regulations and policies often relate toelectricity pricing and technical interconnection of customer-owned powergeneration systems. In the United States and in a number of other countries,these regulations and policies are being modified and may continue to bemodified. Customer purchases of, or further investment in the research anddevelopment of, alternative energy sources, including solar power technology,could be deterred by these regulations and policies, which could result in asignificant reduction in the potential demand for our solar power products. Forexample, utility companies commonly charge fees to larger, industrial customersfor disconnecting from the electric grid or for having the capacity to usepower from the electric grid for back-up purposes. These fees could increase thecost to our customers of using our solar power products and make them lessdesirable, which would harm our business, prospects, results of operations andfinancial condition.

We anticipate that oursolar power products and their installation will be subject to oversight andregulation in accordance with national and local ordinances relating tobuilding codes, health and safety standards, environmental regulations, utilityinterconnection and metering and related matters. There is also a burden inhaving to track the requirements of individual states and design equipment tocomply with the varying standards. Any new government regulations or utilitypolicies pertaining to our solar power products may result in significantadditional expenses to us and our resellers and their customers and, as aresult, could cause a significant reduction in demand for our solar powerproducts.

***Problems with product quality or product performance maycause us to incur warranty expenses and prevent us from achieving sales andmarket share, particularly if we introduce new technologies.***

As is consistent withstandard practice in our industry, the duration of our product warranties islengthy. Our current roofing tile product warranty is for 25 years, and ourroofing membrane product warranty is for 20 years. Due to the long warrantyperiod, we bear the risk of extensive warranty claims long after we haveshipped product and recognized revenues. Our products have not been installedlong enough to allow us to evaluate their performance over a 20 to 25-yearperiod. We experienced a warranty claim with our first tile installation.Although we believe the initial problem has been resolved, other warrantyissues could develop. We also experienced warranty claims with some of our initialmembrane installations, causing us to temporarily discontinue productshipments. There is no assurance that the membrane product warranty issues canbe resolved. Failure to resolve these product warranty issues could force us topermanently discontinue product shipments, which would materially andnegatively affect the Company’s revenues. Please see “Description of Business –Our Products – SolarSave Roofing Membranes.”

***If solar power technology is not suitable for widespreadadoption or sufficient demand for solar power products does not develop ortakes longer to develop than we anticipate, we would be unable to achieve salesand market share.***

The market for solarpower products is emerging and rapidly evolving, and its future success isuncertain. If solar power technology proves unsuitable for widespreadcommercial deployment or if demand for solar power products fails to developsufficiently, we would be unable to achieve sales and market share. Inaddition, demand for solar power products in the markets and geographic regionswe target may not develop or may develop more slowly than we anticipate. Manyfactors will influence the widespread adoption of solar power technology anddemand for solar power products, including:

·                  cost-effectivenessof solar technologies as compared with conventional and competitive alternativeenergy technologies;

·                  performanceand reliability of solar products as compared with conventional and non-solaralternative energy products;

·                  successof alternative distributed generation technologies such as hydrogen fuel cells,wind turbines, bio-diesel generators and solar thermal technologies;

·                  publicconcern regarding energy security, the potential risks associated with globalwarming, the environmental and social impacts of fossil fuel extraction anduse;

·                  fluctuationsin economic and market conditions that impact the viability of conventional andcompetitive alternative energy sources;

·                  increasesor decreases in the prices of oil, coal and natural gas;

·                  capitalexpenditures by customers, which tend to decrease when the domestic or foreigneconomies slow;

·                  continuedderegulation of the electric power industry and broader energy industry; and

·                  availability ofgovernment subsidies and incentives.

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

Our ability to competeeffectively against other solar power technologies will depend, in part, on ourability to protect our current and future proprietary technology, productdesigns and manufacturing processes through a combination of patent, copyright,trademark, trade secret and unfair competition laws. We may not be able toprotect our intellectual property and may need to defend our products and servicesagainst infringement claims, either of which could result in the loss of ourcompetitive advantage in the solar power market and materially harm ourbusiness and profitability. We face the following risks in protecting ourintellectual property and in developing, manufacturing, marketing and sellingour products and services:

·                  we cannot be certain that our pendingpatent applications will result in issued patents or that the claims allowedare or will be sufficiently broad to protect our technology or processes;

·                  given the costs of obtaining patentprotection, we may choose not to protect certain innovations that later turnout to be important;

·                  third parties may design around ourpatented technologies or seek to challenge or invalidate our intellectualproperty rights and there is no assurance that our intellectual property rightswill deter infringement or misappropriation of our intellectual property;

·                  we may incur significant costs anddiversion of management resources in prosecuting or defending intellectualproperty infringement suits;

·                  we cannot be certain that our pendingpatent applications will result in issued patents or that the claims allowedare or will be sufficiently broad to protect our technology or processes;

·                  we may not be successful inprosecuting or defending intellectual property infringement suits and, as aresult, may need to seek to obtain a license of the third party’s intellectualproperty rights, which may not be available to us, whether on reasonable termsor at all; and

·                  thecontractual provisions we rely on to protect our trade secrets and proprietaryinformation, such as our confidentiality and non-disclosure agreements with ouremployees, consultants and other third parties, may be breached and our tradesecrets and proprietary information may be disclosed to competitors, strategicpartners and the public.

***Failure to adequately protect our trademark rights couldcause us to lose market share and cause our sales to decline.***

We sell our solarroofing, architectural glass and balance-of-system products under our brandnames SolarSaveTM and our solar concentrating technology underthe brand name SunConeTM CSP.We are also branding our company with the name Open EnergyTM. We expect to expend significantresources promoting these brand names, and we have applied for registeredtrademarks in the United States for SunConeTM CSP, the OE Logo, Open EnergyTM and other trademarks. However, registration ofour brand name trademarks could be denied, and if granted, such registrationwill not necessarily deter or prevent unauthorized use by others. If othercompanies, including our competitors, use our brand names, consumers may notrecognize us as the source of our products. This would reduce the value ofgoodwill associated with our brand names. This consumer confusion and theresulting reduction in goodwill could cause us to lose market share and causeour sales to decline.

***The continuously adjustable conversion price feature of ourDebentures could require us to issue a large number of shares, which wouldcause dilution to our existing stockholders.***

We may be obligated toissue an extremely large number of shares upon the conversion of the 5% and 10%Secured Convertible Debentures we have issued (or have agreed to issue) toCornell Capital Partners because the conversion price is to be the lower of (a)$0.50 or (b) 95% of the lowest volume weighted average price (VWAP) of ourcommon stock during the 30 trading days immediately preceding the conversiondate, provided that such conversion price cannot be lower than $0.05. Hence,the number of shares of our common stock issuable upon conversion of thesedebentures will increase if the market price of our stock declines, which willcause dilution to our existing stockholders. The following is an example of thenumber of shares of our common stock that would be issuable upon conversion ofthe debentures, including accrued interest and the debentures converted, basedon prices that are 25%, 50% and 75% below the August 27, 2007 closing price ofour stock of $0.68:
| % Below August 27,  2007 | ** ** | **Conversion Price Per   Share** | ** ** | **Number of   Shares** | ** ** | **% of Outstanding Stock   After** | ** ** |
|------------------------------------|------------|-------------------------------------------------|------------|----------------------------------|------------|--------------------------------------------------------|------------|
| **closing price**             | ** ** | **(95% of closing price)**       | ** ** | **Issuable**                     | ** ** | **Conversion (1)**                                | ** ** |
| 25%                                |       | $                                               | 0.4845     |                             | 15,165,249 |                                                   | 11.07%     |   |
| 50%                                |       | $                                               | 0.3230     |                             | 22,747,873 |                                                   | 15.73%     |   |
| 75%                                |       | $                                               | 0.1615     |                             | 45,495,746 |                                                   | 27.18%     |   |

 

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(1)    Assumes 121,878,623 shares of common stockoutstanding immediately prior to conversion and does not include other sharesthat may be held by Cornell in addition to the shares here assumed to beconverted.

As illustrated, thenumber of shares of common stock issuable upon conversion of our securedconvertible debentures will increase if the market price of our stock declines,which will cause greater dilution to our current stockholders.

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***The continuously adjustable conversion price feature of ourDebentures may encourage investors to make short sales of our common stock,which could depress the price of our common stock.***

The Debentures areconvertible into shares of our common stock at a 5% discount to the lowestvolume weighted average price of our common stock during the 30 trading daysimmediately preceding the conversion date, provided that the conversion pricecannot be lower than $0.05. The significant downward pressure on the price ofthe common stock as Cornell converts and sells material amounts of common stockcould encourage short sales by investors. This could place further downwardpressure on the price of the common stock, which in turn would lead to furtherdilution. In addition, not only the sale of shares issued upon conversion orexercise of debentures or warrants, but also the mere perception that thesesales could occur, may adversely affect the market price of the common stock.

***There are a large number of shares underlying ourconvertible debentures and warrants that may be available for future sale. Ourexisting stockholders will experience immediate and substantial dilutionresulting from the issuance of these shares and the sale of these shares may depressthe future market price of our common stock.***

As of August 27, 2007, wehad 121,878,623 shares of common stock issued and outstanding; we haveconvertible debentures outstanding, including accrued interest, convertibleinto 16,217,414 shares of common stock; and warrants outstanding for up to26,837,699 shares of common stock. The number of shares of common stockissuable upon conversion of the convertible debentures or upon the exercise ofwarrants may increase if the market price of our stock declines, or if we issueshares of common stock or securities convertible into common stock at aneffective price per share less than the conversion prices of the convertibledebentures or the exercise prices of the warrants, as the case may be. See “Management’sDiscussion and Analysis - Liquidity and Capital Resources - Financings.”

***Cornell has a general security interest in our assets andthe assets of our subsidiaries. If we were to default under the terms of thesecured convertible debentures issued to Cornell, Cornell would have the rightto foreclose on these assets. We have had defaults in the past, which requiredwaivers from Cornell.***

We entered into asecurities purchase agreement with Cornell pursuant to which we agreed to issueand sell to Cornell 5% and 10% Debentures and warrants, subject to adjustment.The debentures are collateralized by a general security interest in all of ourassets. If we were to default under the terms and conditions of the debenturesor related security agreements with Cornell, Cornell would have the right toaccelerate any indebtedness outstanding and foreclose on our assets and theassets of our subsidiaries in order to satisfy our indebtedness. Such aforeclosure could have a material adverse effect on our business, liquidity,results of operations and financial position. We have had defaults in the pastpursuant to the Cornell security agreements, which has required us to seekwaivers of such defaults from Cornell. Cornell is not required to waive suchdefaults and may not agree to do so in the future if we experience additionaldefaults.

***Our failure to withhold for or pay federal and stateemployment and income taxes associated with the vesting or issuance of sharesof restricted stock granted to our employees may result in significantliabilities for which we may not have sufficient cash to satisfy.***

During the fiscal yearended May 31, 2007, we did not withhold for or pay federal or state employmentor income taxes associated with the vesting dates for restricted stock set forthin employment agreements for three executive officers, or associated with thegrants of shares to two of these executive officers during their employmentperiods for consulting and director services. We also did not withhold or payemployment or income taxes for common stock issued to a non-executive employeeduring the fiscal year ended May 31, 2007.

The failure to withholdfor or pay these taxes has resulted in an increase in other accrued liabilitiesof $2,417,000 associated with the employees’ and employer’s combined requiredwithholding, taxes and penalties, with the employees’ portion being anobligation of our company to the extent not satisfied by the employees. We haverecorded corresponding amounts due from related parties of $1,993,000 for theemployees’ obligations.

As of June 30, 2007 (thelast vesting date set forth in the contracts which has occurred to the date ofthis report), to the extent the vesting dates are deemed to be valid andnon-rescindable, the total amounts due associated with the employees’ andemployer’s combined portion of the required withholding is estimated to be$2,417,000. We do not presently believe any further penalties would accrueafter May 31, 2006, although interest will continue to accrue until the amountsdue are paid.

The employees haveinformed us that they intend to satisfy their contractual obligations toprovide funds for our required payroll tax payments through sales of theunderlying securities, once they may do so in accordance with applicablesecurities laws. The shares of stock subject to all of these awards other thanthe consultant grants, which have been previously registered, were registeredfor the first time on the October 30, 2006 registration statement. Followingregistration or the availability of an exemption from registration, marketconditions may limit the number of shares that may be sold and the proceeds tothe employees from such sales. We may be obligated to pay such tax liabilitiesbefore the employees have been able to sell their shares, and the sales pricesthe employees receive may be less than their tax liability.

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To the extent that theseemployees are unable to satisfy their obligations to provide funds for ourrequired payroll tax payments through sales of the underlying securities, wewill be required to use our cash to satisfy these obligations, which couldrequire us to raise additional funds or curtail operations sooner thananticipated.

Our obligation towithhold for and pay federal state employment and income taxes associated withthese restricted shares granted to employees is ongoing with each new vestingor issuance date, and the level of tax obligation would be significant if anyof the vesting or issuance schedules were to accelerate in accordance with theterms of the employment agreements. Our company could therefore incursignificant additional liabilities for which we may not have sufficient cash tosatisfy, requiring us to raise additional funds or curtail or cease operations.

***Nevada law may have the effect of deterring hostiletakeovers or delaying changes in control of our management, which could depressthe market price of our common stock.***

We will become subject toSections 78.411 and 78.444 of the Nevada General Corporation Law (the “NGCL”)if we ever have 200 or more stockholders of record. Such statutes would preventus from engaging in any “business combination” (as such term is defined inSection 78.416 of the NGCL, described in “Description of Capital Stock” herein)with any interested stockholder for a period of three years following the datethat the stockholder became an interested stockholder unless:

(1)          prior to that date, ourboard of directors approved either the business combination or the transactionthat resulted in the stockholder becoming an interested stockholder;

(2)          upon consummation of thetransaction that resulted in the stockholder becoming an interestedstockholder, the interested stockholder owned at least 85% of the voting stockof the corporation outstanding at the time the transaction commenced, excludingthose shares owned by persons who are directors and also officers, and byemployee stock plans in which shares held subject to the plan will be tenderedin a tender or exchange offer; or

(3)          on or subsequent to thatdate, the business combination is approved by our board of directors and isauthorized at an annual or special meeting of stockholders, and not by writtenconsent, by the affirmative vote of at least two-thirds of the outstandingvoting stock not owned by the interested stockholder.

***Our success depends on our ability to retain our keypersonnel.***

Our success is dependentupon the efforts of key members of our management, including our president andchief executive officer, David Saltman, our chief operating officer, DavidField, and our chief financial officer, Aidan Shields. The loss of thesepersons, or other key employees, could have a material adverse effect on us.Our future success is likely to depend substantially on our continued abilityto attract and retain highly qualified personnel. The competition for suchpersonnel is intense, and our inability to attract and retain such personnelcould have a material adverse effect on us. We do not maintain life insuranceon any of our personnel.

***Our growth may not be manageable and our business couldsuffer as a result.***

Even if we are successfulin obtaining new business, failure to manage the growth could adversely affectour operations. We may experience extended periods of very rapid growth, whichcould place a significant strain on our management, operating, financial andother resources. Our future performance will depend in part on our ability tomanage growth effectively. We must develop management information systems,including operating, financial, and accounting systems, improve projectmanagement systems and expand, train, and manage employees to keep pace withgrowth. Our inability to manage growth effectively could negatively affectresults of operations and the ability to meet obligations as they come due.

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***We may not address successfully the problems encountered inconnection with any recent and potential future acquisitions.***

In March and April, 2006,we completed the acquisitions of Solar Roofing Systems, Inc. and ConnectRenewable Energy, Inc. In December of 2006 we acquired WaterEye. In addition,we expect to consider future opportunities to acquire or make investments inother technologies, products and businesses that could enhance ourcapabilities, complement our products, or expand the breadth of our markets orcustomer base. We have limited experience in acquiring other businesses andtechnologies. Potential and completed acquisitions and strategic investmentsinvolve numerous risks, including:

·            problemsassimilating the purchased technologies, products or business operations;

·             problemsmaintaining uniform standards, procedures, controls and policies;

·             unanticipatedcosts associated with the acquisition;

·             diversionof management’s attention from our core business;

·             adverseeffects on existing business relationships with suppliers and customers;

·             risksassociated with entering new markets in which we have no or limited priorexperience;

·             potentialloss of key employees of acquired businesses; and

·             increasedlegal and accounting costs as a result of the newly adopted rules andregulations related to the Sarbanes-Oxley Act of 2002.

***We have not paid dividends on our common stock in the pastand do not anticipate paying dividends on our common stock in the foreseeablefuture.***

We have not paid commonstock dividends since our inception and do not anticipate paying dividends inthe foreseeable future. Our current business plan provides for the reinvestmentof earnings in an effort to complete development of our technologies andproducts, with the goal of increasing sales and long-term profitability andvalue. In addition, our Security Agreement with Cornell currently restricts,and any other credit or borrowing arrangements that we may enter into mayrestrict or limit, our ability to pay common stock dividends to our stockholders.

***We are subject to new corporate governance and internalcontrol reporting requirements, and our costs related to compliance with, orour failure to comply with existing and future requirements, could adverselyaffect our business.***

We face new corporategovernance requirements under the Sarbanes-Oxley Act of 2002, as well as newrules and regulations subsequently adopted by the SEC and the Public CompanyAccounting Oversight Board. These laws, rules and regulations continue toevolve and may become increasingly stringent in the future. In particular,under rules adopted by the SEC, we will be required to include management’sreport on internal controls as part of our annual report for the fiscal yearending May 31, 2008 pursuant to Section 404 of the Sarbanes-Oxley Act.Furthermore, under the proposed rules an attestation report on our internalcontrols from our independent registered public accounting firm will berequired as part of our annual report for the fiscal year ending May 31, 2009.We are in the process of evaluating our control structure to help ensure thatwe will be able to comply with Section 404 of the Sarbanes-Oxley Act. Thefinancial cost of compliance with these laws, rules and regulations is expectedto be substantial. We cannot assure you that we will be able to fully complywith these laws, rules and regulations that address corporate governance,internal control reporting and similar matters. Failure to comply with theselaws, rules and regulations could materially adversely affect our reputation,financial condition and the value of our securities.

***Because our common stock is subject to the******SEC’s penny stock rules, broker-dealers mayexperience difficulty in completing customer transactions, and trading activityin our securities may be adversely affected.***

Transactions in ourcommon stock are currently subject to the “penny stock” rules promulgated underthe Securities Exchange Act of 1934. Under these rules, broker-dealers whorecommend our securities to persons other than institutional accreditedinvestors must:

·                                     makea special written suitability determination for the purchaser;

·                                     receivethe purchaser’s written agreement to a transaction prior to sale;

·                                     providethe purchaser with risk disclosure documents which identify certain risksassociated with investing in “penny stocks” and which describe the market forthese “penny stocks” as well as a purchaser’s legal remedies; and

·                                     obtaina signed and dated acknowledgment from the purchaser demonstrating that thepurchaser has actually received the required risk disclosure document before atransaction in a “penny stock” can be completed.

As a result of theserules, broker-dealers may find it difficult to effect customer transactions andtrading activity in our securities may be adversely affected. As a result, themarket price of our securities may be depressed, and you may find it moredifficult to sell our securities.

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**ITEM2. DESCRIPTION OF PROPERTY**

We lease threemanufacturing facilities: a 9,950 square foot facility and a 30,000 square footfacility in Aurora, Ontario (outside of Toronto), and an 8,000 square footfacility in Grass Valley, California. We also lease facilities in Solana Beach,California totaling 2,800 square feet for our corporate headquarters, as wellas a 2,500 square foot research and development facility in Grass Valley,California. Additionally, we lease 2,400 square feet related to warehouse spacein Grass Valley for tile and glass related inventory. We consider thesefacilities adequate to meet our current needs. See “Management’s Discussion andAnalysis - Liquidity and Capital Resources - Significant Plant and EquipmentExpenditures.”

**ITEM3. LEGAL PROCEEDINGS**

Pursuant to anacquisition of certain assets and liabilities from Connect by Computer LLC(CBC), an entity wholly-owned by Ronald Gangemi, CRE assumed CBC’s and Mr.Gangemi’s liability under a lawsuit filed by McDonough, Holland & Allen PC onJuly 15, 2005 in the Superior Court for the County of Sacramento, California(Action No. 05AS03127). The Complaint alleges that Mr. Gangemi owes McDonough,Holland & Allen PC unpaid legal fees in the principal sum of $112,000,together with interest thereon from December 31, 2003. On January 11, 2006, theSuperior Court for the County of Sacramento moved the claim to arbitration. Webelieve that we have valid defenses against this claim and plan to defendagainst it.

***Lawsuit -Mitchell Organization LTD***

In March 2006, theCompany was first served with process regarding a civil action commenced onDecember 15, 2005, by Mitchell Organization Ltd. and Brian Wilkinson againstthe Company in Canada in the Court of Queen’s Bench of Alberta, JudicialDistrict of Calgary (Action No. 0501-17623). The Statement of Claim allegedthat the Company entered into an agreement pursuant to which the Company agreedto issue 250,000 shares of its stock to Mr. Wilkinson in exchange for hisproviding consulting services. As relief, the claim sought the issuance of250,000 shares.

In May 2006, legalproceedings between Open Energy Corporation and the Mitchell Organization et alwere settled. To resolve all differences without admission of liability, theCompany agreed to pay 100,000 Canadian Dollars and issue 75,000 shares of itsrestricted stock. A contingent liability reflecting the terms of the settlementwas accrued in May 2006. The settlement was signed in August of 2006, theconsideration has been paid and the stock was issued.

We know of no othermaterial, active, or pending legal proceeding against us, nor are we involvedas a plaintiff in any material proceeding or pending litigation. From time totime, we are a party to other claims and legal proceedings arising in the ordinarycourse of business. Our management evaluates our exposure to these claims andproceedings individually and in the aggregate and allocates monies forpotential losses on such litigation if it is possible to estimate the amountsof loss and the loss is probable.

**ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

No matter was submittedto a vote of stockholders in the fourth quarter of the fiscal year covered bythis report.

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**PARTII**

**ITEM5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESSISSUER PURCHASES OF EQUITY SECURITIES**

Our common stock istraded on the National Association of Securities Dealers, Inc. Over-the-CounterBulletin Board, or the OTCBB. It has been quoted under the symbol “OEGY.OB”since April 21, 2006. Before that, it was quoted under the symbol “BBSE.OB.”The following is a summary of the high and low closing prices of our commonstock on the OTCBB during the periods presented. Such prices representinter-dealer prices, without retail mark-up, mark down or commissions, and maynot necessarily represent actual transactions. Trading in our common stock hasnot been extensive in all the periods presented below, and such trades may notconstitute an active trading market in all the periods presented below.
|                             | ** ** | **High**   | ** ** | **Low**    | ** ** |
|-----------------------------|------------|------------|------------|------------|------------|
| **Year Ended May 31, 2007** | ** ** | ** ** | ** ** | ** ** | ** ** |
| First Quarter               |       | $          | 1.59       |       | $          | 0.60 |   |
| Second Quarter              |       | 0.95       |       | 0.48       |       |
| Third Quarter               |       | 0.66       |       | 0.30       |       |
| Fourth Quarter              |       | 0.59       |       | 0.30       |       |
|                        |       |       |       |       |       |
| **Year Ended May 31, 2006** | ** ** | ** ** | ** ** | ** ** | ** ** |
| First Quarter               |       | $          | 1.38       |       | $          | 0.55 |   |
| Second Quarter              |       | 2.50       |       | 1.44       |       |
| Third Quarter               |       | 2.32       |       | 1.55       |       |
| Fourth Quarter              |       | 1.89       |       | 1.20       |       |
|                        |       |       |       |       |       |

 

On August 27, 2007, theclosing sales price for our common stock was $0.68, as reported on the websiteof the OTCBB. As of August 27, 2007, there were 92 stockholders of recordof the common stock (which does not include the number of persons or entitiesholding stock in nominee or street name through various brokerage firms).

**Dividends**

Since inception, we havenot declared or paid any dividend on our common stock. We do not anticipatethat any dividends will be declared or paid in the foreseeable future on ourcommon stock. In addition, our security agreements with Cornell and otherinvestors currently restrict or limit our ability to enter into other credit orborrowing arrangements and restrict or limit our ability to pay common stockdividends to our stockholders.

**RecentSales of Unregistered Securities**

During the year ended May31, 2007, we issued the following securities without registration under theSecurities Act that were not previously disclosed on Form 10-QSB or Form 8-K.

On September 20, 2006,Coach Capital LLC, Eversource Group Limited and Nadelson Internacional S.A.converted an aggregate of $3,750,000 principal amount of 0% Debentures,representing the entire principal amount of 0% Debentures that were issued tothem at $0.5833 per share, and the Company correspondingly issued 2,571,576shares of its common stock to Coach Capital LLC, 2,571,576 shares of commonstock to Eversource Group Limited and 1,285,788 shares of common stock toNadelson Internacional S.A.

As of January 15, 2007,the remaining 0% Debentures held by Bank Sal. Oppenheim jr. & Cie.(Schweiz) AG were convertible into 5,217,391 shares of the Company’s commonstock at $0.2875 per share, subject to certain restrictions, and subject toadjustment as described above. On February 22, 2007, Bank Sal. Oppenheim jr.& Cie. (Schweiz) AG converted the remaining $1,500,000 principal amount of0% Debentures at $0.2875 per share and the Company correspondingly issued5,217,391 shares of its common stock.

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During the fiscal yearended May 31, 2007 Cornell converted the following principal amounts of 5%Debentures, and the Company has correspondingly issued the following shares ofcommon stock to Cornell, all of which were included in the SB-2 registrationstatement:
|                          | ** ** | ** **    | ** ** | **Shares of** | ** ** |
|--------------------------|------------|---------------|------------|--------------------|------------|
| ** **               | ** ** | **Principal** | ** ** | **Common**         | ** ** |
| **Conversion Date** | ** ** | **Amount**    | ** ** | **Stock**          | ** ** |
| August 22, 2006          |       | $             | 200,000    |               | 342,877    |   |
| September 5,  2006       |       | 800,000       |       | 1,371,507          |       |
| December 22,  2006       |       | 200,000       |       | 695,652            |       |
| January 12, 2007         |       | 200,000       |       | 695,652            |       |
| January 24, 2007         |       | 200,000       |       | 695,652            |       |
| March 29, 2007           |       | 200,000       |       | 670,241            |       |
| April 13, 2007           |       | 800,000       |       | 2,751,978          |       |
| May 15, 2007             |       | 600,000       |       | 2,063,983          |       |
| May 16, 2007             |       | 200,000       |       | 687,994            |       |
| May 22, 2007             |       | 1,100,000     |       | 3,670,337          |       |
| May 31, 2007             |       | 305,000       |       | 969,793            |       |
|                     |       | $             | 4,805,000  |               | 14,615,666 |   |

 

On May 22, 2007, Cornellexercised warrants associated with the 5% Convertible Debentures and theCompany issued 1,000,000 shares of common stock.

Pursuant to a licenseagreement with Dr. Melvin L. Prueitt, we granted Dr. Prueitt 100,000 shares ofcommon stock in July, 2006. The shares were issued as restricted securitiesexempt from registration pursuant to Section 4(2) of the Securities Act, and anappropriate legend was placed on the stock certificate. On December 29, 2006,100,000 shares of common stock previously issued in connection with thetechnology license agreement related to the SunconeÔCSP technology were returned to the Company and cancelled.

On June 15, 2007, theCompany entered into a Note and Warrant Purchase Agreement with an accreditedinvestor for the private placement of a $950,000 promissory note (the “6/15/07Note”) and a related warrant to acquire up to 4,000,000 shares of common stock(the “6/15/07 Warrant) for a purchase price of $750,000. In connection with thetransactions, the Company’s Chief Executive Officer, entered into a StockPledge Agreement pursuant to which certain of his shares of the Company’scommon stock were pledged to secure the performance of the 6/15/07 Note, and heagreed to guaranty any deficiency above and beyond the value of the shares. Inthe event of a default with respect to the 6/15/07 Note, the investor may (i)foreclose on the common stock pledged or (ii) convert all unpaid amounts dueunder the 6/15/07 Note into (A) a convertible debenture which is convertibleinto shares of common stock of Open Energy and (B) a warrant exercisable for shares of common stock.

The maturity date of the6/15/07 Note is October 15, 2007, which may be extended for one month at theCompany’s option. If extended or if the Company is in default under the termsof the 6/15/07 Note, the amount due to the investor is increased by $50,000 to$1,000,000. In the event of a default, any amounts then owed shall bearinterest at the rate of 18% per annum. The Company has the option to prepay thenote in whole or in part without penalty prior to the maturity date.

The 6/15/07 Warrant isexercisable for three years, and is subject to anti dilution provisions and afloor exercise price of $0.05 per share. If issued, the convertible debenturewill accrue interest at a rate of 10% per annum, with accrued interest due and payableon June 15, 2008 and will be convertible into shares of the Company’s commonstock at an initial price of $0.50 per share, which is subject to adjustment.The Investor may not convert if the conversion shares issued would result inthe Investor beneficially owning greater than 4.99% of the Company’soutstanding common stock.

On August 31, 2007, OpenEnergy Corporation entered into a securities purchase agreement with anaccredited investor for the private placement of a convertible promissory notein the principal amount of $1,000,000 (the “8/31/07 Note”) and a relatedwarrant to acquire up to 1,200,000 shares of common stock (the “8/31/07 Warrant”)for a purchase price of $950,000. The 8/31/07 Note matures six months afterAugust 31, 2007 but the Company has the right to prepay it in whole or in partwithout penalty prior to the maturity date. Commencing on the maturity date,the 8/31/07 Note accrues interest at the rate of 10% per annum. The principaland accrued interest are convertible into common stock of the Company at $0.50per share. However, the Investor may not convert if the conversion sharesissued would result in the Investor beneficially owning greater than 4.99% ofOpen Energy’s outstanding common stock.

In the event of default,the 8/31/07 Note will accrue interest at a rate of 10% per annum and theInvestors may convert any or all of the outstanding principal and interest intocommon stock at a fixed conversion price equal to 30% of the Volume WeightedAverage Price on the closing date. In no event shall the conversion price belower than $0.05.

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The 8/31/07 Warrant isexercisable for sixty (60) months after August 31, 2007. The exercise price isthe greater of  $0.55 per share or theclosing bid price of the stock on the last trading day preceding the closingdate plus five cents,  subject toadjustments and anti dilution provisions which include a price floor of $0.05per share.

We plan to raiseadditional debt and/or equity financing to pay the 6/15/07 Note and the 8/31/07Note. Please see “Liquidity and Capital Resources – Management Discussion andAnalysis.”

**ITEM6. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

**CompanyDescription and Overview**

Open Energy Corporationis a renewable energy company focused on the development and commercializationof a portfolio of solar products and technologies capable of deliveringcompetitive power, fresh water and related commodities for a wide range ofresidential, commercial and industrial applications. Our mission is to harnessthe power of the sun to meet the growing resources demands of sustainable 21st century development.

In March and April 2006,the Company acquired two privately-held companies engaged in the manufacturingand distribution of building-integrated Photovoltaic (“PV”) roofing products.Solar Roofing Systems, Inc. (“SRS”) based in Aurora, Ontario, Canada, developeda proprietary building integrated roofing material incorporatinghigh-efficiency crystalline PV cells in a single-ply roofing membrane designedprimarily for commercial and industrial buildings. Connect Renewable Energy,Inc. (“CRE”) based in Grass Valley, California, developed roofing tilesdesigned to match the colors and edge profiles of tiles traditionally used inresidential housing construction. In addition, CRE developed a solararchitectural glass product. These three product lines are now being sold underthe trade name “SolarSaveTM.”

On December 22, 2006, theCompany acquired WaterEye Corporation, a Delaware corporation (“WaterEye”), viaa merger of WaterEye with and into the Company’s wholly-owned subsidiary, OpenEnergy/WE Acquisition Corporation, a Nevada corporation. Prior to such merger,WaterEye was a privately held corporation engaged in the design andinstallation of hardware/software that monitors the quality, safety, andsecurity of water supply and wastewater treatment systems.

We also hold an exclusiveworldwide license to a technology referred to as SunConeTM CSP (concentratingsolar power). The SunConeTM CSP system utilizes non-imaging optical cones toconcentrate sunlight on rods at the base of each cone. Fluid flows throughthese rods and is heated to several hundred degrees centigrade. Thissuperheated fluid can then be used to generate steam and produce electricity orto purify salt or brackish water. Initial testing of the first prototype systemwas successful, and we are currently working to commercialize this technology.Through extensive computer modeling and re-engineering, the Company hasdeveloped numerous improvements to the first prototype, which utilizedaluminized mylar film suspended in tension to create the Suncone collector. Thecurrent design incorporates a more durable hard shell structure, one which webelieve can withstand higher wind forces and will be less expensive tomanufacture, install and service.

With these improvementsand the Company’s own patent filings, Open Energy will no longer be required topay a royalty fee going forward to Dr. Prueitt, and will accrue significantpotential savings over the life of the product. Therefore, as of the quarterended November 30, 2006, the Company wrote off the carrying value pertaining tothe Pruitt license agreement. Dr. Pruitt remains a senior scientific advisor tothe company, and his ray tracing programs have been utilized to determine theoptimum geometries of the new cone design.

We recently reformulated our overall corporate strategy based on threeprimary factors concerning our products and industry:

 

1)              We have proprietarybuilding-integrated PV products that can be sold, installed and servicedthrough the building trades;

2)              With the recentinflux of capital and explosion in PV capacity, the solar industry is becomingincreasingly commoditized and Open Energy determined it would be extremelydifficult to compete as a manufacturer; and

3)              Solar installationsare increasingly being financed through power purchase agreements.

Thesebusiness realities motivated our company to re-evaluate our corporatestrategies and undertake several key initiatives:

1)     Utilizethe traditional building trades as solar installers. In March of 2007, wesigned a joint marketing and distribution agreement with Eagle Roofing Company,the largest concrete tile manufacturer in North America. A similar initiativeis now underway for the membrane product.

2)     Outsourcehigh volume products’ manufacturing in order to remain competitive. In May of2007, Open Energy and Suntech Power Holdings Co., Ltd. (NYSE:STP), signed aletter of intent for broad initiatives targeting the expansion of BIPV productsales in North America. Suntech will supply their high-efficiencypolycrystalline cells and provide cost effective, high quality production ofthe SolarSaveTM  PV Tile product. Thecompanies will market each other’s portfolio of products in the U.S. Under theterms of the LOI, Suntech will be granted the right to acquire up to 5% of theoutstanding shares of Open Energy. This relationship, as well as others underdiscussion, will give Open Energy the ability to deliver high quality productsin very large volumes to meet the demands of the building and constructionchannels.

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3)     Offerfinanced solutions through long-term power purchase agreements. Launch OpenEnergy Solar Solutions using BIPV products. In general, homeowners, commercialtenants and industrial operations do not buy power generating systems. They payfor power through their monthly utility bills. Until recently, solar electricsystems were very expensive, although state rebates, federal tax incentives andother government programs~~,~~ have reduced the costs of solar electricity.Open Energy has developed a unique financial solution to the dilemma. Togetherwith a tax equity partner, we will install our products in “solar communities.”  We will coordinate the engineering, equipmentprocurement and construction of each project. We will contract with thirdparties to maintain the rooftop systems, to read the meters, and to bill thecustomers. The equity investor will receive a secure internal rate of returnand the benefits of the 30% Federal tax credit and 5-year accelerateddepreciation under the 2005 U.S. Energy Bill. The builders will reduce theirconstruction costs and, hopefully, sell their homes more quickly. The homeownerwill be guaranteed a reduced monthly utility bill and receive the benefits ofincremental home value at no additional expense or tax impact. Open Energy willsell more products and participate in the long term revenue streams.

The foregoing threeinitiatives (utilization of the building trades, outsourcing manufacturing, andproviding financed solutions) will allow Open Energy to concentrate on its corecompetencies as a leading edge designer of innovative products andtechnologies, and as a customer-centric marketer of renewable energy solutions.Our value will be in owning the customer. We will remain technology agnostic.As thin film, nano-materials, vapor deposition and other innovations becomecommercially viable on a cost per installed watt basis, we will utilize them todevelop commercial products and bring them to market. Unlike many of ourcompetitors, we are not wed to a particular product or distribution channel. Wedo not spend extensively on research, or carry expensive operational overhead.We are virtually not vertically integrated. This is how we intend to besuccessful in the rapidly changing business environment of renewable energy.

We are currentlyevaluating alternatives to determine how to optimize capabilities at ourAurora, Ontario, Canada and Grass Valley, California locations. Open Energywill concentrate on its core competencies as a leading edge designer ofinnovative products but will outsource the majority of its high volume manufacturingin order to remain competitive. No decision or dates have yet been establishedto discontinue operations at any location and both are currently components ofthe Company’s goal of executing on the opportunities provided by our strategicalliance with Eagle Roofing Products.

During fiscal 2007, theCompany has significantly underperformed versus expectations for both its SRSand CRE acquisitions, and it has become clear that the Company does not havethe resources to be a low cost high volume manufacturer. As a result, theCompany has decided that indicators of impairment could exist for certainpurchased assets and goodwill associated with its SRS and CRE acquisitions. Thecompany has performed annual impairment tests of the carrying value of goodwilland intangibles of its SRS and CRE acquisitions as required under SFAS NO. 142and SFAS NO. 144, respectively. The tests determined that indications ofimpairment existed for certain purchased intangible assets and goodwillassociated with its acquisition of SRS. Based on these assessments, the companyrecorded charges in SRS of $3.5 million and $2.7 million to write-down thevalue of intangible assets and goodwill, respectively (see note 4 of the Notesto Consolidated Financial Statements).

In addition, the Companyhas learned that web based monitoring in the solar industry is heavilysubsidized by the inverter manufacturers and the Company has made the decisionto utilize these subsidized offerings rather than expend the funds necessary tooffer a WaterEye monitoring product customized for the solar industry. As aresult, we have taken a goodwill write-off of $2.5 million. While it isour intention to modify the WaterEye software to provide real time monitoringfor future installations of our SunconeTM CSP product that is in development,this product is not yet commercialized and we are not actively marketing theoriginal WaterEye product for water treatment monitoring.

Open Energy hastemporarily suspended shipments on its existing membrane product due to acorrosion issue that we are currently working to resolve. Coincidently, we arealso working on a combination of product enhancements and incorporating PVcells from alternate manufacturers. As a result, we have recorded a valuationallowance totaling $2.88 million related to the finished goods product ininventory, as well as the potential cost of replacing product under warranty.The Company is currently developing its next generation commercial product.

**LimitedOperating History**

There is limited historicalfinancial information about our company upon which to base an evaluation of ourfuture performance. Our company has generated limited revenues from operations.We cannot guarantee that we will be successful in our business. We are subjectto risks inherent in a fast growing company, including limited capitalresources, possible delays in product development and manufacturing, andpossible cost overruns due to price and cost increases. There is no assurancethat future financing will be available to our company on acceptable terms.Additional equity financing could result in dilution to existing stockholders.

**Resultsof Operations – Fiscal Year Ended May 31, 2007**

The following table setsforth the Company’s consolidated statement of operations data for the yearended May 31, 2007. During the fiscal year ended May 31, 2006, we had not yetbegun significant manufacturing operations, nor did we generate significantrevenues. Thus a prior period comparison is not meaningful.

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*Summary Statement of Operations (in thousands):*
|                                                          | ** ** | **Twelve Months Ended May 31,** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                               | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| **Revenues, net**                                        |       | $                                                   | 4,292      |   | $ | 152 |   |
| **Gross profit (loss)**                                  |       | (4,788                                              | )          | (4 | ) |
| **Operating expenses:**                                  | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| **Selling, general and administrative**                  |       | 17,084                                              |       | 8,638 |   |
| **Research and development**                             |       | 513                                                 |       | 2,530 |   |
| **Impairment of intangibles and goodwill**               |       | 10,540                                              |       | — |   |
| **Impairment of note receivable**                        |       | 683                                                 |       | — |   |
| **Total operating expenses**                             |       | 28,820                                              |       | 11,168 |   |
| **Loss from operations**                                 |       | (33,608                                             | )          | (11,172 | ) |
| **Total other income (expense)**                         |       | (9,206                                              | )          | (1,037 | ) |
| **Loss from continuing operations before income  taxes** |       | (42,814                                             | )          | (12,209 | ) |
| **Loss from discontinued operations**                    |       | —                                              |       | (849 | ) |
| **Income tax benefit**                                   |       | 3,262                                               |       | 885 |   |
| **Net loss**                                             |       | $                                                   | (39,552    | ) | $ | (12,173 | ) |

 

**Revenues**

For the year ended May31, 2007, revenues for SolarSaveTM Tile and SolarSaveTM Membrane products andWaterEye water monitoring subscriptions totaled $4,292,000, fallingsignificantly short of previous revenue forecasts. Revenues were significantlybelow our initial financial projections primarily due to a manufacturing and cellprocurement cost structure that was too high relative to the competition andwhich forced us to price our products at a premium. In addition, our initialsales strategy for our SolarSaveTM Tile of selling through solar integratorsresulted in a sales cost structure that compounded the price disadvantage.Finally, the California Solar Initiative Handbook released in April 2007specifically excluded BIPV solar products, such as ours, for existingresidential homes from receiving the California rebates. In July 2007, aproposal was made by the California Public Utility Commission to reverse thisdecision, but the proposal has not yet been formally approved.

As of May 31, 2007, ourbacklog of SolarSaveTM Tile orders totaled approximately $2.7 million, of whicha majority is expected to be filled during the fiscal year ending May 31, 2008.Our future revenues will depend not only on successful sales efforts, but alsoon our ability to successfully outsource our manufacturing, our ability toprocure PV cells, and our ability to secure sufficient equity financing. In thenext several months, revenues are expected to remain constrained until Suntechand/or alternative suppliers begin production of our SolarSaveTM Tile product,and shipment of our SolarSaveTM Membrane can be resumed.

**Cost ofRevenues**

For the year ended May31, 2007, cost of sales was $9,080,000, resulting in a gross loss of$4,788,000. The cost of sales includes charges for $1,370,000 of inventoryreserves for SRS in Canada, a $547,000 charge to adjust CRE inventory to thelower of cost or market and a charge for SRS warranty reserves totaling$1,520,000. The remaining $5,643,000 of cost of sales exceeded revenues due toan underutilization of manufacturing capacity and the resultingunder-absorption of labor and overhead expenses due to lower than anticipatedsales volume. The inventory and warranty reserves for SRS are primarily relatedto the estimated costs to correct the corrosion issues with the membraneproduct for both on-hand inventories and existing installations.

A substantial part ofcost of sales for the SolarSaveTM Tiles and the SolarSaveTM  Membranes consisted of Sunpower PV cells. Dueto the high cost and limited supply of Sunpower cells, among other factors, weare currently in the process of switching cell suppliers. The cost of PV cellsis currently volatile. Any component price increases could negatively affectour gross profit margins in the near future. The Company signed a letter ofintent with Suntech in China, whereby Suntech will both manufacture thelaminates and conduct final assembly consisting of gluing the laminates intothe frame, securing the output tabs, and installing the junction boxes. Inaddition, the Company is currently in negotiations with Suntech to providevolume manufacturing of a standard size architectural glass panel with morespecialized design and custom manufacturing being planned for our Grass Valleyfacility. Our plan is to reduce our cost of sales by outsourcing to a vendorthat can manufacture our products in high volumes at a lower cost.

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**OperatingExpenses**

***Selling,general and administrative***

Selling, general andadministrative expenses for the year ended May 31, 2007 were $17,084,000. Netof non-cash stock-based compensation and other expenses, SG&A expenses were$9,664,000. Legal, professional and consulting fees were approximately$2,249,000 for fiscal 2007. The legal and professional fees were primarilyrelated to our financing activities, our registration statement that wenteffective October 2006, the acquisition of WaterEye, and SEC reportingrequirements. Cash-based management fees, wages and salaries were approximately$3,536,000 for fiscal 2007. The 2007 period included $7,421,000 in non-cashcompensation for stock grants to key management, directors, and consultants.Depreciation and amortization were $151,000 and $1,350,000 respectively.General administrative, insurance, facilities, and travel for fiscal 2007 were$1,752,000. Advertising expenses, which include investor relations expenses,were $626,000 for fiscal 2007. These expenses were related to the branding ofthe Open Energy Corporation name, participation in trade shows, and themarketing of the SolarSaveTM solar roofingtiles, roofing membranes, and architectural glass.

***Research andDevelopment***

For the year ended May31, 2007, research and development expenses were $513,000. In fiscal 2008, theCompany anticipates an increase in research and development expenses related tothe commercialization of SunConeTM CSP, and the ongoing development of itsSolarSaveTM solar roofing tiles, roofing membrane, andarchitectural glass, and new product development.

As discussed above, thefirst prototype SunConeTM CSP was designed, built, and tested forefficiency, power output and other technical specifications. This initialtesting was successful, and we are now moving forward to design and engineer acommercial product. The Company has developed numerous improvements to thefirst prototype, which utilized aluminized Mylar film suspended in tension tocreate the Suncone collector. The current design incorporates a more durablehard shell structure, one which our design team believes can withstand higherwind forces and will be less expensive to manufacture, install and service.Further work will be required to design a commercial system capable ofinterfacing with an off-the-shelf steam turbine to produce electricity and/orto interface with either flash distillation or membrane filtration equipment inorder to produce potable water from salty or brackish sources. This next phaseof development will require additional time, capital and other resources inorder to complete.

In addition, theSolarSaveTM solar roofing tiles, roofing membranes, andarchitectural glass will require ongoing development in order to achieve andretain market share. In the case of the solar roofing tiles, we are developingvarious color systems and edge profiles. The power output of the solar roofingmembranes can be improved by designing a system on a tilt, and can be improvedvisually by imprinting colors and patterns on their top surfaces, and improvedtechnically by utilizing different materials, including new PV technologies asthey become available. During our production ramp-up, additional improvementsmay be made to the manufacturing processes, which could require additionalresearch and development expenditures.

***Impairment ofintangibles and goodwill***

In fiscal 2007, theCompany recorded an impairment of intangibles and goodwill of $10,540,000 thatwas primarily related to the impairment of intangibles and goodwill in SRS of$3,500,000 and $2,731,000, respectively, and an impairment of goodwill in WaterEye of $2,525,000. In addition, the Company wrote-off the full unamortizedamount of $1,694,000 of the SunConeTM CSP license agreement.

***Write-off  of note receivable***

In fiscal 2007, theCompany wrote off its note receivable from Goldstar of $683,000, includingaccrued interest totaling $33,000.

***Other (expense)***

In fiscal 2007, Other(expense) was $9,206,000. Interest expense was $8,924,000 in fiscal 2007, of which$8,211,000 was due to warrant repricings and non-cash interest expense relatedto amortization of the warrants, beneficial conversion feature and originalissue discount associated with the 0%, 5% and 10% Debentures.

***Net Loss***

Our net loss was $39,552,000for fiscal 2007, of which, $10,540,000 was the write-off and impairment ofintangibles and goodwill,  $7,418,000 wasstock-based compensation, $243,000 was depreciation, $1,350,000 wasamortization, and $8,211,000 was non-cash interest expense. The significantincrease in our increased net loss is directly related to lower thananticipated sales volume, under-utilization of manufacturing facilities and theresulting higher than forecasted cost of sales. The Company believes that ifadequate financing can be secured, sales will increase as a result of its newsales and marketing strategies. To date, the Company has been unable to sellits products in quantities sufficient to be operationally profitable and isunsure if or when it will become profitable.

29

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**Liquidityand Capital Resources**

As of May 31, 2007, wehad cash and cash equivalents of $319,000, and negative working capital of$8,492,000. During the year ended May 31, 2007, we funded our operations fromprivate sales of equity and debt securities. We have no unused sources ofliquidity. We believe our current cash will only provide sufficient workingcapital to fund our operations through September 2007. Thus, additional equityor debt financing will need to be raised in the near future to implement ourbusiness strategy.

For the year ended May31, 2007, we used $9,239,000 of cash in operations. Investment activities used$832,000 of cash during the year, which was primarily related to acquisition ofproperty and equipment. Financing activities provided $7,639,000 of cash duringthe year, with $8,000,000 in gross proceeds from convertible debentures withwarrants and $500,000 in proceeds from warrants that were exercised.

The cost of PV cells,which is the primary cost of sales for solar roofing products, is volatile. TheCompany is uncertain of the extent to which this will affect its workingcapital in the near future. The fluidity of the current cell supply from theCompany’s current major cell suppliers could cause a disruption or a completestoppage of the Company’s manufacturing operation putting even greater strainon its liquidity and cash flow needs.

Our current cashrequirements are significant due to PV cell and tile laminate inventorypurchases; a build-up in personnel to support the Eagle Roofing sales channel;delays in product shipments as a result of the shift to outsourcing and thesuspension of membrane product shipments; research and development expenses;and other operational expenses. We expect to continue to use significant sourcesof cash to fund our operations during fiscal 2008.

The Company has incurredlosses since its inception totaling approximately $52,453,000 through May 31,2007. The Company has been unable to sell its products in quantities sufficientto be operationally profitable and is unsure if or when it will becomeprofitable. To date, the Company has been unable to meet forecasted sales andmargin projections and as a result has experienced significant negative cashflow for an extended period of time. Based on its current cash usage rate, theCompany estimates that it currently has adequate cash to fund operations onlythrough the end of September 2007. The ability of the Company to continue as agoing concern is dependent on obtaining additional financing to support itsproduction and working capital requirements. Management is pursuing a number ofpossible debt and equity financing opportunities in an effort to address theserequirements. However, the Company cannot currently predict the likelihood ofbeing able to raise additional debt or equity financing in an amount, nature oron terms that would be acceptable to the Company and the Company currently doesnot have any commitments for future debt and/or equity financing. If theCompany is unable to obtain additional financing prior to the end of September2007, the Company may not have sufficient cash to satisfy all on-going andpreviously incurred liabilities and will have to substantially curtail or ceaseoperations.

***Significant Capital Expenditures***

We anticipate that wewill make limited capital expenditures over the next twelve months formanufacturing equipment and leasehold improvements.

**Financings**

***0% Debentures***

In July 2006, the Companyand the holders of the 0% Debentures and associated warrants agreed to amendsuch instruments effective as of their original issue date to provide for aminimum conversion price for the 0% Debentures and a minimum warrant exerciseprice of $0.05. The warrants were also amended to fix the aggregate number ofwarrant shares that are issuable to the number of shares of common stock forwhich the warrants were exercisable at the time the warrants were originallygranted 2,354,261.

On September 25, 2006,Coach Capital LLC, Eversource Group Limited and Nadelson Internacional S.A.converted an aggregate of $3,750,000 principal amount of 0% Debentures,representing the entire principal amount of 0% Debentures that were issued tothem at $0.5833 per share, and the Company correspondingly issued 2,571,576shares of its common stock to Coach Capital LLC, 2,571,576 shares of commonstock to Eversource Group Limited and 1,285,788 shares of common stock toNadelson Internacional S.A.

On February 22,2007,  Bank Sal. Oppenheim jr. & Cie.(Schweiz) AG converted the remaining $1,500,000 principal amount of 0%Debentures at $0.2875 per share and the Company correspondingly issued5,217,391 shares of its common stock.

30

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***5% and 10%Secured Convertible Debentures and Related Warrants***

In July 2006, the Companyand Cornell agreed to amend the investment agreements relating to thedebentures and warrants, effective as of their original issue dates, asfollows:

·                  to provide for afloor price of $0.05 on the adjustable conversion price of the 5% Debentures;

·                  to provide for afloor price of $0.05 per share on the exercise price of the warrants applicableto adjustments with respect to certain future issuances of securities by us,and upon certain distributions of assets and similar recapitalization events; 

·                  to extend thedeadline for having the registration statement declared effective until August12, 2006; and

·                  to capliquidated damages payable in respect of failure to have an effectiveregistration statement at 15% of the liquidated value of the debenturesoutstanding.

In August 2006, theCompany and Cornell agreed to further amend the investment agreements describedabove, effective as of their original issue dates, as follows:

·                  toprovide for the purchase by Cornell of $1,500,000 of the remaining securedconvertible debentures as of the date of the amendment, with the remaining$3,500,000 to be purchased by Cornell upon the effectiveness of theregistration statement that we are required to file pursuant to the investorregistration rights agreement, subject to customer closing conditions;

·                  towaive any breaches of the investment agreements with Cornell related to certainof our tax withholding liabilities;

·                  tofurther extend the deadline for having the registration statement declaredeffective until September 5, 2006; and

·                  toprovide that instead of a third warrant being issued to Cornell upon the lastclosing, such warrant was issued on August 17, 2006, at an exercise price of$0.80 (rather than $1.50) per share, and is exercisable for 6,250,000 shares(rather than 3,000,000 shares).

In addition, Cornellgranted us a waiver of certain of the restrictive covenants contained in theinvestment agreements to permit us to take certain remedial actions relative toour tax withholding liabilities described under “Payroll Withholding Taxes”below, including the following with respect to any officer or employee:repurchasing vested shares, canceling any unvested shares, granting substituteequity awards, or permitting such persons to sell, pledge or transfer theirshares.

On August 30, 2006, theCompany filed a registration statement on Form SB-2 covering, among others, theshares issuable upon conversion of the debentures and exercise of the warrants,which was declared effective on October 27, 2006 (the “SB-2 registrationstatement”).

Cornell has converted thefollowing principal amounts of 5% Debentures, and the Company hascorrespondingly issued the following shares of common stock to Cornell, all ofwhich were included in the SB-2 registration statement:
|                          | ** ** | ** **    | ** ** | **Shares of** | ** ** |
|--------------------------|------------|---------------|------------|--------------------|------------|
| ** **               | ** ** | **Principal** | ** ** | **Common**         | ** ** |
| **Conversion Date** | ** ** | **Amount**    | ** ** | **Stock**          | ** ** |
| August 22, 2006          |       | $             | 200,000    |               | 342,877    |   |
| September 5,  2006       |       | 800,000       |       | 1,371,507          |       |
| December 22,  2006       |       | 200,000       |       | 695,652            |       |
| January 12, 2007         |       | 200,000       |       | 695,652            |       |
| January 24, 2007         |       | 200,000       |       | 695,652            |       |
| March 29, 2007           |       | 200,000       |       | 670,241            |       |
| April 13, 2007           |       | 800,000       |       | 2,751,978          |       |
| May 15, 2007             |       | 600,000       |       | 2,063,983          |       |
| May 16, 2007             |       | 200,000       |       | 687,994            |       |
| May 22, 2007             |       | 1,100,000     |       | 3,670,337          |       |
| May 31, 2007             |       | 305,000       |       | 969,793            |       |
|                     |       | $             | 4,805,000  |               | 14,615,666 |   |

 

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On March 30, 2007, OpenEnergy Corporation entered into an agreement with Cornell Capital Partners,L.P. for the private placement of (i) a Convertible Secured Debenture in theoriginal principal amount of $3,000,000 and (b) a Warrant to purchase up to6,000,000 shares of our common stock, par value $0.001 per share, which wereissued and sold for an aggregate purchase price of $3,000,000. We receivedgross proceeds of $3,000,000, before expenses, from the financing transaction,which we expect to use for general corporate and working capital purposes. TheDebenture accrues interest at a rate of 10% per annum and matures on one yearfrom the issuance date. No payments of interest or principal are due under theDebenture until maturity. Subject to limitations contained in the Debenture forthe maximum amount that may be converted, the Debenture is convertible at anytime at Cornell’s option into shares of our common stock at a conversion ratewhich is calculated by dividing (i) the amount of the outstanding and unpaidprincipal and interest of the Debenture to be converted into shares of commonstock by (ii) the conversion price of $0.50. The conversion price is subject toadjustment in the event we issue shares of common stock for a consideration pershare less than the conversion price in effect immediately prior to suchissuance or sale, except for issuances in connection with an approved stockplan, the conversion, exchange or exercise of an outstanding security, anacquisition, or conversion of the Debenture. The Warrant issued to Cornell hasan initial exercise price of $0.50 per share, subject to adjustment, and a termof five years from the issuance date.

On May 21, 2007, theCompany entered into a Letter Agreement (the “Amendment”) with Cornell CapitalPartners, L.P. which amended certain terms of the secured convertibledebentures issued by the Company to Cornell pursuant to a Securities PurchaseAgreement dated March 30, 2006, as amended. Pursuant to the Amendment (i) theownership cap set forth in Section 3(b)(i) of each debenture, which limits theholder’s ability to convert the debenture or receive shares of common stock aspayment of interest on the debenture, was increased from 4.99% to 9.99%, and(ii) the Company permanently waived the conversion limitation set forth inSection 3(b)(ii) of each debenture, which would have limited the principalamount of the debenture that could be converted at the market conversion pricein any 30-day period.

On June 15, 2007, theCompany entered into a Note and Warrant Purchase Agreement with an accreditedinvestor for the private placement of a $950,000 promissory note (the “6/15/07Note”) and a related warrant to acquire up to 4,000,000 shares of common stock (the“6/15/07 Warrant”) for a purchase price of $750,000. In connection with thetransactions, the Company’s Chief Executive Officer, entered into a StockPledge Agreement pursuant to which certain of his shares of the Company’scommon stock were pledged to secure the performance of the 6/15/07 Note, and heagreed to guaranty any deficiency above and beyond the value of the shares. Inthe event of a default with respect to the 6/15/07 Note, the investor may (i)foreclose on the common stock pledged or (ii) convert all unpaid amounts dueunder the 6/15/07 Note into (A) a convertible debenture which is convertibleinto shares of common stock of Open Energy and (B) a warrant exercisable for shares of common stock.

The maturity date of the6/15/07 Note is October 15, 2007, which may be extended for one month at theCompany’s option. If extended or if the Company is in default under the termsof the 6/15/07 Note, the amount due to the investor is increased by $50,000 to$1,000,000. In the event of a default, any amounts then owed shall bearinterest at the rate of 18% per annum. The Company has the option to prepay thenote in whole or in part without penalty prior to the maturity date.

The 6/15/07 Warrant isexercisable for three years, and is subject to anti dilution provisions and afloor exercise price of $0.05 per share. If issued, the convertible debenturewill accrue interest at a rate of 10% per annum, with accrued interest due andpayable on June 15, 2008 and will be convertible into shares of the Company’scommon stock at an initial price of $0.50 per share, which is subject toadjustment. The Investor may not convert if the conversion shares issued wouldresult in the Investor beneficially owning greater than 4.99% of the Company’soutstanding common stock.

On August 31, 2007, OpenEnergy Corporation entered into a securities purchase agreement with anaccredited investor for the private placement of a convertible promissory notein the principal amount of $1,000,000 (the “8/31/07 Note”) and a related warrantto acquire up to 1,200,000 shares of common stock (the “8/31/07 Warrant”) for apurchase price of $950,000. The 8/31/07 Note matures six months after August31, 2007 but the Company has the right to prepay it in whole or in part withoutpenalty prior to the maturity date. Commencing on the maturity date, the8/31/07 Note accrues interest at the rate of 10% per annum. The principal andaccrued interest are convertible into common stock of the Company at $0.50 pershare. However, the Investor may not convert if the conversion shares issuedwould result in the Investor beneficially owning greater than 4.99% of OpenEnergy’s outstanding common stock.

In the event of default,the 8/31/07 Note will accrue interest at a rate of 10% per annum and theInvestors may convert any or all of the outstanding principal and interest intocommon stock at a fixed conversion price equal to 30% of the Volume WeightedAverage Price on the closing date. In no event shall the conversion price belower than $0.05.

The 8/31/07 Warrant isexercisable for sixty (60) months after August 31, 2007. The exercise price isthe greater of  $0.55 per share or theclosing bid price of the stock on the last trading day preceding the closingdate plus five cents,  subject toadjustments and anti dilution provisions which include a price floor of $0.05per share.

We plan to raiseadditional debt and/or equity financing to pay the 6/15/07 Note and the 8/31/07Note. Please see “Liquidity and Capital Resources.”

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On August 29, 2007, theCompany entered into a Letter Agreement (the “Amendment”) with Cornell CapitalPartners, L.P. which amended certain terms of the secured convertibledebentures issued by the Company to Cornell pursuant to a Securities PurchaseAgreement dated March 30, 2006, as amended. Specifically, the Company (i)agreed to consider registering 4,000,000 shares of common stock pursuant toRule 462(b) of the 1933 Securities Act, as amended; however OEC will onlyregister additional shares in an amount and at a price that together representno more than 20% of the shares originally subject to the Initial RegistrationStatement that remain unsold; (ii) Cornell agreed to not request furtherregistration until 90 days after the effective date of the new registrationstatement; (iii) their right of first negotiation was waived with respect tothe Capital Raising Offer letter sent to Cornell August 6, 2007 and theyprovided their consent to complete the transaction; (iv) they consented to theCompany increasing the number of shares allocated to Open Energy’s stock optionplan by 8,000,000 for a total of 16,500,000; and (v)  Cornell confirmed that none of the previousdebentures are in default.

***Payroll Withholding Taxes***

As discussed in Note 8 ofthe Consolidated Financial Statements, during the fiscal years ended May 31,2006 and 2007, we did not withhold for or pay federal or state employment orincome taxes associated with the vesting dates for restricted stock set forthin Mr. Saltman’s, Ms. Bostater’s or Mr. Britt’s’ employment agreements, orassociated with the grants of shares to Mr. Saltman during his employmentperiod for consulting and director services and Ms. Bostater during heremployment period for consulting services. We also did not withhold or payemployment or income taxes for shares of common stock issued to a non-executiveemployee during the fiscal year ended May 31, 2006, and another employee duringthe fiscal year ended May 31, 2007.

Total accrued liabilitiesat May 31, 2007 associated with the employees’ and employer’s combined portionof required withholding, which is an obligation of our company to the extentnot satisfied by the employees, are $2,417,000. We also may be subject topenalties and interest, currently estimated to be approximately $324,000 forthe fiscal year ended May 31, 2007, which has been recorded as other expense.As of June 30, 2007 (the last vesting date set forth in the contracts which hasoccurred to the date of this report), to the extent the vesting dates aredeemed to be valid and non-rescindable, the total liability for our Company’sportion of the required withholding taxes is estimated to be $100,000 and thetotal accounts payable associated with the employees’ combined portion of therequired withholding is estimated to be $1,993,000. We do not presently believeany further penalties will accrue, although interest will continue to accrueuntil the amounts due are paid.

The employees haveinformed us that they intend to satisfy their contractual obligations toprovide funds for our required payroll tax payments through sales of theunderlying securities, once they may do so in accordance with applicablesecurities laws. We have recorded corresponding amounts due of $1,993,000 forthe employees’ obligations.

The shares of stocksubject to all of these awards were registered for the first time with theregistration statement that went effective October 27, 2006. At this time, wecannot predict when shares may be sold by the employees as a means ofgenerating funds to satisfy withholding obligations. Market conditions and SECregulations may also limit the number of shares that may be sold and theproceeds to the employees from such sales. We may be obligated to pay such taxliabilities before the employees have been able to sell their shares, and thesales prices the employees receive may be less than the tax liability.

To the extent that theseemployees are unable to satisfy their obligations to provide funds for ourrequired payroll tax payments through sales of the underlying securities, we willbe required to use our cash to satisfy these obligations, which could requireus to raise additional funds or curtail operations sooner than anticipated.

Our obligation towithhold for and pay federal and state employment and income taxes associated withthese restricted shares granted to employees is ongoing with each new vestingor issuance date, and the level of tax obligation would be significant if anyof the vesting or issuance schedules were to accelerate in accordance with theterms of the employment agreements. Our company could therefore incursignificant additional liabilities for which we may not have sufficient cash tosatisfy, requiring us to raise additional funds or curtail or cease operations.

**CriticalAccounting Policies**

The preparation offinancial statements in conformity with United States generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities, the disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting periods.

Managementroutinely makes judgments and estimates about the effects of matters that areinherently uncertain. As the number of variables and assumptions affecting theprobable future resolution of the uncertainties increase, these judgmentsbecome even more subjective and complex. The Company has identified thefollowing accounting policies, described below, as the most important to anunderstanding of the Company’s current financial condition and results ofoperations.

33

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***Revenue Recognition***

The Company recognizesrevenue in accordance with SEC Staff Accounting Bulletin No. 104, “RevenueRecognition” (“SAB 104”). The Company generates revenue from the sale of PVroofing tiles, PV roofing membranes, balance of system products, and managementsystem products to our dealers or other parties. The Company does not performany installations of PV products. The Company does, however, install watermonitoring systems and recognizes corresponding license/subscription revenueconsistent with the requirements of AICPA Statement of Position (SOP) 97-2,Software Revenue Recognition. SAB 104 requires that four basic criteria must bemet before revenue can be recognized: (1) persuasive evidence of an arrangementexists; (2) delivery has occurred or services rendered; (3) the seller’s priceto the buyer is fixed and determinable; and (4) collectibility is reasonablyassured. Amounts billed or received from customers in advance of performanceare recorded as deferred revenue.

***Inventories***

Inventories are valued atlower of cost (first in, first out) or market. Management provides a reserve,as necessary, to reduce inventory to its net realizable value. Certain factorscould impact the realizable value of inventory so management continuallyevaluates the recoverability based on assumptions about customer demand andmarket conditions. The evaluation may take into consideration expected demand,new product development; the effect new products might have on the sale ofexisting products, product obsolescence and other factors. The reserve or writedown is equal to the difference between the cost of inventory and the estimatedmarket value based upon assumptions about future demand and market conditions.If actual market conditions are less favorable than those projected bymanagement, additional inventory reserves or write downs may be required. Ifactual market conditions are more favorable, reserves or write-downs may bereversed.

***Goodwill and Intangible Assets***

Goodwill represents theexcess of costs over fair value of assets of businesses acquired. Per Statementof Financial Accounting Standards No. 142,*Goodwill and Other Intangible Assets* (“SFAS No.142”), goodwill and intangible assets acquired in a purchasebusiness combination and determined to have an indefinite useful life are notamortized, but instead must be tested for impairment annually or morefrequently if circumstances indicate that indicators of impairment may bepresent. Management assesses goodwill for impairment at the reporting unitlevel on an annual basis at fiscal year end or more frequently under certaincircumstances. Such circumstances include (i) significant adverse change inlegal factors or in the business climate, (ii) an adverse action or assessmentby a regulator, (iii) unanticipated competition, (iv) a loss of key personnel,(v) a more-likely-than-not expectation that a reporting unit or a significantportion of that unit will be sold or otherwise disposed of, and (vi)recognition of an impairment loss in a subsidiary that is a component of areporting unit. Management must make assumptions regarding estimating the fairvalue of the Company reporting unit. If these estimates or related assumptionschange in the future, the Company may be required to record an impairmentcharge.

***Evaluation of Long-lived Assets***

The Company’s policy isto assess potential impairments to its long-lived assets when there is evidencethat events or changes in circumstances have made recovery of the assetscarrying value unlikely and the carrying amount on the asset exceeds theestimated undiscounted future cash flows. If such evaluation were to indicate amaterial impairment of these long-lived assets, such impairment would berecognized by a write down of the applicable asset to its estimated fair valueunder SFAS No. 144,*Accounting for theImpairment of Disposal of Long-Lived Assets*.

***Income Taxes***

Income taxes are computedusing the asset and liability method. Under the asset and liability method,deferred income tax assets and liabilities are determined based on thedifferences between the financial reporting and the tax bases of assets andliabilities and are measured using the currently enacted tax rates and laws. Avaluation allowance is provided for the amount of deferred tax assets that,based on available evidence, are not expected to be realized.

***Beneficial Conversion and Warrant Valuation***

In accordance with EITFNo. 98-5*, Accounting for ConvertibleSecurities with Beneficial Conversion Features or Contingently AdjustableConversion Ratios*  and EITFNo. 00-27,* Application of Issue No. 98-5 to Certain Convertible Instruments*, the Company records a beneficial conversion feature (“BCF”) related to theissuance of convertible debt instruments that have conversion features at fixedrates that are in the money when issued, and the fair value of warrants issuedin connection with those instruments. The BCF for the convertible instrumentsis recognized and measured by allocating a portion of the proceeds to warrants,based on their relative fair value, and as a reduction to the carrying amountof the convertible instrument equal to the intrinsic value of the conversionfeature. The discounts recorded in connection with the BCF and warrantvaluation are recognized as non-cash interest expense over the term of theconvertible debt, using the effective interest method.

**Off-BalanceSheet Arrangements**

The Company does not haveany off-balance sheet arrangements, as defined in Item 303(c)(2) of RegulationS-B promulgated under the Securities Act of 1933.

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**ITEM 7.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

Reports of IndependentRegistered Public Accounting Firm

Consolidated BalanceSheets as of May 31, 2007 and 2006

Consolidated Statementsof Operations for the years ended May 31, 2007 and 2006

Consolidated Statementsof Changes in Shareholders’ Equity for the years ended May 31, 2007 and 2006

Consolidated Statementsof Cash Flows for the years ended May 31, 2007 and 2006

Notes to theConsolidated Financial Statements

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

To the Board ofDirectors and Stockholders of

Open EnergyCorporation

Solana Beach,California

We have auditedthe accompanying consolidated balance sheets of Open Energy Corporation and itssubsidiaries as of May 31, 2007 and 2006, and the related consolidatedstatements of operations, stockholders’ equity (deficit) and cash flows for theyears then ended. These consolidated financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these consolidated financial statements based on our audits.

We conducted ouraudits in accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

In our opinion,the consolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Open Energy Corporation as of May31, 2007 and 2006, and the results of its operations and its cash flows for theyears then ended in conformity with accounting principles generally accepted inthe United States of America.

As discussed inNote 1 to the consolidated financial statements, the Company changed its methodof accounting for stock-based compensation, effective June 1, 2006, as a resultof the adoption of Statement of Financial Accounting Standards No. 123R, *Share-Based Payments.*

The accompanyingfinancial statements have been prepared assuming that the Company will continueas a going concern. As discussed in Note 2 to the financial statements, theCompany’s recurring losses from operations and working capital deficiency raisesubstantial doubt about its ability to continue as a going concern. Management’splans as to these matters are described in Note 2. The accompanying financialstatements do not include any adjustments that might result from the outcome ofthis uncertainty.

/s/ Squar, Milner, Peterson, Miranda & Williamson, LLP

 

San Diego, California

September 7, 2007

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**OPENENERGY CORPORATION**

**CONSOLIDATEDBALANCE SHEETS**

**(Inthousands, except share data)**
| ** **                                                                                                                                                             | ** ** | **May 31, 2007** | ** ** | **May 31, 2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **ASSETS**                                                                                                                                                             | ** ** |
| **Current assets**                                                                                                                                                     | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| **Cash  and cash equivalents**                                                                                                                                         |       | $                          | 319        |                       | $          | 2,758 |   |
| **Accounts  receivable, net of allowance for doubtful accounts of $138 at May 31, 2007**                                                                               |       | 415                        |       | 297                        |       |
| **Inventories**                                                                                                                                                        |       | 1,857                      |       | 2,932                      |       |
| **Notes  receivable**                                                                                                                                                  |       | —                     |       | 650                        |       |
| **Prepaid  expenses and other current assets**                                                                                                                         |       | 380                        |       | 537                        |       |
| **Total  current assets**                                                                                                                                              |       | 2,971                      |       | 7,174                      |       |
| ** **                                                                                                                                                             | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| **Fixed assets, net**                                                                                                                                                  |       | 1,298                      |       | 581                        |       |
| **Due from related parties**                                                                                                                                           |       | 1,993                      |       | 1,139                      |       |
| **Deferred financing costs, net**                                                                                                                                      |       | 93                         |       | 144                        |       |
| **Intangible assets, net**                                                                                                                                             |       | 4,889                      |       | 9,665                      |       |
| **Goodwill**                                                                                                                                                           |       | 10,221                     |       | 11,943                     |       |
| **Total  assets**                                                                                                                                                      |       | $                          | 21,465     |                       | $          | 30,646 |   |
| ** **                                                                                                                                                             | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                          | ** ** |
| **Current liabilities**                                                                                                                                                | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| **Accounts  payable**                                                                                                                                                  |       | $                          | 1,687      |                       | $          | 1,155 |   |
| **Notes  payable, current maturities**                                                                                                                                 |       | 325                        |       | 320                        |       |
| **Convertible  debentures, net**                                                                                                                                       |       | 1,778                      |       | —                     |       |
| **Advances  from related parties**                                                                                                                                     |       | 312                        |       | 314                        |       |
| **Other  accrued liabilities**                                                                                                                                         |       | 6,164                      |       | 2,232                      |       |
| **Deferred  revenue**                                                                                                                                                  |       | 1,197                      |       | 142                        |       |
| **Total  current liabilities**                                                                                                                                         |       | 11,463                     |       | 4,163                      |       |
| ** **                                                                                                                                                             | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| **Notes payable, net of current  maturities**                                                                                                                          |       | 14                         |       | 60                         |       |
| **Convertible debentures, net of  current maturities and debt discounts**                                                                                              |       | 4,178                      |       | 3,823                      |       |
| **Deferred tax liability**                                                                                                                                             |       | 1,752                      |       | 4,836                      |       |
| **Total  liabilities**                                                                                                                                                 |       | 17,407                     |       | 12,882                     |       |
| ** **                                                                                                                                                             | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| **Commitments and contingencies  (Note 15)**                                                                                                                           | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| ** **                                                                                                                                                             | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| **Stockholders’ equity**                                                                                                                                          | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| **Common stock, $0.001 par value;  1,125,000,000 shares authorized; 103,801,854 and 69,131,663 shares issued and  outstanding at May 31, 2007 and 2006, respectively** |       | 104                        |       | 69                         |       |
| **Additional paid—in capital**                                                                                                                                    |       | 56,407                     |       | 30,589                     |       |
| **Accumulated deficit**                                                                                                                                                |       | (52,453                    | )          | (12,901                    | )          |
| **Other comprehensive income**                                                                                                                                         |       | —                     |       | 7                          |       |
| **Total  stockholders’ equity**                                                                                                                                   |       | 4,058                      |       | 17,764                     |       |
|                                                                                                                                                                   |       |                       |       |                       |       |
| **Total liabilities and  stockholders’ equity**                                                                                                                   |       | $                          | 21,465     |                       | $          | 30,646 |   |

 

**The accompanying notes are an integral part of these consolidatedfinancial statements.**

37

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**OPENENERGY CORPORATION**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Inthousands, except per share data)**

 
| ** **                                                   | ** ** | **Twelve Months Ended May 31,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                   | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| **Revenues,  net**                                           |       | $                                                   | 4,292      |   | $ | 152 |   |
| **Cost of  sales**                                           |       | 9,080                                               |       | 156 |   |
| **Gross  profit (loss)**                                     |       | (4,788                                              | )          | (4 | ) |
| ** **                                                   | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| **Operating  expenses**                                      | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| **Selling, general and administrative**                      |       | 17,084                                              |       | 8,638 |   |
| **Research and development**                                 |       | 513                                                 |       | 2,530 |   |
| **Impairment of intangibles and goodwill**                   |       | 10,540                                              |       | — |   |
| **Impairment of note receivable**                            |       | 683                                                 |       | — |   |
| **Total operating expenses**                                 |       | 28,820                                              |       | 11,168 |   |
| ** **                                                   | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| **Loss  from operations**                                    |       | (33,608                                             | )          | (11,172 | ) |
| ** **                                                   | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| **Other  income (expense)**                                  | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| **Interest and other income**                                |       | 70                                                  |       | 16 |   |
| **Interest expense**                                         |       | (8,924                                              | )          | (707 | ) |
| **Other expense**                                            |       | (237                                                | )          | (284 | ) |
| **Loss on foreign exchange**                                 |       | (115                                                | )          | (62 | ) |
| **Total other income (expense)**                             |       | (9,206                                              | )          | (1,037 | ) |
| ** **                                                   | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| **Loss  from continuing operations before income taxes**     |       | (42,814                                             | )          | (12,209 | ) |
| **Income  tax benefit**                                      |       | 3,262                                               |       | 885 |   |
| **Loss  from continuing operations**                         |       | (39,552                                             | )          | (11,324 | ) |
| ** **                                                   | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| **Loss  from discontinued operations**                       |       | —                                              |       | (849 | ) |
| **Net  loss**                                                |       | $                                                   | (39,552    | ) | $ | (12,173 | ) |
| ** **                                                   | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| **Net  loss per share - basic and diluted**                  | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| **Continuing operations**                                    |       | $                                                   | (0.49      | ) | $ | (0.20 | ) |
| **Discontinued operations**                                  |       | $                                                   | —     |   | $ | (0.02 | ) |
| **Net loss**                                                 |       | $                                                   | (0.49      | ) | $ | (0.22 | ) |
|                                                         |       |                                                |       |   |   |
| **Weighted average shares  outstanding - basic and diluted** |       | 81,085,056                                          |       | 55,685,610 |   |

 

**The accompanying notes are an integral part of theseconsolidated financial statements.**

38

----

**OPENENERGY CORPORATION**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)**

**YearsEnded May 31, 2007 and 2006**

**(In thousands, except stock shares)**
| ** **                                                               | ** ** | **Common   Stock Shares** | ** ** | **Common   Stock   Amount** | ** ** | **Additional   Paid in   Capital** | ** ** | **Accumulated   Deficit** | ** ** | **Other   Comprehensive  Income** | ** ** | **Total   Stockholders'   Equity (Deficit)** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------------------------|------------|---------------------------------------|------------|---------------------------------------------------|------------|--------------------------------|------------|----------------------------------------|------------|-------------------------------------------------------------|------------|
| **Balance,  May 31, 2005**                                               | ** ** | **46,668,750**                      | ** ** | **$**                                 | **47**     | ** **                                        | **$**      | **411**                        | ** ** | **$**                                  | **(728**   | **)**                                                       | **$**      | **5** | ** ** | **$** | **(265** | **)** |
| ** **                                                               | ** ** | ** **                          | ** ** | ** **                            | ** ** | ** **                                        | ** ** | ** **                     | ** ** | ** **                             | ** ** | ** **                                                  | ** ** |
| **Issuance  of stock in connection with private placement**              |       | 3,089,790                           |       | 3                                     |       | 2,429                                             |       | —                         |       | —                                 |       | 2,432                                                       |       |
| ** **                                                               | ** ** | ** **                          | ** ** | ** **                            | ** ** | ** **                                        | ** ** | ** **                     | ** ** | ** **                             | ** ** | ** **                                                  | ** ** |
| **Issuance  of unearned restricted stock**                               |       | 9,643,467                           |       | 10                                    |       | (10                                               | )          | —                         |       | —                                 |       | —                                                      |       |
| ** **                                                               | ** ** | ** **                          | ** ** | ** **                            | ** ** | ** **                                        | ** ** | ** **                     | ** ** | ** **                             | ** ** | ** **                                                  | ** ** |
| **Restricted  stock amortization**                                       |       | —                              |       | —                                |       | 4,388                                             |       | —                         |       | —                                 |       | 4,388                                                       |       |
| ** **                                                               | ** ** | ** **                          | ** ** | ** **                            | ** ** | ** **                                        | ** ** | ** **                     | ** ** | ** **                             | ** ** | ** **                                                  | ** ** |
| **Issuance  of stock as loan fee**                                       |       | 65,000                              |       | —                                |       | 132                                               |       | —                         |       | —                                 |       | 132                                                         |       |
| ** **                                                               | ** ** | ** **                          | ** ** | ** **                            | ** ** | ** **                                        | ** ** | ** **                     | ** ** | ** **                             | ** ** | ** **                                                  | ** ** |
| **Issuance  of warrants in connection with debt financing**              |       | —                              |       | —                                |       | 4,478                                             |       | —                         |       | —                                 |       | 4,478                                                       |       |
| ** **                                                               | ** ** | ** **                          | ** ** | ** **                            | ** ** | ** **                                        | ** ** | ** **                     | ** ** | ** **                             | ** ** | ** **                                                  | ** ** |
| **Beneficial  conversion feature - convertible debt, net of income tax** |       | —                              |       | —                                |       | 3,905                                             |       | —                         |       | —                                 |       | 3,905                                                       |       |
| ** **                                                               | ** ** | ** **                          | ** ** | ** **                            | ** ** | ** **                                        | ** ** | ** **                     | ** ** | ** **                             | ** ** | ** **                                                  | ** ** |
| **Issuance  of stock for services**                                      |       | 482,500                             |       | —                                |       | 907                                               |       | —                         |       | —                                 |       | 907                                                         |       |
|                                                                     |       |                                |       |                                  |       |                                              |       |                           |       |                                   |       |                                                        |       |
| **Issuance  of stock in connection with acquisitions**                   |       | 9,182,156                           |       | 9                                     |       | 13,949                                            |       | —                         |       | —                                 |       | 13,958                                                      |       |
| ** **                                                               | ** ** | ** **                          | ** ** | ** **                            | ** ** | ** **                                        | ** ** | ** **                     | ** ** | ** **                             | ** ** | ** **                                                  | ** ** |
| **Net  loss**                                                            |       | —                              |       | —                                |       | —                                            |       | (12,173                        | )          | —                                 |       | (12,173                                                     | )          |
| ** **                                                               | ** ** | ** **                          | ** ** | ** **                            | ** ** | ** **                                        | ** ** | ** **                     | ** ** | ** **                             | ** ** | ** **                                                  | ** ** |
| **Foreign  currency translation adjustments**                            |       | —                              |       | —                                |       | —                                            |       | —                         |       | 2                                      |       | 2                                                           |       |
| ** **                                                               | ** ** | ** **                          | ** ** | ** **                            | ** ** | ** **                                        | ** ** | ** **                     | ** ** | ** **                             | ** ** | ** **                                                  | ** ** |
| **Balance,  May 31, 2006**                                               |       | 69,131,663                          |       | 69                                    |       | 30,589                                            |       | (12,901                        | )          | 7                                      |       | 17,764                                                      |       |
|                                                                     |       |                                |       |                                  |       |                                              |       |                           |       |                                   |       |                                                        |       |
| **Restricted  stock amortization**                                       |       | —                              |       | —                                |       | 6,420                                             |       | —                         |       | —                                 |       | 6,420                                                       |       |
|                                                                     |       |                                |       |                                  |       |                                              |       |                           |       |                                   |       |                                                        |       |
| **Issuance  of stock for services**                                      |       | 421,483                             |       | 1                                     |       | 233                                               |       | —                         |       | —                                 |       | 234                                                         |       |
|                                                                     |       |                                |       |                                  |       |                                              |       |                           |       |                                   |       |                                                        |       |
| **Issuance  of stock and warrants for licensing rights**                 |       | 100,000                             |       | —                                |       | 1,787                                             |       | —                         |       | —                                 |       | 1,787                                                       |       |
| ** **                                                               | ** ** | ** **                          | ** ** | ** **                            | ** ** | ** **                                        | ** ** | ** **                     | ** ** | ** **                             | ** ** | ** **                                                  | ** ** |
| **Cancellation  of stock issued for licensing rights**                   |       | (100,000                            | )          | —                                |       | —                                            |       | —                         |       | —                                 |       | —                                                      |       |
| ** **                                                               | ** ** | ** **                          | ** ** | ** **                            | ** ** | ** **                                        | ** ** | ** **                     | ** ** | ** **                             | ** ** | ** **                                                  | ** ** |
| **Issuance  of warrants in connection with debt financing**              |       | —                              |       | —                                |       | 1,801                                             |       | —                         |       | —                                 |       | 1,801                                                       |       |
| ** **                                                               | ** ** | ** **                          | ** ** | ** **                            | ** ** | ** **                                        | ** ** | ** **                     | ** ** | ** **                             | ** ** | ** **                                                  | ** ** |
| **Beneficial  conversion feature - convertible debt, net of income tax** |       | —                              |       | —                                |       | 229                                               |       | —                         |       | —                                 |       | 229                                                         |       |
|                                                                     |       |                                |       |                                  |       |                                              |       |                           |       |                                   |       |                                                        |       |
| **Conversion  of convertible debentures**                                |       | 26,261,997                          |       | 26                                    |       | 10,029                                            |       | —                         |       | —                                 |       | 10,055                                                      |       |
|                                                                     |       |                                |       |                                  |       |                                              |       |                           |       |                                   |       |                                                        |       |
| **Issuance  of stock in legal settlement**                               |       | 75,000                              |       | —                                |       | 70                                                |       | —                         |       | —                                 |       | 70                                                          |       |
| ** **                                                               | ** ** | ** **                          | ** ** | ** **                            | ** ** | ** **                                        | ** ** | ** **                     | ** ** | ** **                             | ** ** | ** **                                                  | ** ** |
| **Issuance  of stock in connection with acquisitions**                   |       | 6,911,711                           |       | 7                                     |       | 2,905                                             |       | —                         |       | —                                 |       | 2,912                                                       |       |
|                                                                     |       |                                |       |                                  |       |                                              |       |                           |       |                                   |       |                                                        |       |
| **Stock  based compensation expense**                                    |       | —                              |       | —                                |       | 765                                               |       | —                         |       | —                                 |       | 765                                                         |       |
| ** **                                                               | ** ** | ** **                          | ** ** | ** **                            | ** ** | ** **                                        | ** ** | ** **                     | ** ** | ** **                             | ** ** | ** **                                                  | ** ** |
| **Issuance  of stock upon warrant exercise**                             |       | 1,000,000                           |       | 1                                     |       | 499                                               |       | —                         |       | —                                 |       | 500                                                         |       |
| ** **                                                               | ** ** | ** **                          | ** ** | ** **                            | ** ** | ** **                                        | ** ** | ** **                     | ** ** | ** **                             | ** ** | ** **                                                  | ** ** |
| **Foreign  currency translation adjustments**                            |       | —                              |       | —                                |       | —                                            |       | —                         |       | (7                                     | )          | (7                                                          | )          |
| ** **                                                               | ** ** | ** **                          | ** ** | ** **                            | ** ** | ** **                                        | ** ** | ** **                     | ** ** | ** **                             | ** ** | ** **                                                  | ** ** |
| **Warrant  repricing**                                                   |       | —                              |       | —                                |       | 1,080                                             |       | —                         |       | —                                 |       | 1,080                                                       |       |
| ** **                                                               | ** ** | ** **                          | ** ** | ** **                            | ** ** | ** **                                        | ** ** | ** **                     | ** ** | ** **                             | ** ** | ** **                                                  | ** ** |
| **Net  loss**                                                            |       | —                              |       | —                                |       | —                                            |       | (39,552                        | )          | —                                 |       | (39,552                                                     | )          |
|                                                                     |       |                                |       |                                  |       |                                              |       |                           |       |                                   |       |                                                        |       |
| **Balance, May 31, 2007**                                                |       | 103,801,854                         |       | $                                     | 104        |                                              | $          | 56,407                         |       | $                                      | (52,453    | )                                                           | $          | — |   | $ | 4,058 |   |

** **

**The accompanying notes are anintegral part of these consolidated financial statements.**

39

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**OPEN ENERGY CORPORATION**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(In thousands)**
| ** **                                                                            | ** ** | **Twelve Months Ended May 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES**                                             | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Net loss                                                                              |       | $                                                   | (39,552    | ) | $ | (12,173 | ) |
| Loss from  discontinued operations                                                    |       | —                                              |       | 849 |   |
| Adjustments to reconcile net loss to net cash used  in operating activities:          |       |                                                |       |   |   |
| Depreciation and amortization                                                         |       | 1,593                                               |       | 448 |   |
| Interest from amortization of warrants and  beneficial conversion feature, net of tax |       | 6,507                                               |       | 298 |   |
| Amortization of deferred financing costs                                              |       | 51                                                  |       | 8 |   |
| Amortization of original issue discount                                               |       | 573                                                 |       | 44 |   |
| Warrant repricing                                                                     |       | 1,080                                               |       | — |   |
| Stock issued in legal settlement                                                      |       | 70                                                  |       | — |   |
| Stock based compensation                                                              |       | 7,418                                               |       | 5,295 |   |
| Loan fee                                                                              |       | —                                              |       | 132 |   |
| Addition to bad debt reserve                                                          |       | 138                                                 |       | — |   |
| Addition to inventory reserves                                                        |       | 1,917                                               |       | 44 |   |
| Impairment of intangibles and goodwill                                                |       | 10,541                                              |       | 1,800 |   |
| Reserve for note receivable and accrued interest  receivable                          |       | 683                                                 |       | — |   |
| Deferred taxes                                                                        |       | (3,236                                              | )          | (886 | ) |
| Change in operating assets and liabilities, net of  effects of acquisitions:          |       |                                                |       |   |   |
| Accounts receivable                                                                   |       | (228                                                | )          | (213 | ) |
| Due from employees                                                                    |       | (853                                                | )          | (1,139 | ) |
| Inventories                                                                           |       | (842                                                | )          | (1,479 | ) |
| Other current assets                                                                  |       | 124                                                 |       | (513 | ) |
| Accounts payable                                                                      |       | 545                                                 |       | 790 |   |
| Other accrued liabilities                                                             |       | 3,177                                               |       | 1,977 |   |
| Deferred revenue                                                                      |       | 1,055                                               |       | 142 |   |
| Net cash used in continuing operations                                                |       | (9,239                                              | )          | (4,576 | ) |
| Net cash used in discontinued operations                                              |       | —                                              |       | (681 | ) |
| Net cash used in operating activities                                                 |       | (9,239                                              | )          | (5,257 | ) |
|                                                                                  |       |                                                |       |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES**                                             | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Proceeds from sale of discontinued operations                                         |       | —                                              |       | 350 |   |
| Purchases of property and equipment                                                   |       | (852                                                | )          | (277 | ) |
| Additions to intangible assets                                                        |       | (2                                                  | )          | (90 | ) |
| Acquisitions, net of cash acquired                                                    |       | 22                                                  |       | (6,782 | ) |
| Other investing activities of discontinued  operations                                |       | —                                              |       | (119 | ) |
| Net cash used in investing activities                                                 |       | (832                                                | )          | (6,918 | ) |
|                                                                                  |       |                                                |       |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES**                                             | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Proceeds from issuance of notes payable                                               |       | —                                              |       | 334 |   |
| Proceeds from issuance of convertible debt                                            |       | 8,000                                               |       | 15,250 |   |
| Proceeds from warrant exercise                                                        |       | 500                                                 |       | — |   |
| Proceeds from private placements of common stock                                      |       | —                                              |       | 1,755 |   |
| Payments on notes payable                                                             |       | (149                                                | )          | (68 | ) |
| Payments on advances from related parties                                             |       | (2                                                  | )          | (751 | ) |
| Payment of debt issuance costs                                                        |       | (710                                                | )          | (952 | ) |
| Other financing activities of discontinued  operations                                |       | —                                              |       | (637 | ) |
| Net cash provided by financing activities                                             |       | 7,639                                               |       | 14,931 |   |
|                                                                                  |       |                                                |       |   |   |
| Effect of  foreign currency translation                                               |       | (7                                                  | )          | 2 |   |
|                                                                                  |       |                                                |       |   |   |
| Net (decrease)  increase in cash and cash equivalents                                 |       | (2,439                                              | )          | 2,758 |   |
|                                                                                  |       |                                                |       |   |   |
| Cash and cash  equivalents at beginning of period                                     |       | 2,758                                               |       | — |   |
|                                                                                  |       |                                                |       |   |   |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD                                           |       | $                                                   | 319        |   | $ | 2,758 |   |
|                                                                                  |       |                                                |       |   |   |
| SUPPLEMENTAL  DISCLOSURES                                                             |       |                                                |       |   |   |
|                                                                                  |       |                                                |       |   |   |
| **Cash  operating activities:**                                                       | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Interest paid                                                                         |       | $                                                   | 13         |   | $ | 251 |   |
| Income taxes  paid                                                                    |       | $                                                   | —     |   | $ | — |   |
|                                                                                  |       |                                                |       |   |   |
| **Non-cash  investing and financing activities:**                                     | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Stock issued and  to be issued in connection with acquisition                         |       | $                                                   | 3,643      |   | $ | 13,958 |   |
| Liabilities  assumed in connection with acquisition                                   |       | $                                                   | 24         |   | $ | 1,796 |   |
| Assets acquired  in connection with acquisition                                       |       | $                                                   | 2,873      |   | $ | 25,349 |   |
| Note receivable  from sale of oil and gas interests                                   |       | $                                                   | —     |   | $ | 650 |   |
| Warrants issued  in connection with debt financing                                    |       | $                                                   | 1,801      |   | $ | 4,478 |   |
| Beneficial  conversion feature associated with convertible debt                       |       | $                                                   | 229        |   | $ | 3,905 |   |
| Issuance of  stock in lieu of debt repayment                                          |       | $                                                   | —     |   | $ | 677 |   |
| Stock issued  upon conversion of debt                                                 |       | $                                                   | 10,055     |   | $ | — |   |
| Stock and  warrants issued for technology license                                     |       | $                                                   | 1,787      |   | $ | — |   |
| Acquisition of  fixed assets pursuant to notes payable agreement                      |       | $                                                   | 91         |   | $ | — |   |
| Acquisition of fixed  assets pursuant to capital lease                                |       | $                                                   | 16         |   | $ | — |   |

**The accompanying notes are an integral part of theseconsolidated financial statements.**

40

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**Open Energy Corporation**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**For theYears Ended May 31, 2007 and 2006**

**Note 1 –The Company and Summary of Significant Accounting Policies**

*TheCompany*

Open EnergyCorporation, a Nevada corporation (the “Company”), focuses on the developmentand commercialization of solar energy products and technologies for a widerange of applications including power production and water desalination.

The Company wasincorporated on April 11, 2002, and was originally involved in oil and naturalgas development with interests in property, wells, pipelines and a small gasrefinery in Alberta, Canada. In September 2005, the Company decided to sell itsoil and gas holdings in order to focus entirely upon renewable energy. The oiland gas divestiture was completed during the quarter ended February 28, 2006and the Company commenced sales of a portfolio of renewable energy products andtechnologies, based on its acquisitions of Connect Renewable Energy, Inc. (“CRE”)and Solar Roofing Systems, Inc. (“SRS”), which were completed in March 2006 andApril 2006, respectively. With the acquisition of WaterEye Corporation inDecember 2006 (see Note 4), the Company intends to also develop andcommercialize utility monitoring products.

Shares of the Company’scommon stock currently trade on the OTC Bulletin Board under the symbol “OEGY.OB”(formerly BBSE.OB). On April 19, 2006, the Company effected a corporate namechange from Barnabus Energy, Inc. to Open Energy Corporation. (On May 4, 2005,the Company had effected a corporate name change from Barnabus Enterprises,Ltd. to Barnabus Energy, Inc).

*Basis of Presentation and Principles ofConsolidation*

The accompanyingconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States of America. Theconsolidated financial statements include the accounts of the Company and itswholly owned subsidiaries. All significant inter-company accounts andtransactions have been eliminated.

*Reclassification*

Certain amounts inthe prior periods presented have been reclassified to conform to the currentperiod financial statement presentation.

*ForeignCurrency*

The functionalcurrency for the Company’s Canadian subsidiary is the United States dollar.Gains and losses from foreign exchange transactions are included in theconsolidated statements of operations and have not been significant.Translation adjustments resulting from the process of translating the Company’sformer oil and gas operations into U.S. dollars are included in determiningcomprehensive loss and have not been significant.

*Use of Estimates*

The preparation of financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and also requires disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting periods. Actual resultscould differ from those estimates. Significant estimates made by managementinclude revenue recognition estimates, the viability of recognizing deferredtax assets, valuation of intangibles and goodwill, valuation of equityinstruments, reserves for inventory, allowance for uncollectible amounts duefrom related parties and the allowance for doubtful accounts receivable.Significant changes in these estimates may have a material impact on thefinancial statements.

*RevenueRecognition*

The Companyrecognizes revenue in accordance with SEC Staff Accounting Bulletin No. 104, “RevenueRecognition” (“SAB 104”). The Company generates revenue from the sale of PVroofing tiles, PV roofing membranes, balance of system products, and managementsystem products to our dealers or other parties. The Company does not performany installations of PV products. The Company does, however, install watermonitoring systems and recognizes corresponding license/subscription revenueconsistent with the requirements of AICPA Statement of Position (SOP) 97-2,*Software Revenue Recognition*. SAB 104requires that four basic criteria must be met before revenue can be recognized:(1) persuasive evidence of an arrangement exists; (2) delivery has occurred orservices rendered; (3) the seller’s price to the buyer is fixed anddeterminable; and (4) collectibility is reasonably assured. Amounts billed orreceived from customers in advance of performance are recorded as deferredrevenue.

*Cash and Cash Equivalents*

Cash and cashequivalents consist primarily of cash on deposit, certificates of deposit withoriginal maturities of three months or less and money market accounts that arereadily convertible into cash.

41

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*Fair Value of Financial Instruments*

TheCompany’s financial instruments consist primarily of cash, accounts receivable,accounts payable, and notes payable. These financial instruments are stated attheir respective carrying values, which approximate their fair values.

*Concentration of Credit Risk*

Financial instruments that potentially subject the Company toconcentrations of credit risk consist principally of temporary cash investmentsand trade accounts receivable. The Company maintains cash balances at variousfinancial institutions primarily located in California. Accounts at theseinstitutions are secured by the Federal Deposit Insurance Corporation up to$100,000. At times, balances may exceed federally insured limits. The Companyhas not experienced any losses in such accounts. Management believes that theCompany is not exposed to any significant credit risk with respect to its cashand cash equivalents.

*Accounts Receivable*

The Company carries its accounts receivable at their faceamounts less an allowance for doubtful accounts. On a periodic basis, theCompany evaluates its accounts receivable and establishes an allowance fordoubtful accounts based on a combination of specific customer circumstances andcredit conditions and based on a history of write-offs and collections. TheCompany evaluates items on an individual basis when determining accountsreceivable write-offs. The Company’s policy is generally to not charge intereston trade receivables after the invoice becomes past due.

*Inventories*

Inventoriesconsist of PV cells and other component material for specific customer ordersand spare parts, and are valued at lower of cost (first-in, first-out) ormarket. Management provides a reserve to reduce inventory to its net realizablevalue. Certain factors could impact the realizable value of inventory, somanagement continually evaluates its recoverability based on assumptions aboutcustomer demand and market conditions. The evaluation may take intoconsideration expected demand, new product development, the effect new productsmight have on the sale of existing products, product obsolescence, and otherfactors. The reserve or write-down is equal to the difference between the costof inventory and the estimated market value based upon assumptions about futuredemand and market conditions. If actual market conditions are less favorablethan those projected by management, additional inventory reserves orwrite-downs may be required. If actual market conditions are more favorable,reserves or write-downs may be reversed.

*WarrantyReserves*

It is customary inthe Company’s business and industry to warrant or guarantee the performance ofPV roofing products at certain levels of conversion efficiency for extendedperiods, often as long as 25 years. It is also customary to warrant orguarantee the functionality of inverters and balance of systems for 10 years.The Company therefore maintains warranty reserves based on an estimatedpercentage of revenues upon shipment of products to customers as a component ofcost of sales to cover the potential liability that could arise from theseguarantees. The Company’s potential liability is generally in the form ofproduct replacement. As necessary, the Company’s warranty reserve will alsoinclude specific accruals for known product issues and an accrual for anestimate of incurred but not reported product issues based on industry lossinformation.

*Property and Equipment*

Property and equipment is recorded at cost and depreciatedusing the straight-line method over estimated useful lives of the assets,generally ranging from three to seven years. Leasehold improvements areamortized over the lesser of the lease term or useful life of the asset.Expenditures for ordinary repairs and maintenance are expensed as incurredwhile major additions and improvements are capitalized.

*Goodwilland Intangible Assets*

Goodwillrepresents the excess of costs over fair value of assets of businessesacquired. Per Statement of Financial Accounting Standards (“SFAS”) No. 142, *Goodwill and Other Intangible Assets*,goodwill and intangible assets acquired in a purchase business combination anddetermined to have an indefinite useful life are not amortized, but insteadmust be tested for impairment annually or more frequently if circumstancesindicate that indicators of impairment may be present. Management assessesgoodwill for impairment at the reporting unit level on an annual basis atfiscal year end or more frequently under certain circumstances. Suchcircumstances include (i) significant adverse change in legal factors or in thebusiness climate, (ii) an adverse action or assessment by a regulator, (iii)unanticipated competition, (iv) a loss of key personnel, (v) amore-likely-than-not expectation that a reporting unit or a significant portionof a reporting unit will be sold or otherwise disposed of, and (vi) recognitionof an impairment loss in a subsidiary that is a component of a reporting unit.Management must make assumptions regarding estimating the fair value of thecompany reporting unit. If these estimates or related assumptions change in thefuture, the Company may be required to record an impairment charge. For theyear ended May 31, 2007, the Company tested its goodwill for impairment underthe provisions of SFAS No. 142, and recorded the charges described in Note 5.

Intangible assets with finite lives are amortized overtheir estimated useful lives, which range from five to ten years. Intangibleassets are reviewed for impairment whenever events or circumstances indicateimpairment might exist in accordance with SFAS No. 144, *Accounting for the Impairment or Disposal ofLong-lived Assets.*The projected undiscounted net cash flowsexpected to be derived from the use of those assets are compared to therespective net carrying amounts to determine whether any impairment exists.Impairment, if any, is based on the excess of the carrying amount over the fairvalue of those assets.

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Factors theCompany considers important which could trigger an impairment review include:

·      Significant underperformancerelative to historical or projected future operating results;

·      Significant changes in the manner of useof the acquired assets or the strategy for the Company’s overall business; and

·      Significant negative industry or economictrends.

For the year endedMay 31, 2007, the Company tested its intangible assets for impairment under theprovisions of SFAS No. 144, and recorded the charges described in Note 5.

*DeferredFinancing Costs*

Costs related to theissuance of debt are capitalized and amortized to interest expense over thelife of the related debt on a straight line basis which is not materiallydifferent from the results obtained using the effective interest method.

*IncomeTaxes*

Income taxes arecomputed using the asset and liability method. Under the asset and liability method,deferred income tax assets and liabilities are determined based on thedifferences between the financial reporting and tax bases of assets andliabilities and are measured using the currently enacted tax rates and laws. Avaluation allowance is provided for the amount of deferred tax assets that,based on available evidence, are not expected to be realized.

*DerivativeFinancial Instruments*

The Companyaccounts for derivative instruments in accordance with the provisions of SFASNo. 133, *Accounting for DerivativeInstruments and Hedging Activities (“SFAS No. 133”)*, and its relatedinterpretations, and complies with SFAS No. 138, *Accounting for Certain Derivative Instruments and Hedging Activities—anamendment of FASB Statement No. 133 (“SFAS No. 133”)*. SFAS No. 133and SFAS No. 138 establish accounting and reporting standards for derivativeinstruments, including certain derivative instruments embedded in othercontracts and for hedging activities.

The Company doesnot use derivative instruments to hedge exposures to cash flow, market orforeign currency risk. Terms of convertible debt and equity instruments arereviewed to determine whether or not they contain embedded derivativeinstruments that are required under SFAS No. 133 to be accounted for separatelyfrom the host contract, and recorded on the balance sheet at fair value. Thefair value of derivative liabilities is required to be revalued at eachreporting date, with corresponding changes in fair value recorded in currentperiod operating results.

Freestandingwarrants issued by the Company in connection with the issuance or sale of debtand equity instruments are considered to be derivative instruments, and areevaluated and accounted for in accordance with the provisions of the EmergingIssues Task Force Issue (“EITF”) No. 00-19, *Accountingfor Derivative Financial Instruments Indexed to, and Potentially Settled in, aCompany’s Own Stock (“EITF No. 00-19”)*. Pursuant to EITF No. 00-19,an evaluation of specifically identified conditions is made to determinewhether the fair value of warrants issued is required to be classified asequity or as a derivative liability.

*BeneficialConversion and Warrant Valuation*

In accordance withEITF No. 98-5, *Accounting for ConvertibleSecurities with Beneficial Conversion Features or Contingently AdjustableConversion Ratios* and EITF No. 00-27, *Application of Issue No. 98-5 to Certain Convertible Instruments,* the Company records a beneficial conversionfeature (“BCF”) related to the issuance of convertible debt instruments thathave conversion features at fixed rates that are in-the-money when issued, andthe fair value of warrants issued in connection with those instruments. The BCFfor the convertible instruments is recognized and measured by allocating a portionof the proceeds to warrants, based on their relative fair value, and as areduction to the carrying amount of the convertible instrument equal to theintrinsic value of the conversion feature. The discounts recorded in connectionwith the BCF and warrant valuation are recognized as non-cash interest expenseover the term of the convertible debt, using the effective interest method.

*Stock-BasedCompensation*

Beginning infiscal year 2007, the Company accounts for share-based compensationarrangements in accordance with the provisions of Statement of FinancialAccounting Standards No. 123R (“SFAS 123R”) *Share-Based Payment*, which requires the measurement andrecognition of compensation expense for all share-based payment awards toemployees and directors based on estimated fair values. The Company uses theBlack-Scholes option valuation model to estimate the fair value of its stockoptions at the date of grant. The Black-Scholes option valuation model requiresthe input of subjective assumptions to calculate the value of stock options.The Company uses historical data among other information to estimate theexpected price volatility, the expected option life and the expected forfeiturerate.

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In accordance withSFAS 123R, the Company records compensation expense for Restricted Stock Awardsbased on the estimated fair value of the award on the date of grant. Theestimated fair value is determined based on the closing price of the Company’sCommon Stock on the award date multiplied by the number of awards expected tovest. The number of awards expected to vest is based on the number of awardsgranted adjusted by estimated forfeiture rates. The total compensation cost isthen recognized ratably over the vesting period.

*Litigation*

From time to time,the Company is involved in disputes, litigation and other legal actions. TheCompany estimates the range of liability related to pending litigation wherethe amount and range of loss can be estimated. The Company records its bestestimate of a loss when the loss is considered probable. Where a liability isprobable and there is a range of estimated loss with no best estimate in therange, the Company records a charge equal to at least the minimum estimatedliability for a loss contingency when both of the following conditions are met:(i) information available prior to issuance of the financial statementsindicates that it is probable that an asset had been impaired or a liabilityhad been incurred at the date of the financial statements and (ii) the range ofloss can be reasonably estimated.

*Basicand Diluted Net Loss per Share*

Basic net loss per shareis computed by dividing the loss for the period by the weighted average numberof common shares outstanding for the period. Fully diluted loss per sharereflects the potential dilution of securities by including other potentialissuances of common stock, including shares to be issued upon exercise of stockoptions and warrants, in the weighted average number of shares of common stockoutstanding for a period and is not presented where the effect isanti-dilutive.

A total of 44,318,780shares underlying convertible debt and 22,837,699 shares underlying warrantsissued as of May 31, 2007, have been excluded from the calculation because theyare deemed to be anti-dilutive.

**Note 2 –Going Concern**

The accompanyingfinancial statements have been prepared assuming the Company will continue as agoing concern, which contemplates the realization of assets and satisfaction ofliabilities in the normal course of business. The Company has incurred lossessince its inception totaling approximately $52,453,000 through May 31, 2007. Asof May 31, 2007, we had cash and cash equivalents of $319,000, and negativeworking capital of $8,492,000. During the year ended May 31, 2007, we fundedour operations from private sales of equity and debt securities and have nounused sources of liquidity. We believe our current cash will only providesufficient working capital to fund our operations through September 2007. Ourcurrent cash requirements are significant due to significant inventorypurchases; the need to bring in additional personnel to support our salesefforts; delays in product shipments as a result of the shift to outsourcingand the suspension of membrane product shipments; research and developmentexpenses; and other operational expenses. We expect to continue to usesignificant sources of cash to fund our operations during fiscal 2008. Thus,additional equity or debt financing will need to be raised in the near futureto implement our business strategy.

The ability of theCompany to continue as a going concern is dependent on the Company obtainingadequate capital or it could be forced to cease operations. In order tocontinue as a going concern, the Company will also need to develop and grow itscustomer base and revenues and achieve a profitable level of operations. Management’splans to obtain such resources for the Company include raising additionalcapital through sales of debt and equity, the proceeds of which will be used topay the scheduled principal and accrued amounts due currently and in default toother creditors. The financial statements included herein do not include anyadjustments that might be necessary if the Company is unable to continue as agoing concern.

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**Note 3 –Recent Accounting Pronouncements**

In February 2006,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 155, *“Accounting for Certain Hybrid Financial Instruments,”*an amendment of SFAS No. 133, *“Accountingfor Derivative Instruments and Hedging Activities”* and SFAS No. 140,*“Accounting for Transfers and Servicing ofFinancial Assets and Extinguishments of Liabilities.”* With respectto SFAS No. 133, SFAS No. 155 simplifies accounting for certain hybridfinancial instruments by permitting fair value remeasurement for any hybridfinancial instrument that contains an embedded derivative that otherwise wouldrequire bifurcation and eliminates the interim guidance in Statement 133Implementation Issue No. D1, *“Application ofStatement 133 to Beneficial Interests in Securitized Financial Assets,”*which provided that beneficial interests in securitized financial assets arenot subject to the provision of SFAS No. 133. With respect to SFAS No. 140,SFAS No. 155 eliminates a restriction on the passive derivative instrumentsthat a qualifying special-purpose entity may hold. SFAS No. 155 is effectivefor all financial instruments acquired or issued after the beginning of anentity’s first fiscal year that begins after September 15, 2006. The Company iscurrently evaluating the impact of this guidance on its consolidated financialposition, results of operations and cash flows.

InJuly 2006, the FASB issued FIN 48, “*Accountingfor Uncertainty in Income Taxes — an Interpretation of FASB No. 109*”which prescribes a recognition threshold and measurement process for recordingin the financial statements uncertain tax positions taken or expected to betaken in a tax return. Additionally, FIN 48 provides guidance on recognition,classification, accounting in interim periods and disclosure requirements foruncertain tax positions. The accounting provisions of FIN 48 will be effectivefor fiscal years beginning after December 15, 2006. The Company is currentlyevaluating the impact of this guidance on its consolidated financial position,results of operations and cash flows.

InSeptember 2006, the FASB issued SFAS No. 157, “*FairValue Measurements*.” SFAS No. 157 defines fair value, established aframework for measuring fair value under generally accepted accountingprinciples (“GAAP”) and expands disclosures about fair value measurements. SFASNo. 157 is effective for financial statements issued for fiscal years beginningafter November 15, 2007. The Company is currently evaluating the impact of thisguidance on its consolidated financial position, results of operations and cashflows.

In September 2006,the SEC released Staff Accounting Bulletin No. 108 (“SAB 108”), *Considering the Effects of Prior Year Misstatementswhen Quantifying Misstatements in Current Year Financial Statements*.SAB 108 provides interpretive guidance on the SEC’s views regarding the processof quantifying the materiality of financial statement misstatements. SAB 108 iseffective for fiscal years ending after November 15, 2006. The adoption of SAB108 did not have a material impact on the Company’s consolidated financialstatements.

In November 2006,the EITF reached a final consensus in EITF Issue 06-6 “*Debtor’s Accounting for a Modification (or Exchange)of Convertible Debt Instruments.*” EITF No. 06-6 addresses the modification of a convertible debtinstrument that changes the fair value of an embedded conversion option and thesubsequent recognition of interest expense for the associated debt instrumentwhen the modification does not result in a debt extinguishment pursuant to EITFNo. 96-19, “*Debtor’s Accounting for aModification or Exchange of Debt Instruments*.” The consensus shouldbe applied to modifications or exchanges of debt instruments occurring ininterim or annual periods beginning after November 29, 2006. Adoption of EITFNo. 06-6 by the Company during the quarter ended February 28, 2007 did not havea significant impact on its consolidated financial statements.

In November 2006,the FASB ratified EITF Issue No. 06-7, “*Issuer’sAccounting for a Previously Bifurcated Conversion Option in a Convertible DebtInstrument When the Conversion Option No Longer Meets the Bifurcation Criteriain FASB Statement No. 133, Accounting for Derivative Instruments and HedgingActivities*”. At the time of issuance, an embedded conversion optionin a convertible debt instrument may be required to be bifurcated from the debtinstrument and accounted for separately by the issuer as a derivative underSFAS No. 133, based on the application of EITF No. 00-19. Subsequent to theissuance of the convertible debt, facts may change and cause the embeddedconversion option to no longer meet the conditions for separate accounting as aderivative instrument, such as when the bifurcated instrument meets theconditions of Issue 00-19 to be classified in shareholders’ equity. Under EITFNo. 06-7, when an embedded conversion option previously accounted for as aderivative under SFAS No. 133 no longer meets the bifurcation criteria underthat standard, an issuer shall disclose a description of the principal changescausing the embedded conversion option to no longer require bifurcation underSFAS No. 133 and the amount of the liability for the conversion optionreclassified to shareholders’ equity. EITF No. 06-7 should be applied to allpreviously bifurcated conversion options in convertible debt instruments thatno longer meet the bifurcation criteria in SFAS No. 133 in interim or annualperiods beginning after December 15, 2006, regardless of whether the debtinstrument was entered into prior or subsequent to the effective date of EITFNo. 06-7. Earlier application of EITF No. 06-7 is permitted in periods forwhich financial statements have not yet been issued. The adoption of EITFNo. 06-7 did not significantly affect the Company’s financial position orresults of operations.

In December 2006,the FASB issued FASB Staff Position (“FSP”) EITF 00-19-2 “*Accounting for Registration Payment Arrangements*(“FSP EITF 00-19-2”) which specifies that the contingent obligation to makefuture payments or otherwise transfer consideration under a registrationpayment arrangement should be separately recognized and measured in accordancewith SFAS No. 5, “*Accounting forContingencies* .” Adoption of FSP EITF 00-19-02 is required forfiscal years beginning after December 15, 2006. The Company is currentlyevaluating the impact of adopting this position on its consolidated financialstatements.

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In February 2007,the FASB issued SFAS No. 159 “*The Fair ValueOption for Financial Assets and Financial Liabilities—Including an amendment ofFASB Statement No. 115*”, which permits entities to choose to measuremany financial instruments and certain other items at fair value. The fairvalue option established by this Statement permits all entities to choose tomeasure eligible items at fair value at specified election dates. A businessentity shall report unrealized gains and losses on items for which the fairvalue option has been elected in earnings at each subsequent reporting date.Adoption is required for fiscal years beginning after November 15, 2007. Earlyadoption is permitted as of the beginning of a fiscal year that begins on orbefore November 15, 2007, provided the entity also elects to apply theprovisions of SFAS No. 159. The Company is currently evaluating the impact ofthis guidance on its consolidated financial position, results of operations orcash flows.

**Note4 – Acquisitions**

Acquisitions wererecorded using the purchase method of accounting and the results of operationsof acquired companies are included in the Company’s consolidated results fromthe date of each acquisition. The Company allocates the purchase price of itsacquisitions to the tangible assets, liabilities, and intangible assetsacquired, including in-process research and development (“IPR&D”), based ontheir estimated fair values in accordance with SFAS No. 141, *Business Combinations*. The excess purchaseprice over those fair values is recorded as goodwill.

The portion of the acquisition price that wasallocated to patents and other identifiable intangible assets will be amortizedover their estimated useful lives, which range from five to ten years. Amountsallocated to IPR&D are expensed and charged to operations on the date theacquisition closes. Amounts allocated to goodwill are not amortized and will betested annually for impairment. Intangible assets are carried and reported atacquisition cost, net of accumulated amortization subsequent to acquisition.

On March 30, 2006,the Company completed the acquisition and merger of Barnabus/CRE AcquisitionCorporation, a wholly-owned subsidiary of the Company, with and into ConnectRenewable Energy, Inc. (“CRE”), pursuant to the terms of the Agreement and Planof Merger dated February 8, 2006 among the Company, CRE and certain otherparties (the “Merger Agreement”). As a result of the merger, CRE became awholly-owned subsidiary of the Company. A director of the Company was thePresident and Chief Executive Officer of CRE before the merger. Pursuant to theMerger Agreement, all of the outstanding shares of common stock of CRE wereconverted into the right to receive an aggregate of 5,000,000 shares of theCompany’s common stock. CRE manufactures and distributes high efficiency PVroofing products designed to match the colors and edge profiles of cement tilescommonly used in residential and commercial construction. This acquisitionprovided the Company with building integrated solar tiles and architecturalglass.

In connection withthe merger, the Company entered into a consulting agreement with Connect byComputer, LLC, an entity affiliated with Mr. Ronald Gangemi, pursuant to whichMr. Gangemi has agreed to provide consulting services to the Company in thecapacity of Chief Technology Officer and to serve as a director for a period oftwo years. In consideration of such services, the Company agreed to pay Mr.Gangemi $16,000 per month. The Company also agreed to grant to Connect byComputer, LLC, 1,000,000 shares of common stock effective as of the date of themerger and 2,000,000 (subsequently amended to 200,000) additional shares ofcommon stock subject to the achievement by CRE of certain net sales targetsfollowing the merger. The net sales targets were not achieved and theadditional 200,000 shares were not granted.

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The purchase priceat the time of the acquisition was allocated per SFAS No. 141 based on theestimated fair value of net tangible and intangible assets acquired, andliabilities assumed, to the following assets and liabilities:
| Cash                                      |       | $          | 161,000        |       |
|-------------------------------------------|------------|------------|----------------|------------|
| Accounts  receivable                      |       | 37,000     |           |
| Inventory                                 |       | 443,000    |           |
| Other assets                              |       | 8,000      |           |
| Property,  furniture & equipment, net |       | 73,000     |           |
| Identifiable  intangibles                 |       | 5,900,000  |           |
| Goodwill                                  |       | 6,077,000  |           |
| TOTAL ASSETS  ACQUIRED                    |       | 12,699,000 |           |
|                                      |       |       |           |
| Accounts payable                          |       | 298,000    |           |
| Accrued interest                          |       | 56,000     |           |
| Litigation  contingency                   |       | 112,000    |           |
| Note  payable-current maturity            |       | 106,000    |           |
| Note  payable-related parties             |       | 650,000    |           |
| Customer  deposits                        |       | 8,000      |           |
| Accrued  liabilities                      |       | 12,000     |           |
| TOTAL  LIABILITIES ASSUMED                |       | 1,242,000  |           |
|                                      |       |       |           |
| Deferred tax  liability                   |       | 1,307,000  |           |
|                                      |       |       |           |
| **Fair  value of net assets acquired**    | ** ** | **$**      | **10,150,000** | ** ** |
|                                      |       |       |           |
| Consideration  paid:                      |       |       |           |
| Cash                                      |       | $          | 1,410,000      |       |
| Stock                                     |       | 8,580,000  |           |
| Transaction costs                         |       | 160,000    |           |
| ** **                                | ** ** | ** ** | ** **     |
| **Total consideration paid**              | ** ** | **$**      | **10,150,000** | ** ** |

 

Of the $5,900,000of acquired intangible assets, $900,000 was assigned to research anddevelopment assets that were written off at the date of acquisition inaccordance with FASB Interpretation No. 4, *Applicabilityof FASB Statement No. 2 to Business Combinations Accounted for by the PurchaseMethod.* The remaining $5,000,000 of acquired intangible assets wereestimated to have a weighted average useful life of approximately 8 years. Theintangible assets that make up that amount include patented technologies of$4,500,000 (8 year weighted average useful life), customer relationships of$400,000 (8 year weighted average useful life), and backlog of $100,000 (6month weighted average useful life). For the year ended May 31, 2007, theCompany has performed annual impairment tests of the carrying value of goodwilland intangible assets of its CRE acquisition. The tests determined that as ofMay 31, 2007, no indications of impairment existed for purchased intangibleassets and goodwill associated with its acquisition of CRE.

On April 10, 2006,the Company completed the acquisition and merger of all of the outstandingshares of Solar Roofing Systems Inc., an Ontario, Canada corporation. TheCompany’s subsidiary, 2093603 Ontario, Inc. acquired the outstanding shares ofSolar Roofing Systems for consideration equal to $3,204,263 in cash, 736,082shares of the Company’s common stock and 2,446,074 Class A shares of 2093603Ontario, Inc.  Each Class A share of2093603 Ontario, Inc. is exchangeable for one share of the Company’s commonstock, in accordance with the terms and conditions set forth in the articles ofincorporation of 2093603 Ontario, Inc.

In addition andpursuant to the SRS Stock Purchase Agreement, the Company, prior to March 31,2007, was required to calculate and issue post-closing earnout shares to formerSRS shareholders. The Company determined that 1,591,073 shares are issuable tothe former SRS shareholders based on the provisions of the SRS Stock PurchaseAgreement, but the Company has not yet issued said shares. The Company recordedadditional goodwill and an accrued liability of $732,000 in connection with thefinal post-closing transaction. Further, in accordance with the SRS StockPurchase Agreement, the Company is required to register the shares ofRegistrable Stock (as defined in the SRS Stock Purchase Agreement) prior to thefirst anniversary of the closing of said purchase and use its best efforts tohave that registration statement declared effective by the SEC within the timeprescribed in the SRS Stock Purchase Agreement, which has not been done. TheCompany’s intention, following receipt of additional funding, is to issue andsubsequently register additional shares of its common stock pursuant to asubsequent registration statement.

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Solar RoofingSystems, Inc. (“SRS”) manufactures high efficiency building integrated solarroofing membranes for commercial and residential customers. The purchase priceat the time of the acquisition was allocated per SFAS No. 141 based on theestimated fair value of net tangible and intangible assets acquired, andliabilities assumed, to the following assets and liabilities:
| Cash and cash  equivalents                 |       | $          | 54,000         |       |
|--------------------------------------------|------------|------------|----------------|------------|
| Accounts  receivable                       |       | 47,000     |           |
| Inventories                                |       | 1,055,000  |           |
| Prepaid expenses  and other current assets |       | 15,000     |           |
| Property and  equipment, net               |       | 254,000    |           |
| Identifiable  intangibles                  |       | 5,900,000  |           |
| Goodwill                                   |       | 6,599,000  |           |
| TOTAL ASSETS  ACQUIRED                     |       | 13,924,000 |           |
|                                       |       |       |           |
| Accounts payable                           |       | 66,000     |           |
| Accrued  liabilities                       |       | 67,000     |           |
| Advances from  stockholders                |       | 308,000    |           |
| Current  maturities of notes payable       |       | 48,000     |           |
|                                       |       |       |           |
| Long-term debt                             |       | 65,000     |           |
|                                       |       |       |           |
| TOTAL  LIABILITIES ASSUMED                 |       | 554,000    |           |
| Deferred tax  liability                    |       | 1,835,000  |           |
|                                       |       |       |           |
| **Fair  value of net assets acquired**     | ** ** | **$**      | **11,535,000** | ** ** |
|                                       |       |       |           |
| Consideration  paid:                       |       |       |           |
| Cash                                       |       | $          | 5,014,000      |       |
| Stock                                      |       | 6,110,000  |           |
| Transaction costs                          |       | 411,000    |           |
| **Total Consideration Paid**               | ** ** | **$**      | **11,535,000** | ** ** |

 

Of the $5,900,000of acquired intangible assets, $900,000 was assigned to research anddevelopment assets that were written off at the date of acquisition inaccordance with FASB Interpretation No. 4, *Applicabilityof FASB Statement No. 2 to Business Combinations Accounted for by the PurchaseMethod.* The remaining $5,000,000 of acquired intangible assets wereestimated to have a weighted average useful life of approximately 8 years. Theintangible assets that make up that amount include patented technologies of$3,500,000 (8-year weighted-average useful life), customer relationships of$400,000 (8-year weighted-average useful life), and backlog of $200,000(6-month weighted-average useful life) and trademarks of $900,000 (indefiniteuseful life, not amortized).

The results ofoperations of both CRE and SRS have been included in the Company’s consolidatedstatements of operations since the completion of the acquisitions onMarch 30 and April 11, 2006, respectively. The following unauditedpro forma information presents a summary of the results of operations, assumingthe acquisitions had occurred on June 1, 2005: net sales—$520,000; netloss—$13,784,000; and loss per share—$0.25.

During the yearended May 31, 2007, SRS temporarily suspended the manufacture of its productsdue to quality control issues related to certain of its finished products soldunder warranty to customers and materials included in inventory. As a result,we recorded a charge to operations of $1,370,000 for the impairment of thevalue of inventory on hand at May 31, 2007 and $1,510,000 for the cost ofreplacing products sold under warranty for a total charge to operations duringthe year ended May 31, 2007 of $2,880,000.

The Companyperformed impairment testing of the carrying value of goodwill and intangiblesof its SRS acquisition. The tests determined that as of May 31, 2007,indications of impairment existed. Accordingly the Company recorded charges of$3.5 million and $2.7 million to write-down the value of SRS intangible assetsand goodwill, respectively.

On December 22,2006, the Company acquired WaterEye Corporation (“WaterEye”) via a merger ofWaterEye with and into the Company’s wholly-owned subsidiary, Open Energy/WEAcquisition Corporation, a Nevada Corporation. The Company issued 6,911,711shares of its common stock as consideration for the acquisition valued at$2,911,000.  The acquisition was recordedusing the purchase method of accounting. Net assets and liabilities of WaterEye acquired and assumed totaled$160,000 and $24,000, respectively, and the Company recorded the balance ofconsideration paid for WaterEye of $2,775,000 as goodwill.  The Company subsequently evaluated thecarrying value of WaterEye’s goodwill as of May 31, 2007.  As a result of this evaluation, the Companyrecorded a charge to operations for the year ended May 31, 2007 totaling$2,525,000 for the impairment and write-down of goodwill.

The results ofoperations of WaterEye have been included in the Company’s consolidatedstatements of operations since the completion of the acquisition on December 22,2006. The pro forma effect of the WaterEye acquisition was not material.

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**Note5 – Goodwill and Intangible Assets**

As of May 31, 2007 and 2006, intangible assets consist of the following(in thousands):
|                                 | ** ** | **Weighted**              | ** ** | ** **       | ** ** | ** ** | ** ** |
|---------------------------------|------------|---------------------------|------------|------------------|------------|------------|------------|
| ** **                      | ** ** | **average**               | ** ** | ** **       | ** ** | ** ** | ** ** |
| ** **                      | ** ** | **amortization**          | ** ** | **May 31,** | ** ** |
| ** **                      | ** ** | **period   (years)** | ** ** | **2007**         | ** ** | **2006**   | ** ** |
| Amortized intangible  assets:   |       |                      |       |             |       |       |       |
| Patented  technologies          |       | 8                         |       | $                | 5,699      |       | $          | 8,000 |   |
| Customer  relationships         |       | 8                         |       | 462              |       | 800        |       |
| Backlog                         |       | 0.5                       |       | 300              |       | 300        |       |
| Subtotal                        |       |                      |       | 6,461            |       | 9,100      |       |
| Less:  accumulated amortization |       |                      |       | (1,682           | )          | (425       | )          |
| Total amortized  intangibles    |       |                      |       | 4,779            |       | 8,675      |       |
|                            |       |                      |       |             |       |       |       |
| Unamortized  intangible assets: |       |                      |       |             |       |       |       |
| Trademarks                      |       |                      |       | 110              |       | 928        |       |
| Patents pending                 |       |                      |       | —           |       | 62         |       |
| Total  unamortized intangibles  |       |                      |       | 110              |       | 990        |       |
|                            |       |                      |       |             |       |       |       |
| Total intangibles               |       |                      |       | $                | 4,889      |       | $          | 9,665 |   |

 

As of May 31, 2007 and 2006, remaining goodwill applies to thefollowing acquisitions (in thousands):
|            | ** ** | **May 31,** | ** ** |
|------------|------------|------------------|------------|
| ** ** | ** ** | **2007**         | ** ** | **2006** | ** ** |
| CRE        |       | $                | 6,097      |   | $ | 6,097 |   |
| SRS        |       | 3,846            |       | 5,846 |   |
| WaterEye   |       | 278              |       | — |   |
|       |       | $                | 10,221     |   | $ | 11,943 |   |

 

Aggregateamortization expense for all intangible assets for the years ended May 31, 2007and 2006 totaled $1,682,000 and $425,000, respectively. Estimated amortizationof intangible assets is $713,000 annually for fiscal 2008 through 2011 and$2,037,000 thereafter.

**Note 6 – Inventories**

Inventoriesconsisted of the following (in thousands):
|                 | ** ** | **May 31,** | ** ** |
|-----------------|------------|------------------|------------|
| ** **      | ** ** | **2007**         | ** ** | **2006** | ** ** |
| Raw materials   |       | $                | 2,532      |   | $ | 1,786 |   |
| Work-in-process |       | 540              |       | 880 |   |
| Finished goods  |       | 702              |       | 310 |   |
| Less reserves   |       | (1,917           | )          | (44 | ) |
| Total           |       | $                | 1,857      |   | $ | 2,932 |   |

 

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**Note 7 –FixedAssets**

Fixed assets consisted ofthe following (in thousands):
|                                 | ** ** | **May 31,** | ** ** |
|---------------------------------|------------|------------------|------------|
| ** **                      | ** ** | **2007**         | ** ** | **2006** | ** ** |
| Computers and  Networks         |       | $                | 310        |   | $ | 102 |   |
| Machinery and  Equipment        |       | 735              |       | 185 |   |
| Furniture and  fixtures         |       | 89               |       | 22 |   |
| Leasehold  improvement          |       | 59               |       | 38 |   |
| Construction in  progress       |       | 369              |       | 257 |   |
| Subtotal                        |       | 1,562            |       | 604 |   |
| Less:  accumulated depreciation |       | (264             | )          | (23 | ) |
| Fixed assets, net               |       | $                | 1,298      |   | $ | 581 |   |

 

Depreciationexpense was $243,000 and $23,000 for the years ending May 31, 2007 and 2006,respectively.

**Note 8 –Other Accrued Liabilities**

Other accrued liabilitiesconsist of the following (in thousands):
| ** **                                                  | ** ** | **May 31,** | ** ** |
|-------------------------------------------------------------|------------|------------------|------------|
| ** **                                                  | ** ** | **2007**         | ** ** | **2006** | ** ** |
| Accrued personnel  compensation and payroll tax withholding |       | $                | 2,533      |   | $ | 1,342 |   |
| Accrued warranty                                            |       | 1,520            |       | — |   |
| Accrued interest                                            |       | 879              |       | 177 |   |
| Common stock issuable  in connection with SRS acquisition   |       | 734              |       | — |   |
| Accrued legal fees                                          |       | 135              |       | 112 |   |
| Accrued loan fees                                           |       | —           |       | 200 |   |
| Accrued litigation  settlement                              |       | —           |       | 265 |   |
| Other                                                       |       | 363              |       | 136 |   |
| Total                                                       |       | $                | 6,164      |   | $ | 2,232 |   |

 

*Accruedpersonnel compensation and payroll tax withholding*

Included in accruedpersonnel compensation and payroll tax withholding at May 31, 2007 and 2006 areliabilities totaling $2,417,000 and $1,311,000, respectively, representingestimated taxes, withholding and penalties related to the stock-basedcompensation resulting from issuances of restricted shares of common stock tocertain officers and employees of the Company during the years ended May 31,2007 and 2006 as described in Note 13. In connection with the issuance of theseshares, the Company failed to withhold the required amounts related to theindividuals’ federal and state tax liabilities, pay the related employer taxliabilities associated with the issuances, and did not remit the amounts to theappropriate federal and state government agencies associated with amountsvested during the years ended May 31, 2007 and 2006. As discussed in Note 12,the Company has recorded corresponding amounts due from the officers andemployees at May 31, 2007 and 2006 totaling $1,993,000 and $1,139,000,respectively. These amounts are classified as due from related parties on theaccompanying balance sheets and represent the amount of the liability that isowed by the individuals to the Company for the required withholdings not madeon their behalf.

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**Note9 – Notes Payable**

Notes payableconsist of the following (in thousands):
| ** **                                                                                                                                                                                                                                                                   | ** ** | **May 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                                                                                                                                                                                                   | ** ** | **2007**         | ** ** | **2006** | ** ** |
| Unsecured demand  promissory note payable to an unrelated party, bearing interest at 18% per  annum calculated annually with no fixed term of repayment                                                                                                                      |       | $           | 190        |   | $  | 190 |   |
| Unsecured promissory  note to a financial institution, bearing interest at 7.57% per annum,  calculated monthly, payable in 9 equal monthly installments through December  2006                                                                                              |       | —           |       | 82 |   |
| Secured credit facility  agreement for borrowings up to CDN $250,000, bearing interest at prime plus  3% (11.5% and 11% at May 31, 2007 and 2006, respectively), matures March  2008, secured by equipment and personally guaranteed by certain shareholders  of the Company |       | 62               |       | 108 |   |
| Promissory note in  connection with the purchase of computer software bearing interest at 8%, due  in six monthly installments of $15,000 through April 2007, Company currently  in default on amounts owed                                                                  |       | 77               |       | — |   |
| Other                                                                                                                                                                                                                                                                        |       | 10               |       | — |   |
| Long-term portion                                                                                                                                                                                                                                                            |       | 339              |       | 380 |   |
| Less current maturities                                                                                                                                                                                                                                                      |       | 325              |       | 320 |   |
| Notes payable, net of current maturities                                                                                                                                                                                                                                     |       | $                | 14         |   | $ | 60 |   |

 

Accrued interest related to these notes at May 31,2007 and 2006 totaled $55,000 and $21,000, respectively.

**Note10 – Convertible Debentures and Warrants**

*0%Subordinated Convertible Debentures and Related Warrants*

In February andMarch 2006, the Company completed a private placement pursuant to which itissued five-year warrants and $5.25 million 0% subordinated convertibledebentures due July 31, 2008 (“0% Debentures”) at par to Coach Capital LLC,Eversource Group Limited, Bank Sal. Oppenheim jr. & Cie. (Schweiz) AG andNadelson Internacional S.A. The warrants are exercisable into 2,354,261 sharesof the Company’s common stock. The warrant exercise price and 0% Debentureconversion price, which were initially set at $2.23 per share and $1.46,respectively, both became $0.2875 per share on December 22, 2006, and aresubject to further adjustment upon the occurrence of certain specified eventsincluding, but not limited to, the issuance of securities at a deemed pricebelow the current exercise price, stock dividends, stock splits, mergers orreorganizations, and the Company’s failure to meet certain revenue milestones.A previous reduction in the warrant exercise price from $2.23 to $0.5833 pershare on August 22, 2006 resulted in a non-cash interest charge of $447,000 forthe year ended May 31, 2007 due to the change in the estimated fair value ofthe warrants before and after the exercise price reduction as determined by theBlack Scholes option pricing model using the following assumptions:  estimated volatility of 87%; risk freeinterest rate of 4.82%; an estimated life of 4.58 years and no dividend yield.A reduction in the warrant exercise price from $0.5833 to $0.2875 per share onDecember 22, 2006 resulted in a non-cash interest charge of $104,000 for theyear ended May 31, 2007 due to the change in the estimated fair value of thewarrants before and after the exercise price reduction as determined by theBlack Scholes option pricing model using the following assumptions:  estimated volatility of 94%; risk freeinterest rate of 4.53%; an estimated life of 4.25 years and no dividend yield.

As of March 30,2006, the 0% Debentures and warrants were amended and restated to provide thatthe anti-dilution adjustments will occur only upon a future exercise orconversion of a convertible security, rather than upon the issuance of aconvertible security, and will be calculated based upon the actual price usedfor the exercise or conversion. In July 2006, the 0% Debentures and warrantswere further amended to provide for a minimum conversion price and exerciseprice, respectively, of $0.05 per share. The warrants were also amended to fixthe aggregate number of warrant shares that are issuable to the number ofshares of common stock for which the warrants were exercisable at the time thewarrants were originally granted, or 2,354,261 shares.

On September 25,2006, Coach Capital LLC, Eversource Group Limited and Nadelson InternacionalS.A. converted an aggregate of $3,750,000 principal amount of 0% Debentures,representing the entire principal amount of 0% Debentures that were issued tothem at $0.5833 per share, and the Company correspondingly issued 2,571,576shares of its common stock to Coach Capital LLC, 2,571,576 shares of its commonstock to Eversource Group Limited and 1,285,788 shares of its common stock toNadelson Internacional S.A. On February 22, 2007, Bank Sal. Oppenheim jr. &Cie. (Schweiz) AG converted the remaining $1,500,000 principal amount of 0%Debentures into 5,217,391 shares of common stock at $0.2875 per share.

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*5%and 10% Secured Convertible Debentures and Related Warrants*

In March 2006, theCompany entered into a securities purchase agreement with Cornell CapitalPartners, L.P. (“Cornell”), pursuant to which, as subsequently amended, theCompany agreed to issue and sell to Cornell up to an aggregate of $15.0 millionof secured convertible debentures (“5% Debentures) and warrants to purchase upto an aggregate of 13,250,000 shares of the Company’s common stock. On March31, 2006, Cornell purchased $10,000,000 of the 5% Debentures and the Companyissued to Cornell warrants to purchase up to an aggregate of 7,000,000 sharesof common stock. Cornell also agreed to purchase an additional $5,000,000 of 5%Debentures and warrants to purchase up to 3,000,000 shares of common stock onthe date the Company’s registration statement covering the shares issuable uponconversion of the 5% Debentures and exercise of the warrants was declaredeffective. Initially, the warrants were to have an exercise price of $1.50 pershare and a term of five years. Each 5% Debenture matures three years from itsdate of issuance and bears interest at five percent (5%) per annum.

The conversionprice of the 5% Debentures is the lower of (i) a fixed conversion price(initially $1.50) or (ii) 95% of the lowest volume weighted average price ofthe common stock during the 30 trading days immediately preceding theconversion date. The 5% Debentures are secured pursuant to the terms of (1) apledge and escrow agreement among the Company, Cornell and David Gonzalez,Esq., as escrow agent, and (2) security agreements among the Company, Cornelland two of the Company’s subsidiaries. In accordance with the pledge and escrowagreement, the Company deposited 44,117,647 newly issued shares of the Company’scommon stock into escrow, and granted to Cornell a security interest in thoseshares to secure the Company’s obligations to Cornell under the 5% Debenturesand related agreements.

Under the securityagreements, the Company and its subsidiaries granted to Cornell a blanketsecurity interest in the Company’s consolidated assets. The 5% Debenturesholders agreed to subordinate their security interests for certain transactionsoccurring in the normal course of business.

The Company agreed to file with the SEC by May 15,2006, which date the Company refers to as the filing date, a registrationstatement including the shares underlying the 5% Debentures and warrants, andto use its best efforts to have such registration statement declared effectiveby July 29, 2006, which date the Company refers to as the effectiveness date.If a registration statement was not filed by the filing date or declaredeffective by the effectiveness date, as applicable, the Company would havebecome obligated to pay to Cornell, either in cash or in shares of commonstock, liquidated damages equal to 1% of the liquidated value of the 5%Debentures outstanding for each 30 day period (pro-rated for partial periods)that the registration statement was not filed or declared effective, asapplicable. The Company is obligated to keep the registration statementeffective until all the shares have been sold or are eligible for sale withoutvolume restrictions pursuant to Rule 144(k) promulgated under the SecuritiesAct of 1933.

In July 2006, theCompany and Cornell agreed to amend the investment agreements described above,effective as of their original date, as follows:

·                  Providefor a floor price of $0.05 per share on the adjustable conversion price of the5% Debentures;

·                  Providefor a floor price of $0.05 per share on the exercise price of the warrantsapplicable to adjustments with respect to certain future issuances ofsecurities by the Company, and upon certain distributions of assets and similarrecapitalization events;

·                  Extendthe deadline for having a registration statement declared effective untilAugust 12, 2006; and

·                  Capliquidated damages payable in respect of failure to have an effectiveregistration statement at 15% of the liquidated value of the debenturesoutstanding.

In addition, onAugust 17, 2006 the Company and Cornell agreed to further amend the investmentagreements described above, as follows:

·                  Providefor the purchase by Cornell of $1,500,000 of the remaining 5% Debentures as ofthe date of the amendment, with the remaining $3,500,000 to be purchased byCornell upon the effectiveness of the registration statement;

·                  Waiveany breaches of the investment agreements with Cornell related to the Company’stax withholding liabilities as described in Note 8 to the financial statements;

·                  Furtherextend the deadline for having a registration statement declared effectiveuntil September 5, 2006; and

·                  Reducethe exercise price of the warrant to be issued in connection with Cornell’spurchase of the remaining $5,000,000 of 5% Debentures to $0.80 from $1.50 pershare and increase the total number of warrant shares underlying such warrantsto 6,250,000 from 3,000,000. These warrants were issued on the date of theamendment.

In addition,Cornell granted the Company a waiver of certain of the restrictive covenantscontained in the investment agreements to permit the Company to take certainremedial actions relative to the Company’s tax withholding liabilitiesdescribed in Note 8, including the following with respect to any officer oremployee: repurchasing vested shares, canceling any unvested shares, grantingsubstitute equity awards, or permitting such persons to sell, pledge ortransfer their shares.

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Effective as ofSeptember 15, 2006, Cornell agreed to further extend the deadline for havingthe registration statement declared effective until October 31, 2006, andwaived the event of default set forth in each of the 5% Debentures, providedthat the registration statement was declared effective on or before October 31,2006. On October 25, 2006, Cornell agreed to reduce the aggregate number ofshares of common stock that the Company was required to register on Cornell’sbehalf from 54,117,647 to 18,730,000 shares.

On August 30,2006, the Company filed a registration statement on Form SB-2 covering, amongothers, the shares issuable upon conversion of the debentures and exercise ofthe warrants, which was declared effective on October 27, 2006 (the “SB-2registration statement”). On October 30, 2006, the Company completed the saleof the 5% $3,500,000 debenture to Cornell. We evaluated the embedded conversionfeature in the March 2006, August 2006 and October 2006 debentures inaccordance with the provisions of SFAS 133 and EITF 00-19, and concluded thatbifurcation of the conversion feature is not required.

During the fiscalyear ended May 31, 2007 Cornell converted the following principal amountsof 5% Debentures, and the Company has correspondingly issued the followingshares of common stock to Cornell, all of which were included in the SB-2registration statement:
|                          | ** ** | **Shares of** | ** ** | ** ** | ** ** |
|--------------------------|------------|--------------------|------------|------------|------------|
| ** **               | ** ** | **Principal**      | ** ** | **Common** | ** ** |
| **Conversion Date** | ** ** | **Amount**         | ** ** | **Stock**  | ** ** |
| August 22, 2006          |       | $                  | 200,000    |       | 342,877    |   |
| September 5, 2006        |       | 800,000            |       | 1,371,507  |       |
| December 22,  2006       |       | 200,000            |       | 695,652    |       |
| January 12, 2007         |       | 200,000            |       | 695,652    |       |
| January 24, 2007         |       | 200,000            |       | 695,652    |       |
| March 29, 2007           |       | 200,000            |       | 670,241    |       |
| April 13, 2007           |       | 800,000            |       | 2,751,978  |       |
| May 15, 2007             |       | 600,000            |       | 2,063,983  |       |
| May 16, 2007             |       | 200,000            |       | 687,994    |       |
| May 22, 2007             |       | 1,100,000          |       | 3,670,337  |       |
| May 31, 2007             |       | 305,000            |       | 969,793    |       |
|                     |       | $                  | 4,805,000  |       | 14,615,666 |   |

 

On March 30, 2007,the Company entered into an agreement with Cornell Capital Partners, L.P. forthe private placement of (i) a Convertible Secured Debenture in the originalprincipal amount of $3,000,000 and (b) warrants to purchase up to 6,000,000shares of our common stock, which were issued and sold for an aggregatepurchase price of $3,000,000. We received gross proceeds of $3,000,000 (beforeexpenses) from the financing transaction, which were used for general corporateand working capital purposes. The Debenture accrues interest at a rate of 10%per annum and matures one year from the issuance date. No payments of interestor principal are due under the Debenture until maturity. Subject to limitationscontained in the Debenture for the maximum amount that may be converted, theDebenture is convertible at any time at Cornell’s option into shares of ourcommon stock at the conversion price of $0.50 per share. The conversion priceis subject to adjustment in the event we issue shares of common stock for aconsideration per share less than the conversion price in effect immediatelyprior to such issuance or sale, except for issuances in connection with anapproved stock plan, the conversion, exchange or exercise of an outstandingsecurity, an acquisition, or conversion of the Debenture. The warrants issuedto Cornell also have an initial exercise price of $0.50 per share, subject toadjustment, and a term of five years from the issuance date. We evaluated theembedded conversion feature in the March 2006 debenture in accordance with theprovisions of SFAS 133 and EITF 00-19, and concluded that bifurcation of theconversion feature is not required.

The issuance ofthe March 30, 2007 debentures and warrants caused a reduction in the warrantexercise price for the previously issued Cornell warrants to $0.50 per share,and resulted in a non-cash interest charge for the year ended May 31, 2007 inthe amount of $396,000 for the first two warrants issued and $132,000 for thethird warrant issued due to the change in the estimated fair value of thewarrants before and after the exercise price reduction as determined by theBlack Scholes option pricing model using the following assumptions:  estimated volatility of 111%; risk freeinterest rate of 4.48%; an estimated life of 4 years and 4.42 yearsrespectively, and no dividend yield.

On May 21, 2007,the Company entered into a Letter Agreement (the “Amendment”) with CornellCapital Partners, L.P. which amended certain terms of the secured convertibledebentures issued by the Company to Cornell pursuant to a Securities PurchaseAgreement dated March 30, 2006, as amended. Pursuant to the Amendment: (i) theownership cap set forth in Section 3(b)(i) of each debenture, which limits theholder’s ability to convert the debenture or receive shares of common stock aspayment of interest on the debenture, was increased from 4.99% to 9.99%, and(ii) the Company permanently waived the conversion limitation set forth inSection 3(b)(ii) of each debenture, which would have limited the principalamount of the debenture that could be converted at the market conversion pricein any 30-day period.

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Discounts recordedin connection with the value of warrants, beneficial conversion feature, andoriginal issue discount recorded in connection with the 0% Debentures, 5%Debentures and 10% Debentures, are being recognized as non-cash interest overthe term of the debt using the effective interest method. Upon conversion priorto amortization of the total discount, recognition of expense is acceleratedfor any previously unamortized discount. For the years ended May 31, 2007 and2006, the Company recognized $7,080,000 and $342,000 respectively, of non-cashinterest expense in connection with the amortization of debt discount. Thecarrying value of the 5% Debentures and 10% Debentures will accrete to the facevalue over the life of the debentures, as the value of the discounts isexpensed.

Thecarrying value of the debentures as of May 31, 2007 has been calculated asfollows (in thousands):

|                                            | ** ** | **Debentures** | ** ** |
|--------------------------------------------|------------|----------------|------------|
| ** **                                 | ** ** | **0%**         | ** ** | **5%** | ** ** | **10%** | ** ** | **Total** | ** ** |
| Face value of  debentures                  |       | $              | —     |   | $ | 10,195 |   | $ | 3,000 |   | $ | 13,195 |   |
|                                       |       |           |       |   |   |   |   |   |   |
| Less debt  discounts:                      |       |           |       |   |   |   |   |   |   |
| Beneficial conversion feature              |       | 2,756          |       | 3,929 |   | 187 |   | 6,872 |   |
| Warrants                                   |       | 1,677          |       | 3,705 |   | 897 |   | 6,279 |   |
| Original issue discount                    |       | —         |       | 1,200 |   | 310 |   | 1,510 |   |
| Plus accreted  interest expense            |       | 4,433          |       | 2,817 |   | 172 |   | 7,422 |   |
| Debentures  carrying value at May 31, 2007 |       | —         |       | 4,178 |   | 1,778 |   | 5,956 |   |
|                                       |       |           |       |   |   |   |   |   |   |
| Less current  portion                      |       | —         |       | — |   | 1,778 |   | 1,778 |   |
| Long-term portion  convertible debentures  |       | $              | —     |   | $ | 4,178 |   | $ | — |   | $ | 4,178 |   |

 

As of May 31,2007, the debentures, plus accrued interest of $743,000, are convertible into44,318,780 shares of our common stock. Aggregate maturities of the principalamounts of convertible debentures are $3,000,000 in 2008 and $10,195,000 in2009.

**Note 11 –Stockholders’ Equity**

*CommonStock*

During the yearended May 31, 2006, 3,089,790 shares of common stock were issued in a privateplacement for net proceeds totaling $2,432,000. In January 2006, the Companyissued 65,000 shares of common stock with a fair value of $132,400 as a loanfee associated with the issuance of notes payable totaling $650,000.

In accordance withan employment agreement with an officer, the Company granted a total of8,235,662 common shares that are subject to forfeiture prior to vesting. Thefair value of these shares at the date of grant was estimated to beapproximately $16,600,000 and was originally recorded as unearned compensation.Compensation expense for financial statement purposes will be recognized on astraight-line basis over the term of the vesting schedule which runs throughSeptember 30, 2008. 686,305 shares vested quarterly commencing on December 31,2005. All 2007 contractual vesting was deferred in connection with these sharesand the remainder of the 4,804,137 unvested shares will vest ratably on March31, 2008, June 30, 2008 and September 30, 2008. As of May 31, 2007 and 2006,the Company has recorded $5,396,000 and $4,047,000, respectively, of expenserelated to these shares as stock based compensation expense.

In accordance withan employment agreement with an officer, the Company granted a total of1,407,805 shares of common stock that are subject to forfeiture prior tovesting. The fair value of these shares at the date of grant was estimated tobe approximately $2,700,000 and was originally recorded as unearnedcompensation. Compensation expense will be recognized on a straight-line basisover the term of the vesting schedule which runs through September 30, 2008.The shares vested at the rate of 117,317 shares per quarter commencing on March15, 2006. All 2007 vesting was deferred in connection with these shares and theremainder of the 821,220 unvested shares will vest ratably on March 31, 2008,June 30, 2008 and September 30, 2008. As of May 31, 2007 and 2006, the Companyhas recorded $1,024,000 and $341,000, respectively, of expense related to theseshares as stock based compensation expense.

As discussed inNote 4, the Company issued a total of 6,000,000 shares of common stock inconnection with the acquisition of CRE, completed in March 2006, and a total of736,082 shares of common stock in connection with the acquisition of SRS,completed in April 2006. In addition, in connection with the SRS acquisition,2,446,074 shares of Class A common stock of its subsidiary, 2093603 Ontario,Inc. were issued. Each Class A share of 2093603 Ontario, Inc. is exchangeablefor one share of the Company’s common stock, and accordingly, has been includedin the Company’s outstanding share total as of May 31, 2007 and 2006.

In July, 2006, pursuantto a technology license agreement, the Company granted 100,000 shares of commonstock valued at $1.085 per share and a warrant exercisable for 2,233,438 sharesof common stock. The fair value of the warrants was valued at approximately$1,678,000 by using the Black-Scholes option pricing model, assuming anexpected life of 5 years, a risk-free interest rate of 5.25%, an expectedvolatility of 88%, and no dividend yield.

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On August 22,2006, 5% Convertible Debentures with a face value of $200,000 were convertedinto 342,877 shares of the Company’s common stock.

On August 23,2006, the Company issued 75,000 shares of common stock as part of a legalsettlement. The Company recorded a $70,000 charge to operations for the yearended May 31, 2007.

On September 5,2006, $800,000 principal amount of 5% Convertible Debentures was converted into1,371,507 shares of the Company’s common stock.

On September 25,2006, holders of $3,750,000 0% Convertible Debentures converted their entireprincipal amount of convertible debentures into a total of 6,428,940 shares ofthe Company’s common stock.

On September 29,2006, the Company issued 20,000 shares of common stock to IBIS International inexchange for their participation and sponsorship of the Company’s ChiefExecutive Officer’smeetings with various European financial institutions.

On December 1,2006, the Company granted options to purchase an aggregate of 3,655,000 sharesof common stock with an exercise price ranging from $0.48 to $1.50 per share to23 employees, four directors and two consultants.

On December 14,2006, the Company amended the Consulting Agreement dated as of March 30, 2006with Connect by Computer, LLC (“CBC”), an entity affiliated with Mr. Gangemi.In connection with the amendment, the Company reduced the aggregate number ofshares that are issuable to CBC upon meeting certain revenue milestones setforth in the Consulting Agreement from 2,000,000 shares to 400,000 shares ofcommon stock and granted CBC an option to purchase 1,827,000 shares of theCompany’s common stock at an exercise price of $0.44 per share. The fair valueof the option was valued at approximately $522,000 by using the Black-Scholesoption pricing model, assuming an expected life of 6 years, a risk-freeinterest rate of 4.46%, an expected volatility of 70%, and no dividend yield.The option vests based on the achievement of certain product development,commercialization and intellectual property milestones prior to May 31, 2008.As of August 2007, the Company has agreed to vest 572,720 of the options andrecorded $166,080 of expense for the year ended May 31, 2007.

On December 21,2006, the Company entered into a Consulting Agreement with Expedite Venturesand, pursuant to the provisions of said agreement, the Company issued 338,983shares of common stock to Expedite Ventures on January 9, 2007. On January 20,2007, the agreement was amended to eliminate the common stock element ofcompensation and the shares previously issued to Expedite Ventures werecancelled.

On December 22,2006, in connection with the acquisition of WaterEye, the Company issued6,911,711 shares of common stock as consideration for the acquisition, of which345,586 shares were placed in escrow to satisfy any indemnification claims theCompany may have against WaterEye. In addition, the Company granted options topurchase 947,193 shares of common stock with an exercise price of $0.39 pershare to Thomas D. Wolfe, the founder of WaterEye and now Senior Vice Presidentof Engineering and Development of the Company.

On December 22,2006, 5% Convertible Debentures with a face value of $200,000 were convertedinto 695,652 shares of the Company’s common stock.

On December 29,2006, 100,000 shares of common stock previously issued in connection with thetechnology license agreement related to the SunCone TM CSP technology were returned to theCompany and cancelled.

On January 12,2007, 5% Convertible Debentures with a face value of $200,000 were convertedinto 695,652 shares of the Company’s common stock.

On January 24, 2007,5% Convertible Debentures with a face value of $200,000 were converted into695,652 shares of the Company’s common stock.

On January 27,2007, the Company entered into a Consulting Agreement with Timothy Dougherty,pursuant to which the Company issued 338,983 shares of common stock under theCompany’s 2004 Consultant Stock Plan.

On February 22,2007, Bank Sal. Oppenheim jr. & Cie. (Schweiz) AG converted the remaining$1,500,000 principal amount of its 0% Debentures at $0.2875 per share. TheCompany correspondingly issued 5,217,391 shares of its common stock.

On March 29, 2007,5% Convertible Debentures with a face value of $200,000 were converted into670,241 shares of the Company’s common stock.

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Pursuant to theSRS Stock Purchase Agreement, the Company, prior to March 31, 2007, wasrequired to calculate and issue post-closing earnout shares to former SRSshareholders. The Company determined that 1,591,073 shares are issuable to theformer SRS shareholders based on the provisions of the SRS Stock PurchaseAgreement, but the Company has not yet issued said shares. On January 3,2007, the Company recorded additional goodwill and an accrued liability of$732,000 in connection with the final post-closing transaction. Further, inaccordance with the SRS Stock Purchase Agreement, the Company is required toregister the shares of Registrable Stock (as defined in the SRS Stock PurchaseAgreement) prior to the first anniversary of the closing of said purchase anduse its best efforts to have that registration statement declared effective bythe SEC within the time prescribed in the SRS Stock Purchase Agreement, whichhas not been done. The Company’s intention, following receipt of additionalfunding, is to issue and subsequently register additional shares of its commonstock pursuant to a subsequent registration statement.

On April 13, 2007,5% Convertible Debentures with a face value of $800,000 were converted into2,751,978 shares of the Company’s common stock.

On May 15, 2007,5% Convertible Debentures with a face value of $600,000 were converted into2,063,983 shares of the Company’s common stock.

On May 16, 2007,5% Convertible Debentures with a face value of $200,000 were converted into687,994 shares of the Company’s common stock.

On May 22, 2007,Cornell exercised warrants associated with the 5% Convertible Debentures andthe Company issued 1,000,000 shares of common stock.

On May 22, 2007,5% Convertible Debentures with a face value of $1,100,000 were converted into3,670,337 shares of the Company’s common stock.

On May 31, 2007,5% Convertible Debentures with a face value of $305,000 were converted into969,793 shares of the Company’s common stock.

*WarrantsActivity for the Period and Summary of Outstanding Warrants*

During the yearsended May 31, 2006 and 2007, the Company’s Board of Directors approved theissuance of warrants to purchase an aggregate of 23,837,669 shares of itscommon stock in connection with the issuance of the 0%, 5%, and 10% debenturesand the technology licensing agreement. Such warrants were initiallyexercisable at prices ranging from $0.50 to $2.23 per share and expire atvarious times through March 2012. Each warrant contains provisions for theadjustment of the exercise price in the event of stock dividends, stock splits,reorganizations, reclassifications and consolidations. See Note 10.

During the year ended May 31, 2007, a warrant holderexercised warrants to purchase 1,000,000 shares of the Company’s common stockfor an aggregate of $500,000.

A summary ofwarrant activity for the years ended May 31, 2006 and 2007 is as follows:
|                                           | ** ** | ** **         | ** ** | **Initial**  | ** ** | **Current**  | ** ** | ** **               |
|-------------------------------------------|------------|--------------------|------------|--------------|------------|--------------|------------|--------------------------|
| ** **                                | ** ** | **Number of** | ** ** | **Exercise** | ** ** | **Exercise** | ** ** | ** **               |
| ** **                                | ** ** | **Warrants**       | ** ** | **Price**    | ** ** | **Price**    | ** ** | **Expiration Date** |
| Outstanding at  May 31, 2005              |       | —             |       |         |       |         |       |                     |
| Granted                                   |       | 2,354,261          |       | $            | 2.23       |         | $          | 0.2875                   |   | January 31, 2011 |
| Granted                                   |       | 7,000,000          |       | $            | 1.50       |         | $          | 0.5000                   |   | March 31, 2011 |
| Outstanding at  May 31, 2006              |       | 9,354,261          |       |         |       |         |       |                     |
| Granted                                   |       | 2,233,438          |       | $            | 1.50       |         | $          | 1.5000                   |   | June 30, 2013 |
| Granted                                   |       | 6,250,000          |       | $            | 0.80       |         | $          | 0.5000                   |   | August 17, 2011 |
| Granted                                   |       | 6,000,000          |       | $            | 0.50       |         | $          | 0.5000                   |   | March 29, 2012 |
| Exercised                                 |       | (1,000,000         | )          |         |       | $            | 0.5000     |                     |   |
| Outstanding at  May 31, 2007              |       | 22,837,699         |       |         |       |         |       |                     |
|                                      |       |               |       |         |       |         |       |                     |
| Outstanding at  May 31, 2007 consists of: |       |               |       |         |       |         |       |                     |
|                                      |       | 2,354,261          |       |         |       | $            | 0.2875     |                     | January 31, 2011 |
|                                      |       | 2,233,438          |       |         |       | $            | 1.5000     |                     | June 30, 2013 |
|                                      |       | 18,250,000         |       |         |       | $            | 0.5000     |                     | March 31, 2011, August 17, 2011, and March 29, 2012 |
|                                      |       | 22,837,699         |       |         |       |         |       |                     |

 

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We evaluated theoutstanding warrants in accordance with the provisions of EITF 00-19 andconcluded that classification of the fair value of the warrants as equity atMay 31, 2007 was appropriate.

*ConsultantCompensation Plan*

Under the Company’s2004 Consultant Compensation Plan, the Board of Directors is authorized toissue up to 9,771,000 shares to consultants without further shareholderapproval. In February 2006, the Company granted an aggregate of 90,000 sharesto two officers of the Company for services rendered as consultants prior tobeing hired as employees, and an additional 10,000 shares to a formerconsultant. On January 27, 2007, the Company entered into a ConsultingAgreement with Timothy Dougherty, pursuant to which the Company issued 338,983shares of common stock under the Company’s 2004 Consultant Stock Plan.

Through May 31,2007, the Company has recorded $194,000 of expense related to these shares asstock based compensation expense. Pursuant to the securities purchase agreementdescribed in Note 10, the Company is prohibited from issuing additional sharesunder the Consultant Compensation Plan without prior approval from Cornell,other than upon the exercise of previously-issued options, for so long as theconvertible debentures initially issued to Cornell are outstanding.

*SharesIssued for Services*

In February andMarch 2006 as compensation for their services to the Company, a total of382,500 shares of common stock were granted to members of the Board ofDirectors and an employee. Through May 31, 2007, the Company has recorded$697,000 of expense related to these shares as stock based compensationexpense. For the fiscal year ended May 31, 2007, a total of 62,500 shares ofcommon stock were issued to employees as part of their employment agreements,through May 31, 2007, the Company has recorded $69,000 of expense related tothese shares as stock based compensation expense.

*EscrowedCommon Stock*

The 5% and 10% Debentures (see Note 10) are securedpursuant to the terms of (1) a pledge and escrow agreement among the Company,Cornell and David Gonzalez, Esq., as escrow agent, and (2) security agreementsamong the Company, Cornell and two of our subsidiaries. In accordance with thepledge and escrow agreement, we deposited 44,117,647 shares issued in the nameof the Company, into escrow, and granted to Cornell a security interest inthose shares to secure our obligations to Cornell under the 5% and 10% Debenturesand related agreements. The escrowed shares are not included in common stockissued and outstanding at May 31, 2007.

*Sharesto be Issued*

We entered intotwo employment agreements, one of which was with an officer of the Company,calling for the periodic issuances of common stock as partial employmentcompensation. Under these agreements, we have committed to issue an aggregateof 225,000 shares, issuance and vesting taking place on a quarterly basis.Related to these two agreements at May 31, 2007 and 2006, $35,000 and $34,000,respectively, has been recorded as selling, general and administrative expensesin the accompanying statement of operations.

**Note12 - Accounting for Stock-Based Compensation**

On December 1,2006, the Company adopted the Open Energy Corporation 2006 Equity IncentivePlan (the “Plan”), which provides for the granting of stock and non-stock basedcompensation awards, including options, stock awards, stock appreciationrights, and cash awards to employees, officers, directors or consultants. Theaggregate maximum number of shares of the Company’s common stock that may beissued under the Plan is 8,500,000 shares. During the year ended May 31, 2007,options to purchase 7,079,193 shares of common stock were granted to 25employees, four directors and one consultant under the Plan, and options topurchase 1,827,000 shares of common stock were granted to another consultantoutside of the Plan. At May 31, 2007, 2,275,390 shares remained available forfuture grant under the Plan. Shares generally vest over a period of eighteenmonths to three years and options expire ten years from the date of grant**.**Options granted under the Plan haveexercise prices ranging from $0.19 to $1.50 per share.

Under theprovisions of SFAS No. 123R, the fair value of options granted is estimated atthe measurement date and is recognized as stock-based compensation expenseratably over the requisite service period of the award. Determining theappropriate fair-value model and calculating the fair value of stock-basedawards at the grant date requires considerable judgment, including estimatingstock price volatility, expected option life and forfeiture rates. We developedour estimates based on historical data and market information, which can changesignificantly over time. A small change in the estimates used can have arelatively large change in the estimated valuation, and consequently, amaterial effect of the results of operations.

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The risk-freeinterest rate used in the Black-Scholes valuation method is based on theimplied yield currently available in U.S. Treasury securities with maturitiesequal to the expected lives of applicable options. We have not declared or paidany dividends and do not currently expect to do so in the future. The expectedterm of options represents the period that our stock-based awards are expectedto be outstanding and was determined based on projected holding periods for theremaining unexercised shares. Consideration was given to the contractual termsof our stock-based awards, vesting schedules and expectations of futureoptionees’ behavior. Expected volatility is based on the annualized dailyhistorical volatility plus implied volatility of our stock price, includingconsideration of the implied volatility and market prices of traded options forcomparable entities within our industry.

The Company’sstock price volatility and option lives involve management’s best estimates,both of which impact the fair value of the option calculated under theBlack-Scholes methodology and, ultimately, the expense that will be recognizedover the life of the option. SFAS No. 123R also requires that the Companyrecognize compensation expense for only the portion of options expected tovest. Based on very limited historical experience, the Company has assumed noforfeitures in the determination of stock-based compensation expense under SFASNo. 123R. If the actual number of forfeitures differs from our estimates,additional adjustments to compensation expense may be required in futureperiods. The weighted-average fair value per share was calculated at the dateof grant using the Black-Scholes option-pricing model with the followingweighted average assumptions: dividend yield - 0%; expected volatility - 70%;risk-free interest rate - (4.56% - 4.69%); and expected life of 6 years.

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Stock-based compensationexpense recognized under SFAS No. 123R for the year ended May 31, 2007 relatedto stock options was $765,000. A summary of the changes in options outstandingduring the year ended May 31, 2007 is as follows:
|                              | ** ** | ** ** | ** ** | ** **   | ** ** | **Weighted**    | ** ** | ** **    | ** ** |
|------------------------------|------------|------------|------------|--------------|------------|-----------------|------------|---------------|------------|
| ** **                   | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Average**     | ** ** | ** **    | ** ** |
| ** **                   | ** ** | ** ** | ** ** | **Average**  | ** ** | **Remaining**   | ** ** | **Aggregate** | ** ** |
| ** **                   | ** ** | ** ** | ** ** | **Exercise** | ** ** | **Contractual** | ** ** | **Intrinsic** | ** ** |
| **Options**                  | ** ** | **Shares** | ** ** | **Price**    | ** ** | **Term**        | ** ** | **Value**     | ** ** |
| Outstanding at  May 31, 2006 |       | —     |       | $            | —     |            | —     |          | $          | — |   |
| Granted                      |       | 7,079,193  |       | 0.52         |       | 9.06            |       | —        |       |
| Exercised                    |       | —     |       | —       |       | N/A             |       | —        |       |
| Forfeited                    |       | (640,000   | )          | 0.39         |       | N/A             |       | —        |       |
| Cancelled                    |       | (214,583   | )          | 0.53         |       | N/A             |       | —        |       |
| Outstanding at  May 31, 2007 |       | 6,224,610  |       | $            | 0.53       |            | 9.54       |          | $          | — |   |
|                         |       |       |       |         |       |            |       |          |       |
| Exercisable at  May 31, 2007 |       | 1,686,016  |       | $            | 0.56       |            | 9.80       |          | $          | — |   |

 

The weighted-averagegrant-date fair value of options granted during the year ended May 31, 2007 was$0.52 per share. As of May 31, 2007, the total remaining unrecognizedcompensation cost related to unvested stock options totaled $648,000, which isexpected to be recognized over the weighted-average future period of 2.5 years.
|                            | ** ** | ** ** | ** ** | **Weighted**        | ** ** |
|----------------------------|------------|------------|------------|---------------------|------------|
| ** **                 | ** ** | ** ** | ** ** | **Average**         | ** ** |
| ** **                 | ** ** | ** ** | ** ** | **Grant Date** | ** ** |
| **Nonvested Shares**  | ** ** | **Shares** | ** ** | **Fair Value** | ** ** |
| Nonvested at May  31, 2006 |       |       |       |                |       |
| Granted                    |       | 7,079,193  |       | 0.27                |       |
| Vested                     |       | (1,686,016 | )          | 0.29                |       |
| Forfeited                  |       | (640,000   | )          | 0.24                |       |
| Cancelled                  |       | (214,583   | )          | 0.31                |       |
| Nonvested at May  31, 2007 |       | 4,538,594  |       | $                   | 0.29       |   |
|                            |            |            |            |                     |            |  |

 

In accordance with theiremployment agreements, certain officers and a non-executive employee wereawarded restricted stock grants that vest over periods ranging from 2.8 to 3.0years. As of May 31, 2007, there was $8,559,000 of unrecognized compensationcost related to nonvested share-based compensation arrangements, which isexpected to be recognized over a weighted-average period of 1.3 years.Stock-based compensation recognized during the years ended May 31, 2007 and2006 related to vesting of the restricted stock was $6,420,000 and $4,388,000,respectively.

Stock based compensationrecognized during the years ended May 31, 2007 and 2006 related to common stockgranted for services was $233,000 and $838,000, respectively.

**Note 13 – Due from Related Parties**

As described in Note 8,the Company has accrued estimated payroll taxes, withholding and penalties owedas of May 31, 2007 and 2006 totaling $2,417,000 and $1,311,000, respectively,in connection with the grant of restricted shares of common stock to certainofficers and employees of the Company (see Notes 8 and 11) during the yearended May 31, 2006. The withholding portion of this accrual totaling $1,993,000and $1,139,000 has been recorded at May 31, 2007 and 2006, respectively, asamounts due from related parties based on agreements with the respectiveofficers and employees for them to remit funds to the Company for an amountequal to the withholding obligations. The Company believes that the amounts duefrom the individuals is fully collectable and requires no allowance foruncollectible amounts at either May 31, 2007 or 2006.

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**Note14 – Advances from Related Parties**

The Companyassumed advances from various related parties, including shareholders, inconnection with the acquisition of SRS. These advances are due on demand andbear interest at 6% per annum. As of May 31, 2007 and 2006, balances due torelated parties totaled $312,000 and $314,000, respectively, and relatedaccrued interest totaled $81,000 and $56,000, respectively.

**Note15 – Commitments and Contingencies**

*SunconeLicense Agreement*

In July 2005, the Companyentered into a technology license agreement, through which the Company obtainedan exclusive license to apply technology known as SunconeTM CSP (ConcentratedSolar Power) to distributed energy systems, electric power plants, saline waterdesalination systems and other applications (the “Suncone License Agreement”).Under the agreement, the Company is responsible for funding the development andcommercialization of the technology. As consideration for granting the license,the agreement entitles the licensor to receive a royalty of 5% to 8 % of grosssales from licensed products, and 2% of sales of electrical power ordesalinated water. 

In August 2005,the Company entered into a Technology Consulting Agreement with the licensorunder the Suncone License Agreement which requires the Company to pay $10,000per month for consulting services and $2,000 per month for office expensesduring the term of the Suncone License Agreement. The Company incurred $492,887of research and development expense and did not incur any royalty expenseduring the year ended May 31, 2006, associated with this agreement.

In March 2006, theCompany entered into an amended and restated technology license with Dr. MelvinPrueitt pursuant to which the Company’s license of certain patent rights andtechnology which the Company refers to as SunconeTM CSP (Concentrating SolarPower) system was amended. As amended, the license agreement provides for anexclusive and worldwide license for the defined field of use of collectingsolar energy to generate electricity, desalinate water and for all otherindustrial applications. The Company also has the right to sublicense thelicensed technology. The license agreement expires at the earlier of January27, 2026 or the date of expiration of the last to expire of any issued patentwithin the patent rights subject to the license agreement. The Company alsoagreed to fund a six month development project to develop a prototype of asolar collector and to expend or devote resources equal to at least $300,000during such time period.

Pursuant to the licenseagreement, the Company agreed to pay to the licensor certain royalties forsales of products incorporating the licensed technology (“Licensed Products”).The subset of Licensed Products that consists of generated electrical power ordesalinated water or other pumped liquids that are generated or purified, asapplicable, using any product or device which, or the manufacture, use or saleof which, is covered by a valid claim of the licensed patent rights is referredto as “licensed commodity products.” The royalty payments for licensed productsand the subset of licensed commodity products are as follows:

•                  2% of net salesof licensed commodity products;

•                  Sales ofLicensed Products (other than licensed commodity products) for each three monthperiod commencing October 21, 2005: 8% of net sales up to $500,000; 7% of netsales up to $1,000,000; 6% of net sales up to $1,500,000; and 5% of net salesover $1,500,000;

•                  Minimumroyalties during each three month royalty period beginning in October 2005ranging from $4,000 to $50,000.

In addition, the Companygranted to the licensor 100,000 shares of common stock and a five year warrantto purchase up to 2,233,438 shares of common stock at an initial exercise priceof $1.50 per share. The warrant vests incrementally upon the completion ofcertain milestones specified in the warrant.

In July 2006, the Companyand Dr. Prueitt signed an Amended and Restated Technology License Agreement.Material changes to the original agreement are:

•                  elimination ofthe Company’s minimum royalty payment obligations;

•                  replacement of astaggered royalty rate structure with a flat percentage equal to the priorlowest staggered royalty rate;

•                  modification ofthe vesting schedule applicable to the warrant granted to Dr. Prueitt inconnection with the license agreement to provide for quarterly vesting of300,000 shares beginning on September 30, 2006 (with the final 133,438 sharesvesting on June 30, 2008), and modification of the warrant to survive anytermination of the license agreement, such that it will expire only pursuant toits own terms; and

•                  theaddition of the right of either party to terminate the agreement upon 90 daysnotice without cause.

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*OperatingLeases*

The Company conducts allof its operations from leased facilities. Most of the leases are for 36 monthterms, contain annual escalation clauses, and some provide for renewal afterthe expiration of the initial term. In most cases, management expects that inthe normal course of business, leases will be renewed or replaced by otherleases. One lease contains an option that expires in October 2008 to purchasethe facility at fair value.

Rent expense was $404,000and $47,000 for the twelve months ended May 31, 2007 and 2006, respectively.Future minimum rental payments required under operating leases that haveinitial or remaining noncancelable lease terms in excess of one year as of May31, 2007 are as follows: 2008 - $481,000; 2009 - $440,000; 2010 - $324,000;2011 - $230,000; and 2012 - $192,000.

*Agreementsfor investor relations services*

The Company iscommitted to an agreement for investor relations’ services for $10,000 permonth plus reasonable expenses beginning April 1, 2007 and ending March 31, 2009.

*CommonStock*

The Company hasemployment contracts with certain members of its executive management team andcertain other senior managers. The agreements are for three year terms andinclude stock grants. The stock vests quarterly over the three year period. Asof May 31, 2007, 4,093,110 shares had vested with 5,675,357 remaining unvested.

*EmploymentContract*

We entered into anEmployment Agreement dated August 25, 2005, between our company and DavidSaltman whereby our company appointed Mr. Saltman as President and ChiefExecutive Officer. The term of the employment agreement is from September 15,2005 to September 30, 2008. Pursuant to the terms of the employment agreement,our company agreed to pay Mr. Saltman an annual base salary of $250,000 plusannual bonuses as determined by our board of directors and based upon ourcompany’s financial achievements. On January 30, 2007, the Company and Mr.Saltman, entered into an amendment to his employment agreement, dated August25, 2005, to amend the vesting terms of a stock grant issued to Mr. Saltman inconnection with his employment agreement. In connection with the originalemployment agreement, on August 25, 2005, the Company issued 8,235,662 sharesof common stock to Mr. Saltman. Such shares were scheduled to vest quarterlyover a three-year period commencing December 31, 2005, with 686,305 sharesscheduled to vest for the first 11 quarters and 686,307 shares scheduled tovest in the 12th and final quarter. On January 30, 2007, the Company and Mr. Saltmanamended the agreement to provide that all shares that were scheduled to vest onMarch 31, 2007, June 30, 2007, September 30, 2007 and December 31, 2007, wouldinstead vest ratably on March 31, 2008, June 30, 2008, and September 30, 2008.All unvested shares will be cancelled if the employment agreement is terminatedfor cause by our company or if Mr. Saltman terminates the employment agreementother than for good reason, as defined in the employment agreement. Finally,Mr. Saltman is entitled to certain benefits, expenses, an automobile allowanceand reasonable office support services as set out in the employment agreement.

If our company terminatesthe employment agreement for the death or disability of Mr. Saltman or forcause as defined in the employment agreement, our company will pay Mr. Saltman,or his legal representative as applicable, a sum in cash of an amount equal tothe accrued but unpaid salary and any applicable bonuses. If Mr. Saltmanterminates the employment agreement for good reason, as defined in theemployment agreement, or if our company terminates the employment agreement forany reason other than for cause, then our company will pay Mr. Saltman atermination fee in cash of an amount in accordance with section 6(b) of theemployment agreement.

*Supplyof Materials*

There is currently anindustry-wide shortage of semi-conductor grade silicon, an essential rawmaterial in the production of certain of the Company’s primary products.Continued shortages of silicon used in the manufacture of the Company’sproducts may result in significant price increases in PV cells or the Company’sinability to obtain needed raw materials on a timely basis, which could resultin delays in manufacturing and adversely affect gross margins and results of operations.

*Dependenceon Limited Number of Suppliers*

The Company historicallypurchased the majority of certain raw materials and components used tomanufacture its products from one supplier. Although the Company is indiscussions with multiple suppliers, it is anticipated that in the future, theCompany will continue to depend on a limited number of suppliers.

*Restrictionson Dividend Payments*

The Company’s agreementswith Cornell in connection with outstanding debentures prohibit its payingdividends without their approval.  

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**Note 16 –Related Party Transactions**

During fiscal2005, a company owned by a person related to an officer of the Company advancedCDN $200,000 (approximately $171,000) to the former officer and the formerofficer then advanced this amount to the Company. The amount was unsecured,non-interest bearing and has no fixed terms for repayment. The Company repaid$205,000 on May 11, 2006 to satisfy this claim.

During fiscal2006, the Company repaid $860,000 in loans to Connect by Computer, LLC, whichis wholly owned by a former director of the Company. The loans were part of theacquisition price paid for the merger with CRE.

During the yearended May 31, 2006, a total of $14,000 was paid to Customatrix, Inc. forconsulting services. Customatrix, Inc. is 30% owned by an officer of theCompany.

**Note17 - Income Taxes**

Deferred tax assets andliabilities at May 31, 2007 and 2006 are comprised of the following:
| ** **                                         | ** ** | **May 31, 2007** | ** ** | **May 31, 2006** | ** ** |
|----------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                         | ** ** | **US**                     | ** ** | **Foreign**                | ** ** | **Total** | ** ** | **US** | ** ** | **Foreign** | ** ** | **Total** | ** ** |
| Deferred tax assets                      |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Net operating loss                                 |       | $                          | 7,563      |                       | $          | 1,677 |   | $ | 9,240 |   | $ | 3,094 |   | $ | 544 |   | $ | 3,638 |   |
| Inventory                                          |       | 763                        |       | —                     |       | 763 |   | 18 |   | — |   | 18 |   |
| Warranty                                           |       | 602                        |       | —                     |       | 602 |   | — |   | — |   | — |   |
| Deferred compensation                              |       | 2,394                      |       | —                     |       | 2,394 |   | 641 |   | — |   | 641 |   |
| Impairment of note  receivable                     |       | 272                        |       | —                     |       | 272 |   | — |   | — |   | — |   |
| Credits                                            |       | 208                        |       | —                     |       | 208 |   | 64 |   | — |   | 64 |   |
| Total gross deferred  tax assets                   |       | 11,802                     |       | 1,677                      |       | 13,479 |   | 3,817 |   | 544 |   | 4,361 |   |
| Valuation allowance                                |       | (11,802                    | )          | (1,677                     | )          | (13,479 | ) | (3,817 | ) | (544 | ) | (4,361 | ) |
| Net deferred tax assets                            |       | $                          | —     |                       | $          | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
|                                               |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Deferred tax  liabilities                          |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Intangible assets                                  |       | $                          | (452       | )                          | $          | (139 | ) | $ | (591 | ) | $ | (862 | ) | $ | (1,423 | ) | $ | (2,285 | ) |
| Goodwill                                           |       | —                     |       | —                     |       | — |   | (46 | ) | — |   | (46 | ) |
| Beneficial conversion  feature of convertible debt |       | (1,161                     | )          | —                     |       | (1,161 | ) | (2,505 | ) | — |   | (2,505 | ) |
| Total deferred tax  liabilities                    |       | $                          | (1,613     | )                          | $          | (139 | ) | $ | (1,752 | ) | $ | (3,413 | ) | $ | (1,423 | ) | $ | (4,836 | ) |

 

The Company has recordeda valuation allowance amounting to the entire net deferred tax asset balancedue to its lack of a history of earnings, possible limitations on the use ofcarryforwards, and the expiration of certain of the net operating losscarryforwards (“NOL”) which gives rise to uncertainty as to whether the netdeferred tax asset is realizable. Internal Revenue Code Section 382 and similarCalifornia rules place a limitation on the amount of taxable income that can beoffset by carryforwards after a change in control (generally greater than a 50%change in ownership). As a result of these provisions, the utilization of theNOL may be limited. There were no significant differences from the Company’stotal provision for income taxes as compared to applying the statutory foreignand U.S. federal income tax rates for the years ended May 31, 2007 and 2006.

The Company has NOLcarryforwards of approximately $18.0 million which expire beginning in 2008through 2027. The Company has investment and research activity creditcarryforwards aggregating $64,000, which will substantially expire in 2009 and2010.

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A reconciliation of theexpected tax computed at the U.S. federal statutory income tax rate to thetotal benefit for income taxes at May 31, 2007 is as follows:
|                                       | ** ** | **Years ended May 31,** | ** ** |
|---------------------------------------|------------|----------------------------------------|------------|
| ** **                            | ** ** | **2007**                               | ** ** | **2006** | ** ** |
| Expected tax at  34%                  |       | $                                      | (14,559    | ) | (34.00 | )% | $ | (4,133 | ) | (34.00 | )% |
| State income  tax, net of federal     |       | (2,498                                 | )          | (5.83 | )% | (627 | ) | (5.15 | )% |
| Change in  valuation allowance        |       | 9,119                                  |       | 21.30 | % | 3,921 |   | 32.15 | % |
| Intangibles                           |       | 2,805                                  |       | 6.56 | % | — |   | — | % |
| Non-deductible  expenses              |       | 87                                     |       | 0.20 | % | 56 |   | 46 | % |
| Warrants                              |       | 1,527                                  |       | 3.56 | % | — |   | — | % |
| Stock options                         |       | 305                                    |       | 0.70 | % | — |   | — | % |
| Other                                 |       | (48                                    | )          | (0.11 | )% | (102 | ) | (0.11 | )% |
| Provision (benefit) for  income taxes |       | $                                      | (3,262     | ) | (7.62 | )% | $ | (885 | ) | (11.53 | )% |

 

The Company has adoptedthe position under APB 23 that earnings of its foreign subsidiaries will bepermanently reinvested outside of the United States. As such, United Statesdeferred taxes have not been provided for on these earnings.

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**Note18 – Discontinued Operations**

In September 2005, theCompany determined to sell its oil and gas holdings in order focus its efforts entirelyon the renewable energy component of the business. The sale of the Company’soil and gas interests was completed in January 2006. During the year ended May31, 2006, no revenues were reported in discontinued operations, while a loss of$849,000 was incurred in connection with discontinued operations. 

**Note 19 –Subsequent Events**

On June 15, 2007, theCompany entered into a Note and Warrant Purchase Agreement with an accreditedinvestor for the private placement of a $950,000 promissory note (the “6/15/07Note”) and a related warrant to acquire up to 4,000,000 shares of common stock(the “6/15/07 Warrant) for a purchase price of $750,000. In connection withthis transaction, the Company’s Chief Executive Officer entered into a StockPledge Agreement pursuant to which certain of his shares of the Company’scommon stock were pledged to secure the performance of the 6/15/07 Note, and heagreed to guaranty any deficiency above and beyond the value of the shares. Inthe event of a default with respect to the 6/15/07 Note, the investor may (i)foreclose on the common stock pledged or (ii) convert all unpaid amounts dueunder the 6/15/07 Note into (A) a convertible debenture which is convertibleinto shares of common stock of Open Energy and (B) a warrant exercisable forshares of common stock. 

The maturity date of the6/15/07 Note is October 15, 2007, which may be extended for one month at theCompany’s option. If extended or if the Company is in default under the termsof the 6/15/07 Note, the amount due to the investor is increased by $50,000 to$1,000,000. In the event of a default, any amounts then owed shall bearinterest at the rate of 18% per annum. The Company has the option to prepay thenote in whole or in part without penalty prior to the maturity date.

The 6/15/07 Warrant isexercisable for three years, and is subject to anti dilution provisions and afloor exercise price of $0.05 per share. If issued, the convertible debenturewill accrue interest at a rate of 10% per annum, with accrued interest due andpayable on June 15, 2008 and will be convertible into shares of the Company’scommon stock at an initial price of $0.50 per share, which is subject toadjustment. The Investor may not convert if the conversion shares issued wouldresult in the Investor beneficially owning greater than 4.99% of the Company’soutstanding common stock.

On August 31, 2007, OpenEnergy Corporation entered into a securities purchase agreement with anaccredited investor for the private placement of a convertible promissory notein the principal amount of $1,000,000 (the “8/31/07 Note”) and a relatedwarrant to acquire up to 1,200,000 shares of common stock (the” 8/31/07 Warrant”)for a purchase price of $950,000. The 8/31/07 Note matures six months afterAugust 31, 2007 but the Company has the right to prepay it in whole or in partwithout penalty prior to the maturity date. Commencing on the maturity date,the 8/31/07 Note accrues interest at the rate of 10% per annum. The principaland accrued interest are convertible into common stock of the Company at $0.50per share. However, the Investor may not convert if the conversion sharesissued would result in the Investor beneficially owning greater than 4.99% ofOpen Energy’s outstanding common stock.

In the event of default, the8/31/07 Note will accrue interest at a rate of 10% per annum and the Investorsmay convert any or all of the outstanding principal and interest into commonstock at a fixed conversion price equal to 30% of the Volume Weighted AveragePrice on the closing date. In no event shall the conversion price be lower than$0.05. 

The 8/31/07 Warrant isexercisable for sixty (60) months after August 31, 2007. The exercise price isthe greater of  $0.55 per share or theclosing bid price of the stock on the last trading day preceding the closingdate plus five cents,  subject toadjustments and anti dilution provisions which include a price floor of $0.05per share.

64

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**ITEM8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURES**

None.

**ITEM8A. CONTROLS AND PROCEDURES.**

We are required tomaintain disclosure controls and procedures designed to ensure that materialinformation related to us, including our consolidated subsidiaries, isrecorded, processed, summarized and reported within the time periods specifiedin the SEC rules and forms.

Under the supervision andwith the participation of our management, including our principal executiveofficer and our principal financial officer, we conducted an evaluation of ourdisclosure controls and procedures, as such term is defined under Rules13a-15(e) and 15d-15(e) promulgated under the Exchange Act. Based on thisevaluation, our principal executive officer and our principal financial officerconcluded that our disclosure controls and procedures were not effective as ofMay 31, 2007, due to the following deficiencies:

•                  insufficientpersonnel resources and technical accounting expertise within the accountingfunction to resolve non-routine or complex accounting matters;

•                  ineffectivecontrols over period end financial close and reporting processes and thepreparation and review of the annual consolidated financial statements,resulting in numerous post-closing journal entries and audit adjustments;

•                  inadequatesegregation of duties in a number of accounting functions;

•                  inadequatedocumentation and support for certain transactions; and

•                  a lack ofeffective record keeping and compliance assistance for reports required underSection 16(a) of the Exchange Act.

These deficiencies wereidentified in June 2007 as part of our procedures for completing our financialstatements for the fiscal year ended May 31, 2007. We hired Aidan Shields asour Chief Financial Officer on June 7, 2007 and are in the process ofimplementing remedial steps, which include greater oversight of our accountingand compliance functions, and an active search for additional internalaccounting and legal compliance resources. To date, management has not beenable to hire sufficient additional personnel to assist in the Company’sdisclosure controls and procedures, and is in the process of further testingthe new procedures, and thus has not been able to conclude that any of thesedeficiencies have been remediated as of the filing date of this report.

**ITEM8B. OTHER INFORMATION**

None.

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**PART III**

**ITEM9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**

The following sets forthcertain biographical information concerning our current directors and executiveofficers:
| **Name**            | ** ** | **Position**                                                                                       | ** ** | **Age** |
|---------------------|------------|----------------------------------------------------------------------------------------------------|------------|---------|
| David P. Saltman    |       | Member of Board of Directors of the Company,  President and Chief Executive Officer of the Company |       | 53      |
|                |       |                                                                                               |       |    |
| Norman J. Dodd      |       | Member of Board of Directors of the Company and  President of East Coast Operations                |       | 50      |
|                |       |                                                                                               |       |    |
| Edward Douglas Ward |       | Member of Board of Directors of the Company, Chair  of the Compensation Committee                  |       | 75      |
|                |       |                                                                                               |       |    |
| Dalton W. Sprinkle  |       | Director, Chair of the Audit Committee and  Nominating and Governance Committee                    |       | 34      |
|                |       |                                                                                               |       |    |
| David Field         |       | Chief Operating Officer                                                                            |       | 45      |
|                |       |                                                                                               |       |    |
| Aidan Shields       |       | Chief Financial Officer and Treasurer of the Company                                               |       | 39      |
|                |       |                                                                                               |       |    |
| John Hart           |       | General Counsel & Corporate Secretary                                                          |       | 68      |
|                |       |                                                                                               |       |    |
| Tom Wolfe           |       | Chief Technology Officer                                                                           |       | 59      |
|                |       |                                                                                               |       |    |
| Don Rogers          |       | Executive Vice President, East Coast Operations                                                    |       | 60      |

 

**DavidSaltman** is currently a director of the Company, a position hehas held since July 2005, and is the President and the Chief Executive Officerof the Company, positions he has held since September 2005. From June 2000 toSeptember 2005, Mr. Saltman was a senior executive of BioCompositesInternational, Inc., a company producing natural fiber reinforced plastics fora wide range of industrial applications, including automotive interiors,building materials and consumer products. Mr. Saltman served on the President’sadvisory council that created environmental purchasing guidelines for thefederal government, and is the recipient of several awards from the AmericanMarketing Association and the National Recycling Coalition for his work onsustainable technologies. Prior to his efforts in the energy sector, Mr.Saltman enjoyed a career in the entertainment industry, including being afounder of the “E!” Entertainment Network. Mr. Saltman is a former board memberof the California League of Conservation Voters and currently sits on the boardof CALEAP, a California clean energy bond initiative. In 1978, Mr. Saltmanearned a Bachelor of Arts Degree in Motion Picture/Television Production fromUCLA.

**NormanJ. Dodd** has been a director of the Company since October 2005and our President of East Coast Operations since April 1, 2006. He waspreviously the Chief Executive Officer of SRS, a position he held since March2003. Mr. Dodd spent eleven years at Procter and Gamble before becoming apartner in a Sales Consulting and Organizational Development business calledSales Performance Group Inc. He has been a consultant to a variety of companiesin a number of unique industries, including petro-chemical, hydro-generation,packaged goods and the public sector. In 1999 he became President and a partnerof LabX.com, the second-largest on-line auction system for scientificequipment. In 1979, Mr. Dodd earned an H.B.A. from Brock University in Ontario,Canada. 

**EdwardDouglas Ward**, or E. Douglas Ward, is currently a director andChair of the Company’s Compensation Committee. Since 1994 he has served as aManaging Director of Irvine Associates, Inc., a privately held CorporateFinance Group that arranges credit facilities and equity infusions forunder-financed technology companies. Previously, he was President and ChiefOperating Officer of Astrotech International Corporation, which had five operatingcompanies and a commercial space venture. Earlier, he was Vice President andGeneral Manager, Executive Vice President, and President of five diversecommercial and aerospace companies. In 1956, Mr. Ward received a Diploma inAeronautical Engineering from Northrop Aeronautical Institute.

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**Dalton W.Sprinkle** is currently Chairman of the Audit Committee andChairman of the Nominating and Governance Committee on our Board of Directors.Mr. Sprinkle is an attorney in private practice. Mr. Sprinkle was President andChief Executive Officer and a director of Integrated Dental Solutions, Inc., aninternational dental services company headquartered in San Diego from September2006 through June 2007. Mr. Sprinkle was special counsel to Sheppard MullinRichter & Hampton LLP from October 2005 through September 2006, where hecounseled public and private companies on a wide range of business and legalissues. From July 2004 through October 2005, Mr. Sprinkle was associated withLuce, Forward, Hamilton and Scripps, where he practiced corporate andsecurities law with an emphasis on private placements of real estate securitiesand REITs. From November 2002 through July 2004, Mr. Sprinkle was associatedwith Morgan, Lewis and Bockius in Los Angeles where he practiced corporate andsecurities law with an emphasis on renewable and other energy transactions. Mr.Sprinkle serves on the board of directors of several other private companies.  Mr. Sprinkle earned his Juris Doctor degree,cum laude, from Georgetown University Law Center, where he served aseditor-in-chief of The Tax Lawyer, and received his Bachelor of Arts degree,magna cum laude, from the University of Southern California.

**DavidField**was appointed as our Chief Operating Officer effectiveas of June 5, 2007. Prior to joining Open Energy Corporation, Mr. Field was asenior executive at Clark Security Products, the largest independent verticallyintegrated security distribution company in North America from January 2005 toAugust 2006. Previously, he founded and managed several companies in the energysector. In June 2001. Mr. Field founded and was CEO of Clarus Energy Partners,a leading Distributed Generation developer, owner and operator that wasacquired by Hunt Power in early 2004. Prior to Clarus Energy, Mr. Fieldco-founded Omaha-based Kiewit Fuels, a renewable energy company specializing inthe development of biofuels production. In addition to a career in sustainableenergy development, he also has an extensive background in water technology andinfrastructure development, with companies such as; Bechtel, Peter Kiewit, andPoseidon Resources, as well as, in corporate finance with Citicorp. Mr. Fieldholds a MBA from the Garvin School of International Management (Thunderbird).

**Aidan Shields******was appointed as our Chief Financial Officer**e**ffective as of June 5, 2007. Prior to joiningOpen Energy, Mr. Shields was Chief Financial Officer of Satellite SecurityCorporation, a start-up micro-cap company in the wireless GPS technology spacefrom May 2006 to March 2007. Previously, he spent 11 years with Gap Inc. inseveral roles, including Chief Financial Officer of the Outlet Division andSenior Director and Controller of the Old Navy Division. During his time withOld Navy, the division grew from a start up to the fastest growing retailer inU.S. history. While at Gap Inc., Mr. Shields spent time in a multitude of rolessupporting Real Estate, Financial Planning, Business development, MarketingEffectiveness, Supply Chain, Operations and SEC reporting. Before Gap Inc., Mr.Shields worked for Minerals Technologies Inc. in Cork, Ireland and Europe. Mr.Shields is a native of the Republic of Ireland and is a graduate of theInstitute of Chartered Accountants in Ireland. He received his training as aChartered Accountant with KPMG in Ireland.

**JohnHart** was appointed General Counsel and Corporate Secretary onMay 11, 2007. John Hart has beeninvolved in the photovoltaic industry for many years including being a foundingshareholder and serving as general counsel to Connect Renewable Energy beforeits acquisition by Open Energy Corporation. Mr. Hart has over four decades oflegal experience as a sole practitioner, partner in law firms, and generalcounsel to private and publicly held companies. His practice has ranged fromcounseling individuals and businesses on enterprise formation, financings,mergers, acquisitions, operational issues, and a variety of litigations. Inaddition, Mr. Hart has been an entrepreneur, business advisor and a director ofpublic and private companies. Mr. Hart received a Bachelor of Arts, cum laudefrom the University of Redlands and Juris Doctor from the University ofSouthern California. He was admitted to the State Bar of California in January,1964.

**Tom Wolfe**is currently Chief Technology Officer andhas been with Open Energy since December 22, 2006. In 1998****Mr. Wolfe found WaterEyeCorporation, which became an Open Energy subsidiary on December 22, 2006. Mr.Wolfe has over twenty five years experience in the chemical process industries,with particular experience in power, water and wastewater treatment technologies.Mr. Wolfe has made many contributions to the development and advancement ofreverse osmosis membrane technology and wastewater evaporation technologydating back to the early 1970’s. He has participated at all levels in some ofthe largest membrane and evaporator installations in the world and has hands onexperience with a wide variety of evaporator configurations including vaporrecompression, steam driven single and multiple effect systems, as well asdirect contact and submerged combustion processes. In the software field, Mr.Wolfe was the founder of Western Pacific Data Systems, now part of SpirentSystems (UK) a leading software development company in California. Mr. Wolfedeveloped much of the software currently in use today for reverse osmosis membraneperformance prediction and computational chemistry for recovery determinationand scale control. Mr. Wolfe has authored more than 20 technical articles andpapers in his various fields of involvement and is a member of the AmericanChemical Society and the American Water Works Association. He received hisBachelors Degree in Chemistry from the University of California, San Diego.

67

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**Don Rogers** was appointed to the position of ExecutiveVice President of East Coast Operations of the Company on April 10, 2006. InApril 2003 Mr. Rogers was appointed President of Solar Roofing Systems, Inc.and served as its President until he joined the Company in April 2006.From March 2001 to March 2003, Mr. Rogers was thePresident and founder of Rogers & Associates, a business consulting firm.Don Rogers manages the operations of our East Coast manufacturing facility. Hisbackground is in consumer packaged goods, including 16 years with Procter andGamble, and 15 years with Nabisco Brands. Earlier in his career, Don heldpositions of increasing responsibility in sales, marketing, and productpromotion. Over the past decade, he has served in senior management roles inthe US and Canada, including seven years in New Jersey, as President andGeneral Manager of two operating divisions of the Nabisco. In1968, he earned a Bachelors Degree in Commerce from the University of Manitoba.

**Committeesof the Board of Directors**

**AuditCommittee**

The board of directorshas an Audit Committee, which consists of Dalton Sprinkle(Chair) and E. Douglas Ward. The board of directors has examined thecomposition of the Audit Committee in light of the listing standards of theNasdaq Stock Market and the regulations under the ExchangeAct applicable to audit committees. Based upon this examination, the board ofdirectors has determined that each of the Audit Committee members is an “independent”director within the meaning of such listing standards and the Exchange Act andthe rules and regulations thereunder.       

**Nominating& Governance Committee**

The Governance Committeeof the board of directors is comprised of Dalton Sprinkle (Chair) and E.Douglas Ward. 

**CompensationCommittee**

The board has aCompensation Committee comprised of E. Douglas Ward (Chair). 

**CODE OFETHICS**

Effective August 30,2005, our board of directors adopted a Code of Business Conduct and Ethics thatapplies to, among other persons, our President and Chief Executive Officer aswell as the individuals performing the functions of our Chief FinancialOfficer, Secretary and Controller. As adopted, our Code of Business Conduct andEthics sets forth written standards that are designed to deter wrongdoing andto promote:

1.                         honestand ethical conduct, including the ethical handling of actual or apparentconflicts of interest between personal and professional relationships;

2.                         full,fair, accurate, timely, and understandable disclosure in reports and documentsthat we file with, or submit to, the Securities and Exchange Commission and inother public communications made by us;

3.                         Compliancewith applicable governmental laws, rules and regulations;

4.                         theprompt internal reporting of violations of the Code of Business Conduct andEthics to an appropriate person or persons identified in the Code of BusinessConduct and Ethics; and

5.                         accountabilityfor adherence to the Code of Business Conduct and Ethics.

Our Code ofBusiness Conduct and Ethics requires, among other things, that all of ourCompany’s personnel shall be accorded full access to our President and ChiefExecutive Officer with respect to any matter which may arise relating to theCode of Business Conduct and Ethics. Further, all of our Company’s personnelare to be accorded full access to our Company’s board of directors if any suchmatter involves an alleged breach of the Code of Business Conduct and Ethics byour President and Chief Executive Officer.

In addition, ourCode of Business Conduct and Ethics emphasizes that all employees, andparticularly managers and/or supervisors, have a responsibility for maintainingfinancial integrity within our company, consistent with generally acceptedaccounting principles, and federal, provincial and state securities laws. Anyemployee who becomes aware of any incidents involving financial or accountingmanipulation or other irregularities, whether by witnessing the incident orbeing told of it, must report it to his or her immediate supervisor or to ourPresident and Chief Executive Officer. If the incident involves an allegedbreach of the Code of Business Conduct and Ethics by the President and ChiefExecutive Officer, the incident must be reported to any member of our board ofdirectors. Any failure to report such inappropriate or irregular conduct ofothers is to be treated as a severe disciplinary matter. It is against ourcompany policy to retaliate against any individual who reports in good faiththe violation or potential violation of our Code of Business Conduct and Ethicsby another.

68

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**SECTION16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE**

Based solely on areview of copies of such reports furnished to us and written representationsthat no other reports were required during the fiscal year ended May 31, 2007,we believe that all persons subject to the reporting requirements of Section16(a) filed the required reports on a timely basis with the SEC, except asfollows:

Jeffrey BryanStein, an officer, filed a late Form 3 disclosing his holdings as of the datehe became an officer and one late Form 4 reporting one transaction, a stockoption grant. David Field, an officer, filed a late Form 4 reporting onetransaction, a stock option grant. Cheryl Bostater, an officer, filed a lateForm 4 reporting four transactions, sales of common stock. David Saltman, anofficer, filed a late Form 4 reporting one transaction and a late Form 4reporting three transactions, sales of common stock. 

**ITEM 10. EXECUTIVE COMPENSATION**

The informationrequired by this Item is incorporated by reference from our definitive proxystatement to be delivered to stockholders in connection with our 2007 AnnualMeeting of Stockholders.

**ITEM11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERS**

The information requiredby this Item is incorporated by reference from our definitive proxy statementto be delivered to stockholders in connection with our 2007 Annual Meeting ofStockholders.

**ITEM12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE**

The informationrequired by this Item is incorporated by reference from our definitive proxystatement to be delivered to stockholders in connection with our 2007 AnnualMeeting of Stockholders.

**ITEM13. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**

The exhibits filedherewith are listed in the Exhibit Index immediately preceding such exhibits.The Exhibit Index is incorporated herein by reference.

**ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**

***Independent Public Accountants***

The Registrant’sBoard of Directors has appointed Squar, Milner, Peterson, Miranda &Williamson, LLP as independent public accountant for the fiscal year ending May31, 2007.

69

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***Principal Accounting Fees***

The followingtable presents the fees paid for professional audit services rendered byvarious firms in FY 2007 and by Peterson & Co. LLP for FY 2006, for theaudits of the Registrant’s annual financial statements and related matters forthe years ended May 31, 2007 and May 31, 2006, respectively, and fees billedfor other services rendered by such accounting firms during those periods.
| ** **             | ** ** | **FY2007**          | ** ** | **FY 2006** | ** ** |
|------------------------|------------|---------------------|------------|------------------|------------|
| ** **             | ** ** | **Squar,  Millner** | ** ** | **Matheson**     | ** ** | **CBIZ** | ** ** | **Other** | ** ** | **Total** | ** ** | **Peterson** | ** ** |
| Audit fees (1)         |       | $                   | 93,806     |             | $          | 26,964 |   | $ | 21,245 |   | $ | 1,188 |   | $ | 143,203 |   | $ | 1,657 |   |
| Audit-related fees (2) |       | 149,125             |       | —           |       | 16,365 |   | — |   | 165,490 |   | 364 |   |
| Tax fees (3)           |       | 16,820              |       | —           |       | — |   | — |   | 16,820 |   | 875 |   |
| SB2 Registration (4)   |       | 33,014              |       | —           |       | — |   | — |   | 33,014 |   | — |   |
| All other fees (5)     |       | 845                 |       | —           |       | — |   | — |   | 845 |   | — |   |
|                   |       | $                   | 293,610    |             | $          | 26,964 |   | $ | 37,610 |   | $ | 1,188 |   | $ | 359,372 |   | $ | 2,896 |   |

 

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(1)          Audit fees include feesand expenses for professional services rendered for the audits of the Company’sannual financial statements for those years and for the review of the financialstatements included in the Company’s Quarterly Reports on Form 10-QSB duringthose years.

(2)          Audit-related feesconsist of assistance and discussion concerning financial accounting andreporting standards and other accounting issues, and SEC compliance matters.

(3)          Tax fees consist ofpreparation of federal and state tax returns, review of quarterly estimatedpayments, and consultation concerning tax compliance issues. All tax feesbilled to us during the year ended May 31, 2007 and 2006 were billed by SquarMilner and Peterson & Co., LLP, respectively.

(4)          SB2 registration feesconsist of preparation and review of SB2 forms for the registration of theCompany in the state of Nevada. All SB2 registration fees billed to us duringthe year ended May 31, 2007 and 2006 were billed by Squar Milner and Peterson& Co., LLP, respectively.

(5)           Allother fees include any fees for services not covered above.

The Board ofDirectors has considered whether the provision of non-audit services iscompatible with maintaining the principal accountant’s independence.

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**SIGNATURES**

In accordance withSection 13 or 15(d) of the Securities Exchange Act of 1934, the registrantcaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.
|     |   | Open Energy Corporation |
|----------|--------|-------------------------|
|     |   |                    |
|     |   | By:                     | /s/  David  Saltman |   |
| * * |   | * *                | *President and Chief Executive  Officer*

*(Principal Executive Officer)* |

 

Each person whosesignature appears below hereby severally constitutes and appoints David Saltmanand Aidan H. Shields, and each of them, his true and lawful attorney-in-fact andagent, with full power of substitution and resubstitution for him and in hisname, place and stead, in any and all capacities to sign any and all amendmentsto this Report, and to file the same, with all exhibits thereto, and otherdocuments in connection therewith, with the Commission, granting unto saidattorney-in-fact and agents, and each of them, full power and authority to doand perform each and every act and thing requisite or necessary fully to allintents and purposes as he might or could do in person, hereby ratifying andconfirming all that each said attorneys-in-fact and agents or any of them ortheir or his substitute or substitutes, may lawfully do or cause to be done byvirtue hereof.

In accordance with theSecurities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of registrant in their capacities and on September13, 2007.
| Signature               | ** ** | **Title**                                                           | ** ** | **Date**           |
|-------------------------|------------|---------------------------------------------------------------------|------------|--------------------|
|                    |       |                                                                |       |               |
| /s/ David P. Saltman    |       | Director and Chief Executive Officer (Principal  Executive Officer) |       | September 13, 2007 |
| David P. Saltman        |       |                                                                |       |               |
|                    |       |                                                                |       |               |
| /s/ Aidan H. Shields    |       | Chief Financial Officer and Treasurer (Principal  Financial and     |       | September 13, 2007 |
| Aidan H. Shields        |       | Accounting Officer)                                                 |       |               |
|                    |       |                                                                |       |               |
| /s/ Norman J. Dodd      |       | Director                                                            |       | September 13, 2007 |
| Norman J. Dodd          |       |                                                                |       |               |
|                    |       |                                                                |       |               |
| /s/ Dalton Sprinkle     |       | Director                                                            |       | September 13, 2007 |
| Dalton Sprinkle         |       |                                                                |       |               |
|                    |       |                                                                |       |               |
| /s/ Edward Douglas Ward |       | Director                                                            |       | September 13, 2007 |
| Edward Douglas Ward     |       |                                                                |       |               |

 

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**EXHIBIT  INDEX**
| Exhibit   Number | ** ** | **Exhibit**                                                                                                                                                                                                                                                                        |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                                                                                                                                               |
| 3.1              |       | Articles of Incorporation, incorporated by reference  from Exhibit 3.1 to the Form SB-2 filed August 1, 2002.                                                                                                                                                                      |
|             |       |                                                                                                                                                                                                                                                                               |
| 3.2              |       | Bylaws, incorporated by reference from Exhibit 3.1  to the Form 10-Q filed April 19, 2006.                                                                                                                                                                                         |
|             |       |                                                                                                                                                                                                                                                                               |
| 3.3              |       | Certificate of Amendment filed with the Secretary of  State of Nevada on February 23, 2004, incorporated by reference from Exhibit  3.3 to the Form 10-KSB filed September 12, 2005.                                                                                               |
|             |       |                                                                                                                                                                                                                                                                               |
| 3.4              |       | Certificate of Amendment filed with the Secretary of  State of Nevada on May 4, 2005, incorporated by reference from Exhibit 3 to  Form 8-K filed August 31, 2005.                                                                                                                 |
|             |       |                                                                                                                                                                                                                                                                               |
| 3.5              |       | Certificate of Merger filed with the Secretary of  State of Nevada on April 21, 2006, incorporated by reference from Exhibit 3.1  to the Form 8-K filed April 25, 2006.                                                                                                            |
|             |       |                                                                                                                                                                                                                                                                               |
| 4.1              |       | Secured Convertible Debenture No. CCP-4, issued on  October 30, 2006 in favor of Cornell Capital Partners, LP., incorporated by  reference from Exhibit 4.1 to the Form 8-K filed November 3, 2006.                                                                                |
|             |       |                                                                                                                                                                                                                                                                               |
| 4.2              |       | Agreement and Plan of Merger, dated December 21,  2006, by and among Open Energy Corporation, Open Energy/WE Acquisition  Corporation, WaterEye Corporation, and certain other parties thereto,  incorporated by reference from Exhibit 2.1 to Form 8-K filed December 28,  2006.  |
|             |       |                                                                                                                                                                                                                                                                               |
| 4.3              |       | Securities Purchase Agreement dated March 30, 2007  by and between Open Energy Corporation and Cornell Capital Partners, L.P.,  incorporated by reference from Exhibit 4.1 to Form 8-K filed April 5, 2007.                                                                        |
|             |       |                                                                                                                                                                                                                                                                               |
| 4.4              |       | Secured Convertible Debenture dated March 29, 2007  issued by Open Energy Corporation to Cornell Capital Partners, L.P.,  incorporated by reference from Exhibit 4.2 to Form 8-K filed April 5, 2007.                                                                              |
|             |       |                                                                                                                                                                                                                                                                               |
| 4.5              |       | Security Agreement dated March 29, 2007 by and among  Open Energy Corporation, Connect Renewable Energy, Inc., Solar Roofing  Systems, Inc., WaterEye Corporation and Cornell Capital Partners, L.P.,  incorporated by reference from Exhibit 4.3 to Form 8-K filed April 5, 2007. |
|             |       |                                                                                                                                                                                                                                                                               |
| 4.6              |       | Warrant to Purchase Common Stock dated March 29,  2007 issued by Open Energy Corporation to Cornell Capital Partners, L.P.,  incorporated by reference from Exhibit 4.4 to Form 8-K filed April 5, 2007.                                                                           |
|             |       |                                                                                                                                                                                                                                                                               |
| 4.7              |       | Registration Rights Agreement dated March 29, 2007  by and between Open Energy Corporation and Cornell Capital Partners, L.P. incorporated  by reference from Exhibit 4.5 to Form 8-K filed April 5, 2007.                                                                         |
|             |       |                                                                                                                                                                                                                                                                               |
| 4.8              |       | Letter Agreement, dated May 21, 2007, between Open  Energy Corporation and Cornell Capital Partners, L.P., incorporated by  reference from Exhibit 10.1 to the Form 8-K filed May 24, 2007.                                                                                        |
|             |       |                                                                                                                                                                                                                                                                               |
| 4.9              |       | Note and Warrant Purchase Agreement dated June 15,  2007, incorporated by reference from Exhibit 10.1 to the Form 8-K filed June  21, 2007.                                                                                                                                        |
|             |       |                                                                                                                                                                                                                                                                               |
| 4.10             |       | Form of Warrant, incorporated by reference from  Exhibit 10.2 to the Form 8-K filed June 21, 2007.                                                                                                                                                                                 |
|             |       |                                                                                                                                                                                                                                                                               |
| 4.11             |       | Form of Stock Pledge Agreement, incorporated by  reference from Exhibit 10.3 to the Form 8-K filed June 21, 2007.                                                                                                                                                                  |
|             |       |                                                                                                                                                                                                                                                                               |
| 4.12             |       | Form of Note, incorporated by reference from Exhibit  10.4 to the Form 8-K filed June 21, 2007.                                                                                                                                                                                    |
|             |       |                                                                                                                                                                                                                                                                               |
| 4.13             |       | Convertible Debenture dated June 15, 2007,  incorporated by reference from Exhibit 10.5 to the Form 8-K filed June 21,  2007.                                                                                                                                                      |
|             |       |                                                                                                                                                                                                                                                                               |
| 4.14             |       | Form of Default Warrant, incorporated by reference  from Exhibit 10.6 to the Form 8-K filed June 21, 2007.                                                                                                                                                                         |
|             |       |                                                                                                                                                                                                                                                                               |
| 4.15             |       | Form of Registration Rights Agreement, incorporated  by reference from Exhibit 10.7 to the Form 8-K filed June 21, 2007.                                                                                                                                                           |

 

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| 4.16         |   | Securities Purchase Agreement, dated August 31,  2007, by and between Open Energy Corporation and Everest Asset Management AG,  incorporated by reference from Exhibit 4.1 to Form 8-K filed September 6,  2007.                                                                            |
|--------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                                                                                                                                                                                        |
| 4.17         |   | Convertible Note, dated August 31, 2007, issued by  Open Energy Corporation to Everest Asset Management AG, incorporated by  reference from Exhibit 4.2 to Form 8-K filed September 6, 2007.                                                                                                |
|         |   |                                                                                                                                                                                                                                                                                        |
| 4.18         |   | Warrant, dated August 31, issued by Open Energy  Corporation to Everest Asset Management AG, incorporated by reference from  Exhibit 4.3 to Form 8-K filed September 6, 2007.                                                                                                               |
|         |   |                                                                                                                                                                                                                                                                                        |
| 4.19         |   | Registration Rights Agreement, dated August 31,  2007, by and between Open Energy Corporation and Everest Asset Management AG,  incorporated by reference from Exhibit 4.4 to Form 8-K filed September 6,  2007.                                                                            |
|              |   |                                                                                                                                                                                                                                                                                        |   |
|         |   |                                                                                                                                                                                                                                                                                        |   |
| 10.1†   |   | Open Energy Corporation 2006 Equity Incentive Plan,  incorporated by reference from Exhibit 10.1 to the Form 8-K filed November 8,  2006.                                                                                                                                                   |   |
|         |   |                                                                                                                                                                                                                                                                                        |   |
| 10.1.1† |   | Form of Stock Option Agreement under the Open Energy  Corporation 2006 Equity Incentive Plan, incorporated by reference from  Exhibit 10.2 to the Form 8-K filed November 8, 2006.                                                                                                          |   |
|         |   |                                                                                                                                                                                                                                                                                        |   |
| 10.1.2† |   | Form of Stock Award Agreement for Restricted Stock  under the Open Energy Corporation 2006 Equity Incentive Plan, incorporated by  reference from Exhibit 10.3 to the Form 8-K filed November 8, 2006.                                                                                      |   |
|         |   |                                                                                                                                                                                                                                                                                        |   |
| 10.1.3† |   | Form of Stock Award Agreement for Stock Units under  the Open Energy Corporation 2006 Equity Incentive Plan, incorporated by  reference from Exhibit 10.4 to the Form 8-K filed November 8, 2006.                                                                                           |   |
|         |   |                                                                                                                                                                                                                                                                                        |   |
| 10.2†   |   | Amendment No. 1 to CBC Consulting Agreement, dated  December 14, 2006, incorporated by reference from Exhibit 10.1 to the Form  8-K filed December 19, 2006.                                                                                                                                |   |
|         |   |                                                                                                                                                                                                                                                                                        |   |
| 10.3         |   | Agreement and Plan of Merger dated as of December  21, 2006, by and among Open Energy, incorporated by reference from Exhibit  2.1 to the Form 8-K filed December 19, 2006. Corporation, Open Energy/WE  Acquisition Corporation, WaterEye Corporation, and certain other parties  thereto. |   |
|         |   |                                                                                                                                                                                                                                                                                        |   |
| 10.4†   |   | Employment Agreement dated as of December 22, 2006,  by and between Open Energy Corporation and Thomas D. Wolfe, incorporated by  reference from Exhibit 10.4 to the Form 10-QSB filed February 1, 2007.                                                                                    |   |
|         |   |                                                                                                                                                                                                                                                                                        |   |
| 10.5         |   | Indenture Agreement (Lease) and Amendment No. 1 to  Lease with Acton Management Co. Limited dated November 22, 2006, incorporated  by reference from Exhibits 10.1 and 10.2, respectively, to the Form 8-K filed  November 29, 2006.                                                        |   |
|         |   |                                                                                                                                                                                                                                                                                        |   |
| 10.6†   |   | Amendment No. 1 to Executive Employment dated  January 30, 2007 by and between Open Energy and David Saltman incorporated by  reference from Exhibit 10.6 to the Form 10-QSB filed February 1, 2007.                                                                                        |   |
|         |   |                                                                                                                                                                                                                                                                                        |   |
| 10.7†   |   | Amendment No. 2 to Executive Employment dated  January 30, 2007 by and between Open Energy and Cheryl Bostater, incorporated  by reference from Exhibit 10.7 to the Form 10-QSB filed February 1, 2007.                                                                                     |   |
|         |   |                                                                                                                                                                                                                                                                                        |   |
| 10.10†  |   | Employment Agreement, dated November 1, 2006, by and  between Open Energy Corporation and Jeffrey Stein, incorporated by reference  from Exhibit 10.5 to the Form 10-QSB filed April 23, 2007.                                                                                              |   |
|         |   |                                                                                                                                                                                                                                                                                        |   |
| 10.11†  |   | Amendment No. 1 to Employment Agreement, dated April  6, 2007, by and between Open Energy Corporation and Jeffrey Stein,  incorporated by reference from Exhibit 10.6 to the Form 10-QSB filed April  23, 2007.                                                                             |   |
|         |   |                                                                                                                                                                                                                                                                                        |   |
| 10.12        |   | Letter Agreement, dated May 21, 2007, between Open  Energy Corporation and Cornell Capital Partners, L.P., incorporated by  reference from Exhibit 10.1 to the Form 8-K filed May 24, 2007.                                                                                                 |   |
|         |   |                                                                                                                                                                                                                                                                                        |   |
| 10.13†  |   | Employment Agreement with Aidan H. Shields dated  June 15, 2007, incorporated by reference from Exhibit 10.9 to the Form 8-K  filed June 21, 2007.                                                                                                                                          |   |
|         |   |                                                                                                                                                                                                                                                                                        |   |
| 10.14†  |   | Employment Agreement with John E. Hart dated June  15, 2007, incorporated by reference from Exhibit 10.10 to the Form 8-K filed  June 21, 2007.                                                                                                                                             |   |
|         |   |                                                                                                                                                                                                                                                                                        |   |
| 10.15†  |   | Employment Agreement with David Field dated November  1, 2006 and Amendment No. 1 to the Employment Agreement dated June 15, 2007,  incorporated by reference from Exhibit 10.11 to the Form 8-K filed June 21,  2007.                                                                      |   |

 

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| 14.1   |   | Code of Ethics, incorporated by reference from  Exhibit 14.1 to Form 10-KSB filed September 12, 2005.                                                                                          |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                           |
| 16.1   |   | Letter from Peterson & Co., LLP to the  Securities and Exchange Commission, dated December 1, 2006, incorporated by  reference from Exhibit 16.1 to the Form 8-K/A filed December 1, 2006. |
|   |   |                                                                                                                                                                                           |
| 21.1*  |   | List of Subsidiaries.                                                                                                                                                                          |
|   |   |                                                                                                                                                                                           |
| 23.1*  |   | Consent of Squar, Milner, Peterson, Miranda &  Williamson, LLP.                                                                                                                            |
|   |   |                                                                                                                                                                                           |
| 24.1*  |   | Power of Attorney (included on signature page).                                                                                                                                                |
|   |   |                                                                                                                                                                                           |
| 31.1*  |   | Certification of Principal Executive Officer as  required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                           |
|   |   |                                                                                                                                                                                           |
| 31.2*  |   | Certification of Principal Financial Officer as  required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                           |
|   |   |                                                                                                                                                                                           |
| 32.1*  |   | Certification of Principal Executive Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                       |
|   |   |                                                                                                                                                                                           |
| 32.2*  |   | Certification of Principal Financial Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                       |

 

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*Filed herewith.

†Indicates a managementcontract or compensatory plan.

74

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