**United
      States**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**FORM
      10-KSB**





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





**For
      the fiscal year ended May 31, 2006**





OR





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





Commission
      File Number 000-50450





**OPEN
      ENERGY CORPORATION**


(Name
      of
      small business issuer in its charter)





**Nevada**
              (State
                or other jurisdiction of
              incorporation
                or organization)
            **98-0370750**
              (I.R.S.
                Employer
              Identification
                Number)**514
                Via de la Valle, Suite 200, Solana Beach, California**
              (Address
                of principal executive offices)
            **92075**(Zip
                Code)




**(858)
      794-8800**


(Registrant’s
      telephone number, including area code)





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





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





(Title
      of Class)





Common
      Stock, par value $0.001 per share




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 or information
      statements incorporated by reference in Part III of 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 
      o No x





The
      registrant’s revenues for its most recent fiscal year were
      $152,532.





As
      of
      August 22, 2006, the aggregate market value of the voting stock of the
      registrant held by non-affiliates of the registrant was
      $41,474,329.**





The
      number of shares of Common Stock, $0.001 par value, outstanding on August 22,
      2006, was 69,668,290.




*   
Excludes
      filings on Form 8-K as
      provided in Rule 144(c)(i) under the Securities Act of 1933.


**
      Excludes the Common Stock held by executive officers, directors and stockholders
      whose ownership exceeds 5% of the Common Stock outstanding on August 22, 2006.
      The calculation does not reflect a determination that such persons are
      affiliates for any other purposes.










**TABLE
      OF CONTENTS**




Page**PART
                I**ITEM
                1.
            Business
            2ITEM
                2.
            Properties
            21ITEM
                3.
            Legal
                Proceedings
            21ITEM
                4.
            Submission
                of Matters to a Vote of Security Holders
            21**PART
                II**ITEM
                5.
            Market
                for Common Equity, Related Stockholder Matters, and Small Business
                Issuer
                Purchases of Equity Securities
            22ITEM
                6.
            Management's
                Discussion and Analysis or Plan of Operation
            24ITEM
                7.
            Financial
                Statements
            35ITEM
                8.
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            71ITEM
                8A.
            Controls
                and Procedures
            71ITEM
                8B.
            Other
                Information
            71**PART
                III**ITEM
                9.
            Directors,
                Executive Officers, Promoters and Control Persons; Compliance with
                Section
                16(a) of the Exchange Act
            72ITEM
                10.
            Executive
                Compensation
            75ITEM
                11.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            78ITEM
                12.
            Certain
                Relationships and Related Transactions
            80ITEM
                13.
            Exhibits
            80ITEM
                14.
            Principal
                Accountant Fees and Services
            81









**FORWARD-LOOKING
      STATEMENTS**  ****




This
      Report contains forward-looking statements. These forward looking statements
      are
      often identified by words such as "may," "will," "expect," "intend,"
      "anticipate," "believe," "estimate," "continue," "plan" and similar expressions.
      These statements involve known and unknown risks, estimates, assumptions and
      uncertainties that could cause actual results to differ materially from those
      expressed for the reasons described in this Report. You should not place undue
      reliance on these forward-looking statements.




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




·
            significant
                uncertainty inherent in the renewable energy
                industry;




·
            intense
                and increasing competition from other "clean" renewable energy companies
                and conventional fossil fuel based energy companies; new competitors
                are
                likely to emerge and new technologies may further increase
                competition;




·
            our
                operating costs may increase beyond our current expectations and
                we may be
                unable to fully implement our current business
                plan;




·
            our
                ability to obtain future financing or funds when
                needed;




·
            our
                ability to successfully obtain a diverse customer
                base;




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




·
            our
                ability to attract and retain a qualified employee
                base;




·
            our
                ability to respond to new developments in technology and new applications
                of existing technology before our
                competitors;




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




·
            our
                ability to maintain and execute a successful business strategy;
                and




·
            we
                may face other risks described from time to time in periodic and
                current
                reports we file with the United States Securities and Exchange Commission,
                or SEC.





You
      also
      should consider carefully the statements under "Risks Related to Our Business"
      and other sections of this Report, which address additional factors that could
      cause our actual results to differ from those set forth in the forward-looking
      statements and could materially and adversely affect our business, operating
      results and financial condition. All subsequent written and oral forward-looking
      statements attributable to us or persons acting on our behalf are expressly
      qualified in their entirety by the applicable cautionary
      statements.




The
      forward-looking statements speak only as of the date on which they are made,
      and, except to the extent required by federal securities laws, we undertake
      no
      obligation to update any forward-looking statement to reflect events or
      circumstances after the date on which the statement is made or to reflect the
      occurrence of unanticipated events. In addition, we cannot assess the impact
      of
      each factor on 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
      materially from those contained in any forward-looking statements.




1




**PART
      I**





**ITEM
      1.**  **Description
      of Business**





**Company
      Overview**




Open
      Energy Corporation is a renewable energy company focused on the development
      and
      commercialization of a portfolio of solar products and technologies capable
      of
      delivering cost competitive power, fresh water and related commodities. Our
      mission is to harness the power of the sun to meet the growing resource demands
      of sustainable 21 st century
      development.




Our
      company was originally incorporated in the State of Nevada on April 11, 2002
      under the name Barnabus Enterprises Ltd., and in May 2005 we changed our name
      to
      Barnabus Energy, Inc. By 2005, we had acquired gas leases and a number of
      existing and proposed gas wells in Alberta, Canada.  This network tied into
      a transport pipeline leading into the United States, where a premium for
      production could be obtained.




In
      June
      of 2005, we made a strategic business decision to shift our
      focus. Motivated by the growth in wind, solar and other renewable energy
      technologies and believing that market forces and legislative incentives were
      in
      place to support the industry, we decided to transform into a renewable
      energy company. We moved our corporate offices to Southern California in
      November, 2005.




In August
      of 2005, we signed an exclusive international license for SunCone Ô CSP
      (concentrating solar power) technology. SunCone Ô CSP was
      conceived by Dr. Melvin Prueitt, a physicist, inventor and former senior
      research scientist at the Los Alamos National Laboratory. SunCone Ô CSP is
      capable of concentrating solar energy to heat fluid and drive a turbine to
      produce electricity, or to purify water using the power of the sun. The first
      prototype was designed and built by Hytec Engineering of Los Alamos, New Mexico.
      Initial testing of this prototype system was successful and we are currently
      working to commercialize the technology.





In
      August
      of 2005, we signed an agreement to acquire a controlling interest in
      Toronto-based Solar Roofing Systems, Inc. (SRS), which has a patent pending
      on SolarSave ® photovoltaic
      (PV) roofing membrane.  SRS founder Norman Dodd subsequently joined our
      Board of Directors.  In November of 2005, we signed an agreement to acquire
      California-based Connect Renewable Energy, Inc. (CRE) **,** which
      developed, patented, and is currently manufacturing PV integrated roofing tiles,
      and  CRE founder Ron Gangemi joined the Board. Both companies produce
      lightweight, fire-rated, waterproof, building-integrated PV roofing solutions.
      In March 2006, we completed the acquisition of CRE and in April 2006,
      we acquired the remaining interests in SRS that we did not previously
      own.   SRS and CRE provided our company with proprietary products and
      expanded manufacturing, marketing, sales and service capabilities. SRS had
      no
      sales prior to its acquisition by us.




On
      December 8, 2005, we sold our oil and gas holdings. In February and March 2006,
      we signed agreements to obtain approximately $20 million through a series of
      financings, and on April 21, 2006 we changed our name to Open Energy Corporation
      to better reflect our mission, vision and strategic objectives. We are entering
      a marketplace that grew by 57% in 2004 (according to the U.S. Department of
      Energy) with superior products, an experienced leadership team, and a clear
      strategic focus.




According
      to the U.S. Department of Energy, every hour of every day the earth receives
      enough solar energy to meet mankind's entire requirements for one year. It
      is
      this power we intend to utilize in order to deliver safe, clean, cost
      competitive products to our residential, commercial and industrial
      customers.




**The
      Energy Industry**




The
      production of electrical power is one of the world's largest industries.
      According to the U.S. Department of Energy's International Energy Outlook,
      global demand for electricity is expected to grow at annual rates of between
      2%
      to 5% from 2003 to 2030, and the use of electricity will increase from 14.3
      trillion kilowatt hours in 2002 to over 26 trillion kilowatt hours by
      2025.




Increases
      in the world’s consumption of oil are similarly forecasted. According to
      OPEC, total world consumption of crude oil in 1996 was 71.7 million barrels
      per day. OPEC estimates that world oil consumption could reach 100 million
      barrels per day by the year 2020. According to *BP
      Energy World Review* , while
      China’s economy grew by 9.5% in 2004, this was outstripped by the rise in
      Chinese energy demand-up 15.1% over the year. Over the last 3 years, Chinese
      energy demand has risen by 65%, accounting for over half the increase in global
      demand over the period.





2




Fossil
      fuels are non-renewable resources, meaning that at some point the world will
      exhaust all known oil and natural gas reserves. The electrical utility industry
      and traditional oil and gas companies face many challenges in meeting the
      growing worldwide demand for energy, including the following:




·
            **Fossil
                Fuel Supply Constraints:**Over
                65% of the world's electricity is generated from fossil fuels such
                as
                coal, oil and natural gas, according to the International Energy
                Agency
                (IEA). Limited fossil fuel supply and escalating demand for electricity
                should continue to drive up wholesale electricity prices, creating
                a need
                to develop new technologies for power
                generation.




·
            **Infrastructure
                Constraints:**In
                many parts of the world, the existing electricity generation and
                transmission infrastructure is insufficient to meet projected demand.
                Developing and building a centralized power supply and delivery
                infrastructure is capital intensive. This has left the electricity
                supply
                insufficient to meet demand in some areas, resulting in both scheduled
                and
                unscheduled blackouts.




·
            **Desire
                for Energy Security:**Given
                the political and economic instability in the major oil and gas producing
                regions of the world, governments are trying to reduce their dependence
                on
                foreign sources of fossil fuels. According to the World Bank, over
                60% of
                the energy used in Germany, Italy and Spain, over 80% of the energy
                used
                in Japan and Korea, and over 25% of the energy used in the U.S. is
                imported. Reducing these imports would bolster the energy security
                of
                these countries.





An
      underlying consideration concerning the delivery of electricity is the location
      of the generation source relative to the location of the end-use consumption.
      Over the past century, the economics of power plant construction supported
      larger and larger central station sites linked to transmission lines spanning
      great distances to reach the ultimate consumer. These economic considerations
      have been altered by the advent of smaller scale technologies that can provide
      electricity at competitive prices near the place of consumption. The combination
      of economic factors and of advances in generation technologies opens the market
      to an opportunity for "distributed generation" of electricity in combination
      with traditional grid resources. Open Energy's PV products are directed at
      this
      renewable distributed generation environment.




**Environmental
      Issues**




In
      addition to the fundamental challenges described above, the energy industry
      has
      increasingly become the target of environmental concerns. Government regulators
      have strengthened air and water emissions control requirements over the past
      decade. New U.S. power plants are required to install emission control
      technologies, which can be costly. This expense causes electricity from new
      fossil fuel-fired plants to cost more than electricity from existing power
      plants, which increases retail electric rates over time. To date, concerns
      regarding negative environmental impacts have slowed oil and gas exploration
      in
      the Alaskan Wildlife Preserve, the California coastal waters, and many other
      locations around the world.




At
      the
      same time, climate change risks have created international political momentum
      to
      implement green house gas reduction strategies. In 1992, The United Nations
      Framework Convention on Climate Change was adopted and signed by 154 nations.
      Despite a boycott by the United States, as of 2000, 184 nations were party
      to
      the Convention (better known as the Kyoto Protocol). It calls for the reduction
      of green house gas emissions to 5% less than 1990 levels by 2012, and provides
      carbon trading and funding initiatives to develop alternative sources of
      renewable energy. The Kyoto Protocol has motivated a number of legislative
      initiatives and corporate policies which have contributed to the growth of
      the
      renewable energy industry.




**Government
      Initiatives**




Rising
      energy costs, declining oil and gas reserves, and growing concerns about the
      environmental and political impacts of the world’s dependence on fossil fuels
      has ignited global interest in renewable energy alternatives. Europe and Japan
      have led this charge by providing substantial government subsidies, tax rebates,
      feed-in tariffs and other financial support for the development and
      implementation of green power technologies. As a result, according to the
      publication *European
      Daily Electricity Markets* ,
      Germany
      already derives 10% of its power from renewable energy sources, and according
      to
      the IEA, Japan leads the world in photovoltaic cell production.




In
      2005,
      President Bush signed into law a major energy bill that includes federal tax
      credits, renewable portfolio standards and other programs designed to accelerate
      the adoption of renewable energy alternatives. Renewable portfolio standards
      are
      regulations that require that a certain percentage of electricity produced
      in a
      state be derived from renewable sources. Colorado, New Jersey and Pennsylvania
      are among 15 states, in addition to the District of Columbia, that have
      implemented renewable portfolio standards.




3




All
      50
      States now have one or more renewable energy incentive programs, including
      net
      metering, renewable portfolio standards, tax credits, loans and grant programs.
      In December of 2005, the California Public Utility Commission created the
      largest solar energy bill in U.S. history, providing $3.2 billion in rebates
      over the next 11 years to support distributed generation solar
      systems.




**Alternative
      Energy Technologies**




According
      to the IEA, as of 1993, hydroelectric power plants generated 16% of worldwide
      electricity, but creating additional projects will flood agricultural land
      and
      destroy natural habitats.





According
      to the World Nuclear Association, nuclear energy contributes another 16% of
      electrical energy to the international grid, but uranium is a non-renewable
      resource and the challenges of safe disposal of radioactive waste remain a
      concern.




Biomass
      is organic material that has stored sunlight in the form of chemical energy.
      Biomass fuels include wood, agricultural bi-products, and even municipal solid
      waste. When burned, the chemical energy is released as thermal energy, which
      has
      been used to cook food and heat dwellings ever since man discovered fire.
      Although long regarded as a non-commercial subsistence energy source, there
      is
      growing recognition of the social and economic advantages of sustainable biomass
      power generation. Various studies conclude that it is possible to fulfill
      between 5 and 10% of Germany's primary energy requirements by using biomass
      energy.




Today's
      wind turbines can efficiently generate electricity from 5 kilowatt (kW) home
      systems to giant 100 foot towers arrayed along utility power lines, generating
      over 4 megawatts (MW) of power per turbine. Various tax incentives and long-term
      power purchase agreements have created a booming industry in wind energy.
      According to the Global Wind Energy Council, total global capacity grew 20%
      in
      2004, to 47,317 MW, with Spain and Germany accounting for fully half this
      growth. New government incentives are stimulating a resurgence of the domestic
      wind energy industry, but its penetration is limited by space constraints,
      wind
      availability, and zoning restrictions. Additionally, peak wind availability
      is
      unpredictable and may not coincide with peak electricity demand.




Geothermal
      power plants are yet another example of a renewable energy alternative. Iceland,
      an area rich in geothermal resources, has proposed to use this energy and free
      itself entirely from fossil fuels. Electricity can also be derived from tidal
      flows and wave action. The oceans cover 70% of the earth's surface, making
      them
      the world's largest solar collectors. Theoretically, one could use the heat
      differential between surface and deep water for electrical generation, or
      develop large-scale mechanical devices such as those proposed by Ocean Power
      Delivery Limited to force water through turbines using wave or tidal action,
      but
      these technologies remain in the development phase and will require significant
      capital to commercialize.




**Photovoltaic
      Systems**




In
      1953,
      Bell Laboratory invented the first photovoltaic cell, a thin sandwich of silicon
      and metal capable of converting sunlight directly into electricity. Though
      widely used in remote locations and on space satellites since then, the market
      for grid connected PV power has undergone significant growth in the last several
      years, expanding 57% in 2004 alone, according to the U.S. Department of Energy.
      Industry publication *SolarBuzz* reports
      that on-grid applications, where solar power is used to supplement a customer's
      electricity purchased from a utility network, represent the largest and fastest
      growing segment of the market, accounting for 77% of such market.




Growth
      in
      installed solar power systems has been stimulated by long-term government
      subsidies, tax incentives and feed-in tariffs (requiring the utilities to buy
      back excess power generated by privately owned PV systems). According to the
      IEA, Japan leads the world in PV cell production with 604 MW, followed by
      Germany with 198 MW of production capacity. With 30% federal tax credits
      provided by the recently enacted U.S. Energy Bill, coupled with state rebates
      and tax incentives, the U.S. posted solid 35% growth in PV system installations,
      and now ranks third in the world. California alone had 75 MW of installed solar
      PV systems as of 2004.




PV
      advantages include security, system reliability, low maintenance, modularity
      and
      flexibility of design, as well as significant environmental benefits (carbon
      neutral, fossil fuel independent). 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 the demand for distributed generation.




4




One
      of
      the most significant drawbacks of PV is the high initial cost of individual
      systems. Solar power can cost twice as much as grid power. This is due almost
      entirely to the high cost of PV cells, which depends upon the cost and
      availability of semi-conductor grade silicon. While technical developments
      are
      underway in thin film, membrane and other non-crystalline based materials,
      over
      90% of the industry currently relies upon crystalline silicon cells. The major
      PV cell suppliers are listed below. They represented 87% of the 2004 global
      PV
      production capacity (source: industry publication *Renewable
      Energy World* ):





**Company**
            
            **Production
                (MW)**Sharp
            
            
            324Kyocera
            
            
            105BP
                Solar
            
            
            85Mitsubishi
            
            
            75Q-Cells
            
            
            75Shell
                Solar
            
            
            72Sanyo
            
            
            65Schott
                Solar
            
            
            63Isofoton
            
            
            53Motech
            
            
            35Suntech
            
            
            28Deutsche
                Cell
            
            
            28General
                Electric
            
            
            25Photowatt
            
            
            22




**Concentrating
      Solar Power (CSP)**




CSP
      technologies are based on concentrating solar radiation to heat fluids, which
      can then be used to generate industrial heating or cooling, to produce
      electricity, or to desalinate water. The first commercially scaled CSP systems
      were built in Southern California in the mid-1980's and continue to deliver
      power to the Los Angeles basin. CSP's can provide safe, clean, economical,
      renewable power in either large-scale, grid-connected installations, or remote
      off-grid locations.




Three
      basic CSP systems are employed today. Trough systems utilize long rows of
      parabolic mirrors to focus sunlight on a pipe through which a heating fluid
      flows. These troughs track the sun along its axis. The fluid transfers energy
      to
      a conventional steam turbine in order to generate electricity. While, according
      to the U.S. Department of Energy, solar trough systems have relatively low
      efficiency (10%-15%) and have high capital and maintenance costs, they are
      a
      proven renewable energy technology. As a result, large scale CSP systems are
      currently being built in Southern California, Spain, Israel and other sun-belt
      regions of the world.




A
      second
      type of CSP system utilizes large parabolic mirrors to focus energy on a target.
      The target can either be small gas turbine, or a Stirling engine, both of which
      generate electricity. These dish systems are capable of generating very high
      temperatures, but they are expensive to build and maintain, and require very
      accurate sun tracking devices. A third basic CSP system deploys a series of
      tracking mirrors to concentrate sunlight on a central tower. According to the
      U.S. Department of Energy, these tower systems are capable of achieving
      internal temperatures of 567°C. The energy is absorbed by a working fluid or
      process gas, and then used to generate steam to power a conventional
      turbine.




Compared
      to other energy technologies, solar power's benefits include:




·
            ***Environmental
                Superiority.***Solar
                power is one of the most benign electric generation resources. Solar
                cells
                and CSP systems generate electricity without significant air or water
                emissions, habitat impact or waste
                generation.




·
            ***Price
                Stability.***Unlike
                fossil fuels, solar energy has no fuel price volatility or delivery
                risk.
                Although there is variability in the amount and timing of sunlight,
                it is
                predictable, and a properly configured system can be designed to
                be highly
                reliable while providing long-term, fixed price
                electricity.




·
            ***Location
                Flexibility****.*Unlike
                other renewable resources such as hydroelectric or wind power, solar
                power
                can be generated where it is needed. This limits the expense and
                energy
                losses associated with transmission and distribution of large, centralized
                power stations.




·
            ***Peak
                Generation.***Solar
                power is well-suited to match peak energy needs as maximum sunlight
                hours
                generally correspond to peak demand periods when electricity prices
                are at
                their highest.




5


·
            ***System
                Modularity.***Solar
                power products can be deployed in many sizes and configurations to
                meet
                the specific needs of the customer. Modules can be added as power
                requirements increase.




·
            ***Reliability.***With
                no moving parts or regular required maintenance, photovoltaic systems
                are
                among the most reliable forms of electricity
                generation.




**Our
      Strategy**




Our
      business strategy includes the acquisition and development of renewable energy
      technologies, and the manufacturing and marketing of innovative products, in
      order to provide superior solutions to our customers. In so doing, we believe
      we
      will generate substantial value for our stockholders while contributing to
      energy security, social equity, and protection of the ecosystems upon which
      life
      depends. We plan to accomplish our business strategy by:




·
            Building
                strong domestic and international demand for SolarSave®products through industry promotion, and through our network of dealers
                and solar integrators;




·
            Expanding
                our manufacturing capacities, production efficiencies and PV cell
                supplier
                relationships in order to meet the market demand for our PV
                products;




·
            Advancing
                our products, improving their quality and driving down their costs
                in
                order to be competitive in the renewable energy industry;
                and




·
            Completing
                the development of SunConeÔCSP and beginning to manufacture and market commercial units, with
                particular emphasis on distributed water and power
                systems.




**Our
      Products**




***SolarSave*** ***®*** ** ***Roofing
      Membranes***




Led
      by a
      team of building materials designers and photovoltaic experts, we have developed
      high-efficiency solar-powered roofing membranes for commercial, industrial
      and
      institutional applications. SolarSave ® Roofing
      Membranes encapsulate crystalline solar cells in composite materials which
      are
      laminated under pressure to create lightweight, waterproof, fire rated, and
      aesthetically appealing solar roofing material for flat or low slope commercial
      roofing applications. Features and benefits of the product include:




·
            Crystalline
                cells that provide high-efficiency power
                output




·
            Membranes
                that can be installed over existing roof
                surfaces




·
            SolarSave®Roofing Membranes may be installed so as to constitute an entire
                roof, in
                lieu of traditional roofing
                material





·
            Fully
                integrated, Class A fire-rated, UL 1703 and 1741 approved, CEC-listed
                and
                CSA-approved roofing membranes that are rapidly installed and easily
                maintained




·
            Compatibility
                with premium quality system components (inverters, controllers,
                batteries)




·
            Light
                weight -eliminates the need for roof reinforcement or additional
                framing




·
            Fully
                scaleable and expandable design that allows for additional modules
                to
                increase power




·
            Heavy
                duty junction boxes, output cables and polarized weatherproof
                connectors




·
            Embedded
                bypass diodes to minimize power drop caused by shading or
                debris




·
            Reduced
                water ponding and wind uplift, keeping roof substructure dry and
                mold-free




6




***SolarSave*** ***®*** ** ***Roofing
      Tiles***




While
      SolarSave ® Roofing
      Membranes are well suited for low-slope commercial or industrial buildings,
      we
      believe that SolarSave ® PV
      Roofing Tiles are better suited for residential housing projects, where the
      use
      of slate or ceramic tiles is prevalent. We have developed and are now producing
      a line of photovoltaic tiles that blend seamlessly with the colors and edge
      profiles of the most commonly used cement tiles. SolarSave ® Roofing
      Tiles are waterproof, fire-rated building materials that require no external
      framing or roof penetration. They can be safely and easily installed by
      professional roofing contractors. SolarSave ® Tiles
      have the following features and benefits:




·
            Easily
                installed in accordance with Roof Tile Institute standards by building
                professionals




·
            Robust,
                weatherproof, Class A fire-rated, UL 1703 and 1741 approved, CEC-listed
                and CSA-approved roofing material with a single-source 20-year
                warranty




·
            Tile
                sizes, shapes and colors can be customized to match traditional roofing
                products




·
            Modular,
                expandable system: PV tiles can be added to the system to increase
                power
                output




·
            Low
                voltage system is safer and easier to install than higher voltage
                systems




·
            "Short
                String" inverter with one of the highest DC to AC conversion ratios
                in the
                industry




·
            Flexible
                reinforced lamination protects crystalline cells from damage or
                breakage




·
            Edge
                profiles naturally shed water and have a wind load rating to 125
                mph with
                clips




***SolarSave*** ***®*** ** ***Architectural
      Glass***




Open
      Energy Corporation also 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
      specification available today, allowing for a direct substitution for
      monolithic, laminated or insulated glass panels. It is often desirable to
      achieve translucency in photovoltaic skylight applications. While a standard
      photovoltaic cell is an opaque 125 mm square, our cells can be arranged within
      clear glass panels to provide appropriate light levels and shading coefficients.
      A wide variety of colors, thickness, patterns, and shapes can be
      produced.




***SolarSave*** ***®*** ** ***Balance-of-Systems***




Open
      Energy Corporation also designs and manufactures balance-of-systems components
      that complete the solar energy power conversion operation. The PV cells embedded
      in our tile, glass, or membrane products generate direct current.
      SolarSave ® Balance
      of System products, which include inverters, combiners, fuse blocks and other
      accessories, convert the DC power into standard 120-volt AC and integrate this
      power into grid-connected systems in homes and buildings. All
      SolarSave ® Balance
      of System products are Underwriters Laboratories Inc. or CSA certified and
      National Electric Code compliant. The products come in a range of sizes that
      complement the installation into varying project configurations. We provide
      consulting in the design, configuration, certification, installation and service
      of SolarSave ® Balance
      of System products directly or through our network of installers and solar
      integrators across the U.S.




**The
      Manufacturing Process**




We
      manufacture SolarSave ® membranes in a 9,950 sq. ft. facility in Aurora, Ontario, Canada. Our
      proprietary process is unique when compared to the construction of traditional
      solar modules. The process starts by assembling and soldering PV cells into
      strings in our stringing department. The strings are transported to the lay-up
      department and placed on specially designed tables.  The module layout
      consists of 18 strings of nine cells (minus two cells for the junction box)
      with
      bypass diodes encapsulated to prevent overheating should one cell become
      shaded.  A high-modulus composite back sheet is laid down to provide
      rigidity to the product, followed by layers of ethylene vinyl acetate (EVA),
      cells and other sheeting materials in order to build a multi-layer "sandwich".
      The modules are then baked at high temperature under vacuum pressure in custom
      laminators for a set time, allowing the EVA to cross link to form permanent
      bonds between the laminations. The final step is taken in the gluing department,
      where the panels are adhered to sheets of PVC roofing membrane
      material.




SolarSave ® PV Tiles
      are manufactured in our 8,000 sq. ft. facility in Grass Valley, California.
      Pre-assembled PV modules are glued in place into the bases, output tabs are
      secured, and junction box bases are installed into place. Then, the circuit
      boards of the blocking diodes are placed on the junction box bases. At this
      point, quality checks verify power output and proper circuitry.
      SolarSave ® PV Tiles
      are then placed in customized packaging designed to be conveyed onto the roof
      at
      any given job site, rapidly unpacked and easily installed by traditional roofing
      contractors.




7




SolarSave ® Architectural PV Glass is specified by architects and designers seeking to
      incorporate photovoltaics directly into skylights, glass canopies, or vertical
      glass curtain walls. We string PV cells together in our Canadian facility,
      then
      lay them between EVA top and bottom sheets. These in turn are sandwiched between
      top and bottom sheets of glass per the colors, dimensions and technical
      specifications of the project. The glass panels are placed in a special
      laminator and processed under heat and vacuum pressure to create a bonded
      product. It is removed from the laminator, trimmed, and packaged for safe
      shipment to the job site.




We
      also
      design and build customized system components engineered to be used in concert
      with the power output specifications of each of our PV systems. These
      balance-of-system components include inverters, combiners and various other
      accessories, including fuse blocks. In our Grass Valley facility, we produce
      high and low voltage combiner boxes and inverters for residential applications.
      For commercial installations we also manufacture combiners, and specify (and
      at
      times modify) inverters from various OEM suppliers.




**Our
      Marketing Strategy**




The
      initial target customers for our SolarSave ® photovoltaic product line include:




·
            Architects
                and Specifiers




·
            Developers,
                Builders and Construction Companies




·
            Commercial
                and Industrial Building Owners




·
            Engineering
                Firms and Electrical Contractors




·
            Property
                Management Companies




·
            Solar
                Integrators, Distributors and
                Agents




·
            Roofing
                Companies and Contractors




·
            Public
                Administrators and City Planners




·
            Hotel/Resort
                Owners and Developers




·
            Educational
                Institutions




·
            Government
                Purchasing Officers




·
            International
                Development Agencies




We
      promote our building-integrated PV products through a series of focused
      marketing channels that include trade publications, attendance at key industry
      trade shows, direct mail campaigns, on-line advertising, and relationship
      marketing to our expanding network of dealers and solar integrators. The goal
      of
      our promotional campaign is to establish strong industry and consumer
      recognition for SolarSave ® PV
      products, and to emphasize their superior features and benefits.




**Our
      Sales Strategy**




We are selling our
      SolarSave ® membranes, tiles, architectural glass and balance-of-system
      products primarily through our distribution network of solar integrators,
      dealers and installers. We intend to further expand and support our network
      with
      training materials, co-op advertising, and other promotional efforts. Leads
      from
      print advertisements, trade shows and our web site are gathered, entered into
      a
      central data base, then distributed to our dealers.  Future sales
      initiatives may include international opportunities, particularly in Europe,
      China and the Middle East.




8




We
      are
      currently involved in two high-profile projects. We have a purchase order
      from the new California Academy of Science in San Francisco's Golden Gate Park
      for a PV glass canopy, which we expect to ship between December 1, 2006,
      and September 1, 2007 and have recently installed a new solar tile roof for
      the
      new Environmental Science Center in Lake Tahoe.





As
      of May
      31, 2006, our backlog orders believed to be firm were approximately $5,700,000
      of which a majority are expected to be filled during the fiscal year
      ending May 31, 2007. We had no backlog as of May 31, 2005. Our sales typically
      rely upon standard purchase orders for delivery of products. Customer
      relationships are generally not subject to long-term contracts. However, we
      do
      have one contract and expect to have future contracts that specify a delivery
      date several months from the contract date. Products to be delivered and the
      related delivery schedules are generally subject to revision by our customers.
      Accordingly, our backlog at any particular date is not necessarily
      representative of actual sales for any succeeding period.




**Research
      & Development**




In
      July
      of 2005, Open Energy Corporation became the exclusive worldwide licensee of
      a
      solar thermal technology invented and patented by Dr. Melvin Prueitt, a
      physicist and research scientist from the Los Alamos National Laboratory.
      SunCone Ô CSP
      utilizes non-imaging optical cones made of reflective composites to concentrate
      sunlight on rods at the base of each cone. A series of these cones can be
      mounted to a base through which a heating fluid flows. The cones stay relatively
      cool, but the fluid is superheated, then used to produce steam to drive a
      turbine and produce electricity. This same system can be coupled with reverse
      osmosis membranes or flash distillation equipment to produce fresh water from
      salt or brackish sources.




We
      believe that SunCone Ô CSP
      (Concentrating Solar Power) has the potential to be less expensive to build,
      operate and maintain than competitive parabolic trough or dish systems. In
      2006,
      we enlisted the services of Hytec Engineering of New Mexico to build the first
      full-scale SunCone Ô CSP
      prototype. Initial testing of this prototype system was successful. We have
      now
      redesigned SunconeTM CSP to achieve a more cost effective design and are in the
      process of submitting our patent application.




**The
      Competition**




We
      face
      competition from domestic and international companies actively engaged in the
      manufacturing and distribution of solar PV systems, as well as from emerging
      technologies that may become viable in the next several years. The best funded
      and most powerful of these multi-national corporations also produce photovoltaic
      cells. They include Sharp Corporation, Kyocera Corporation, BP Solar and GE
      Solar (formerly AstroPower).  While these competitors utilize high
      efficiency crystalline PV cells, we believe that our building-integrated roofing
      products have significant advantages over most other PV product offerings.
      In
      most cases, competitors produce modules (framed arrays of PV cells) that must
      be
      rack mounted externally to the building, creating potential damage to the
      structure, generating maintenance problems, and detracting from their visual
      appearance. Our competitors include the following companies:




**BP
      Solar** designs,
      manufactures, markets and installs solar electric systems for a wide range
      of
      applications in the residential, commercial and industrial sectors. They also
      produce about 5% of the PV cells used in the world today. BP Solar products
      have
      features which include framing to withstand up to 125 mph winds, EVA
      encapsulation, anti-reflective coatings, 25 year warranty for power and 5 year
      warranty for materials, and international safety, performance, and manufacturing
      certifications (UL, FM, TUV, others).





**Evergreen**  **Solar** is a
      vertically integrated PV company that produces modules rated up to 190 watts
      with 12.7% efficiencies. They provide anti-reflection glass and a maximum TUV
      voltage rating of 1000 volts (UL rated to 600 volts). Evergreen’s product design
      is screw-less, with a double walled deep frame with integrated water drainage.
      Their advanced solar technology includes string ribbon polycrystalline cells
      that use half as much silicon per watt and outperform thin film alternatives.
      They also use proprietary cell fabrication.




**First
      Solar LLC** claims
      to have developed a Cadmium Tellurium based thin film product that produces
      high
      energy output across a wide range of climatic conditions. We believe this
      frameless laminate is relatively cost effective and recyclable, but of lower
      output efficiency than either SolarSave ® tiles or
      membranes.





**GE
      Solar’s** technologies are also based on crystalline silicon wafers. Their module product
      line spans a range from 30 to 200 watts and are designed to meet international
      safety and performance certifications. They utilize anodized metal frames for
      strength and mounting convenience. Roofing modules have a 25 year power warranty
      and 5 year material warranty. They have just released an energy system
      trademarked as “Brilliance” that allows homebuilders to purchase the required
      solar components in an all-inclusive package for reliability and performance.





9




**Kyocera** produces
      8% of all PV cells currently used in the industry today. They claim to have
      perfected a new surface treatment technology called “d.Blue” that processes
      crystalline silicon cells in order to produce a surface texture which minimizes
      reflectance and increases efficiency. Kyocera’s modules are available in 167
      watts and 125 watts panels. They come with a 25 year power output warranty.
      Kyocera develops solar technologies for residential and industrial applications.





**Powerlight** began as
      a solar integrator (installer), but is now vertically integrated via its own
      modules, which utilize high-efficiency SunPower cells. They are a global
      provider of large-scale solar systems to commercial, industrial and residential
      markets. Their latest technological advance is the “Powertilt” which is angled
      at 10 degrees to maximize energy output. Powerlight uses non-penetrating modules
      that interlock for secure, rapid installation. Powerlight is involved in some
      large projects with big corporations such as Johnson & Johnson and many
      others.





**Sharp** is the
      market leader in PV, producing just over 24% of the cells used today. The
      company utilizes polycrystalline cells for roofing modules, with 62-watt maximum
      power output. Their roofing systems are equipped with water channeling for
      weather blocking. They are UL and ISO certified with a 25 year warranty on
      power
      output. They claim that their systems can function in temperatures from minus
      40
      to 194 degrees Fahrenheit. Sharp recently introduced triangular modules to
      fit
      diverse angled and shaped roofing surface areas.





**Shell**  **Solar** is
      focused almost exclusively on producing CIS (Copper Indium di-Selenide)
      thin-film technologies. This technology does not use silicon in production
      and
      the metal solutions are sprayed onto glass sheets in layers eliminating wiring
      and assembly. Shell solar products are sold through SolarWorld.





**Solar
      Integrated Technologies (SIT)** has
      developed an integrated roofing membrane that utilizes thin film technology.
      This flexible, amorphous silicon product has a 20 year warranty for operations
      and maintenance. Despite the relatively low electrical output, SIT has had
      a
      number of installations on commercial and industrial buildings, the most notable
      being the Frito Lay Distribution facility in Southern California. They also
      work
      with Coca-Cola, GE, the US Airforce, and Wal-Mart.





**Unisolar** uses
      amorphous silicon polymer glazes in conjunction with a metal roofing material.
      Applied with a "peel and stick" method (adhesive to metal), we believe the
      product is presently limited in dimension to 9-foot and 18-foot lengths and
      has
      a power generating potential of 6 watts per square foot. Unisolar's Solar
      Laminates range from 64W to 136W. They produce Solar Shingles that won the
      Popular Science Grand Award for ‘Best of What’s New’ in environmental technology
      as well as Discover Magazine’s ‘Technological Innovation Award’.





**Atlantis
      Energy** is a
      European manufacturer of Sunslate Ô PV
      tiles, that incorporate base and plug connectors from Switzerland. Atlantis
      has
      purchased a PV laminator creating modules up to 3600mm x 2050mm.





**Conergy** is
      a
      solar company based out of Germany. Conergy provides PV modules as well as
      solar
      thermal systems, solar water pumps, and small wind power. Conergy works closely
      with Sanyo, GE and SunTech to create their PV modules. They have partnered
      to
      implement PV systems from 1kW systems to the world’s largest PV power station
      with 10MW capacity. Conergy sells only via distribution partners.





**Mitsubishi**  **Electric** is the
      sixth largest producer of PV cells. They also manufacture modules for commercial
      and residential applications. Their polycrystalline PV cells and systems are
      UL
      and TUV certified, and their plant is registered in compliance with ISO
      standards. Mitsubishi is currently preparing to release a PV inverter for
      European market.





**Sanyo** is the
      fourth largest producer of PV cells. They produce 190, 195 and 200 watt
      mono-crystalline modules for domestic and commercial applications. This Japanese
      company uses an anti-reflective coating to maximize sunlight absorption, and
      their HIT modules allegedly produce the most power per square meter of panel
      combining single crystalline cells with amorphous silicon. HIT cells have
      reported above 20% efficiency rating, one of the highest in the industry.





**Schott
      Solar** is a
      German company that manufactures approximately 130 MW of cells, about 5% of
      global PV production capacity. Schott produces solar modules as well as
      stand-alone systems for decentral power supply and ASI thin film solar cells
      and
      modules. Using both crystalline and thinfilm technologies Schott works with
      residential and commercial installations.





**Solar
      Century** is a UK
      based company that works with solar photovoltaics and solar thermal productions.
      They have developed the C21e which is a roof integrated, solar electric tile
      with 52 watt power output. Solar Century gives a 20 year warranty for its
      roofing tiles. They work within the domestic, commercial and public sector.
      Solar centuries ‘Complete Solar Roof’ won the ‘best product for the building
      envelope’ as well as ‘best overall product’ at the construction industries
      showcase exhibition at Interbuild 2006.





10




**Suntech** is the
      leading Chinese manufacturer of solar cells and modules, and the eighth largest
      solar cell producer in the world. They produce polycrystalline silicon thin-film
      products that require less silicon than many of their competitors. Suntech
      also
      produces 165, 170 and 175 Watt modules and provide a 2 year warranty on
      materials; 12 year warranty on 90% of the minimum output; and a 25 year warranty
      on 80% of the minimum output. Suntech is IEC and UL rated.




There
      are
      also a number of emerging photovoltaic technologies beginning to appear on
      the
      market. Many of these innovations are originating in Germany, where the
      government has made major commitments to renewable energy initiatives. These
      companies include the following





**Konarka** develops
      light activated power plastics that are flexible and lightweight. It is not
      a
      silicon based cell; instead it is made from conducting polymers and
      nano-engineered materials that can be coated or printed onto a surface. The
      new
      material is a wireless application and installation that can work on laptops
      or
      cell phones as well as buildings. The product can also be manufactured with
      custom colors and patterns.





**Nanosolar** has
      created roll-print solar cells that require only 1/100 th as thick
      an absorber as a silicon-wafer cell. It was named one of the Top 5 Small Tech
      companies by ‘Small Times’. Nanosolar works to create printable semiconductors
      and nano-components in solar technology. The ‘PowerSheet’ will be available in
      2007 and in an A-100 cell solar electric product and the ‘SolarPly’ which is
      non-fragile and flexible solar-electric ‘carpet’ for integration with commercial
      roofing membranes.




The
      chart
      below summarizes features of Open Energy's SolarSave ® products
      rel ative
      to
      our major competitors.





**Product**
            
            **High
                Power Density**
            
            **Building
                Integrated System**
            
            **Light**
              **Weight**
            
            **20-Year
                Product Warranty**
            
            **Class
                A Fire Rating**
            
            **No
                External Racking**
            
            **No
                Roof Penetration**
            
            **Ease
                of Installation & Maintenance**
            
            **Can
                be walked on**
            
            **Color
                Availability**SolarSaveTM
                Membrane
            
            
            **+**
            
            
            **+**
            
            
            **+**
            
            
            **+**
            
            
            **+**
            
            
            **+**
            
            
            **+**
            
            
            **+**
            
            
            **+**SolarSaveTM
                Tiles
            
            
            **+**
            
            
            **+**
            
            
            
            
            
            **+**
            
            
            **+**
            
            
            **+**
            
            
            **+**
            
            
            **+**
            
            
            **+**
            
            
            **+**SIT
            
            
            
            
            
            **+**
            
            
            **+**
            
            
            **+**
            
            
            **+**
            
            
            **+**
            
            
            **+**
            
            
            **+**Power
                Light
            
            
            **+**
            
            
            **+**
            
            
            
            
            
            **+**
            
            
            **+**
            
            
            **+**
            
            
            **+**UniSolar
            
            
            
            
            
            **+**
            
            
            
            
            
            **+**
            
            
            
            
            
            **+**
            
            
            **+**Evergreen
            
            
            
            
            
            
            
            
            
            
            
            **+**
            
            
            
            
            
            
            
            
            **+**Atlantis
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            **+**
            
            
            
            
            
            
            
            
            
            
            
            **+**Sharp
                Solar
            
            
            **+**
            
            
            
            
            
            
            
            
            **+**
            
            
            **+**Kyocera
            
            
            **+**
            
            
            
            
            
            
            
            
            **+**
            
            
            **+**BP
                Solar
            
            
            **+**
            
            
            
            
            
            
            
            
            **+**
            
            
            **+**GE
                Solar
            
            
            **+**
            
            
            
            
            
            
            
            
            **+**
            
            
            **+**




**Intellectual
      Property**




We
      rely
      on a combination of patent, copyright, trade secret, trademark and contractual
      protection to establish and protect our proprietary rights.
      SolarSave ® is
      a registered trademark in the United States and we have U.S. filed
      registration applications for SunConeTM, the OE Logo, Open EnergyTM and other
      trademarks. We require our customers to enter into confidentiality and
      nondisclosure agreements before we disclose any sensitive aspects of our solar
      technologies or strategic plans, and we typically enter into proprietary
      information agreements with employees and consultants. Despite our efforts
      to
      protect our proprietary rights, unauthorized parties may attempt to copy or
      otherwise obtain and use our technology. It is difficult to monitor unauthorized
      use of technology, particularly in foreign countries where the laws may not
      protect our proprietary rights as fully as laws in the United States. In
      addition, our competitors may independently develop technology similar to ours.
      Our precautions may not prevent misappropriation or infringement of our
      intellectual property.




As
      of
      July, 2006, in the United States we had two issued patents, three U.S. patent
      applications pending and one foreign patent applications pending. Pursuant
      to an
      agreement with Dr. Melvin Prueitt, we are the exclusive licensee of a
      provisional U.S. Patent application. We have redesigned SunconeTM CSP to achieve
      a cost effective design and are in the process of submitting our patent
      application. Our issued patents expire beginning 2013. We intend to continue
      assessing appropriate opportunities for patent protection of those aspects
      of
      our technology that we believe provide significant competitive advantages to
      us,
      and for licensing opportunities of new technologies relevant to our
      business.




11




Although
      we apply for patents to protect our technology, our revenue is not dependent
      on
      any one patent we own and we currently rely on trade secret rights to protect
      our proprietary information and know-how. We also employ proprietary processes
      and customized equipment in our Aurora, Ontario, Canada manufacturing facility.
      We do not know if our current or future patent applications will result in
      patents being issued with the scope of the claims we seek, if at all, or whether
      any patents we may receive will be challenged, invalidated or declared
      unenforceable.




**Environmental
      Regulations**




We
      use,
      generate and discharge toxic, volatile or otherwise hazardous chemicals and
      wastes in our research and development and manufacturing activities. We are
      subject to a variety of foreign, federal, state and local governmental laws
      and
      regulations related to the purchase, storage, use and disposal of hazardous
      materials. If we fail to comply with present or future environmental laws and
      regulations, we could be subject to fines, suspension of production or a
      cessation of operations. In addition, under some foreign, federal, state and
      local statutes and regulations, a governmental agency may seek recovery and
      response costs from operators of property where releases of hazardous substances
      have occurred or are ongoing, even if the operator was not responsible for
      the
      release or otherwise was not at fault.




We
      believe that we have all environmental permits necessary to conduct our business
      and expect to obtain all necessary environmental permits for our new facility
      in
      Grass Valley. We believe that we have properly handled our hazardous materials
      and wastes and have appropriately remediated any contamination at any of our
      premises. We are not aware of any pending or threatened environmental
      investigation, proceeding or action by foreign, federal, state or local
      agencies, or third parties involving our current facilities. Any failure by
      us
      to control the use of or to restrict adequately the discharge of, hazardous
      substances could subject us to substantial financial liabilities, operational
      interruptions and adverse publicity, any of which could materially and adversely
      affect our business, results of operations and financial condition.





**Employees**





Our
      corporate office currently has 7 employees. Upon the acquisition of Solar
      Roofing Systems, Inc. we gained 18 full-time employees, 10 of which are
      production related. Upon the acquisition of Connect Renewable Energy, Inc.,
      we
      gained 12 full-time employees, of which 3 are production related. Our current
      full-time headcount is 47 employees. We anticipate that by May 31, 2007, we
      will have approximately 25 production related employees, 20 corporate and
      administrative employees, 5 in research and development, and 10 in sales and
      marketing.





**RISKS
      RELATED TO OUR BUSINESS**




*Investors
      should carefully consider the risks described below before deciding whether
      to
      invest in our common stock. The risks described below are not the only ones
      we
      face. Additional risks not presently known to us or that we currently believe
      are immaterial may also impair our business operations and financial results.
      If
      any of the following risks actually occurs, our business, financial condition
      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 or part of your
      investment. Our filings with the Securities and Exchange Commission also contain
      forward-looking statements that involve risks and uncertainties. Our actual
      results could differ materially from those anticipated 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 substantial funds. Our stockholders
      may be adversely affected if we issue additional debt or equity securities
      to
      obtain financing.***




We
      will
      require substantial funds to execute our business plan. We anticipate that
      such
      funds will be obtained from external sources and intend to seek additional
      equity or debt financing to fund future operations.




Our
      actual capital requirements may vary. Additional funding may not be available
      on
      favorable terms, if at all. Additional funding may only be available on terms
      that may, for example, cause substantial dilution to common stockholders, and
      have liquidation preferences or pre-emptive rights. If we raise additional
      funds
      by issuing debt or equity securities, existing stockholders may be adversely
      affected because new investors may have rights superior to those of current
      stockholders, and current stockholders may be diluted. If we do not succeed
      in
      raising needed funds, we could be forced to discontinue operations
      entirely.




12




***We
      have a history of losses and anticipate future
      losses.***




We
      have
      incurred significant losses from operations. As shown in our consolidated
      financial statements, for the fiscal year ended May 31, 2006, we have incurred
      a
      cumulative net loss of $12,900,794 from operations. We are unsure if or
      when we will become profitable.




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




The
      trading price for our common stock has been, and is expected to continue to
      be,
      volatile. During the 52-week period ended August 22, 2006, the high and low
      closing prices of a share of our common stock were $2.50 and $0.60,
      respectively. The price at which our common stock trades depends upon a number
      of factors, including the market's perception of the prospects for companies
      in
      our industry and general market and economic conditions which are beyond our
      control. Factors such as fluctuations in our financial and operating results,
      changes in government regulations affecting product or service approvals or
      other aspects of our business, announcements of technological innovations or
      new
      commercial products by our competitors, developments concerning our intellectual
      property rights, significant collaborations or strategic alliances and publicity
      regarding actual or potential performance of products under development by
      us or
      our competitors could also cause the market price of our common stock to
      fluctuate substantially. Moreover, our common stock may be subject to greater
      price volatility than the stock market as a whole.





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




There
      is
      limited historical information available about our company upon which you can
      base your evaluation of our business and prospects. We first shipped renewable
      energy commercial products in December 2005. Relative to the entire solar
      industry, we have shipped only a very small number of products.




The
      market we are addressing is rapidly evolving and is experiencing technological
      advances and new market entrants. Our future success will require us to scale
      our manufacturing capability significantly beyond our current capacity, and
      our
      business model and technologies are unproven at significant scale. Moreover,
      the
      SunCone Ô CSP
      system is only in the early stages of development and we have limited experience
      upon which to predict whether it can be successfully commercialized. As a
      result, you should consider our business and prospects in light of the risks,
      expenses and challenges that we will face as an early-stage company seeking
      to
      develop and manufacture new products in a growing and rapidly evolving
      market.




***There
      is a shortage of semi-conductor grade silicon and the photovoltaic (PV) cells
      made from this material, upon which our products depend, that may constrain
      our
      revenue growth. The price that we pay for photovoltaic cells has increased
      recently and we expect these price increases to continue, which may further
      delay our profitability. Additionally, we may not have sufficient financial
      resources to take advantage of supply opportunities as they may
      arise.***




Silicon
      is an essential raw material in the production of PV cells. There is currently
      an industry-wide shortage 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 announced plans to add additional capacity. As this manufacturing capacity
      becomes operational, it will increase the demand for silicon and further
      exacerbate the current shortage. Polysilicon is also used in the semiconductor
      industry generally, and any increase in demand from that sector will compound
      the shortage. The production of silicon is capital intensive and adding
      additional capacity requires significant lead time. We do not believe that
      the
      supply imbalance will be remedied in the near term, and we expect that silicon
      demand will continue to outstrip supply for the foreseeable future.




***Our
      dependence on a limited number of third party suppliers for raw materials could
      prevent us from delivering our products to our customers within required
      timeframes, which could result in order cancellations and substantial harm
      to
      our business.***




We
      manufacture our products using materials and components procured from a limited
      number of third-party suppliers. We currently purchase most of our PV cells
      from
      a single supplier. If we fail to maintain our relationships with this supplier,
      or to secure additional supply sources from other cell suppliers, we may be
      unable to manufacture our products or our products may be available only at
      a
      higher cost or after a long delay, which could prevent us from delivering our
      products to our customers within required timeframes, and we may experience
      order cancellations and our business may fail. We currently do not have
      contracts with suppliers sufficient to meet our current sales projections,
      and
      may not be able to procure sufficient quantities of the materials and components
      necessary to manufacture our products on acceptable commercial terms or at
      all.
      To the extent the processes that our suppliers use to manufacture materials
      and
      components are proprietary, we may be unable to obtain comparable materials
      and
      components from alternative suppliers. The failure of a supplier to supply
      materials and components in a timely manner, or to supply materials and
      components that meet our quality, quantity and cost requirements could impair
      our ability to manufacture our products or increase their costs, particularly
      if
      we are unable to obtain substitute sources of these materials and components
      on
      a timely basis or on terms acceptable to us. In order to obtain required
      supplies, we may need to make large inventory purchases on short notice, and
      prior to having purchase orders or deposits from our customers for product
      using
      the full amount of silicon required to be purchased. We may not have sufficient
      financial resources to make these purchases, which may exacerbate supply
      shortages.





13




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




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




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




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




·
            whether
                customers will accept our new designs under development;
                and




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




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




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




Our
      failure to refine our technology and to develop and introduce new products
      could
      cause our products to become uncompetitive or obsolete, which could prevent
      us
      from achieving market share and sales. The solar power industry is rapidly
      evolving and highly competitive. We will need to invest significant financial
      resources in research and development to keep pace with technological advances
      in the solar power industry and to compete in the future and we may be unable
      to
      secure such financing. We believe that a variety of competing solar power
      technologies may be under development by other companies that could result
      in
      lower manufacturing costs or higher product performance than those expected
      for
      our products. Our development efforts may be rendered obsolete by the
      technological advances of others, and other technologies may prove more
      advantageous for the commercialization of solar power products.




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




The
      market for electricity generation products is heavily influenced by foreign,
      federal, state and local government regulations and policies concerning the
      electric utility industry, as well as internal policies and regulations
      promulgated by electric utilities. These regulations and policies often relate
      to electricity pricing and technical interconnection of customer-owned
      electricity generation. In the United States and in a number of other countries,
      these regulations and policies are being modified and may continue to be
      modified. Customer purchases of, or further investment in the research and
      development of, alternative energy sources, including solar power technology,
      could be deterred by these regulations and policies, which could result in
      a
      significant reduction in the potential demand for our solar power products.
      For
      example, utility companies commonly charge fees to larger, industrial customers
      for disconnecting from the electric grid or for having the capacity to use
      power
      from the electric grid for back-up purposes. These fees could increase the
      cost
      to our customers of using our solar power products and make them less
      desirable, which would harm our business, prospects, results of operations
      and financial condition. We anticipate that our solar power products and their
      installation will be subject to oversight and regulation in accordance with
      national and local ordinances relating to building codes, safety, environmental
      protection, utility interconnection and metering and related matters. There
      is
      also a burden in having to track the requirements of individual states and
      design equipment to comply with the varying standards. Any new government
      regulations or utility policies pertaining to our solar power products may
      result in significant additional expenses to us and our resellers and their
      customers and, as a result, could cause a significant reduction in demand for
      our solar power products.





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





14


As
      is
      consistent with standard practice in our industry, the duration of our product
      warranties is lengthy relative to expected product life. Our current roofing
      tile and roofing membrane product warranty is for a 20-year period. Due to
      the long warranty period, we bear the risk of extensive warranty claims long
      after we have shipped product and recognized revenues. Our products have not
      been installed long enough to allow us to evaluate their performance over a
      20-year period.




***If
      solar power technology is not suitable for widespread adoption or sufficient
      demand for solar power products does not develop or takes longer to develop
      than
      we anticipate, we would be unable to achieve sales and market
      share.***




The
      market for solar power products is emerging and rapidly evolving, and its future
      success is uncertain. If solar power technology proves unsuitable for widespread
      commercial deployment or if demand for solar power products fails to develop
      sufficiently, we would be unable to achieve sales and market share. In addition,
      demand for solar power products in the markets and geographic regions we target
      may not develop or may develop more slowly than we anticipate. Many factors
      will
      influence the widespread adoption of solar power technology and demand for
      solar
      power products, including:




·
            cost-effectiveness
                of solar power technologies as compared with conventional and competitive
                alternative energy technologies;




·
            performance
                and reliability of solar power products as compared with conventional
                and
                non-solar alternative energy
                products;




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




·
            fluctuations
                in economic and market conditions that impact the viability of
                conventional and competitive alternative energy
                sources;




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




·
            capital
                expenditures by customers, which tend to decrease when the domestic
                or
                foreign economies slow;




·
            continued
                deregulation of the electric power industry and broader energy industry;
                and




·
            availability
                of government subsidies and
                incentives.




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




We
      believe that the near-term growth of the market for "on-grid" applications,
      where solar power is used to supplement a customer's electricity purchased
      from
      the utility network, depends in large part on the availability and size of
      government and economic incentives. The reduction or elimination of government
      economic incentives may adversely affect the growth of this market or result
      in
      increased price competition, which could prevent us from achieving sales and
      market share.




Today,
      the cost of solar power exceeds the cost of power furnished by the electric
      utility grid in many locations. As a result, federal, state and local government
      bodies in many countries, most notably Germany, Japan and the United States,
      have provided incentives in the form of rebates, tax credits and other
      incentives to end users, distributors, system integrators and manufacturers
      of
      solar power products to promote the use of solar energy in on-grid applications
      and to reduce dependency on fossil fuels. These government economic incentives
      could be reduced or eliminated altogether, which would significantly harm our
      business.




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




The
      solar
      power market is intensely competitive and rapidly evolving. Our competitors
      have
      established market positions more prominent than ours, and if we fail to attract
      and retain customers and establish a successful distribution network for our
      solar products, we may be unable to achieve sales and market share. There are
      a
      number of major multi-national corporations that produce solar power products,
      including BP Solar, Kyocera, Sharp, GE, Mitsubishi, Solar World AG and Sanyo.
      We
      also expect that future competition will include new entrants to the solar
      power
      market offering new technological solutions. Further, many of our competitors
      are developing and are currently producing products based on new solar power
      technologies that may have costs similar to, or lower than, our projected
      costs.




15




Most
      of
      our competitors are substantially larger than we are, have longer operating
      histories and have substantially greater financial, technical, manufacturing
      and
      other resources than we do. Our competitors' greater sizes in some cases
      provides them with competitive advantages with respect to manufacturing costs
      due to their ability to allocate fixed costs across a greater volume of
      production and purchase raw materials at lower prices. Many also have far
      greater name recognition, an established distribution network and an installed
      base of customers. In addition, many of our competitors have well-established
      relationships with current and potential resellers, which have extensive
      knowledge of our target markets. As a result, our competitors will be able
      to
      devote greater resources to the research, development, promotion and sale of
      their products and may be able to respond more quickly to evolving industry
      standards and changing customer requirements than we can.





***There
      are a large number of shares underlying our convertible debentures and warrants
      that may be available for future sale. Our existing stockholders will experience
      immediate and substantial dilution resulting from the issuance of these shares
      and the sale of these shares may depress the future market price of our common
      stock.***




As
      of
      August 22, 2006, we had 69,668,290 shares of common stock issued and
      outstanding;  we have convertible debentures outstanding, including
      accrued interest, convertible into 34,715,684 shares of common stock; and
      warrants outstanding that are exercisable for up to 17,837,699 shares of common
      stock. The number of shares of common stock issuable upon conversion of the
      convertible debentures or upon the exercise of warrants may increase if the
      market price of our stock declines, if we fail to meet certain revenue
      milestones, or if we issue shares of common stock or securities convertible
      into
      common stock at an effective price per share less than the conversion prices
      of
      the convertible debentures or the exercise prices of the warrants, as the case
      may be. See "Management’s Discussion and Analysis - Liquidity and Capital
      Resources - Recent Financings." On August 30, 2006 we filed a registration
      statement to permit the resale of all of the shares issuable upon conversion
      of
      the convertible debentures and  upon exercise of certain of the
      warrants described above and the issuance of these shares will cause immediate
      and substantial dilution of the shares held by our existing stockholders. There
      is currently a limited market for shares of our common stock and the sale of
      these shares may adversely affect the market price of our common
      stock.




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




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




·
            we
                cannot be certain that our pending patent applications will result
                in
                issued patents or that the claims allowed are or will be sufficiently
                broad to protect our technology or
                processes;




·
            given
                the costs of obtaining patent protection, we may choose not to protect
                certain innovations that later turn out to be
                important;




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




·
            we
                may incur significant costs and diversion of management resources
                in
                prosecuting or defending intellectual property infringement
                suits;




·
            we
                may not be successful in prosecuting or defending intellectual property
                infringement suits and, as a result, may need to seek to obtain a
                license
                of the third party's intellectual property rights, which may not
                be
                available to us, whether on reasonable terms or at all;
                and




·
            the
                contractual provisions we rely on to protect our trade secrets and
                proprietary information, such as our confidentiality and non-disclosure
                agreements with our employees, consultants and other third parties,
                may be
                breached and our trade secrets and proprietary information may be
                disclosed to competitors, strategic partners and the
                public.




16




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





We
      sell
      our solar roofing, architectural glass and balance-of-system products under
      our
      brand names SolarSave ® , and
      our
      solar concentrating technology under the brand name SunCone Ô .
      We are
      also branding our company with the name Open Energy Ô .
      We
      expect to expend significant resources promoting these brand names, and we
      have
      applied for registered trademarks in the United States for SunCone Ô ,
      the OE
      Logo, Open Energy Ô and
      other trademarks. However, registration of our brand name trademarks could
      be
      denied, and if granted, such registration will not necessarily deter or prevent
      unauthorized use by others. If other companies, including our competitors,
      use
      our brand names, consumers may not recognize us as the source of our products.
      This would reduce the value of goodwill associated with our brand names. This
      consumer confusion and the resulting reduction in goodwill could cause us to
      lose market share and cause our sales to decline.




***The
      continuously adjustable conversion price feature of our 5% Debentures could
      require us to issue a large number of shares, which would cause dilution to
      our
      existing stockholders.***





We
      may be
      obligated to issue an extremely large number of shares upon the conversion
      of
      the 5% Secured Convertible Debentures (the "5% Debentures") we have issued
      (or
      have agreed to issue) to Cornell because the conversion price is to be the
      lower
      of (a) $1.50 or (b) 95% of the lowest volume weighted average price (VWAP)
      of
      our common stock during the 30 trading days immediately preceding the conversion
      date, provided that such conversion price cannot be lower than $0.05. Hence,
      the
      number of shares of our common stock issuable upon conversion of these
      debentures will increase if the market price of our stock declines, which will
      cause dilution to our existing stockholders. The following is an example of
      the
      number of shares of our common stock that would be issuable upon conversion
      of
      the debentures (assuming the sale of the full $15,000,000 of debentures pursuant
      to the March 30, 2006 securities purchase agreement with Cornell), excluding
      accrued interest and the $200,000 of debentures converted on August 22, 2006,
      based on prices that are 25%, 50% and 75% below the August 22, 2006 closing
      price of our stock of $0.80: ****




**%
                Below August 22,**
              **2006
                closing price**
            
            **Conversion
                Price Per Share**
              **(95%
                of closing price)**
            
            **Number
                of Shares**
              **Issuable**
            
            **%
                of Outstanding Stock After**
              **Conversion
                (1)**25%
            
            $0.5664
            
            26,128,214
            
            27.27%50%
            
            $0.3776
            
            39,192,320
            
            36.00%75%
            
            $0.1888
            
            78,384,641
            
            52.94%




(1)
        (1)    Assumes 69,668,290 shares of common stock
      outstanding immediately prior to conversion.




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




***The
      continuously adjustable conversion price feature of our 5% Debentures may
      encourage investors to make short sales of our common stock, which could depress
      the price of our common stock.***




The
      5%
      Debentures are convertible into shares of our common stock at a 5% discount
      to
      the lowest volume weighted average price of our common stock during the 30
      trading days immediately preceding the conversion date, provided that the
      conversion price cannot be lower than $0.05. The significant downward pressure
      on the price of the common stock as Cornell converts and sells material amounts
      of common stock could encourage short sales by investors. This could place
      further downward pressure on the price of the common stock, which in turn would
      lead to further dilution. In addition, not only the sale of shares issued upon
      conversion or exercise of debentures or warrants, but also the mere perception
      that these sales could occur, may adversely affect the market price of the
      common stock.




***A
      substantial number of shares we have issued in exempt transactions are, or
      are
      being made, available for sale on the open market. the resale of these
      securities might adversely affect our stock price.***





The
      sale
      of a substantial number of shares of our common stock being registered pursuant
      to our registration statement filed August 30, 2006, or the market’s
      anticipation of such sales, could make it more difficult for us to sell equity
      or equity-related securities in the future at a time and at a price that we
      might otherwise wish to effect sales.





The
      80,000,891 shares being registered pursuant to our August 30, 2006 registration
      statement represent more than 100% of the amount of our common stock outstanding
      on August 22, 2006, although as of August 22, 2006 only 11,427,594 of such
      registered shares were outstanding and the other 68,573,297 of such
      registered shares are issuable upon the conversion of the debentures and
      exercise of the warrants or otherwise currently unissued. The holders of such
      registered shares will be permitted to sell their shares in the open market
      from
      time to time without advance notice to us or to the market and without
      limitations on volume.




17




Sales
      of
      shares pursuant to convertible debentures and exercisable warrants could also
      lead to subsequent sales of the shares in the public market. These sales,
      together with sales by other existing stockholders, could depress the market
      price of our stock by creating an excess in supply of shares for sale.
      Availability of these shares for sale in the public market could also impair
      our
      ability to raise capital by selling equity securities.





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




During
      the fiscal year ended May 31, 2006, we did not withhold for or pay federal
      or
      state employment or income taxes associated with the vesting dates for
      restricted stock set forth in employment agreements for three executive
      officers, or associated with the grants of shares to two of these executive
      officers during their employment periods for consulting and director services.
      We also did not withhold or pay employment or income taxes for common stock
      issued to a non-executive employee during the fiscal year ended May 31,
      2006.




The
      failure to withhold for or pay these taxes has resulted in an increase
      in other accrued liabilities of $1,311,471 associated with the employees’
and employer’s combined required withholding, taxes and penalties, with the
      employees’ portion being an obligation of our company to the extent not
      satisfied by the employees. We have recorded corresponding amounts due from
      related parties of $1,139,343 for the employees’ obligations.




As
      of June 30, 2006 (the last vesting date set forth in the contracts which has
      occurred to the date of this report), to the extent the vesting dates are deemed
      to be valid and non-rescindable, the total amounts due associated with
      the employees' and employer's combined portion of the required withholding
      is
      estimated to be $1,655,000. We do not presently believe any further penalties
      would accrue after May 31, 2006, although interest will continue to accrue
      until
      the amounts due are paid.




The
      employees have informed us that they intend to satisfy their contractual
      obligations to provide funds for our required payroll tax payments through
      sales
      of the underlying securities, once they may do so in accordance with applicable
      securities laws. The shares of stock subject to all of these awards other than
      the consultant grants, which have been previously registered, were
      registered for the first time on the August 30, 2006 registration
      statement. Following registration or the availability of an exemption from
      registration, market conditions may limit the number of shares that may be
      sold
      and the proceeds to the employees from such sales. We may be obligated to pay
      such tax liabilities before the employees have been able to sell their shares,
      and the sales prices the employees receive may be less than the tax liability.




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




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




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




We
      will
      become subject to Sections 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 prevent us from engaging in any "business combination"
      (as such term is defined in Section 78.416 of the NGCL, described in
      "Description of Capital Stock" herein) with any interested stockholder for
      a
      period of three years following the date that the stockholder became an
      interested stockholder unless:




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




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




18




(3)
            on
                or subject to that date, the business combination is approved by
                our board
                of directors and is authorized at an annual or special meeting of
                stockholders, and not by written consent, by the affirmative vote
                of at
                least two-thirds of the outstanding voting stock not owned by the
                interested stockholder.





***We
      have deposited 44,117,647  shares into escrow and pledged these shares to
      Cornell as security for our obligations under the 5% debentures we issued to
      Cornell and related agreements. If we were to default under the debentures
      or
      related agreements, Cornell could take possession of these shares and sell
      them
      into the market, causing immediate and substantial dilution to our stockholders
      and potentially causing downward pressure on our common
      stock.***




In
      accordance with a pledge and escrow agreement between us and Cornell, we
      deposited 44,117,647 shares into escrow and pledged those shares to Cornell
      as security for our obligations under the 5% Debentures and related agreements.
      If we defaulted under the 5% Debentures or related agreements, Cornell could
      take possession of these shares and sell them into the market, causing
      significant downward pressure on the price of our common stock. Although Cornell
      may not take possession of the shares to the extent such possession would cause
      Cornell to own in excess of 9.99% of our outstanding common stock, this
      restriction does not prevent Cornell from selling shares and then taking
      possession of additional shares. In this way, Cornell could sell more than
      this
      limit while never holding more than this limit. There is currently a limited
      market for shares of our common stock and the sale of these shares may
      significantly depress the market price of our common stock.




***Cornell
      has a general security interest in our assets and the assets of our
      subsidiaries. If we were to default under the terms of the secured convertible
      debentures issued to Cornell, then Cornell would have the right to foreclose
      on
      these assets.***




In
      March
      2006, we entered into a securities purchase agreement with Cornell pursuant
      to
      which we agreed to issue and sell to Cornell up to an aggregate of $15,000,000
      of the 5% Debentures and warrants to purchase up to an aggregate
      of 10,00,000 shares of common stock, subject to adjustment. We subsequently
      agreed to increase the number of shares issuable under the warrants to
      13,250,000. The debentures are collateralized by a general security interest
      in
      our assets. If we were to default under the terms and conditions of the
      debentures or related security agreements with Cornell, Cornell would have
      the
      right to accelerate any indebtedness outstanding and foreclose on our assets
      and
      the assets of our subsidiaries in order to satisfy our indebtedness. Such a
      foreclosure could have a material adverse effect on our business, liquidity,
      results of operations and financial position.




***Our
      success depends on our ability to retain our key
      personnel.***




Our
      success is dependent upon the efforts of key members of our management,
      including our president and chief executive officer, David Saltman, and our
      chief financial officer, Cheryl Bostater. The loss of either of these persons,
      or other key employees, could have a material adverse effect on us. Our future
      success is likely to depend substantially on our continued ability to attract
      and retain highly qualified personnel. The competition for such personnel is
      intense, and our inability to attract and retain such personnel could have
      a
      material adverse effect on us. We do not maintain life insurance on any of
      our
      personnel.




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




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




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




We
      recently completed the acquisitions of Solar Roofing Systems, Inc. and Connect
      Renewable Energy, Inc.  In addition, we expect to consider future
      opportunities to acquire or make investments in other technologies, products
      and
      businesses that could enhance our capabilities, complement our products, or
      expand the breadth of our markets or customer base. We have limited experience
      in acquiring other businesses and technologies. Potential and completed
      acquisitions and strategic investments involve numerous risks,
      including:




19




·
            problems
                assimilating the purchased technologies, products or business
                operations;




·
            problems
                maintaining uniform standards, procedures, controls and
                policies;




·
            unanticipated
                costs associated with the
                acquisition;




·
            diversion
                of management's attention from our core
                business;




·
            adverse
                effects on existing business relationships with suppliers and
                customers;




·
            risks
                associated with entering new markets in which we have no or limited
                prior
                experience;




·
            potential
                loss of key employees of acquired businesses;
                and




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




***We
      have not paid dividends on our common stock in the past and do not anticipate
      paying dividends on our common stock in the foreseeable
      future.***




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




***We
      are subject to new corporate governance and internal control reporting
      requirements, and our costs related to compliance with, or our failure to comply
      with existing and future requirements, could adversely affect our
      business.***




We
      face
      new corporate governance requirements under the Sarbanes-Oxley Act of 2002,
      as
      well as new rules and regulations subsequently adopted by the SEC and the Public
      Company Accounting Oversight Board. These laws, rules and regulations continue
      to evolve and may become increasingly stringent in the future. In particular,
      under rules proposed by the SEC on August 6, 2006 we will be required to
      include management's report on internal controls as part of our annual report
      for the fiscal year ending May 31, 2008 pursuant to Section 404 of the
      Sarbanes-Oxley Act. Furthermore, under the proposed rules, an attestation report
      on our internal controls from our independent registered public accounting
      firm
      will be required 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
      that we will be able to comply with Section 404 of the Sarbanes-Oxley Act.
      The
      financial cost of compliance with these laws, rules and regulations is expected
      to be substantial. We cannot assure you that we will be able to fully comply
      with these laws, rules and regulations that address corporate governance,
      internal control reporting and similar matters. Failure to comply with these
      laws, 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
      may
      experience difficulty in completing customer transactions, and trading activity
      in our securities may be adversely affected.***





Transactions
      in our common stock are currently subject to the "penny stock" rules promulgated
      under the Securities Exchange Act of 1934. Under these rules, broker-dealers
      who
      recommend our securities to persons other than institutional accredited
      investors must:




·
            make
                a special written suitability determination for the
                purchaser;




·
            receive
                the purchaser's written agreement to a transaction prior to
                sale;




·
            provide
                the purchaser with risk disclosure documents which identify certain
                risks
                associated with investing in "penny stocks" and which describe the
                market
                for these "penny stocks" as well as a purchaser's legal remedies;
                and




·
            obtain
                a signed and dated acknowledgment from the purchaser demonstrating
                that
                the purchaser has actually received the required risk disclosure
                document
                before a transaction in a "penny stock" can be
                completed.




20




As
      a
      result of these rules, broker-dealers may find it difficult to effectuate
      customer transactions and trading activity in our securities may be adversely
      affected. As a result, the market price of our securities may be depressed,
      and
      you may find it more difficult to sell our securities.





**ITEM
      2.**  **DESCRIPTION
      OF PROPERTIES**





We
      lease
      two manufacturing facilities: a 9,950 sq. ft. facility in Aurora, Ontario
      (outside of Toronto) and a 8,000 sq. ft. facility in Grass Valley,
      California (that we will be occupying as of September 1, 2006). We also lease
      corporate headquarter space in Solana Beach, California, and a 2,500 sq. ft.
      research & development facility in Grass Valley, California. We consider
      these facilities adequate to meet our current needs. See "Management's
      Discussion and Analysis - Liquidity and Capital Resources - Significant Plant
      and Equipment Expenditures."





**ITEM
      3.**  **LEGAL
      PROCEEDINGS**





Pursuant
      to an acquisition of certain assets and liabilities from Connect by Computer
      LLC
      (CBC), an entity wholly-owned by Ronald Gangemi, CRE assumed CBC and Mr.
      Gangemi's liability under a lawsuit filed by McDonough, Holland & Allen PC
      on July 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
      $119,699, together with interest thereon from December 31, 2003. On January
      11,
      2006, the Superior Court for the County of Sacramento moved the claim to
      arbitration. We believe that we have valid defenses against this claim and
      plan
      to defend against it.




In
        March
        2006, the Company was first served with process regarding a civil action
        commenced on December 15, 2005, by Mitchell Organization Ltd. and Brian
        Wilkinson against the Company in Canada in the Court of Queen's Bench of
        Alberta, Judicial District of Calgary (Action No. 0501-17623). The Statement
        of
        Claim alleges that the Company entered into an agreement pursuant to which
        the
        Company agreed to issue 250,000 shares of its stock to Mr. Wilkinson in exchange
        for his providing consulting services. As relief, the claim sought the issuance
        of the 250,000 shares. The Company subsequently settled this civil action
        in
        August 2006 for $100,000 Canadian and 75,000 shares of restricted common
        stock. Based on this settlement, the Company has recorded other expense and
        a
        corresponding accrued liability for approximately $153,400 as of May 31,
        2006.


We
      know
      of no other material, active, or pending legal proceeding against us, nor are
      we
      involved as a plaintiff in any material proceeding or pending litigation. From
      time to time, we are a party to other claims and legal proceedings arising
      in
      the ordinary course of business. Our management evaluates our exposure to these
      claims and proceedings individually and in the aggregate and allocates monies
      for potential losses on such litigation if it is possible to estimate the
      amounts of loss and the loss is probable.





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





No
      matter
      was submitted to a vote of stockholders in the fourth quarter of the fiscal
      year
      covered by this report.





21




**PART
      II**





**ITEM
      5.**  **MARKET
      FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS**





**Trading
      History**




Our
      common stock is traded on the National Association of Securities Dealers, Inc.
      Over-the-Counter Bulletin 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 common stock on the OTCBB during the periods presented. Such prices
      represent inter-dealer prices, without retail mark-up, mark down or commissions,
      and may not necessarily represent actual transactions. Trading in our common
      stock has not been extensive in all the periods presented below, and such trades
      may not constitute an active trading market in all the periods presented
      below.





**High**
            
            **Low****Year
                Ending May 31, 2006**First
                Quarter
            
            $
            1.38
            
            $
            0.55Second
                Quarter
            
            $
            2.50
            
            $
            1.44Third
                Quarter
            
            $
            2.32
            
            $
            1.55Fourth
                Quarter
            
            $
            1.89
            
            $
            1.20**Year
                Ending May 31, 2005**First
                Quarter
            
            $
            0.80
            
            $
            0.25Second
                Quarter
            
            $
            0.70
            
            $
            0.35Third
                Quarter
            
            $
            0.56
            
            $
            0.32Fourth
                Quarter
            
            $
            0.61
            
            $
            0.42




On
      August
      22, 2006, the closing sales price for the common stock was $0.80, as reported
      on
      the website of the OTCBB. As of August 22, 2006, there were 56 stockholders
      of record of the common stock (which does not include the number of persons
      or
      entities holding stock in nominee or street name through various brokerage
      firms).




**Dividends**




Since
      inception, we have not declared or paid any dividend on our common stock. We
      do
      not anticipate that any dividends will be declared or paid in the future on
      our
      common stock. In addition, our security agreement with Cornell currently
      restricts, and any other credit or borrowing arrangements that we may enter
      into
      may restrict or limit, our ability to pay common stock dividends to our
      stockholders.





**Recent
      Sales of Unregistered Securities**




During
      the year ended May 31, 2006, we issued the following securities without
      registration under the Securities Act, in addition to those unregistered
      issuances not previously disclosed on Form 10-QSB or Form 8-K.




Pursuant
      to the terms of Mr. Saltman’s employment agreement, he was granted a total of
      8,235,662 shares of common stock on September 15, 2005, such shares vesting
      quarterly commencing on December 31, 2005, with 686,305 shares being issued
      for
      each of the first eleven quarters and 686,307 shares being issued in the twelfth
      and final quarter. All unvested shares will be forfeited if the employment
      agreement is terminated by us for cause or if Mr. Saltman terminates the
      employment agreement other than for good reason. These shares were issued as
      restricted securities exempt from registration pursuant to Section 4(2) of
      the
      Securities Act, and an appropriate legend was placed on the stock
      certificates.




Pursuant
      to a license agreement with Dr. Melvin L.
      Prueitt, we granted to Dr. Prueitt 100,000 shares of common stock. These shares
      were issued as restricted securities exempt from registration pursuant to
      Section 4(2) of the Securities Act, and an appropriate legend was placed on
      the
      stock certificate.




22




**ITEM
      6.**  **MANAGEMENT'S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**





**Limited
      Operating History**




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




**Company
      Description and Overview**




Open
      Energy Corporation began as a small oil and natural gas development firm with
      interests in oil and gas leases, wells, pipelines and a small gas refinery
      in
      Alberta, Canada. In September 2005, we determined we would sell our holdings
      in
      order to focus entirely upon renewable energy products and technologies. The
      oil
      and gas divestiture was completed during December 2005, and we are now pursuing
      the development
      and commercialization of a portfolio of renewable energy products and
      technologies for a wide range of applications, including electrical generation,
      solar thermal heating, solar energy, power production and water
      desalination.




We
      recently acquired two privately-held companies engaged in the manufacturing
      and
      distribution of building-integrated photovoltaic roofing products. Solar Roofing
      Systems, Inc. (SRS) based in Ontario, Canada, produces a proprietary roofing
      material incorporating high-efficiency crystalline photovoltaic cells in a
      single-ply roofing membrane designed primarily for commercial and industrial
      buildings. Connect Renewable Energy, Inc. (CRE) based in Grass Valley,
      California, incorporates these same high-efficiency cells in roofing tiles
      designed to match the colors and edge profiles of tiles traditionally used
      in
      residential housing construction. Both of these product lines will now be sold
      under the trade name "SolarSave ® ".




We
      also
      hold a license to a technology referred to as SunConeÔCSP
      (concentrating solar power). The license is exclusive and worldwide for the
      defined field of use of collecting solar energy for generating electricity,
      desalinating water and for all other industrial applications. The
      SunConeÔCSP
      system utilizes non-imaging optical cones to concentrate sunlight on rods at
      the
      base of each cone. Fluid flows through these rods and is heated to several
      hundred degrees centigrade. This superheated fluid can then be used to generate
      steam and produce electricity or to purify salt or brackish water. Initial
      testing of the first prototype system was successful, and we are currently
      working to commercialize this technology. We plan to add additional products
      and
      technologies to our portfolio of renewable energy solutions in the
      future.




23




For
      the
      fiscal year ended May 31, 2006, we had generated only limited revenues and
      we incurred losses of $12,172,615, of which $5,294,971 was non-cash
      stock compensation, $341,943 was non-cash expenses relating to recording the
      beneficial conversion feature and warrants associated with the 0% Debentures
      and
      5% Debentures, $884,694 was an income tax benefit, and $848,979 was a loss
      from
      discontinued operations. Our operating expenses included significant legal
      and
      accounting expenses, as well as research and development. The year ended May
      31,
      2006 is the first year during which our company is considered an operating
      company and is no longer in the development stage. We expect to continue to
      use
      cash in our operating activities for at least the first three quarters of fiscal
      2007 as we expand our manufacturing capacity and our product shipments.





**Results
      of Operations**





We
      have
      financed our operations since inception primarily through private sales of
      securities. As of May 31, 2006, we had approximately $2.76 million in cash,
      and
      working capital of $4.15 million. In addition, we expect to receive an
      additional $3,500,000 in gross proceeds from the 5% Debentures being sold to
      Cornell upon our August 30, 2006 registration statement being declared
      effective. With the acquisitions of Connect Renewable Energy, Inc. and Solar
      Roofing Systems, Inc. now complete, and with our successful financings,
      management is now focused on growing its operations and customer base, while
      paying attention to profitability and cash flows. In addition, management will
      continue to search for and identify other acquisitions or technologies that
      enhance our business model.




**Fiscal
      Year Ended May 31, 2006**




The
      following table sets forth our consolidated statements of operations data for
      the year ended May 31, 2006. Our entire operations for fiscal 2005 are being
      treated as discontinued operations and thus are not shown below.




***Summary
      Income Statement***


Revenues,
                  net
              
              $
              152,532Gross
                  profit (loss)
              
              
              (3,781
              )Selling,
                  general and administrative expenses
              
              
              8,638,186Research
                  & development expenses
              
              
              2,529,872Total
                  operating expenses
              
              
              11,168,058Loss
                  from operations
              
              
              (11,171,839
              )Other
                  Income (expense)
              
              
              (1,036,491
              )Loss
                  from continuing operations before income taxes
              
              
              (12,208,330
              )Income
                  tax provision
              
              
              884,694Loss
                  from continuing operations
              
              
              (11,323,636
              )Loss
                  from discontinued operations
              
              
              (848,979
              )Net
                  loss
              
              $
              (12,172,615
              )




As
      discussed above, in August 2005, our business focus began to change to solar
      energy, from oil and gas, with the licensing of the Suncone Ô CSP
      technology. In December 2005, we completed the sale of our oil and gas and
      mineral interests. In March 2006, we completed the acquisition of Connect
      Renewable Energy, Inc. In April 2006, we completed the acquisition of Solar
      Roofing Systems, Inc. Due to the significant changes, our results for the May
      31, 2005 financial year are being reported as discontinued operations, and
      we
      believe that a comparison of results of operations for the years ended May
      31,
      2006 and May 31, 2005 should not be relied on as an indication of future
      performance. Factors that may cause our results of operations to fluctuate
      include those discussed in the “Risk Factors.”




***Revenues***





For
      the
      year ended May 31, 2006, we had revenues of $152,532, which were primarily
      from
      the sale of SolarSave ® Tiles.
      All of this revenue was recognized in the fourth quarter of the fiscal
      year **.** Revenues
      were below our initial financial projections primarily due to delays in
      obtaining our CSA listing, UL 1703 certification and Class A fire rating.
      However, we have now received these approvals and are beginning to ship
      products. As of May 31, 2006, our backlog orders believed to be firm were
      approximately $5.7 million of which a majority are expected to be
      filled during the fiscal year ending May 31, 2007. As of May 31, 2006, we
      had $4.3 million in backlog orders for our SolarSave ® Membrane
      product. In addition, we currently have a $1.27 million contract for supplying
      solar architectural glass for the California Academy of Sciences Museum in
      Golden Gate Park, San Francisco, California, which is expected to ship between
      December 1, 2006 and September 1, 2007. Our future revenues will depend not
      only
      on successful sales efforts, but also on our ability to ramp up production
      and
      our ability to procure photovoltaic cells.




24




***Cost
      of sales***




For
      the
      quarter ended May 31, 2006, cost of sales was $156,313. All of this cost was
      incurred in the fourth quarter. **** We
      do not
      believe this result is a reliable indicator of gross margin for the future.
      A
      substantial part of cost of sales for the SolarSave ® Tiles
      and the SolarSave ® Membranes consists of photovoltaic cells. The cost of photovoltaic cells is
      currently volatile and is expected to rise due to a current supply shortage.
      We
      are uncertain of the extent to which component price increases will negatively
      affect our gross profit margins in the near future, as we may be able to pass
      on
      some of these increases to customers. We are currently exploring various supply
      strategies to control our raw materials costs. In addition, we are exploring
      strategies to reduce other manufacturing costs.




***Selling,
      general and administrative***





Selling,
      general and administrative expenses for the year ended May 31, 2006 were
      $8,638,186. Legal, professional and consulting fees were approximately
      $1,510,000 for fiscal 2006, of which $871,000 were legal fees. The legal and
      professional fees were primarily related to the license for the
      SunCone Ô CSP
      technology, our financing activities, the August 30, 2006 registration
      statement, and SEC reporting. Cash-based management fees, wages and salaries
      were approximately $656,000 for fiscal 2006. In September 2005 we hired Mr.
      Saltman as Chief Executive Officer, in November 2005 we hired Ms. Bostater
      as
      our Chief Financial Officer, and a marketing manager. General and administrative
      expenses increased in the fourth quarter due to additional hires in the
      accounting department, human resources, and to post-acquisition wages for
      Connect Renewable Energy and Solar Roofing Systems, Inc. The 2006 period
      included $5,294,971 in non-cash compensation for stock grants to key management,
      directors, and consultants. Advertising expenses, which include investor
      relations expenses, were $483,106 for fiscal 2006. The expenses were related
      to
      the branding of the Open Energy Corporation name, the marketing of the
      SolarSave TM solar
      roofing tiles and roofing membranes, and participation in trade shows.




***Research and
      development***





For
      the
      year ended May 31, 2006, research and development expenses were $2,529,872,
      of
      which approximately $300,000 was for the development of SunCone Ô CSP
      (Concentrating Solar Power) and $1,800,000 were related to research and
      development assets from our two acquisitions that were written off. We
      anticipate research and development expenses to be lower in fiscal 2007, and
      will be related to the commercialization of SunCone Ô CSP, the
      ongoing development for the SolarSave TM solar
      roofing tiles and roofing membrane, and future product development. As discussed
      above, we have entered into a license agreement with Dr. Melvin Prueitt to
      commercialize the SunCone Ô CSP
      technology. The first prototype was designed, built, and tested for efficiency,
      power output and other technical specifications. This initial testing was
      successful, and we are now moving forward to design and engineer a commercial
      product. Further work will be required to design a commercial system capable
      of
      interfacing with an off-the-shelf steam turbine to produce electricity and/or
      to
      interface with either flash distillation or membrane filtration equipment in
      order to produce potable water from salty or brackish sources. This next phase
      of development will require additional time, capital and other resources in
      order to complete.




In
      addition, the SolarSave TM solar
      roofing tiles and roofing membranes will require ongoing development in order
      to
      achieve and retain market share. In the case of the solar roofing tiles, we
      are
      developing various color systems and edge profiles. The solar roofing membranes
      can be improved visually by imprinting colors and patterns on their top surfaces
      and improved technically by utilizing different materials, including new
      photovoltaic technologies as they become available. During our production
      ramp-up, additional improvements may be made to the manufacturing processes,
      which could require additional research and development
      expenditures.





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




·
            elimination
                of our minimum royalty payment
                obligations;




·
            replacement
                of a staggered royalty rate structure with a flat percentage equal
                to the
                prior lowest staggered royalty
                rate;




25




·
            modification
                of the vesting schedule applicable to the warrant granted to Dr.
                Prueitt
                in connection with the license agreement to provide for quarterly
                vesting
                of 300,000 shares beginning on September 30, 2006 (with the final
                133,438
                shares vesting on June 30, 2008), and modification of the warrant
                to
                survive any termination of the license agreement, such that it will
                expire
                only pursuant to its own terms; and




·
            the
                addition of the right of either party to terminate the agreement
                upon 90
                days notice without cause.




If
      not
      terminated earlier, the license provided by the license agreement will expire
      the later of January 27, 2026 or the date of expiration of the last to expire
      of
      any issued patent within the patent rights subject to the license agreement.
      We
      also agreed to fund a six month development project to develop a prototype
      of a
      solar collector and to expend or devote resources equal to at least $300,000
      during such time period, which obligation has been satisfied.





***Other
      income (expense)***





In
      fiscal
      2006, Other income (expense) was $1,036,491. Interest expense was
      $706,902 in fiscal 2006, of which $341,943 was non-cash interest expense related
      to the amortization of the fair value of warrants and beneficial conversion
      feature on the 0% Debentures and the 5% Debentures.




***Discontinued
      Operations***





We
      recorded a loss from discontinued operations of $848,979 based on the final
      divestiture of our oil and gas properties. We are still owed $650,000 relating
      to the divestiture, which is due November 28, 2006.





***Net
      Loss***





Our
      net
      loss was $12,172,615 for fiscal 2006. The net loss reflects our expenses
      relating to our acquisitions and financings, the cost of additional employees
      to
      pursue our strategy, a loss from discontinued operations for the oil and gas
      assets that were disposed of, and expenditures for research and development.
      These expenses have been incurred ahead of our ability to recognize material
      revenues from our new strategy.





**Liquidity
      and Capital Resources**




As
      of May
      31, 2006, we had cash and cash equivalents of $2,758,369, and working capital
      of
      $4,150,949. During the year ended May 31, 2006, we funded our operations from
      private sales of equity and debt securities. Upon our August 30, 2006
      registration statement being declared effective, we expect to receive $3,500,000
      in remaining gross proceeds from the $15,000,000 in aggregate principal amount
      of the 5% Debentures described below. Other than cash and cash equivalents
      and
      the proceeds due on the remaining 5% Debentures, we have no unused sources
      of
      liquidity. We believe our current cash, together with these proceeds, will
      provide sufficient working capital to fund our operations for at least the
      next
      12 months assuming a steady ramp-up in production and we are
      able secure a working capital line of credit. Changes in our operating
      plans, an increase in our inventory, increased expenses, additional
      acquisitions, or other events, may cause us to seek additional equity or
      debt financing in the future.





For
      the
      year ended May 31, 2006, we used $5,257,435 of cash in operations. Net cash
      used
      by operating activities reflected $1,478,756 in inventory purchases, an
      increase in accounts receivable of $212,806, and operating expenses. Investment
      activities used $6,917,928 million of cash during the year, which was primarily
      related to our acquisitions. Financing activities provided $14,931,355 of
      cash during the year, with $15.25 million in gross proceeds from
      convertible debentures with warrants, and $1.75 million in private placement
      subscription proceeds.




Our
      current cash requirements are significant due to the building of our
      photovoltaic cell inventory; increased working capital requirements of our
      integrated company; expected leasehold improvements for a new manufacturing
      facility in Grass Valley, California; manufacturing equipment purchases;
      research and development expenses for SunCone Ô CSP; and
      other operational expenses. We expect to continue to use cash to fund operations
      for at least the first three quarters of fiscal 2007 we expand our manufacturing
      capacity and our product shipments. We expect to continue to use cash to build
      up our inventory of photovoltaic cells to hedge the current shortage in the
      industry.





In
      the
      past, we paid cash for our inventory purchases and we are in the process of
      negotiating credit terms with our vendors. We also paid cash for our equipment
      purchases. In the future, we plan to finance our equipment purchases and
      establish a working capital line of credit.




26




The
      cost
      of photovoltaic cells, which is the primary cost of sales for our solar roofing
      products, is currently volatile and is expected to rise due to a current supply
      shortage. We are uncertain of the extent to which this will negatively affect
      our working capital in the near future. A significant increase in cost of
      photovoltaic cells that we cannot pass on to our customers could cause us to
      run
      out of cash more quickly than our projections indicate, requiring us to raise
      additional funds or curtail operations.




***Significant
      Capital Expenditures***




We
      anticipate that we will make significant capital expenditures over the next
      twelve months for manufacturing equipment and leasehold improvements. We
      recently secured additional manufacturing space for the operation in Grass
      Valley, California for a three year term beginning September 1, 2006. We
      estimate that the additional space will require cash of $9,000 per month for
      rent, plus leasehold improvements. We estimate leasehold improvements and
      manufacturing equipment expenditures of approximately $1,000,000 over the next
      twelve months. The associated cash needs will depend upon the configuration
      of
      the manufacturing equipment and the availability of equipment lease financing.





We
      are in
      the process of implementing a new EPICOR accounting/Enterprise Resource Planning
      software that will unify our accounting for all three of our locations. We
      expect to incur costs of approximately $200,000 for the software license fees
      and professional services associated with this implementation.





***Oil
      and Gas Asset Sale Agreement***




In
      our
      third quarter, we entered into a Settlement and Rescission Agreement to transfer
      all our right, title and interest in certain oil and gas assets to the party
      from which they were originally acquired. Pursuant to that agreement, we
      received an advance payment of $350,000 on December 8, 2005 and a 5% $650,000
      debenture due on November 28, 2006.




***Recent
      Financings***




*0%
      Debentures*




In
      February and March 2006, we completed a private placement pursuant to which
      we
      issued five-year warrants and $5.25 million in principal amount of 0% Debentures
      due July 31, 2008 at par to Coach Capital LLC, Eversource Group Limited,
      Bank Sal. Oppenheim jr. & Cie. (Schweiz) AG and Nadelson Internacional S.A.
      The warrants are exercisable for 2,354,261 shares of our common stock. The
      exercise price, which was initially set at $2.23 per share, became $0.5833
      per
      share on August 22, 2006, and is subject to further adjustment upon
      the occurrence of certain specified events including, but not limited to,
      issuance of securities at a deemed price below the current exercise price,
      stock
      dividends, stock splits, mergers or reorganizations, and our failure to meet
      certain revenue milestones. As of August 22, 2006, the debentures were
      convertible into 9,000,516 shares of common stock, subject to certain
      restrictions, and subject to adjustment upon the occurrence of certain specified
      events including, but not limited to, issuance of securities at a deemed price
      below the current conversion price, stock dividends, stock splits, mergers
      or
      reorganizations, and our failure to meet certain revenue milestones.





As
      of
      March 30, 2006, the debentures and warrants were amended and restated to
      indicate that the anti-dilution adjustments will occur only upon a future
      exercise or conversion of a convertible security, rather than upon the issuance
      of a convertible security, and will be calculated based upon the actual price
      used for the exercise or conversion. Accordingly, there was no initial
      adjustment of the conversion price of the debentures or the exercise price
      of
      the warrants upon original issuance of the debentures and warrants sold to
      Cornell Capital Partners, LP described below, but the exercise price and
      conversion price did reduce upon Cornell’s conversion of $200,000 in principal
      amount of a portion of a debenture on August 22, 2006.





In
      July
      2006, we and the holders of the 0% Debentures and associated warrants agreed
      to
      amend such instruments effective as of their original issue date to provide
      for
      a minimum conversion price for the 0% Debentures and a minimum warrant exercise
      price of $0.05. The warrants were also amended to fix the aggregate number
      of
      warrant shares that are issuable to the number of shares of common stock for
      which the warrants were exercisable at the time the warrants were originally
      granted 2,354,261. ****




*5%
      Debentures*




In
      March
      2006, we entered into a securities purchase agreement with Cornell Capital
      Partners, LP, pursuant to which, as subsequently amended, we agreed to
      issue and sell to Cornell up to an aggregate of $15,000,000 in principal amount
      of secured convertible debentures (the 5% Debentures) and warrants to purchase
      up to an aggregate of 13,250,000 shares of common stock.




27




Cornell
      purchased $10,000,000 of the debentures on March 31, 2006. Half of the net
      proceeds from the sale of the debentures were delivered to us, and half of
      the
      net proceeds were held in escrow until the filing of a registration statement
      for the sale by Cornell of the shares which may be acquired upon conversion
      or
      default under the 5% Debentures and upon exercise of the warrants. Such
      registration statement was filed in May 2006, and the $5,000,000 balance of
      the
      net proceeds were paid to us. Prior to the August 2006 amendments to the related
      investment agreements, Cornell was obligated to purchase another $5,000,000
      of the 5% Debentures on the date our August 30, 2006 registration statement
      is
      declared effective by the SEC. The conversion price 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 of the common stock during the 30 trading
      days immediately preceding the conversion date. Each debenture matures
      three years from its date of issuance and bears interest at five
      percent (5%) per annum. The 5% Debentures are secured pursuant to the terms
      of
      (1) a pledge and escrow agreement among us, Cornell and David Gonzalez, Esq.,
      as
      escrow agent, and (2) security agreements among us, Cornell and two of our
      subsidiaries. In accordance with the pledge and escrow agreement, we deposited
      44,117,647 newly issued shares of common stock into escrow, and granted to
      Cornell a security interest in those shares to secure our obligations to Cornell
      under the 5% Debentures and related agreements.





Under
      the
      security agreements, we and our subsidiaries granted to Cornell a blanket
      security interest in our consolidated assets. The debentures are subordinate
      to
      certain transactions in the normal course of business in which we may
      participate.





In
      connection with the March 2006 issuance of the debentures, we initially agreed
      to issue to Cornell warrants to purchase up to an aggregate of 10,000,000 shares
      of common stock in accordance with the following schedule: (1) a warrant to
      purchase up to 3,500,000 shares of common stock was issued at the first closing;
      (2) a warrant to purchase up to 3,500,000 shares of common stock was issued
      and
      deposited into escrow at the first closing and was released in May 2006 upon
      the
      filing of a registration statement for the sale by Cornell of the shares which
      may be acquired upon conversion or default under the 5% Debentures and upon
      exercise of the warrants; and (3) a warrant to purchase up to 3,000,000 shares
      of common stock was to be issued when our August 30, 2006 registration statement
      is declared effective by the SEC.  The warrants were to  have an
      initial exercise price of $1.50 and a term of five years.




We
      agreed
      to file with the SEC by May 15, 2006, which date we refer to as the filing
      date,
      a registration statement including the shares underlying the debentures and
      warrants, and to have such registration statement declared effective by July
      29,
      2006, which date we refer to as the effectiveness date. If a registration
      statement was not filed by the filing date or declared effective by the
      effectiveness date, as applicable, we would have become obligated to pay to
      Cornell, either in cash or in shares of common stock, liquidated damages equal
      to 1% of the liquidated value of the debentures outstanding for each 30 day
      period (pro-rated for partial periods) that the registration statement is not
      filed or declared effective, as applicable. We are obligated to keep the
      registration statement effective until all the shares have been sold or are
      eligible for sale without volume restrictions pursuant to SEC Rule 144(k).




In
      July
      2006, we and Cornell agreed to amend the investment agreements relating to
      the
      debentures and warrants, effective as of their original issue dates, as
      follows:




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




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




·
            to
                extend the deadline for having the registration statement declared
                effective until August 12, 2006;
                and




·
            to
                cap liquidated damages payable in respect of failure to have an effective
                registration statement at 15% of the liquidated value of the debentures
                outstanding.




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




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




28




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




·
            to
                further extend the deadline for having the registration statement
                declared
                effective until September 5, 2006;
                and




·
            to
                provide that instead of a third warrant being issued to Cornell upon
                the
                last closing, 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, Cornell granted us a waiver of certain of the restrictive covenants
      contained in the investment agreements to permit us to take certain remedial
      actions relative to our 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
      substitute equity awards, or permitting such persons to sell, pledge or transfer
      their shares.




On
      August
      22, 2006 Cornell converted $200,000 principal amount of the first debenture
      that
      we issued to it, and we correspondingly issued 342,877 shares of common stock
      to
      Cornell, all of which shares are being registered pursuant our August 30, 2006
      registration statement.




***Payroll
      Withholding Taxes***




As
      discussed in Notes 10 and 14 of the Consolidated Financial Statements,
      during the fiscal year ended May 31, 2006, we did not withhold for or pay
      federal or state employment or income taxes associated with the vesting dates
      for restricted stock set forth in Mr. Saltman's, Ms. Bostater's or Mr. Britts’
employment agreements, or associated with the grants of shares to Mr. Saltman
      during his employment period for consulting and director services and Ms.
      Bostater during her employment period for consulting services. We also did
      not
      withhold or pay employment or income taxes for 10,000 shares of common stock
      issued to a non-executive employee during the fiscal year ended May 31,
      2006.




Total
      accounts payable at May 31, 2006 associated with the employees’ combined portion
      of required withholding, which is an obligation of our company to the extent
      not
      satisfied by the employees, are $1,311,471. We also may be subject to penalties
      and interest, currently estimated to be approximately $127,301 for the fiscal
      year ended May 31, 2006, which has been recorded as other
      expense. As of June 30, 2006 (the last vesting date set forth in the contracts
      which has occurred to the date of this report), to the extent the vesting dates
      are deemed to be valid and non-rescindable, the total liability for our
      company’s portion of the required withholding taxes is estimated to be $61,000
      and the total accounts payable associated with the employees’ combined portion
      of the required withholding is estimated to be $1,594,000. We do not presently
      believe any further penalties would accrue after May 31, 2006, although interest
      will continue to accrue until the amounts due are paid.




The
      employees have informed us that they intend to satisfy their contractual
      obligations to provide funds for our required payroll tax payments through
      sales
      of the underlying securities, once they may do so in accordance with applicable
      securities laws. We have recorded corresponding accounts receivable of
      $1,139,343 for the employees’ obligations.




The
      shares of stock subject to all of these awards other than the consultant grants
      to Mr. Saltman and Ms. Bostater are being registered for the first time on
      the
      registration statement filed August 30, 2006. At this time, we cannot predict
      when shares may be sold by the employees as a means of generating funds to
      satisfy withholding obligations. Market conditions may also limit the number
      of
      shares that may be sold and the proceeds to the employees from such sales.
      We
      may be obligated to pay such tax liabilities before the employees have been
      able
      to sell their shares, and the sales prices the employees receive may be less
      than the tax liability.




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




Our
      obligation to withhold for and pay federal and state employment and income
      taxes
      associated with these restricted shares granted to employees is ongoing with
      each new vesting or issuance date, and the level of tax obligation would be
      significant if any of the vesting or issuance schedules were to accelerate
      in
      accordance with the terms of the employment agreements. Our company could
      therefore incur significant additional liabilities for which we may not have
      sufficient cash to satisfy, requiring us to raise additional funds or curtail
      or
      cease operations. In light of this future exposure, our compensation committee
      intends to work with executives and employees who have restricted stock or
      the
      right to receive stock, to seek to restructure their compensation arrangements
      in a manner that would not expose our company to further liabilities beyond
      those already incurred.




29




**Restatement
      for the Quarter Ended February 28, 2006**




In
      July
      2006, our audit committee, after discussion with management and our independent
      registered public accounting firm, determined that there were errors in our
      financial statements included in our quarterly report on Form 10-QSB for the
      quarter ended February 28, 2006. The errors were discovered by management in
      the
      course of preparing our annual report on Form 10-KSB for the year ended May
      31,
      2006. Management determined that the financial statements included in the third
      quarter Form 10-QSB: (1) did not properly account for the warrants and
      beneficial conversion feature contained in the convertible debentures that
      were
      issued in February 2006, (2) classified our interest expense as an operating
      expense rather than an other expense, and (3) classified our former oil and
      gas
      operations as part of our continuing operations rather than as discontinued
      operations. In the course of further work to complete the audit for the fiscal
      year ended May 31, 2006, management discovered further errors related to
      non-cash compensation for employee, director and consulting services. These
      errors were corrected in a Form 10-QSB/A filed with the SEC on August 18,
      2006.




**Recent
      Acquisitions**





*Connect
      Renewable Energy*




In
      March
      2006, a subsidiary of ours completed a merger with and into CRE, pursuant to
      the
      terms of the Agreement and Plan of Merger dated February 8, 2006. As a result
      of
      the merger, CRE became our wholly-owned subsidiary. Ron Gangemi, a director
      of
      our company, was the President and Chief Executive Officer of CRE before the
      merger.




Pursuant
      to the CRE merger agreement, all of the outstanding shares of common stock
      of
      CRE were converted into the right to receive an aggregate of 5,000,000 shares
      of
      our common stock. No options, warrants or other rights to purchase the common
      stock of CRE were outstanding at the closing. Before the closing, we also loaned
      to CRE an aggregate of $1,410,000 for working capital purposes.




Also
      in
      connection with the CRE merger agreement, we entered into a consulting agreement
      with Connect by Computer, LLC, an entity wholly-owned by Mr. Gangemi, pursuant
      to which Mr. Gangemi has agreed to provide consulting services to us in the
      capacity of Chief Technology Officer and serve as a director of our company
      for
      a period of two years.





*Solar
      Roofing Systems*




In
      September 2005, we entered into an agreement to purchase 20% of SRS and acquired
      an option to purchase additional shares of SRS to bring our ownership to
      51%.




In
      April
      2006, pursuant to a February 8, 2006 Stock Purchase Agreement by and among
      us,
      SRS, SRS' stockholders and 2093603 Ontario Inc., an Ontario corporation and
      a
      subsidiary of ours, the acquisition subsidiary acquired all of the outstanding
      shares of SRS other than those already owned by us in exchange
      for $3,204,263 and 736,082 unregistered shares of our common stock issued
      to the U.S. shareholders of SRS and 2,446,074 Class A shares of the acquisition
      subsidiary issued to the Canadian shareholders of SRS. In addition, the former
      shareholders of SRS will be entitled to receive up to 736,079 additional shares
      of our common stock and up to 2,446,067 additional Class A shares, which share
      amounts will each be reduced by up to 50% in the event that SRS fails to satisfy
      certain gross sales targets for calendar 2006. Norman J. Dodd, a director of
      our
      company, was the President of SRS prior to the transaction.




In
      connection with the closing, we entered into an exchange rights agreement with
      certain stockholders of SRS. Pursuant to the exchange rights agreement, we
      granted to the holders of Class A shares the right to exchange each such share
      for one share of our common stock upon specified liquidation or insolvency
      events applicable to us or in the event that the acquisition subsidiary fails
      to
      redeem Class A shares as required by its articles of incorporation. The exchange
      agreement will terminate at such time as no Class A shares (or securities
      convertible into or exchangeable for such shares) are held by any party other
      than us or any of our affiliates.




We
      also
      entered into a support agreement with the acquisition subsidiary and certain
      stockholders of SRS. Pursuant to the support agreement, we agreed to refrain
      from paying any dividends upon our common stock unless (1) the acquisition
      subsidiary simultaneously declares or pays an equivalent dividend on the Class
      A
      shares and (2) the acquisition subsidiary has sufficient funds to enable it
      to
      timely make such dividend payment. In addition, the support agreement requires
      us to take all such actions and do all things that are reasonably necessary
      or
      desirable to enable and permit the acquisition subsidiary and us to satisfy
      our
      obligations pursuant to the articles of incorporation of the acquisition
      subsidiary and the exchange agreement to cause the exchange of Class A shares
      (and all declared and unpaid dividends, if applicable) for shares of our common
      stock. For so long as there are any outstanding Class A shares not held by
      us or
      our affiliates, the support agreement requires that we maintain the economic
      equivalence of the Class A shares with shares of our common stock by refraining
      from taking certain specified actions, such as stock or rights dividends, stock
      splits, reclassifications, mergers or similar actions, unless the Class A shares
      benefit from an economically equivalent action. The support agreement will
      terminate at such time as no Class A shares (or securities convertible into
      or
      exchangeable for such shares) are held by any party other than us or any of
      our
      affiliates.




30




In
      addition, we entered into a registration rights agreement with certain
      stockholders of SRS pursuant to which we agreed to register the resale of shares
      of our common stock issued or issuable in exchange for Class A shares of the
      acquisition subsidiary, which we refer to as the exchange shares. The
      registration rights agreement requires that we cause a registration statement
      to
      be declared effective by the SEC with respect to the resale of the exchange
      shares prior to the earlier of (1) March 30, 2007, and (2) the date the
      acquisition subsidiary first exercises its right to redeem Class A shares for
      exchange shares. We are required to keep the registration statement effective
      until the first anniversary of the date on which all Class A shares have been
      exchanged or deemed exchanged for exchange shares. We are required to pay all
      registration-related expenses in connection with the registration statement.
      Each Class A share of the acquisition subsidiary is exchangeable for one share
      of our common stock, in accordance with the terms and conditions set forth
      in
      the articles of incorporation of the acquisition subsidiary and the exchange
      rights agreement and support agreement described above.





**Critical
      Accounting Policies**




The
      preparation of financial statements in conformity with United States generally
      accepted accounting principles requires management of our company to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities, the disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting periods.




Our
      management routinely makes judgments and estimates about the effects of matters
      that are inherently uncertain. As the number of variables and assumptions
      affecting the probable future resolution of the uncertainties increase, these
      judgments become even more subjective and complex. Our significant accounting
      policies are discussed in Note 2 to our consolidated financial statements
      for the fiscal year ended May 31, 2006 included in this Report. We have
      identified the following accounting policies, described below, as the most
      important to an understanding of our current financial condition and results
      of
      operations.




*Debenture
      and Warrant Accounting*




We
      issued
      debentures and warrants under two different sets of terms, one being the 0%
      Debentures and the other being the 5% Debentures described in “Liquidity and
      Capital Resources - Recent Financings” above and Note 11 to our financial
      statements for the fiscal year ended May 31, 2006 included in this
      Report.




In
      accordance with EITF 00-27, *Application
      of Issue No. 98-5 to Certain Convertible Instruments* (“EITF
      00-27”) and EITF 98-5 *Accounting
      for Convertible Securities with Beneficial Conversion Features or Contingently
      Adjustable Conversion Ratios,* it was
      determined that the embedded conversion feature had intrinsic value. The
      proceeds of the issuance have been allocated among the 0% Debentures and the
      warrants based upon their relative fair values. The fair value of the warrants
      was determined by using the Black-Scholes option pricing model assuming an
      expected life of 5 years, a risk-free interest rate of 5%, an expected
      volatility of 75%, and a dividend yield of 0%.





For
      the
      $3,750,000 of 0% Debentures, the fair value of the debentures was allocated
      34.1% ($1,277,853) to the warrants and 65.9% ($2,472,147) to the debentures.
      The
      beneficial conversion feature (conversion option value) related to the
      debentures is $2,356,345, which will be recognized as interest expense over
      the
      life of the debenture.




For
      the
      $1,500,000 of 0% Debentures, the fair value of the debentures was allocated
      26.6% ($399,614) to the warrants and 73.4% ($1,100,386) to the debentures.
      The
      beneficial conversion feature (debt discount) related to the debentures is
      $399,614, which will be recognized as interest expense over the life of the
      debenture.




In
      accordance with EITF 00-27, the fair value of the warrants was allocated
      from the proceeds of the debt securities, and the remaining proceeds were then
      allocated to the debentures, resulting in the debentures being recorded at
      a
      discount from their face amount as follows:




Proceeds
                received on issuance of the convertible debt
            
            $
            5,250,000Allocated
                to:Fair value of the debentures
            
            
            3,572,533Fair value of warrants
            
            
            1,677,467Intrinsic
                value of beneficial conversion feature
            
            
            2,755,959




31




In
      accordance with EITF 00-27 and EITF 98-5, it was determined that the embedded
      conversion feature for the 5% Debentures had intrinsic value. The
      proceeds of the issuance have been allocated among the 5% Debentures and the
      warrants based upon their relative fair values. The value of the warrants was
      determined to be $2,800,894 by using the Black-Scholes option pricing model
      assuming an expected life of 5 years, a risk-free interest rate of 5%, an
      expected volatility of 75%, and a dividend yield of 5%.




In
      accordance with EITF 00-27, the fair value of the warrants was allocated from
      the proceeds of the debt securities, and the remaining proceeds, were then
      allocated to the debentures, resulting in the debentures being recorded at
      a net
      discount from their face amount. The analysis used to determine the dollar
      amount of proceeds to allocate to the debentures versus the warrants was based
      on Black-Scholes.




The
      proceeds received on issuance of the 5% Debentures during the fiscal year ended
      May 31, 2006 were allocated to the fair value of the convertible debentures
      and
      the warrants as follows:




Proceeds
                  received on issuance of the convertible debt
              
              $
              10,000,000Allocated
                  to:
              
              
              -Original
                  issue discount
              
              $
              800,000Fair
                  value of the debentures
              
              $
              6,399,016Fair
                  value of warrants
              
              $
              2,800,984Intrinsic
                  value of beneficial conversion feature
              
              $
              3,734,317




The
      carrying value as of May 31, 2006 of the debentures has been calculated as
      follows:


**0%**
              
              **5%**
              
              **Total**Face
                  value of debentures
              
              $
              5,250,000
              
              $
              10,000,000
              
              $
              15,250,000Less:
                  debt discount - beneficial conversion feature
              
              
              (2,755,959
              )
              
              (3,734,317
              )
              
              (6,490,276
              )Less:
                  debt discount - warrants
              
              
              (1,677,467
              )
              
              (2,800,984
              )
              
              (4,478,451
              )Less:
                  original issue discount
              
              
              
              
              
              (800,000
              )
              
              (800,000
              )Plus:
                  accreted interest expense (through May 31, 2006)
              
              
              173,344
              
              
              168,599
              
              
              341,943Debentures
                  carrying value at May 31, 2006
              
              $
              989,918
              
              $
              2,833,298
              
              $
              3,823,216




Discounts
      recorded in connection with the value of warrants, beneficial conversion
      feature, and original issue discount recorded in connection with the convertible
      debt, are being recognized as non-cash interest over the term of the debt using
      the effective interest method. The carrying value of the debentures will accrete
      to the face value over the life of the debentures, as the value of the discounts
      is expensed.





*Acquisition
      accounting*




We
      allocated the purchase price of the acquisitions of Solar Roofing Systems,
      Inc.
      and Connect Renewable Energy, Inc., according to Statement of Financial
      Accounting Standards No. 141 *Business
      Combinations* .
      This
      allocation is shown in Note 4 to our consolidated financial statements for
      the
      year ended May 31, 2006 included in this Report. The allocation
      included $1.8 million of acquired intangible assets that
      were assigned to research and development assets that were written off at
      the date of the acquisitions in accordance with FASB Interpretation No 4, *Applicability
      of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase
      Method.* The
      portion of the acquisition price that was allocated to patents and other
      identifiable intangible assets will be amortized over their estimated useful
      lives, which range from five years to ten years. This amortization expense
      was
      $425,000 for the year-ended May 31, 2006. The amounts allocated to goodwill
      are
      not amortized and will be tested annually for impairment. Intangible assets
      are
      carried and reported at acquisition cost, net of accumulated amortization
      subsequent to acquisition. While the amortization expense will be stable over
      time, the estimated useful lives of the intangible assets may prove to differ
      significantly from management’s initial estimates. Thus, the non-cash
      amortization expense may be either overstated or understated. In addition,
      in
      the future, we may need to record an impairment to the goodwill recorded that
      is
      associated with the acquisitions if the products and intellectual property
      acquired prove not to be economically viable.




32




**Off-Balance
      Sheet Arrangements**




We
      do not
      have any off-balance sheet arrangements, as defined in Item 303(c)(2) of
      Regulation S-B.




33




**ITEM
      7.**  **FINANCIAL
      STATEMENTS**





**TABLE
      OF CONTENTS**




The
      following consolidated financial statements and the notes thereto are filed
      as
      part of this registration statement.




Page**OPEN
                ENERGY CORPORATION**Report
                of Independent Registered Public Accounting Firm
            
            36Report
                of Independent Registered Public Accounting Firm
            
            37Consolidated
                Balance Sheets as of May 31, 2006 and 2005
            
            38Consolidated
                Statements of Operations for the twelve month periods ended May 31,
                2006
                and 2005
            
            39Consolidated
                Statement of Stockholders' Equity as of May 31, 2006
            
            40Consolidated
                Statements of Cash Flows for the twelve month periods ended May 31,
                2006
                and 2005
            
            41Notes
                to Consolidated Financial Statements
            
            42




34


**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




To
      the
      Board of Directors and Stockholders of


Open
      Energy Corporation


Solana
      Beach, California





We
      have
      audited the accompanying consolidated balance sheet of Open Energy Corporation
      and subsidiaries as of May 31, 2006, and the related consolidated statements
      of
      operations, stockholders’ equity (deficit) and cash flows for the year then
      ended. These consolidated financial statements are the responsibility of the
      company’s management. Our responsibility is to express an opinion on these
      consolidated financial statements based on our audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audit provides a
      reasonable basis for our opinion.




In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Open Energy Corporation
      as
      of May 31, 2006 and the results of its operations and its cash flows for the
      year then ended in conformity with accounting principles generally accepted
      in
      the United States of America.




/s/
PETERSON& CO.,
      LLP





San
      Diego, California


August
      28, 2006


35


**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Board of Directors and Stockholders of Open Energy Corporation (formerly
      Barnabus Energy, Inc.) an exploration stage company:




We
      have
      audited the consolidated balance sheet of Open Energy Corporation (formerly
      Barnabus Energy, Inc.), an exploration company, as at May 31, 2005 and the
      consolidated statements of operations, stockholders’ equity, and cash flows for
      the year then ended. These consolidated financial statements are the
      responsibility of the Company’s management. Our responsibility is to express an
      opinion on these financial statements based on our audits.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform an audit to obtain reasonable assurance whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audit provides a
      reasonable basis for our opinion.





In
      our
      opinion, these financial statements present fairly, in all material respects,
      the financial position of the Company, as at May 31, 2005 and the results of
      its
      operations and its cash flows and the changes in stockholders’ equity for the
      year then ended in conformity with United States generally accepted accounting
      principles.





As
      more
      fully described in Note 15 to the accompanying financial statements, subsequent
      to the issuance of the Company's 2005 consolidated financial statements and
      our
      report thereon dated August 22, 2005, the company decided to sell its oil and
      gas interests. In the accompanying financial statements, the comparative numbers
      for the year ended May 31, 2005 reflect the financial position and results
      of
      operations relating to oil and gas interests as a discontinued operation. In
      our
      original report we expressed an unqualified opinion on the 2005 consolidated
      financial statements, and our opinion on the revised consolidated financial
      statements, as expressed therein, remains unqualified.





The
      May
      31, 2005 financial statements were prepared assuming that the Company will
      continue as a going concern. As discussed in Note 2 to the May 31, 2005
      financial statements, the Company had a working capital deficiency, a capital
      deficiency, had incurred significant losses since inception and further losses
      were anticipated in the development of its business raising substantial doubt
      about the Company’s ability to continue as a going concern. Management’s plans
      in regard to these matters were also described in Note 2. The May 31, 2005
      financial statements did not include any adjustments that might result from
      the
      outcome of this uncertainty.




Vancouver,
                BC
            /s/
                DALE MATHESON CARR-HILTON LABONTEAugust
                28, 2006
            CHARTERED
                ACCOUNTANTS




36


**Open
      Energy Corporation**


**CONSOLIDATED
      BALANCE SHEETS**


**May
      31, 2006 and 2005**




**May
                31,****2006**
            
            **2005****ASSETS****CURRENT
                ASSETS****Cash
                and cash equivalents**
            
            $
            2,758,369
            
            $
            -**Accounts
                receivable**
            
            
            296,574
            
            
            -**Due
                from related parties**
            
            
            1,139,343
            
            
            -**Inventories**
            
            
            2,932,891
            
            
            -**Notes
                receivable**
            
            
            650,000
            
            
            -**Prepaid
                expenses and other current assets**
            
            
            536,915
            
            
            -**Current
                assets of discontinued operations**
            
            
            -
            
            
            225,102**Total
                current assets**
            
            
            8,314,092
            
            
            225,102**FIXED
                ASSETS, NET**
            
            
            581,258
            
            
            -**DEFERRED
                FINANCING COSTS, NET**
            
            
            143,554
            
            
            -**INTANGIBLE
                ASSETS, NET**
            
            
            9,665,230
            
            
            -**GOODWILL**
            
            
            11,942,594
            
            
            -**NON
                CURRENT ASSETS OF DISCONTINUED OPERATIONS**
            
            
            -
            
            
            881,187**Total
                assets**
            
            $
            30,646,728
            
            $
            1,106,289**LIABILITIES
                AND STOCKHOLDERS' EQUITY (DEFICIT)****CURRENT
                LIABILITIES****Accounts
                payable**
            
            $
            1,155,301
            
            $
            -**Notes
                payable, current maturities**
            
            
            320,025
            
            
            -**Advances
                from related parties**
            
            
            314,039
            
            
            -**Other
                accrued liabilities**
            
            
            2,231,806
            
            
            -**Deferred
                revenue**
            
            
            141,972
            
            
            -**Current
                liabilities of discontinued operations**
            
            
            -
            
            
            1,371,773**Total
                current liabilities**
            
            
            4,163,143
            
            
            1,371,773**LONG-TERM
                LIABILITIES****Notes
                payable, net of current maturities**
            
            
            59,693
            
            
            -**Convertible
                debentures, net**
            
            
            3,823,216
            
            
            **-****Deferred
                tax liability**
            
            
            4,835,857
            
            
            -**Total
                long-term liabilities**
            
            
            8,718,766
            
            
            -**COMMITMENTS
                AND CONTINGENCIES (Note 16)****STOCKHOLDERS'
                EQUITY (DEFICIT)****Common
                stock, $.001 par value;****1,125,000,000
                shares authorized; 69,131,663 and 46,668,750 shares issued****and
                outstanding at May 31, 2006 and 2005,
                respectively**
            
            
            69,132
            
            
            46,669**Additional
                paid-in capital**
            
            
            45,553,087
            
            
            411,451**Unearned
                compensation**
            
            
            (14,979,183
            )
            
            -**Shares
                to be issued**
            
            
            15,625
            
            
            -**Accumulated
                deficit**
            
            
            (12,900,794
            )
            
            (728,179
            )**Other
                comprehensive loss**
            
            
            6,952
            
            
            4,575**Total
                stockholders' equity (deficit)**
            
            
            17,764,819
            
            
            (265,484
            )**Total
                liabilities and stockholders' equity (deficit)**
            
            $
            30,646,728
            
            $
            1,106,289




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


37


**Open
      Energy Corporation**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**For
      the Years Ended May 31, 2006 and 2005**





**Year
                Ended May 31,****2006**
            
            **2005****Revenues,
                net**
            
            $
            152,532
            
            $
            -**Cost
                of sales**
            
            
            156,313
            
            
            -**Gross
                profit (loss)**
            
            
            (3,781
            )
            
            -**Operating
                Expenses****Selling,
                general and administrative**
            
            
            8,638,186
            
            
            -**Research
                and development**
            
            
            2,529,872
            
            
            -**Total
                operating expenses**
            
            
            11,168,058
            
            
            -**Loss
                from operations**
            
            
            (11,171,839
            )
            
            -**Other
                Income (expense)****Interest
                and other income**
            
            
            15,763
            
            
            -**Interest
                expense**
            
            
            (706,902
            )
            
            -**Other
                expense**
            
            
            (283,928
            )
            
            -**Loss
                on foreign exchange**
            
            
            (61,424
            )
            
            -**Total
                other income (expense)**
            
            
            (1,036,491
            )
            
            -**Loss
                from continuing operations before income taxes**
            
            
            (12,208,330
            )
            
            -**Income
                tax benefit**
            
            
            884,694
            
            
            -**Loss
                from continuing operations**
            
            
            (11,323,636
            )
            
            -**Loss
                from discontinued operations**
            
            
            (848,979
            )
            
            (666,046
            )**Net
                loss**
            
            $
            (12,172,615
            )
            $
            (666,046
            )**Net
                loss per share - basic and diluted****Continuing
                operations**
            
            $
            (0.20
            )
            $
            -**Discontinued
                operations**
            
            $
            (0.02
            )
            $
            (0.01
            )**Net
                loss**
            
            $
            (0.22
            )
            $
            (0.01
            )**Weighted
                average shares outstanding - basic and diluted**
            
            
            55,685,610
            
            
            47,615,209




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


38


**Open
      Energy Corporation**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)**


**For
      the Years Ended May 31, 2006 and 2005**




**Common
                Stock Shares**
            
            **Common
                Stock Amount**
            
            **Additional
                Paid in Capital**
            
            **Unearned
                Compensation**
            
            **Shares
                To Be Issued**
            
            **Accumulated
                Deficit**
            
            **Other
                Comprehensive Income**
            
            **Total
                Stockholders' Equity(Deficit)****Balance,
                May 31, 2004**
            
            
            **48,855,000**
            
            **$**
            **48,855**
            
            **$**
            **(17,785**
            **)**
            **$**
            **-**
            ****
            **$**
            **-**
            ****
            **$**
            **(62,133**
            **)**
            **$**
            **0**
            ****
            **$**
            **(31,063**
            **)**-**Issuance
                of stock at $.39 per share**
            
            
            1,095,000
            
            
            1,095
            
            
            425,955
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            427,050**Cancellation
                of shares**
            
            
            (3,281,250
            )
            
            (3,281
            )
            
            3,281
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -**Net
                loss**
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (666,046
            )
            
            -
            
            
            (666,046
            )**Foreign
                currency translation adjustments**
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            4,575
            
            
            4,575**Balance,
                May 31, 2005**
            
            
            **46,668,750**
            
            **$**
            **46,669**
            
            **$**
            **411,451**
            
            **$**
            **-**
            ****
            **$**
            **-**
            ****
            **$**
            **(728,179**
            **)**
            **$**
            **4,575**
            ****
            **$**
            **(265,484**
            **)****Issuance
                of stock in connection with private placement**
            
            
            3,089,790
            
            
            3,090
            
            
            2,428,873
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2,431,963**Issuance
                of unearned restricted stock**
            
            
            9,643,467
            
            
            9,643
            
            
            19,357,536
            
            
            (19,367,179
            )
            
            -
            
            
            -
            
            
            -
            
            
            -**Restricted
                stock amortization**
            
            
            -
            
            
            -
            
            
            -
            
            
            4,387,996
            
            
            -
            
            
            -
            
            
            -
            
            
            4,387,996**Issuance
                of stock as loan fee**
            
            
            65,000
            
            
            65
            
            
            132,335
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            132,400**Issuance
                of warrants in connection with debt financing**
            
            
            -
            
            
            -
            
            
            4,478,451
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            4,478,451**Beneficial
                conversion feature - convertible debt, net of income
                tax**
            
            
            -
            
            
            -
            
            
            3,904,913
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            3,904,913**Issuance
                of stock for services**
            
            
            482,500
            
            
            483
            
            
            890,867
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            891,350**Shares
                to be issued to employees**
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            15,625
            
            
            -
            
            
            -
            
            
            15,625**Issuance
                of stock in connection with acquisitions**
            
            
            9,182,156
            
            
            9,182
            
            
            13,948,661
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            13,957,843**Net
                loss**
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (12,172,615
            )
            
            -
            
            
            (12,172,615
            )**Foreign
                currency translation adjustments**
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2,377
            
            
            2,377**Balance,
                May 31, 2006**
            
            
            69,131,663
            
            $
            69,132
            
            $
            45,553,087
            
            $
            (14,979,183
            )
            $
            15,625
            
            $
            (12,900,794
            )
            $
            6,952
            
            $
            17,764,819




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


39




**Open
      Energy Corporation**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**For
      the Years Ended May 31, 2006 and 2005**




**Year
                Ended May 31,****2006**
            
            **2005****CASH
                FLOWS FROM OPERATING ACTIVITIES**Net
                loss
            
            $
            (12,172,615
            )
            $
            (666,046
            )Net
                loss from discontinued operations
            
            
            848,979
            
            
            666,046Adjustments
                to reconcile net loss to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            447,928
            
            
            -Interest
                from amortization of warrants and beneficial conversion feature,
                net of
                tax
            
            
            297,481
            
            
            -Amortization
                of deferred financing costs
            
            
            8,464
            
            
            -Amortization
                of original issue discount
            
            
            44,462
            
            
            -Addition
                to inventory reserves
            
            
            43,936
            
            
            -Writeoff
                of acquired in-process research and development
            
            
            1,800,000
            
            
            -Stock
                issued as loan fee
            
            
            132,400
            
            
            -Stock
                based compensation
            
            
            5,294,971
            
            
            -Other
                operating activities from discontinued operations
            
            
            (681,757
            )
            
            (433,228
            )Change
                in operating assets and liabilities, net of effects of
                acquisitionsAccounts
                receivable
            
            
            (212,806
            )
            
            -Due
                from employees
            
            
            (1,139,343
            )
            
            -Inventories
            
            
            (1,478,756
            )
            
            -Other
                current assets
            
            
            (513,326
            )
            
            -Accounts
                payable
            
            
            789,648
            
            
            -Other
                accrued liabilities
            
            
            1,977,221
            
            
            -Deferred
                revenue
            
            
            141,972
            
            
            -Deferred
                taxes
            
            
            (886,294
            )
            
            -Net
                cash used by operating activities
            
            
            (5,257,435
            )
            
            (433,228
            )**CASH
                FLOWS FROM INVESTING ACTIVITIES**Proceeds
                from sale of oil and gas interests
            
            
            350,000
            
            
            -Purchases
                of property and equipment
            
            
            (277,227
            )
            
            -Additions
                to intangible assets
            
            
            (90,231
            )
            
            -Payment
                for acquisitions, net of cash acquired
            
            
            (6,781,657
            )
            
            -Other
                investing activities of discontinued operations
            
            
            (118,813
            )
            
            (881,187
            )Net
                cash used in investing activities
            
            
            (6,917,928
            )
            
            (881,187
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES**Proceeds
                on notes payable
            
            
            333,975
            
            
            -Proceeds
                from convertible debt
            
            
            15,250,000
            
            
            -Proceeds
                from private placement
            
            
            1,754,759
            
            
            -Payments
                on notes payable
            
            
            (68,184
            )
            
            -Payments
                on advances from related parties
            
            
            (750,488
            )
            
            -Payment
                of debt issue costs
            
            
            (952,018
            )
            
            -Other
                financing activities of discontinued operations
            
            
            (636,689
            )
            
            1,305,091Net
                cash provided by financing activities
            
            
            14,931,355
            
            
            1,305,091Effect
                of foreign currency translation
            
            
            2,377
            
            
            4,575Net
                increase (decrease) in cash and cash equivalents
            
            
            2,758,369
            
            
            (4,749
            )Cash
                and cash equivalents at beginning of year
            
            
            -
            
            
            4,749CASH
                AND CASH EQUIVALENTS AT END OF YEAR
            
            $
            2,758,369
            
            $
            -SUPPLEMENTAL
                DISCLOSURES**Cash
                operating activities:**Interest
                paid
            
            $
            251,344
            
            $
            23,222Income
                taxes paid
            
            $
            -
            
            $
            -**Non-cash
                investing and financing activities:**Stock
                issued in connection with acquisitions
            
            $
            13,957,843
            
            $
            -Liabilities
                assumed in connection with acquisitions
            
            $
            1,796,000
            
            $
            -Assets
                acquired, net of deferred income taxes
            
            $
            25,349,000
            
            $
            -Note
                receivable from sale of oil and gas interests
            
            $
            650,000
            
            $
            -Warrants
                issued in connection with debt financing
            
            $
            4,478,451
            
            $
            -Beneficial
                conversion feature associated with convertible debt
            
            $
            3,904,913
            
            $
            -Issuance
                of stock in lieu of debt repayment
            
            $
            677,204
            
            $
            -




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


40




**Open
      Energy Corporation**


**Notes
      to Consolidated Financial Statements**


**May
      31, 2006**





**1.**
            **Nature
                of Operations**




Open
      Energy Corporation, (formerly Barnabus Energy, Inc.,) a Nevada corporation
      (the
      "Company”), focuses on the development and commercialization of solar energy
      products and technologies for a wide range of applications including power
      production and water desalination.  The Company was incorporated on April
      11, 2002 and was originally involved in oil and natural gas development with
      interests in property, wells, pipelines and a small gas refinery in Alberta,
      Canada. In September 2005, the Company decided to sell its oil and gas holdings
      in order to focus entirely upon renewable energy. The oil and gas divestiture
      was completed during the quarter ended February 28, 2006 and the Company has
      begun sales of a portfolio of renewable energy products and technologies, based
      on its acquisitions of Connect Renewable Energy, Inc. (“CRE”) and Solar Roofing
      Systems, Inc. (“SRS”), which were completed in March 2006 and April 2006,
      respectively. The Company was in the development stage through May 31, 2005.
      The
      year ended May 31, 2006 is the first year during which the Company is considered
      an operating company and is no longer in the development stage.





Shares
      of
      the Company's common 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 name change 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).





**2.**
            **Basis
                of Presentation****and
                Summary of Significant Accounting
                Policies**




**Principles
      of Consolidation**




The
      consolidated financial statements include the accounts of the Company and its
      wholly owned subsidiaries. All significant inter-company accounts and
      transactions have been eliminated.




**Basis
      of Presentation**




The
      accompanying consolidated financial statements have been prepared in accordance
      with accounting principles generally accepted in the United States of America.
      The preparation of these financial statements requires us to make estimates
      and
      judgments that affect the reported amounts of assets, liabilities, revenue
      and
      expenses. We base our estimates on historical experience and on various other
      assumptions that we believe to be reasonable under the circumstances, the
      results of which form the basis for making judgments about the carrying values
      of assets and liabilities that are not readily apparent from other sources.
      Actual results may differ from these estimates under different assumptions
      or
      conditions.




**Financial
      Reclassifications**




Certain
      amounts in the 2005 financial statements have been reclassified to conform
      with
      the 2006 classifications. These reclassifications have no effect on reported
      net
      income.




**Financial
      Instruments**




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


41


**Open
      Energy Corporation**


**Notes
      to Consolidated Financial Statements**


**May
      31, 2006**




**Revenue
      Recognition**




The
      Company recognizes revenue in accordance with SEC Staff Accounting Bulletin
      No. 104, “Revenue Recognition” (“SAB 104”). The Company generates revenue
      from the sale of photovoltaic roofing tiles, photovoltaic roofing membranes,
      balance of system products, and management system products to our dealers or
      other parties. The Company does not perform any installations. SAB 104
      requires that four basic criteria must be met before revenue can be recognized:
      (1) persuasive evidence of an arrangement exists; (2) delivery has
      occurred or services rendered; (3) the seller’s price to the buyer is fixed
      and determinable; and (4) collectibility is reasonably assured. Amounts
      billed or received from customers in advance of performance are recorded as
      deferred revenue.





**Allowance
      for Doubtful Accounts**




The
      Company provides an allowance for doubtful accounts equal to the estimated
      uncollectible amounts. Accounts receivable are presented net of the allowance
      for doubtful accounts. Due to the limited accounts receivable balance at May
      31,
      2006, and the lack of accounts receivable at May 31, 2005, there was no
      allowance for doubtful accounts at either of the respective year end
      dates.




**Warranty
      Reserves**




Due
      to
      the limited number of shipments made during the year ended May 31, 2006, the
      Company did not recognize warranty expense, and accordingly, as of May 31,
      2006
      there was no warranty reserve. It is customary in the
      Company's business and industry to warrant or guarantee the performance
      of  photovoltaic roofing products at certain levels of conversion
      efficiency for extended periods, often as long as 20 years. It is also customary
      to warrant or guarantee the functionality of  inverters and balance of
      systems for 10 years. The Company  therefore plans to maintain
      warranty reserves based on 0.5 % of revenue upon shipment of product to
      customers as a component of cost of sales to cover the potential liability
      that
      could arise from these guarantees. The Company's potential liability is
      generally in the form of product replacement. As necessary, the
      Company's warranty reserve will also include specific accruals for known
      product issues and an accrual for an estimate of incurred but not reported
      product issues based on industry loss information.





**Cash
      and Cash Equivalents**





Cash
      and
      cash equivalents consist primarily of cash on deposit, certificates of deposit,
      and money market accounts that are readily convertible into cash. These are
      purchased with original maturities of three months or less.




**Inventory**




Inventories
      consist of photovoltaic cells and other component material for specific customer
      orders and spare parts, and are valued at lower of cost (first-in, first-out)
      or
      market. Management provides a reserve to reduce inventory to its net realizable
      value. Certain factors could impact the realizable value of  inventory,
      so management continually evaluates the recoverability based on assumptions
      about customer demand and market conditions. The evaluation may take into
      consideration expected demand, new product development, the effect new products
      might have on the sale of existing products, product obsolescence, and other
      factors. The reserve or write-down is equal to the difference between the cost
      of inventory and the estimated market value based upon assumptions about future
      demand and market conditions. If actual market conditions are less favorable
      than those projected by management, additional inventory reserves or write-downs
      may be required. If actual market conditions are more favorable, reserves or
      write-downs may be reversed.


42


**Open
      Energy Corporation**


**Notes
      to Consolidated Financial Statements**


**May
      31, 2006**




**Fixed
      Assets**




Equipment
      and improvements are stated at cost less accumulated depreciation and
      amortization. Depreciation and amortization of equipment and improvements are
      provided over the estimated useful lives of the assets, or the related lease
      terms if shorter, by the straight-line method. Useful lives range as
      follows:




Computers
                and networks
            
            3
                yearsMachinery
                and equipment
            
            5-7
                yearsFurniture
                and fixtures
            
            5-7
                yearsLeasehold
                improvements
            
            Lesser
                of lease term or useful life of
                asset





Expenditures
      for maintenance and repairs are charged to operations.





**Goodwill
      and Intangible Assets**





Goodwill
      represents the excess of costs over fair value of assets of businesses
      acquired.  Per Statement of Financial Accounting Standards No. 142, *Goodwill
      and Other Intangible Assets* (“SFAS
      No. 142”), goodwill and intangible assets acquired in a purchase business
      combination and determined to have an indefinite useful life are not amortized,
      but instead must be tested for impairment annually or more frequently if
      circumstances indicate that indicators of impairment may be present. Management
      assesses goodwill for impairment at the reporting unit level on an annual basis
      at fiscal year end or more frequently under certain circumstances. Such
      circumstances include (i) significant adverse change in legal factors or in
      the
      business climate, (ii) an adverse action or assessment by a regulator, (iii)
      unanticipated competition, (iv) a loss of key personnel, (v) a
      more-likely-than-not expectation that a reporting unit or a significant portion
      of a reporting unit will be sold or otherwise disposed of, and (vi) recognition
      of an impairment loss in a subsidiary that is a component of a reporting unit.
      Management must make assumptions regarding estimating the fair value of the
      company reporting unit. If these estimates or related assumptions change in
      the
      future, the Company may be required to record an impairment charge. Impairment
      charges would be included in selling, general and administrative expenses in
      the
      Company’s consolidated statements of operations, and would result in reduced
      carrying amounts of the goodwill.





As
      of May
      31, 2006, the Company has tested its goodwill for impairment under the
      provisions of SFAS No. 142, and no impairment charges were deemed necessary.




Intangible
      assets with finite lives are amortized over their estimated useful lives, which
      range from five years to ten years. Intangible assets are reviewed for
      impairment whenever events or circumstances indicate impairment might exist
      in
      accordance with Statement of Financial Accounting Standards No. 144, *Accounting
      for the Impairment or Disposal of Long-lived Assets* (“SFAS
      No. 144”) *.* The
      projected undiscounted net cash flows expected to be derived from the use of
      those assets are compared to the respective net carrying amounts to determine
      whether any impairment exists. Impairment, if any, is based on the excess of
      the
      carrying amount over the fair value of those assets.




Factors the
      Company considers important which could trigger an impairment review
      include:




·
            Significant
                underperformance relative to historical or projected future operating
                results;·
            Significant
                changes in the manner of use of the acquired assets or the strategy
                for the Company's overall business;
                and





·
            Significant
                negative industry or economic
                trends.




As
      of May
      31, 2006, the Company evaluated intangible assets under the provisions of with
      SFAS No. 144 *,* and
      no
      impairment charges were deemed necessary.


43


**Open
      Energy Corporation**


**Notes
      to Consolidated Financial Statements**


**May
      31, 2006**




**Deferred
      Financing Costs**




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




**Income
      Taxes**





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





**Foreign
      Currency**




The
      functional currency for the Company’s Canadian subsidiary is the United States
      Dollar. Gains and losses from foreign exchange transactions are included in
      the
      consolidated statements of operations and have not been significant. Translation
      adjustments resulting from the process of translating the Company’s former oil
      and gas operations into U.S. dollars are included in determining comprehensive
      loss and have not been significant.





**Basic
      and Diluted Net Loss per Share**





Basic
      net
      loss per share is computed by dividing the loss for the period by the weighted
      average number of common shares outstanding for the period. Fully diluted loss
      per share reflects the potential dilution of securities by including other
      potential issuances of common stock, including shares to be issued upon exercise
      of stock options and warrants, in the weighted average number of shares of
      common stock outstanding for a period and is not presented where the effect
      is
      anti-dilutive.





A
      total
      of 44,117,647 shares held in escrow as collateral in connection with convertible
      debt agreements and a total of 22,563,134 shares underlying the convertible
      debt
      and warrants issued as of May 31, 2006, have been excluded from the calculation
      because they are deemed to be anti-dilutive.




**Stock
      Based Compensation**





In
      December 2002, the Financial Accounting Standards Board ("FASB") issued
      Statement of Financial Accounting Standards No. 148, *Accounting
      for Stock-Based Compensation - Transition and Disclosure* ("SFAS
      No. 148"), an amendment of Statement of Financial Accounting Standards No.
      123, *Accounting
      for Stock-Based Compensation* ("SFAS
      No. 123"). The purpose of SFAS No. 148 is to: (1) provide alternative methods
      of
      transition for an entity that voluntarily changes to the fair value based method
      of accounting for stock-based employee compensation, (2) amend the disclosure
      provisions to require prominent disclosure about the effects on reported net
      income of an entity’s accounting policy decisions with respect to stock-based
      employee compensation, and (3) require disclosure of those effects in interim
      financial information. The adoption of SFAS 148 has not had an impact on the
      Company’s financial position or results of operations.





The
      Company has elected to continue to account for stock-based employee compensation
      arrangements using the intrinsic value method as permitted by the provisions
      of
      Accounting Principles Board Opinion No. 25, *Accounting
      for Stock Issued to Employees* ,
      ("APB
      No. 25") and comply with the disclosure provisions of SFAS No. 123 as amended
      by
      SFAS No. 148 which requires a proforma disclosure showing the effect on reported
      earnings had the Company recorded stock-based compensation at fair value. As
      of
      May 31, 2006, there were no stock options outstanding, and therefore pro forma
      disclosure has not been included.


44


**Open
      Energy Corporation**


**Notes
      to Consolidated Financial Statements**


**May
      31, 2006**





Under
      APB
      No. 25, compensation expense is recognized based on the difference, if any,
      on
      the date of grant between the estimated fair value of the Company’s stock and
      the amount an employee must pay to acquire the stock. Compensation expense
      is
      recognized immediately for past service and pro-rata for future service over
      the
      vesting period.





The
      Company accounts for equity instruments issued in exchange for the receipt
      of
      goods or services from other than employees in accordance with SFAS No. 123
      and
      the conclusions reached by the Emerging Issues Task Force in Issue No. 96-18, *Accounting
      for Equity Instruments That Are Issued to Other than Employees for Acquiring
      or
      in Conjunction with Selling Goods or Services* ("EITF
      96-18"). Costs are measured at the estimated fair market value of the
      consideration received or the estimated fair value of the equity instruments
      issued, whichever is more reliably measurable. The value of equity instruments
      issued for consideration other than employee services is determined on the
      earlier of a performance commitment or completion of performance by the provider
      of goods or services as defined by EITF 96-18.




**Derivative
      Financial Instruments**




The
      Company accounts for derivative instruments in accordance with the provisions
      of
      SFAS No. 133, *Accounting
      for Derivative Instruments and Hedging Activities* ,
      and its
      related interpretations, and complies with SFAS No. 138, *Accounting
      for Certain Derivative Instruments and Hedging Activities—an amendment of FASB
      Statement No. 133* .
      SFAS
      No. 133 and SFAS No. 138 establish accounting and reporting standards
      for derivative instruments, including certain derivative instruments embedded
      in
      other contracts and for hedging activities.




The
      Company does not use derivative instruments to hedge exposures to cash flow,
      market or foreign currency risk. Terms of convertible debt and equity
      instruments are reviewed to determine whether or not they contain embedded
      derivative instruments that are required under SFAS No. 133 to be accounted
      for
      separately from the host contract, and recorded on the balance sheet at fair
      value. The fair value of derivative liabilities is required to be revalued
      at
      each reporting date, with corresponding changes in fair value recorded in
      current period operating results.





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




**Beneficial
      Conversion and Warrant Valuation**





In
      accordance with EITF No. 98-5, *Accounting
      for Convertible Securities with Beneficial Conversion Features or Contingently
      Adjustable Conversion Ratios* and EITF
      No. 00-27, *Application
      of Issue No. 98-5 to Certain Convertible Instruments,* the
      Company records a beneficial conversion feature (“BCF”) related to the
      issuance of convertible debt instruments that have conversion features at fixed
      rates that are in-the-money when issued, and the fair value of warrants issued
      in connection with those instruments. The BCF for the convertible instruments
      is
      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 amount
      of
      the convertible instrument equal to the intrinsic value of the conversion
      feature. The discounts recorded in connection with the BCF and warrant
      valuation are recognized as non-cash interest expense over the term of the
      convertible debt, using the effective interest method.


45


**Open
      Energy Corporation**


**Notes
      to Consolidated Financial Statements**


**May
      31, 2006**




**Concentrations
      of Credit Risk**





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




**3.****Recent
                Accounting Pronouncements**





In
      December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
      No. 123(R), *Share-Based
      Payment* (“SFAS
      No. 123(R)”), which is a revision of SFAS No. 123, *Accounting
      for Stock-Based Compensation* .
      SFAS
      123(R) is effective for public companies that file as small business issuers
      as
      of the beginning of the first annual reporting period that begins after
      June 15, 2005. The new standard will be effective for the Company for the
      fiscal year beginning June 1, 2006. SFAS 123(R) supersedes APB Opinion
      No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      amends SFAS 95, *Statement
      of Cash Flows* .
      SFAS
      123(R) requires all share-based payments to employees, including grants of
      employee stock options, to be recognized in the income statement based on their
      fair values.




The
      precise impact of adoption of SFAS No. 123(R) cannot be predicted at this
      time because it will depend on levels of share-based payments granted in the
      future. SFAS No. 123(R) also requires the benefits of tax deductions in
      excess of recognized compensation cost to be reported as a financing cash flow,
      rather than as an operating cash flow as required under current literature.
      This
      requirement will reduce net operating cash flows and increase net financing
      cash
      flows in periods after adoption. The Company cannot estimate what those amounts
      will be in the future because they depend on, among other things, when employees
      exercise stock options. The Company is currently in the process of adopting
      SFAS
      123(R) and evaluating the impact on the financial statements.





In
      November 2005, the FASB issued Staff Position (“FSP”) FAS115-1/124-1, *The
      Meaning of Other-Than-Temporary Impairment and Its Application to Certain
      Investments* ,
      which
      addresses the determination as to when an investment is considered impaired,
      whether that impairment is other than temporary, and the measurement of an
      impairment loss. This FSP also includes accounting considerations
      subsequent to the recognition of other-than-temporary impairment and requires
      certain disclosures about unrealized losses that have not been recognized as
      other-than-temporary impairments. The guidance in this FSP amends FASB
      Statements No. 115, *Accounting
      for Certain Investments in Debt and Equity Securities* ,
      and
      No. 124, *Accounting
      for Certain Investments Held by Not-for-Profit Organizations* , and
      APB Opinion No. 18, *The
      Equity Method of Accounting for Investments in Common Stock* . This FSP is effective for reporting periods beginning after
      December 15, 2005. Management does not believe the adoption of this
      FSP will have a material effect on the Company’s future reported financial
      position or results of operations.





In
      February 2006, the FASB issued SFAS No. 155, *Accounting
      for Certain Hybrid Financial Instruments-an amendment of FASB Statements No.
      133
      and 140* ,
      to
      simplify and make more consistent the accounting for certain financial
      instruments. SFAS No. 155 amends SFAS No. 133, *Accounting
      for Derivative Instruments and Hedging Activities* ,
      to
      permit fair value measurement for any hybrid financial instrument with an
      embedded derivative that otherwise would require bifurcation, provided that
      the
      whole instrument is accounted for on a fair value basis. SFAS No. 155 amends
      SFAS No. 140, *Accounting
      for the Impairment or Disposal of Long-Lived Assets* ,
      to
      allow a qualifying special-purpose entity to hold a derivative financial
      instrument that pertains to a beneficial interest other than another derivative
      financial instrument. SFAS No. 155 applies to all financial instruments acquired
      or issued after the beginning of an entity's first fiscal year that begins
      after
      September 15, 2006, with earlier application allowed. This standard is not
      expected to have a material effect on the Company’s future reported
      financial position or results of operations.


46


**Open
      Energy Corporation**


**Notes
      to Consolidated Financial Statements**


**May
      31, 2006**




On
      June
      29, 2005, the EITF ratified Issue No. 05-2, *The
      Meaning of Conventional Convertible Debt Instrument* in EITF
      Issue No. 00-19, *Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company's Own Stock* .
      EITF
      Issue 05-2 provides guidance on determining whether a convertible debt
      instrument is "conventional" for the purpose of determining when an issuer
      is
      required to bifurcate a conversion option that is embedded in convertible debt
      in accordance with SFAS 133. Issue No. 05-2 is effective for new instruments
      entered into and instruments modified in reporting periods beginning after
      June
      29, 2005. The adoption of this pronouncement did not have a material effect
      on
      the Company's future reported financial position or results of
      operations.




In
      September 2005, the EITF issued Issue No. 05-4,*The
      Effect of a Liquidated Damages Clause on a Freestanding Financial
      Instrument*,
      subject
      to EITF Issue No. 00-19,*Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company's Own Stock*.EITF
      05-4 provides guidance to issuers as to how to account for registration rights
      agreements that require an issuer to use its "best efforts" to file a
      registration statement for the resale of equity instruments and have it declared
      effective by the end of a specified grace period and, if applicable, maintain
      the effectiveness of the registration statement for a period of time or pay
      a
      liquidated damage penalty to the investor. The Task Force has not reached a
      consensus on this issue.





In
      September 2005, the FASB ratified the EITF Issue No. 05-7, *Accounting
      for Modifications to Conversion Options Embedded in Debt Instruments and Related
      Issues* ,
      which
      addresses whether a modification to a conversion option that changes its fair
      value affects the recognition of interest expense for the associated debt
      instrument after the modification and whether a borrower should recognize a
      beneficial conversion feature, not a debt extinguishment if a debt modification
      increases the intrinsic value of the debt (for example, the modification reduces
      the conversion price of the debt). This issue is effective for future
      modifications of debt instruments beginning in the first interim or annual
      reporting period beginning after December 15, 2005. The Company is currently
      in
      the process of evaluating what effect, if any, that the adoption of this
      pronouncement may have on its future reported financial position or results
      of
      operations.





In
      September 2005, the FASB also ratified EITF Issue No. 05-8, *Income
      Tax Consequences of Issuing Convertible Debt with a Beneficial Conversion
      Feature* ,
      which
      discusses whether the issuance of convertible debt with a beneficial conversion
      feature results in a basis difference arising from the intrinsic value of the
      beneficial conversion feature on the commitment date (which is recorded in
      the
      shareholder's equity for book purposes, but as a liability for income tax
      purposes), and, if so, whether that basis difference is a temporary difference
      under FASB Statement No. 109, *Accounting
      for Income Taxes* .
      This
      Issue should be applied by retrospective application pursuant to Statement
      154
      to all instruments with a beneficial conversion feature accounted for under
      Issue 00-27 included in financial statements for reporting periods beginning
      after December 15, 2005. Early application is permitted for periods for which
      financial statements have not been issued. The Company's application
      of EITF 05-8 resulted in a reduction of approximately $2.5 million to
      stockholders’ equity due to the tax effect of the beneficial conversion feature
      related to convertible debt financing completed during the year ended May 31,
      2006.


47


**Open
      Energy Corporation**


**Notes
      to Consolidated Financial Statements**


**May
      31, 2006**





In
      June
      2006, the FASB issued Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes - an interpretation of FASB Statement No.
      109* (“FIN
      48”). FIN 48 clarifies the accounting for uncertainty in tax positions and
      requires that a Company recognize in its financial statements the impact of
      a
      tax position, if that position is more likely than not of being sustained on
      audit, based on the technical merits of the position. The provisions of FIN
      48
      are effective for fiscal years beginning after December 15, 2006. The adoption
      of FIN 48 is not expected to have a material effect on the Company's
      future reported financial position or results of operations.




**4.****Acquisitions**




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




The
      portion of the acquisition price that was allocated to patents and other
      identifiable intangible assets will be amortized over their estimated useful
      lives, which range from five years to ten years. Amounts allocated to goodwill
      are not amortized and will be tested annually for impairment. Intangible assets
      are carried and reported at acquisition cost, net of accumulated amortization
      subsequent to acquisition.




On
      March
      30, 2006, the Company completed the acquisition and merger of Barnabus/CRE
      Acquisition Corporation, a wholly-owned subsidiary of the Company, with and
      into
      Connect Renewable Energy, Inc. ("CRE"), pursuant to the terms of the Agreement
      and Plan of Merger dated February 8, 2006 among the Company, CRE and
      certain other parties (the "Merger Agreement"). As a result of the merger,
      CRE
      became a wholly-owned subsidiary of the Company. A director of the Company
      was
      the President and Chief Executive Officer of CRE before the merger. Pursuant
      to
      the Merger Agreement, all of the outstanding shares of common stock of CRE
      were
      converted into the right to receive an aggregate of 5,000,000 shares of the
      Company's common stock.





CRE
      manufactures and distributes high efficiency photovoltaic roofing products
      designed to match the colors and edge profiles of cement tiles commonly used
      in
      residential and commercial construction. This acquisition enhances the Company’s
      ability to pursue the development and commercialization of renewable energy
      products by providing the Company with building integrated solar tiles,
      architectural glass, and balance of systems products.





In
      connection with the merger, the Company entered into a consulting agreement
      with
      Connect by Computer, LLC, an entity affiliated with Mr. Gangemi, currently
      a
      director of the Company. Pursuant to which Mr. Gangemi has agreed to provide
      consulting services to the Company in the capacity of Chief Technology Officer
      and serve as a director for a period of two years. In consideration of such
      services, the Company agreed to pay $16,000 per month for each full month of
      services rendered. The Company also agreed to grant to Connect by Computer,
      LLC,
      1,000,000 shares of common stock effective as of the date of the merger and
      2,000,000 additional shares of common stock subject to the achievement by CRE
      of
      certain net sales targets following the merger.




The
      purchase price at the time of the acquisition was allocated per SFAS No. 141
      based on the estimated fair value of net tangible and intangible assets
      acquired, and liabilities assumed, to the following assets and
      liabilities:


48


**Open
      Energy Corporation**


**Notes
      to Consolidated Financial Statements**


**May
      31, 2006**





Cash
            
            $
            161,000Accounts
                receivable
            
            
            37,000Inventory
            
            
            443,000Other
                assets
            
            
            8,000Property,
                furniture & equipment, net
            
            
            73,000Identifiable
                intangibles
            
            
            5,900,000Goodwill
            
            
            6,077,000TOTAL
                ASSETS ACQUIRED
            
            
            12,699,000Accounts
                payable
            
            
            298,000Accrued
                interest
            
            
            56,000McDonough
                litigation contingency
            
            
            112,000Note
                payable-current maturity
            
            
            106,000Note
                payable-related parties
            
            
            650,000Customer
                deposits
            
            
            8,000Accrued
                liabilities
            
            
            12,000TOTAL
                LIABILITIES ASSUMED
            
            
            1,242,000Deferred
                tax liability
            
            
            1,307,000**Fair
                value of net assets acquired**
            
            **$**
            **10,150,000**Consideration
                paid:Cash
            
            $
            1,410,000Stock
            
            
            8,580,000Transaction
                costs
            
            
            160,000Total
                consideration paid
            
            $
            10,150,000





Of
      the
      $5,900,000 of acquired intangible assets, $900,000 was assigned to research
      and
      development assets that were written off at the date of acquisition in
      accordance with FASB Interpretation No. 4, *Applicability
      of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase
      Method.* Those
      write-offs are included in selling, general and administrative expenses. The
      remaining $5,000,000 of acquired intangible assets have a weighted average
      useful life of approximately 8 years. The intangible 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 (6 month weighted average useful
      life).





On
      April
      10, 2006, the Company completed the acquisition and merger of all of the
      outstanding shares of Solar Roofing Systems Inc., an Ontario, Canada
      corporation. The Company's subsidiary, 2093603 Ontario, Inc. acquired the
      outstanding shares of Solar Roofing Systems for consideration equal to
      $3,204,263 in cash, 736,082 shares of the Company's common stock and 2,446,074
      Class A shares of 2093603 Ontario, Inc. In addition, the former shareholders
      of
      Solar Roofing Systems will be entitled to receive up to 736,079 additional
      shares of the Company's common stock and up to 2,446,067 Class A shares within
      90 days following the December 31, 2006 fiscal year end of Solar Roofing
      Systems. Such share amounts will each be reduced by up to 50% in the event
      that
      Solar Roofing Systems fails to satisfy certain gross sales targets for its
      fiscal year 2006. A director of the Company was the President of Solar Roofing
      Systems prior to the transaction and was appointed President of East Coast
      Operations after the closing.


49


**Open
      Energy Corporation**


**Notes
      to Consolidated Financial Statements**


**May
      31, 2006**




Each
      Class A share of 2093603 Ontario, Inc. is exchangeable for one share of the
      Company's common stock, in accordance with the terms and conditions set forth
      in
      the articles of incorporation of 2093603 Ontario, Inc.




Solar
      Roofing Systems, Inc. manufactures high efficiency building integrated solar
      roofing membranes for commercial and residential customers. This acquisition
      enhances the Company’s ability to pursue the development and commercialization
      of renewable energy products by providing the Company with a proprietary
      building integrated solar roofing product line.




The
      purchase price at the time of the acquisition was allocated per SFAS No. 141
      based on the estimated fair value of net tangible and intangible assets
      acquired, and liabilities assumed, to the following assets and
      liabilities:




Cash
                and cash equivalents
            
            $
            54,000Accounts
                receivable
            
            
            47,000Inventories
            
            
            1,055,000Prepaid
                expenses and other current assets
            
            
            15,000Property
                and equipment, net
            
            
            254,000Identifiable
                intangibles
            
            
            5,900,000Goodwill
            
            
            5,867,000TOTAL
                ASSETS ACQUIRED
            
            
            13,192,000Accounts
                payable
            
            
            66,000Accrued
                liabilities
            
            
            67,000Advances
                from stockholders
            
            
            308,000Current
                maturities of notes payable
            
            
            48,000Long-term
                debt
            
            
            65,000TOTAL
                LIABILITIES ASSUMED
            
            
            554,000Deferred
                tax liability
            
            
            1,835,000**Fair
                value of net assets acquired**
            
            **$**
            **10,803,000**Consideration
                paid:Cash
            
            $
            5,014,000Stock
            
            
            5,378,000Transaction
                costs
            
            
            411,000Total
                Consideration Paid
            
            $
            10,803,000




Of
      the
      $5,900,000 of acquired intangible assets, $900,000 was assigned to research
      and
      development assets that were written off at the date of acquisition in
      accordance with FASB Interpretation No. 4, *Applicability
      of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase
      Method.* Those
      write-offs are included in selling, general and administrative expenses. The
      remaining $5,000,000 of acquired intangible assets have a weighted average
      useful life of approximately 8 years. The intangible 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 (indefinite useful life, not amortized).


50


**Open
      Energy Corporation**


**Notes
      to Consolidated Financial Statements**


**May
      31, 2006**




The
      results of operations of both CRE and SRS have been included in the Company’s
      consolidated statements of operations since the completion of the acquisitions
      on March 30 and April 11, 2006, respectively. The following unaudited pro forma
      information presents a summary of the results of operations assuming the
      acquisitions had occurred on June 1, 2004:





**Year
                Ended May 31,****2006**
            
            **2005**Net
                sales
            
            $
            520,732
            
            $
            150,099Net
                loss
            
            $
            (13,783,502
            )
            $
            (939,091
            )Loss
                per shareBasic
                and Diluted
            
            $
            (0.25
            )
            $
            (0.02
            )




**5.**
            **Due
                from related parties**





As
      described in Note 10, the Company has accrued estimated payroll taxes,
      withholding and penalties owed as of May 31, 2006 totaling $1,311,471 in
      connection with issuances of restricted shares of common stock to certain
      officers and employees of the Company (see Notes 10 and 14). The
      withholding portion of this accrual totaling $1,139,343 has been recorded at
      May
      31, 2006 as amounts due from related parties based on agreements with the
      respective officers and employees for them to remit funds to the Company for
      an
      amount equal to the withholding obligations.




**6.**
            **Inventories**




Inventories
      consisted of the following:




**May
                31,****2006**
            
            **2005**Raw
                materials
            
            $
            1,742,710
            
            $
            -Work-in-process
            
            
            879,560
            
            $
            -Finished
                goods
            
            
            310,621
            
            $
            -TOTAL
            
            $
            2,932,891
            
            $
            -





Inventories
      are shown net of reserves for slow moving and obsolete inventory of $43,936
      and
      $0, as of May 31, 2006 and 2005, respectively.


51


**Open
      Energy Corporation**


**Notes
      to Consolidated Financial Statements**


**May
      31, 2006**





**7.**
            **Fixed
                Assets**





Fixed
      assets consisted of the following:




**May
                31,****2006**
            
            **2005**Computers
                and Networks
            
            $
            102,018
            
            $
            -Machinery
                and Equipment
            
            
            185,049Furniture
                and fixtures
            
            
            22,408
            
            
            -Leasehold
                improvement
            
            
            37,492
            
            
            -Construction
                in progress
            
            
            257,217Subtotal
            
            
            604,184
            
            
            -Less:
                accumulated depreciation
            
            
            (22,926
            )
            
            -Fixed
                assets, net
            
            $
            581,258
            
            $
            -





Depreciation
      expense was $22,296 and $0 for the years ending May 31, 2006 and 2005,
      respectively.





**8.**
            **Intangible
                Assets**





As
      of May
      31, 2006, the Company has the following amounts related to intangible
      assets:





Gross
                Carrying Amount
            
            Accumulated
              Amortization
            
            Net
                AmountAmortized
                intangible assets:Patented
                technologies
            
            $
            8,000,000
            
            $
            (250,000
            )
            $
            7,750,000Customer
                relationships
            
            
            800,000
            
            
            (25,000
            )
            
            775,000Backlog
            
            
            300,000
            
            
            (150,000
            )
            
            150,000Total
                amortized intangibles
            
            
            9,100,000
            
            
            (425,000
            )
            
            8,675,0000Unamortized
                intangible assets:Trademarks
            
            
            927,883
            
            
            -
            
            
            927,883Unpatented
                technologies
            
            
            62,347
            
            
            -
            
            
            62,347Total
                unamortized intangibles
            
            
            990,230
            
            
            -
            
            
            990,230Total
                intangibles
            
            $
            10,090,230
            
            $
            (425,000
            )
            $
            9,665,230




No
      significant residual value is estimated for the patented technologies which
      have
      a remaining useful life of approximately eight years. Aggregate amortization
      expense for all intangible assets for the years ended May 31, 2006 and 2005
      totaled $425,000 and $0, respectively. The following table represents the total
      estimated amortization of intangible assets for the five succeeding
      years:





Year
                ended May 31,2007
            
            $
            1,250,0002008
            
            
            1,100,0002009
            
            
            1,100,0002010
            
            
            1,100,0002011
                and thereafter
            
            
            4,125,000$
            8,675,000




52




**Open
      Energy Corporation**


**Notes
      to Consolidated Financial Statements**


**May
      31, 2006**




**9.**
            **Advances
                in Respect of Oil and Gas Interest Acquisition (Included in Non-current
                Assets of Discontinued
                Operations)**





All
      of
      the Company’s oil and gas activities were previously conducted in Canada. As
      discussed in Note 15, the oil and gas component of the business is being
      reported as discontinued operations for the year ended May 31, 2006, and amounts
      related to discontinued operations included in prior period financial statements
      have been reclassified to conform with the current period presentation. The
      following costs were incurred in oil and gas acquisition, exploration and
      development activities during the following periods:




**Year
                Ended May 31,****May
                31, 2006**
            
            **May
                31, 2005**Advances
                in respect of planned acquisition
            
            $
            -
            
            $
            789,783Development
                costs -unproved
            
            
            -
            
            
            91,404Total
            
            $
            -
            
            $
            881,187





Manyberries
      Assets:





On
      March
      3, 2005, the Company entered into an Oil and Gas Asset Sale Agreement ("OGAS
      Agreement") with Goldstar. Pursuant to the terms of the OGAS Agreement, the
      Company agreed to acquire a 90% interest in a bare trust from Goldstar. The
      bare
      trust was administered by MB Gas Inc., as bare trustee, which held legal title
      to certain unproven petroleum and natural gas assets (the "Manyberries Assets")
      on behalf of Goldstar as set out in the OGAS Agreement. The Company agreed
      to
      acquire the beneficial interest in the Manyberries Assets in consideration
      for
      the issuance of 2,000,000 shares of common stock to Goldstar, a cash payment
      of
      $99,483 and the assumption of $624,751 of Goldstar indebtedness. In addition
      to
      the issuance of shares to Goldstar, the Company agreed to issue 250,000 shares
      of common stock as an agency fee in connection with the OGAS
      Agreement.





Upon
      the
      closing under the OGAS Agreement, the Company would have owned a controlling
      interest in the bare trust that holds the legal interest in the Manyberries
      Gas
      Project, which is located in the southeastern region of Alberta, Canada, and
      a
      controlling interest in a sweet and sour gas processing and compression
      facility. Prior to the closing under the OGAS Agreement, Goldstar agreed to
      permit the Company to hold the 90% interest in the bare trust as of December
      15,
      2004. From this date, the Company has made advances to and incurred expenses
      from MB Gas as operator of the assets and trustee of the trust.





In
      March
      2005, the Company signed a Project Development and Project Management Agreement
      with MB Gas. The Company agreed to pay MB Gas a monthly fee of CDN $20,000
      (USD
      $15,916) as the operator of the property up to December 31, 2006. For the period
      ending May 31, 2006, the Company paid MB Gas a total of CDN $171,200 (approx.
      USD $150,000) relating to this Agreement, which was capitalized as development
      costs.




In
      June
      2005, the Company entered into an agreement with MB Gas to acquire a 90%
      interest in MB Gas’s working interest, existing wells, gathering pipelines,
      wellsite and plant facility in the Manyberries area of Alberta, Canada for
      a
      total purchase price of CDN $275,000 (USD $235,667). As part of the agreement
      the Company was to receive various percentage interests in related property
      sections.





In
      November 2005, the Company recorded an impairment charge of $589,923 against
      “Advances in respect of oil and gas interest acquisition” to reflect an
      estimated recoverable value of $1,000,000 based on an agreement with Goldstar
      that was formalized with the January 17, 2006 Settlement and Rescission
      Agreement.


53


**Open
      Energy Corporation**


**Notes
      to Consolidated Financial Statements**


**May
      31, 2006**





On
      January 17, 2006, the Company finalized a Settlement and Rescission Agreement
      to
      transfer all its rights, title and interest in the Manyberries Assets to the
      party from which they were originally acquired, which includes the following
      significant terms:




**·**
            A
                release from the Company's obligation to issue 2,250,000 shares of
                common
                stock;




**·**
            A
                release from any further obligation of the Company to fund the operations
                of these assets or of the operator;




**·**
            A
                settlement and rescission agreement constituting a full and final
                settlement of all claims arising, past, present and future, among
                the
                parties; and




**·**
            The
                receipt by the Company of $350,000 in cash and a $650,000 note, bearing
                interest at 5% per annum payable in arrears at maturity, due not
                later
                than November 28, 2006, and secured by a lien on all of the assets
                of the
                debtor. As of May 31, 2006, accrued interest receivable of $11,864
                was
                included in other current assets.





**10.**
            **Other
                Accrued Liabilities**




Other
      accrued liabilities consist of the following:




**May
                31,****2006**
            
            **2005**Payroll
                liabilities
            
            $
            1,341,635
            
            $
            -Accrued
                interest
            
            
            176,881Accrued
                loan fees
            
            
            200,000Accrued
                research and development expense
            
            
            118,312Accrued
                legal fees
            
            
            112,020Accrued
                litigation settlement
            
            
            265,089Other
            
            
            17,869$
            2,231,806
            
            $
            -




*Payroll
      Liabilities*




Included
      in payroll liabilities at May 31, 2006 is a liability in the amount of
      $1,311,471 that represents estimated taxes, withholding and penalties related
      to
      the stock-based compensation resulting from issuances of restricted shares
      to
      certain officers of the Company as described in Note 14. In connection with
      the
      issuance of these shares, the Company failed to withhold for, or pay federal
      or
      state employment or income taxes associated with amounts vested during the
      year
      ended May 31, 2006. As discussed in Note 5, the Company has recorded
      corresponding amounts due from the officers totaling $1,139,343, which
      represents the amount of this liability that is owed by them to the
      Company.


54


**O****pen
      Energy Corporation**


**Notes
      to Consolidated Financial Statements**


**May
      31, 2006**




**11.**
            **Notes
                Payable**





Notes
      payable consist of the following:




**May
                31,****2006**
            
            **2005**Unsecured
                promissory note to AFCO, bearing interest at 7.57% per annum, calculated
                monthly, payable in 9 equal monthly installments ending December
                01, 2006.
            
            $
            81,600
            
            $
            -Secured
                credit facility agreement for borrowings up to CDN $250,000, bearing
                interest at prime plus 3% as quoted by the Bank of Montreal. Payments
                of
                $4,630 (CDN $5,000) plus interest are due monthly. The note is due
                in
                March 2008 and is secured by equipment and is personally guaranteed
                by
                certain shareholders of the Company.
            
            
            108,143
            
            
            -Unsecured
                demand promissory note payable to an unrelated party, bearing interest
                at
                18% per annum calculated annually with no fixed term of repayment.
                $50,000
                was advanced in August 2005, $100,000 on November 9, 2005 and $39,975
                on
                December 2, 2005.
            
            
            189,975
            
            
            -Subtotal
            
            
            379,718
            
            
            -Less
                current maturities
            
            
            320,025Notes
                payable, net of current maturities
            
            $
            59,693
            
            $
            -





For
      the
      years ended May 31, 2006 and 2005, the Company has incurred a total of $183,768
      and $8,497, respectively, in cash interest expense. Accrued interest related
      to
      these notes at May 31, 2006 and 2005 was $20,818 and $0,
      respectively.





Aggregate
      maturities of notes payable in the next five years are as follows:




2007
            
            $
            320,0252008
            
            
            59,693Total
                debt
            
            $
            379,718




**12.**
            **Convertible
                Debentures and Warrants**





*0%
      Debentures*





During
      February 2006, the Company raised $3,750,000 gross proceeds from three unrelated
      entities through the issuance of 0% Subordinated Mandatory Convertible
      Debentures (“0% Debentures”). The 0% Debentures are convertible at the holders'
      option, on or before the maturity date of July 31, 2008, into shares of the
      Company’s common stock at an initial conversion price of $1.46 per share. The
      conversion price is reduced and the number of shares issuable upon conversion
      is
      increased if the Company does not meet certain revenue milestones, or if the
      Corporation issues or sell shares of Common Stock for consideration less than
      the Conversion Price, other than certain excluded issuances.





In
      March,
      2006, the Company raised an additional $1,500,000 gross proceeds through the
      issuance of 0% Debentures on the same terms as above.




55




**Open
      Energy Corporation**


**Notes
      to Consolidated Financial Statements**


**May
      31, 2006**





In
      connection with the issuance of the 0% Debentures, the Company issued warrants
      to purchase shares of the Company’s common stock at the initial warrant exercise
      price of $2.23 per share. The warrant exercise price is reduced if the Company
      does not meet certain revenue milestones, or if the Corporation issues or sells
      shares of Common Stock for consideration less than the Conversion Price, other
      than certain excluded issuances.





In
      March
      2006, the Company amended and restated the 0% Debentures and warrants to
      indicate that the anti-dilution adjustments set forth therein will occur only
      upon a future exercise or conversion of a convertible security, rather than
      upon
      the issuance of a convertible security, and will be calculated based upon the
      actual price used for the exercise or conversion. Accordingly, there was no
      initial adjustment of the conversion price of the debentures or the exercise
      price of the warrants upon original issuance of the debentures and warrant
      sold
      to Cornell Capital Partners, LP on March 31, 2006.





In
      July
      2006, the Company and the holders of the 0% Debentures and associated warrants
      agreed to amend such instruments effective as of their original issue date
      to
      provide for a minimum conversion price for the 0% Debentures and a minimum
      warrant exercise price of $0.05 each. The warrants were also amended to provide
      that the number of warrant shares will be fixed at 2,354,260, based on the
      number of shares of common stock for which the warrants were exercisable at
      the
      time the warrants were issued. ****





The
      Company did not achieve the revenue milestones set for the quarter ended May
      31,
      2006, and accordingly, as of May 31, 2006, each holder of the 0% debenture
      had
      the right to request a reduction in the conversion price on the debentures
      to
      $1.18 and a warrant exercise price of $1.82. However, the 0% Debentures and
      the
      warrants include a “make-up” provision so that if the Company achieves the
      cumulative milestones through any subsequent quarter, previous adjustments
      to
      the conversion price and the warrant exercise price related to the milestones
      will be reversed.





Subsequent
      to May 31, 2006, the conversion price of the 0% Debenture and the exercise
      price
      of the warrants became $0.5833 per share as a result of the issuance of shares
      by the Company at such price upon partial conversion of a debenture held by
      Cornell Capital Partners, L.P. See Note 19.




Pursuant
      to these agreements, the Company is obligated to file a resale registration
      statement within 120 days of the financing to register for public resale the
      shares of common stock underlying these debentures and warrants.





In
      accordance with EITF 00-27 and EITF 98-5, *Accounting
      for Convertible Securities with Beneficial Conversion Features or Contingently
      Adjustable Conversion Ratios* ,
      it was
      determined that the embedded conversion feature had intrinsic value. The
      proceeds of the issuance have been allocated among the 0% Debentures and the
      warrants based upon their relative fair values. The fair value of the warrants
      was determined by using the Black-Scholes option pricing model assuming an
      expected life of 5 years, a risk-free interest rate of 5%, an expected
      volatility of 75%, and a dividend yield of 0%.





For
      the
      $3,750,000 of 0% Debentures, the face value of the debentures was allocated
      34.1% ($1,277,853) to the warrants and 65.9% ($2,472,147) to the debentures.
      The
      beneficial conversion feature (conversion option value) related to the
      debentures is $2,356,345, which will be recognized as interest expense over
      the
      life of the debenture.




For
      the
      $1,500,000 of 0% Debentures, the face value of the debentures was allocated
      26.6% ($399,614) to the warrants and 73.4% ($1,100,386) to the debentures.
      The
      beneficial conversion feature (debt discount) related to the debentures is
      $399,614, which will be recognized as interest expense over the life of the
      debenture.




In
      accordance with EITF 00-27, the fair value of the warrants was allocated from
      the proceeds of the debt securities, and the remaining proceeds, were then
      allocated to the debentures, resulting in the debentures being recorded at
      a
      discount from their face amount as follows:




56





**Open
      Energy Corporation**


**Notes
      to Consolidated Financial Statements**


**May
      31, 2006**




Proceeds
                received on issuance of the convertible debt
            
            $
            5,250,000Allocated
                to:Fair
                value of the debentures
            
            $
            3,572,533Fair
                value of warrants
            
            $
            1,677,467Intrinsic
                value of beneficial conversion feature
            
            $
            2,755,959




*5%
      Debentures*





In
      March
      2006, the Company entered into a securities purchase agreement with Cornell
      Capital Partners, LP ("Cornell"), pursuant to which it agreed to issue and
      sell
      to Cornell up to an aggregate of $15,000,000 in principal amount of secured
      convertible debentures (the 5% Debentures”) and warrants to purchase up to an
      aggregate of 10,000,000 shares of common stock.





Cornell
      purchased $10,000,000 of the debentures on March 31, 2006. Half of the net
      proceeds from the sale of the debentures were delivered to the Company, and
      half
      of the net proceeds were held in escrow until the filing of a registration
      for
      the sale by Cornell of the shares which may be acquired upon conversion or
      default under the 5% Debentures and upon exercise of the warrants. Such
      registration statement was filed in May 2006, and the balance of the net
      proceeds was paid to the Company. Pursuant to the securities purchase agreement,
      Cornell was obligated to purchase another $5,000,000 of the 5% Debentures on
      the
      date such registration statement is declared effective by the SEC. The
      conversion price of the 5% Debentures is (i) a fixed conversion price (initially
      $1.50) or (ii) 95% of the lowest volume weighted average price of the common
      stock during the 30 trading days immediately preceding the conversion date.
      The
      5% Debentures are secured pursuant to the terms of (1) a pledge and escrow
      agreement among the Company, Cornell and David Gonzalez, Esq., as escrow agent,
      and (2) security agreements among the Company, Cornell and two of the Company's
      subsidiaries. In accordance with the pledge and escrow agreement, the Company
      deposited 44,117,647 newly issued shares into escrow, and granted to
      Cornell a security interest in those shares to secure the Company's obligations
      to Cornell under the 5% Debentures and related agreements.





Under
      the
      security agreements, the Company and its subsidiaries granted to Cornell a
      blanket security interest in the Company's consolidated assets.





In
      connection with the issuance of the debentures, the Company agreed to issue
      to
      Cornell warrants to purchase up to an aggregate of 10,000,000 shares of common
      stock in accordance with the following schedule: (1) a warrant to purchase
      up to
      3,500,000 shares of common stock was issued at the first closing; (2) a warrant
      to purchase up to 3,500,000 shares of common stock was deposited into escrow
      at
      the first closing and was released on May 25, 2006 upon filing of our SB-2
      registration statement; and (3) a warrant to purchase up to 3,000,000 shares
      of
      common stock was to be issued when the registration statement is declared
      effective by the SEC.





The
      warrants were to have an initial exercise price of $1.50 and a term of five
      years.




The
      debenture matures three years from closing and bears interest at five percent
      (5%) per annum. An additional one percent (1%) penalty per month
      was required to paid by the Company if registration statement was not filed
      within 130 days of closing. The Company is obligated to keep the registration
      statement effective until all the shares have been sold or are eligible for
      sale
      without volume restrictions pursuant to SEC Rule 144(k). The debentures are
      subordinate to certain transactions in the normal course of business that the
      Company may participate in.




57





**Open
      Energy Corporation**


**Notes
      to Consolidated Financial Statements**


**May
      31, 2006**




In
      July
      2006, the Company and Cornell agreed to amend the investment agreements
      effective as of their original issue dates, as follows:




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





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





·
            to
                extend the deadline for having the registration statement declared
                effective until August 12, 2006;
                and





·
            to
                cap liquidated damages payable in respect of failure to have an effective
                registration statement at 15% of the liquidated value of the debentures
                outstanding.




In
      addition, in August 2006, the company and Cornell agreed to further amend the
      investment agreements described above, as follows:




·
            to
                  provide for the purchase by Cornell of $1,500,000 of the remaining
                  secured
                  convertible debentures as of the date of the amendment, with the
                  remaining
                  $3,500,000 to be purchased by Cornell upon the effectiveness of
                  the
                  registration statement that the Company is required to
                  file;




·
            to
                  waive any breaches of the investment agreements with Cornell related
                  to
                  the tax withholding liabilities described in Notes 10 and 14;




·
            to
                  further extend the deadline under the investor registration rights
                  agreement for having the registration statement declared effective
                  until
                  September 5, 2006; and




·
            to
                provide that instead of a third warrant being issued to Cornell upon
                the
                last closing, such warrant was issued in August 2006, at an exercise
                price
                of $.80 (rather than from $1.50) per share, and is exercisable for
                6,250,000 shares (rather than from 3,000,000
                shares).





In
      addition, Cornell granted the company a waiver of certain of the
      restrictive covenants contained in the investment agreements to permit the
      company to take certain remedial actions relative to the tax withholding
      liabilities described in Notes 10 and 14, including the following with respect
      to any officer or employee: repurchasing vested shares, canceling any unvested
      shares, granting substitute equity awards, or permitting such persons to sell,
      pledge or transfer their shares.




58




**Open
      Energy Corporation**


**Notes
      to Consolidated Financial Statements**


**May
      31, 2006**




In
      accordance with EITF 00-27 and EITF 98-5, it was determined that the embedded
      conversion feature had intrinsic value. The proceeds of the issuance have been
      allocated among the 5% Debentures and the warrants based upon their relative
      fair values. The value of the warrants was determined to be $2,800,894 by using
      the Black-Scholes option pricing model assuming an expected life of 5 years,
      a
      risk-free interest rate of 5%, an expected volatility of 75%, and a dividend
      yield of 5%.




In
      accordance with EITF 00-27, the fair value of the warrants was allocated from
      the proceeds of the debt securities, and the remaining proceeds, were then
      allocated to the debentures, resulting in the debentures being recorded at
      a net
      discount from their face amount. The analysis to determine the dollar amount
      of
      proceeds to allocate to the debentures versus the warrants was based on Black
      Scholes.




The
      proceeds received on issuance of the 5% Debentures during the fiscal year ended
      May 31, 2006 were allocated to the fair value of the convertible debentures
      and
      the warrants as follows:





Proceeds
                received on issuance of the convertible debt
            
            $
            10,000,000Allocated
                to:Original
                issue discount
            
            $
            800,000Fair
                value of the debentures
            
            $
            6,399,016Fair
                value of warrants
            
            $
            2,800,984Intrinsic
                value of beneficial conversion feature
            
            $
            3,734,317




The
      carrying value as of May 31, 2006 of the debentures has been calculated as
      follows:




**0%**
            
            **5%**
            
            **Total**Face
                value of debentures
            
            $
            5,250,000
            
            $
            10,000,000
            
            $
            15,250,000Less:
                debt discount - beneficial conversion feature
            
            
            (2,755,959
            )
            
            (3,734,317
            )
            
            (6,490,276
            )Less:
                debt discount - warrants
            
            
            (1,677,467
            )
            
            (2,800,984
            )
            
            (4,478,451
            )Less:
                original issue discount
            
            
            
            
            
            (800,000
            )
            
            (800,000
            )Plus:
                accreted interest expense (through May 31, 2006)
            
            
            173,344
            
            
            168,599
            
            
            341,943Debentures
                carrying value at May 31, 2006
            
            $
            989,918
            
            $
            2,833,298
            
            $
            3,823,216




Discounts
      recorded in connection with the value of warrants, beneficial conversion
      feature, and original issue discount recorded in connection with the convertible
      debt, are being recognized as non-cash interest over the term of the debt using
      the effective interest method. The carrying value of the debentures will accrete
      to the face value over the life of the debentures, as the value of the discount
      is expensed.




As
      of May
      31, 2006, the debentures are convertible into 13,208,873 shares of our common
      stock.




Aggregate
      maturities of convertible debentures in the next five years are as
      follows:




2007
            
            $
            -2008
            
            
            -2009
            
            
            15,250,000Total
                debentures
            
            $
            15,250,000




59




**Open
      Energy Corporation**


**Notes
      to Consolidated Financial Statements**


**May
      31, 2006**





**13.**
            **Advances
                From Related Parties**





The
      Company assumed advances from various related parties, including shareholders,
      in connection with the acquisition of Solar Roofing Systems. These advances
      are
      due on demand and bear interest at 6% per annum. As of May 31, 2006 and 2005,
      there were balances due related parties of $314,039 and $0, and accrued interest
      of $56,239 and $0, respectively.





**14.**
            **Stockholders’
                Equity**





*Common
      Stock*





The
      Company's authorized capital stock consists of 1,125,000,000 common shares,
      $0.001 par value per share. 45,598,000 shares of common stock were issued to
      current stockholders on March 3, 2004, pursuant to a 1:15 forward stock split.
      In contemplation of this stock split, the number of authorized shares of common
      stock was increased from 75,000,000 to 1,125,000,000, and the number of shares
      issued and outstanding increased from 3,257,000 to 48,855,000. The par value
      of
      the stock remained as $0.001 per share. Unless otherwise noted, all references
      to common stock, common shares outstanding, average numbers of common shares
      outstanding and per share amounts in these financial statements and the notes
      to
      financial statements prior to the effective date of the forward stock split
      have
      been restated to reflect the 1:15 forward split on a retroactive
      basis.





In
      October 2004, 3,281,250 shares of common stock owned by the former President
      and
      Secretary were returned to treasury for cancellation, following her resignation
      as part of management reorganization.





In
      a
      series of cash transactions during 2006, 3,089,790 shares of common stock were
      issued in a private placement for $2,431,963.





In
      January 2006, the Company issued 65,000 shares of common stock with a fair
      value
      of $132,400 as a loan fee associated with notes payable totaling
      $650,000.





In
      accordance with an employment agreement with an officer, the Company granted
      a
      total of 8,235,662 common shares that are subject to forfeiture prior to
      vesting. The fair value of these shares at the date of grant was estimated
      to be
      approximately $16.6 million and was recorded as unearned compensation.
      Compensation expense will be recognized on a straight-line basis over the term
      of the vesting schedule which runs through September 30, 2008. 686,305 shares
      vest quarterly commencing on December 31, 2005. Through May 31, 2006, the
      Company has recorded $4,046,604 of expense related to these shares as stock
      based compensation expense. This amount is reflected in the Statement of
      Stockholders’ Equity (Deficit) as a reduction of unearned
      compensation.





In
      accordance with an employment agreement with an officer, the Company granted
      a
      total of 1,407,805 common shares that are subject to forfeiture prior to
      vesting. The fair value of these shares at the date of grant was estimated
      to be
      approximately $2.7 million and was recorded as unearned compensation.
      Compensation expense will be recognized on a straight-line basis over the term
      of the vesting schedule which runs through September 30, 2008. 117,317 shares
      vest quarterly commencing on March 15, 2006. Through May 31, 2006, the Company
      has recorded $341,393 of expense related to these shares as stock based
      compensation expense. This amount is reflected in the Statement of Stockholders’
Equity (Deficit) as a reduction of unearned compensation.





As
      discussed in Note 4, the Company issued a total of 6,000,000 shares of
      common stock in connection with the acquisition of Connect Renewable Energy
      Inc., completed in March 2006, and a total of 736,082 shares of common stock
      in
      connection with the acquisition of Solar Roofing Systems, Inc., completed in
      April 2006. In addition, in connection with the Solar Roofing Systems
      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
      exchangeable for one share of the Company's common stock, and accordingly,
      have
      been included in the Company's outstanding share total at May 31,
      2006.




60





**Open
      Energy Corporation**


**Notes
      to Consolidated Financial Statements**


**May
      31, 2006**




*Warrants*




As
      of May
      31, 2006, warrants to purchase 9,354,261 shares of our common stock were issued
      and outstanding, as follows:




**Number
                of Shares of**
              **Common
                Stock(1)**
            
            **Exercise
                Price**
              **At
                May 31, 2006**
            
            **Expiration
                Date**2,354,261
            
            1.82
            
            January
                31, 20117,000,000
            
            1.50
            
            March
                31, 20119,354,261





(1)
            Based
                on the exercise price in effect on May 31, 2006. Each warrant contains
                provisions for the adjustment of the exercise price and the number
                of
                shares issuable upon the exercise of the warrant in the event of
                stock
                dividends, stock splits, reorganizations, reclassifications and
                consolidations. See Note 19.





*Consultant
      Compensation Plan*





Under
      the
      Company’s 2004 Consultant Compensation Plan, the Board of Directors is
      authorized to issue up to 9,771,000 shares to consultants without further
      shareholder approval. In February 2006, the Company granted an aggregate of
      90,000 shares to two officers of the Company for services rendered as
      consultants prior to being hired as employees, and an additional 10,000 shares
      to a former consultant. Through May 31, 2006, the Company has recorded $194,000
      of expense related to these shares as stock based compensation expense. Pursuant
      to the securities purchase agreement described in Note 12, the Company is
      prohibited from issuing additional shares under the Consultant Compensation
      Plan, other than upon the exercise of previously-issued options, for so long
      as
      the convertible debentures initially issued to Cornell are
      outstanding.




61




**Open
      Energy Corporation**


**Notes
      to Consolidated Financial Statements**


**May
      31, 2006**





*Shares
      Issued for Services*





In
      February and March 2006, as compensation for their services to the Company,
      a
      total of 382,500 shares of common stock were granted to members of the Board
      of
      Directors and an employee. Through May 31, 2006, the Company has recorded
      $697,350 of expense related to these shares as stock based compensation
      expense..





*Escrowed
      Common Stock*





The
      5%
      Debentures (see Note 12) are secured pursuant to the terms of (1) a pledge
      and
      escrow agreement among us, Cornell and David Gonzalez, Esq., as escrow agent,
      and (2) security agreements among us, Cornell and two of our subsidiaries.
      In
      accordance with the pledge and escrow agreement, we deposited 44,117,647 shares
      issued in the name of the Company, into escrow, and granted to Cornell a
      security interest in those shares to secure our obligations to Cornell under
      the
      5% Debentures and related agreements. The escrowed shares are not included
      in
      common stock issued and outstanding at May 31, 2006.




*Shares
      to be Issued*





We
      entered into two employment agreements, one of which was with an officer of
      the
      Company, calling for the periodic issuances of common stock as partial
      employment compensation. Under these agreements, we have committed to issue
      an
      aggregate of 225,000 shares, vesting and being issued on a quarterly basis.
      Related to these two agreements, at May 31, 2006, $15,625 has been recorded
      as
      selling, general and administrative expenses.





**15.**
            **Discontinued
                Operations**





In
      September 2005, the Company determined to sell its oil and gas holdings in
      order
      focus it efforts entirely on the renewable energy component of the business.
      As
      discussed in Note 9, the sale of the Company’s oil and gas interests was
      completed in January 2006 pursuant to a Settlement and Rescission Agreement
      (‘Settlement Agreement”) under which the Company received $350,000 in cash and
      issued a note receivable, due November 28, 2006, in the amount of $650,000.
      During the quarter ended November 30, 2005, the Company recorded an impairment
      charge in the amount of $589,923 included in loss from discontinued operations
      in order to reduce the carrying value of the oil and gas assets to the estimated
      recoverable value.





In
      accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long
      Lived Assets,” the Company determined that based on the finalization of the
      Settlement Agreement in January 2006, under which all of its interests in the
      oil and gas assets were transferred back to the party from which they were
      originally acquired, the oil and gas component of the business should be
      reported as discontinued operations during the quarter ended February 28, 2006.





During
      the three and twelve months ended May 31, 2006, no revenues were reported in
      discontinued operations. For the twelve months ended May 31, 2006, a loss of
      $848,979 was incurred in discontinued operations, as a result of operating
      expenses related to the oil and gas component and the impairment described
      above. Amounts related to discontinued operations included in prior period
      financial statements presented herein have been reclassified to conform with
      the
      current period presentation.




62




**Open
      Energy Corporation**


**Notes
      to Consolidated Financial Statements**


**May
      31, 2006**





The
      carrying amounts and major classes of the assets and liabilities, which are
      presented as assets and liabilities of discontinued operations on the
      accompanying balance sheets, are as follows:





May
                31,
              2006
            
            May
                31,
              2005ASSETSCash
            
            $
            -
            
            $
            173,611Prepaid
                expenses and other current assets
            
            
            -
            
            
            51,491Total
                current assets of discontinued operations
            
            $
            -
            
            $
            225,102Advances
                in respect of oil and gas interest acquisition
            
            $
            -
            
            $
            881,187Total
                non-current assets of discontinued operations
            
            $
            -
            
            $
            881,187LIABILITIESAccounts
                payable and accrued liabilities
            
            $
            -
            
            $
            57,880Notes
                payable
            
            
            -
            
            
            477,517Advances
                from related parties
            
            
            -
            
            
            836,376Total
                current liabilities of discontinued operations
            
            $
            -
            
            $
            1,371,773




**16.**
            **Commitments
                and Contingencies**





*Suncone
      License Agreement*





In
      July
      2005, the Company entered into a technology license agreement, through which
      the
      Company obtained an exclusive license to apply technology known as SunconeTM CSP
      (Concentrated Solar Power) to distributed energy systems, electric power plants,
      saline water desalination systems and other applications (the "Suncone License
      Agreement"). Under the agreement, the Company is responsible for funding the
      development and commercialization of the technology. As consideration for
      granting the license, the agreement entitles the licensor to receive a royalty
      of 5% to 8 % of gross sales from licensed products, and 2% of sales of
      electrical power or desalinated water.





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





In
      March
      2006, the Company entered into an amended and restated technology license
      pursuant to which the Company's license of certain patent rights and technology
      which the Company refer to as SunconeTM CSP (Concentrating Solar Power) system
      was amended. As amended, the license agreement provides for an exclusive and
      worldwide license for the defined field of use of collecting solar energy to
      generate electricity, desalinate water and for all other industrial
      applications. The Company also has the right to sublicense the licensed
      technology. The license agreement expires at the earlier of January 27, 2026
      or
      the date of expiration of the last to expire of any issued patent within the
      patent rights subject to the license agreement.  The Company also agreed to
      fund a six month development project to develop a prototype of a solar collector
      and to expend or devote resources equal to at least $300,000 during such time
      period.




63




**Open
      Energy Corporation**


**Notes
      to Consolidated Financial Statements**


**May
      31, 2006**




Pursuant
      to the license agreement, the Company agreed to pay to the licensor certain
      royalties for sales of products incorporating the licensed technology ("Licensed
      Products"). The subset of Licensed Products that consists of generated
      electrical power or desalinated water or other pumped liquids that are generated
      or purified, as applicable, using any product or device which, or the
      manufacture, use or sale of which, is covered by a valid claim of the licensed
      patent rights is referred to as "licensed commodity products." The royalty
      payments for licensed products and the subset of licensed commodity products
      are
      as follows:




·
            2%
                of net sales of licensed commodity
                products.





·
            The
                following royalties for sales of Licensed Products (other than licensed
                commodity products) for each three month period commencing October
                21,
                2005: 8% of net sales up to $500,000; 7% of net sales up to $1,000,000;
                6%
                of net sales up to $1,500,000; and 5% of net sales over
                $1,500,000.





·
            Minimum
                royalties during each three month royalty period beginning in October
                2005
                ranging from $4,000 to $50.000.





In
      addition, the Company granted to the licensor 100,000 shares of common stock
      and
      a five year warrant to purchase up to 2,233,438 shares of common stock at an
      initial exercise price of $1.50 per share. The warrant vests incrementally
      upon
      the completion of certain milestones specified in the warrant. As these warrants
      were not approved by the Company’s board of directors until July 2006, they have
      not been included as outstanding warrants at May 31, 2006.





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




·
            elimination
                of the Company’s minimum royalty payment
                obligations;




·
            replacement
                of a staggered royalty rate structure with a flat percentage equal
                to the
                prior lowest staggered royalty
                rate;




·
            modification
                of the vesting schedule applicable to the warrant granted to Dr.
                Prueitt
                in connection with the license agreement to provide for quarterly
                vesting
                of 300,000 shares beginning on September 30, 2006 (with the final
                133,438
                shares vesting on June 30, 2008), and modification of the warrant
                to
                survive any termination of the license agreement, such that it will
                expire
                only pursuant to its own terms; and




·
            the
                addition of the right of either party to terminate the agreement
                upon 90
                days notice without cause.




64




**Open
      Energy Corporation**


**Notes
      to Consolidated Financial Statements**


**May
      31, 2006**




*Operating
      Leases*





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





The
      following is a schedule by years of future minimum rental payments required
      under operating leases that have initial or remaining noncancelable lease terms
      in excess of one year as of May 31, 2006:





Twelve
                months ended May 31,2007
            
            $
            203,3352008
            
            
            159,5352009
            
            
            112,6242010
            
            
            24,137$
            499,631




Rent
      expense was $46,899 and $0 for the twelve months ended May 31, 2006 and 2005.




*Agreements
      for investor relations services*





The
      Company is committed to an agreement for investor relations’ and public
      relations services for $16,000 per month plus reasonable expenses for six months
      beginning May 15, 2006.





*Management
      services*





The
      Company has employment contracts with all of its executive management team and
      certain other senior managers. The agreements are for three year terms and
      include stock grants or stock options. The stock or options vest quarterly
      over
      the three year period. As of May 31, 2006, 1,619,744 shares had vested with
      8,248,723 remaining unvested. As of May 31, 2006, no stock options had vested
      and 530,000 remained unvested.




65




**Open
      Energy Corporation**


**Notes
      to Consolidated Financial Statements**


**May
      31, 2006**





*Common
      Stock*





In
      connection with the acquisition of Connect Renewable Energy, Inc., the company
      agreed to issue 2,000,000 additional shares of common stock subject to the
      achievement of certain net sales targets following the acquisition. In addition,
      in connection with the acquisition of Solar Roofing Systems, Inc., the Company
      agreed to issue up to 736,079 additional shares of common stock and up to
      2,446,067 Class A shares of its subsidiary, 2093603 Ontario, Inc., within 90
      days following the December 31, 2006 fiscal year end of Solar Roofing Systems.
      Each Class A share of 2093603 Ontario, Inc. is exchangeable for one share of
      the
      Company's common stock. Such share amounts will each be reduced by up to 50%
      in
      the event that Solar Roofing Systems fails to satisfy certain gross sales
      targets for its fiscal year 2006.




*Stock
      Options*





As
      of May
      31, 2006, stock options exercisable into 530,000 shares of our common stock
      were
      promised under employment contracts, with promised vesting dates beginning
      June
      30, 2006. None of the promised options have yet been granted or authorized
      by the board of directors.





*Supply
      of Materials*





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





*Dependence
      on Limited Number of Suppliers*





The
      Company currently buys the majority of certain raw materials and components
      used
      to manufacture its products from one supplier. The loss of this supplier or
      a
      significant reduction in product availability from the principal supplier could
      have a material adverse effect on the Company’s results of
      operations.




**17.**
            **Related
                Party Transactions**





During
                fiscal 2005, a company owned by a person related to an officer of
                the
                Company advanced CDN $200,000 (approximately $171,000) to the former
                officer and the former officer then advanced the amount to the Company.
                The amount was unsecured, non-interest bearing and has no fixed terms
                for
                repayment. The Company paid $204,557 on May 11, 2006 to satisfy this
                claim.





During
                fiscal 2006, the Company repaid $859,557 in loans to Connect by Computer,
                LLC, which is wholly owned by a director of the Company. The loans
                were
                part of the acquisition price paid for the merger with Connect Renewable
                Energy, Inc.During
                the year ended May 31, 2006, a total of $13,550 was paid to Customatrix,
                Inc. for consulting services. Customatrix, Inc. is 50% owned by an
                officer
                of the Company.




66


**18.**
            **Income
                Taxes**





The
      following table presents the current and deferred income tax provision (benefit)
      for federal, state and foreign taxes:




Year
                Ended
              May
                31, 2006Current
                tax provision (benefit)Federal
            
            $
            0State
            
            
            1,600Foreign
            
            
            0Total
                current provision (benefit)
            
            
            1,600Deferred
                tax provision (benefit)Federal
            
            
            (404,824
            )State
            
            
            (69,742
            )Foreign
            
            
            (411,728
            )Total
                deferred tax provision (benefit)
            
            
            (886,294
            )Total
                provision (benefit) for income taxes
            
            $
            (884,694
            )




Current
      income taxes (benefits) are based upon the year’s income taxable for federal,
      state and foreign tax reporting purposes. Deferred taxes (benefits) are provided
      for certain income and expenses, which are recognized in different periods
      for
      tax and financial reporting purposes.





67


**Open
      Energy Corporation**


**Notes
      to Consolidated Financial Statements**


**May
      31, 2006**




Deferred
      tax assets and liabilities are computed for differences between the financial
      statements and tax bases of assets and liabilities that will result in taxable
      or deductible amounts in the future based on enacted laws and rates applicable
      to the period in which the differences are expected to affect taxable
      income.





Significant
      components of the Company’s net deferred tax asset or liability at May 31, 2006
      are as follows:





US
            
            Foreign
            
            TotalDeferred
                tax assetsNet
                operating loss
            
            $
            3,094,000
            
            $
            544,000
            
            $
            3,638,000Inventory
            
            
            18,000
            
            
            -
            
            
            18,000Deferred
                compensation
            
            
            641,000
            
            
            -
            
            
            641,000Credits
            
            
            64,000
            
            
            -
            
            
            64,000Total
                gross deferred tax assets
            
            
            3,817,000
            
            
            544,000
            
            
            4,361,000Valuation
                allowance
            
            
            (3,817,000
            )
            
            (544,000
            )
            
            (4,361,000
            )Net
                deferred tax assets
            
            $
            -
            
            $
            -
            
            $
            -Deferred
                tax liabilitiesIntangible
                assets
            
            $
            (862,000
            )
            $
            (1,423,000
            )
            $
            (2,285,000
            )Goodwill
            
            
            (46,000
            )
            
            -
            
            
            (46,000
            )Beneficial
                conversion feature of convertible debt
            
            
            (2,505,000
            )
            
            -
            
            
            (2,505,000
            )Total
                deferred tax liabilities
            
            $
            (3,413,000
            )
            $
            (1,423,000
            )
            $
            (4,836,000
            )





In
      assessing the realizability of deferred tax assets of $4,361,000 at May 31,
      2006, management considered whether it is more likely than not that that some
      portion or all of the deferred tax assets will be realized. The ultimate
      realization of deferred tax assets is dependent on the generation of future
      taxable income during the periods in which those temporary differences become
      deductible.





There
      was
      a fully offsetting valuation allowance against the current and non-current
      deferred tax assets recorded at May 31, 2006. The valuation allowance will
      be
      reduced at such time as management is able to determine that it is more likely
      than not that this deferred tax asset will be utilized. A valuation allowance
      of
      $440,000 was created in accounting for the SRS acquisition. The valuation
      allowance increased $3,921,000 in 2006 to $4,361,000 at May 31,
      2006.





A
      reconciliation of the expected tax computed at the U.S. federal statutory income
      tax rate to the total benefit for income taxes at May 31, 2006 is as
      follows:





Expected
                tax at 34%
            
            $
            (4,133,000
            )
            
            34.00
            %State
                income tax, net of federal
            
            
            (627,000
            )
            
            5.15
            %Change
                in valuation allowance
            
            
            3,921,000
            
            
            (32.15
            %)Foreign
                income tax rate differential
            
            
            (38,000
            )
            
            0.32
            %Non-deductible
                expenses
            
            
            56,000
            
            
            (0.46
            %)Research
                credits
            
            
            (65,000
            )
            
            0.53
            %Other
            
            
            1,000
            
            
            (0.01
            %)Provision
                (benefit) for income taxes
            
            $
            (885,000
            )
            
            7.38
            %





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


68


**Open
      Energy Corporation**


**Notes
      to Consolidated Financial Statements**


**May
      31, 2006**





**19.**
            **Subsequent
                Events**





*Lawsuit
      - Mitchell Organization Ltd. And Brian Wilkinson*





In
      March
      2006, the Company was first served with process regarding a civil action
      commenced on December 15, 2005, by Mitchell Organization Ltd. and Brian
      Wilkinson against the Company in Canada in the Court of Queen's Bench of
      Alberta, Judicial District of Calgary (Action No. 0501-17623). The Statement
      of
      Claim alleges that the Company entered into an agreement pursuant to which
      the
      Company agreed to issue 250,000 shares of its stock to Mr. Wilkinson in exchange
      for his providing consulting services. As relief, the claim sought the issuance
      of the 250,000 shares. The Company subsequently settled this civil action in
      August 2006 for $100,000 Canadian and 75,000 shares of restricted common
      stock. Based on this settlement, the Company has recorded other expense and
      a
      corresponding accrued liability for approximately $153,400 as of May 31,
      2006.





*Conversion
      of 5% Debentures and Adjustment of 0% Debentures and Related
      Warrants*





In
      August
      2006, Cornell converted $200,000 of the 5% debentures issued in March 2006
      into
      342,877 shares of restricted common stock at a conversion price of $0.5833
      per
      share. As a result of this conversion, the conversion price of the 0%
      Debenture and the exercise price of the related warrants became $0.5833 per
      share.


69


**ITEM
              8.**
            **CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                DISCLOSURE**





Not
      applicable.




**ITEM
      8A.**  **CONTROLS
      AND PROCEDURES**





We
      are
      required to maintain disclosure controls and procedures designed to ensure
      that
      material information related to us, including our consolidated subsidiaries,
      is
      recorded, processed, summarized and reported within the time periods specified
      in the SEC rules and forms.





Under
      the
      supervision and with the participation of our management, including our
      principal executive officer and our principal financial officer, we conducted
      an
      evaluation of our disclosure controls and procedures, as such term is defined
      under Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act. Based
      on
      this evaluation, our principal executive officer and our principal financial
      officer concluded that our disclosure controls and procedures were not effective
      as of May 31, 2006, due to the following deficiencies:


the
            absence of procedures to ensure the timely filing of current reports
            on Form
            8-K;
        a
            lack
            of effective record keeping and compliance assistance for reports required
            under Section 16(a) of the Exchange Act;
        insufficient
            personnel resources and technical accounting expertise within the accounting
            function to resolve non-routine or complex accounting
            matters;
        our
            failure to obtain counsel from an ERISA or tax attorney on the tax
            implications to our company of restricted stock awards, discussed in
            "Management's Discussion and Analysis or Plan of Operation -- Liquidity
            and
            Capital Resources -- Payroll Withholding Taxes"; and
        ineffective
            controls over period end financial close and reporting processes and
            the
            preparation and review of the annual consolidated financial statements,
            resulting in numerous post-closing journal entries and audit
            adjustments.


We
      identified the first two deficiencies described above in March 2006. We then,
      in
      March 2006, took the following remedial measures to address these deficiencies:
      we implemented more robust procedures to (i) identify events requiring the
      filing of a Form 8-K and to ensure the timely filings of such forms, and (ii)
      to
      identify transactions and other events requiring the filing of reports under
      Section 16(a) of the Exchange Act and to facilitate the timely filing of such
      forms by our directors and executive officers. We have also provided to
      management, and management has reviewed, practice materials identifying filing
      events, and we have increased the level of involvement by our outside securities
      counsel. Our chief financial officer is also engaging in continuing education
      focused on the latest developments in securities laws and disclosure
      obligations.




The
      last
      three deficiencies were identified in July 2006 as part of our procedures for
      completing our financial statements for the fiscal year ended May 31, 2006.
      We
      are in the process of implementing remedial steps for these further
      deficiencies, which include greater oversight of our accounting and compliance
      functions, and an active search for additional internal accounting and legal
      compliance resources. To date, management has not been able to hire sufficient
      additional personnel to assist in the company’s disclosure controls and
      procedures, and is in the process of further testing the new procedures, and
      thus has not been able to conclude that any of these deficiencies have been
      remediated as of the filing date of this report.




**ITEM
      8B.**  **OTHER
      INFORMATION**





Not
      applicable.


70


**PART
      III**




**ITEM
      9.**  **DIRECTORS
      AND EXECUTIVE OFFICERS**




The
      following sets forth certain biographical information concerning our current
      directors and executive officers:




**Name**
            
            **Position**
            
            **Age**David
                P. Saltman
            
            Member
                of Board of Directors of the Company, President and Chief Executive
                Officer of the Company
            
            52Norman
                J. Dodd
            
            Member
                of Board of Directors of the Company and President of East Coast
                Operations
            
            49Ron
                Gangemi
            
            Member
                of Board of Directors of the Company and Chief Technology
                Officer
            
            63Andrew
                M. Leitch
            
            Member
                of Board of Directors of the Company, Chair of the Audit
                Committee
            
            62Derek
                May
            
            Chair
                of the Board of Directors of the Company
            
            69Edward
                Douglas Ward
            
            Member
                of Board of Directors of the Company, Chair of the Compensation
                Committee
            
            74Cheryl
                J. Bostater
            
            Chief
                Financial Officer, Secretary, and Treasurer of the
                Company
            
            44Robert
                A. Britts
            
            Chief
                Operating Officer, West Coast Operations
            
            61Don
                Rogers
            
            Executive
                Vice President, East Coast Operations
            
            59




**David
      Saltman** is
      currently a director of the Company, a position he has held since July 2005
      and
      the President and the Chief Executive Officer of the Company, positions he
      has
      held since September 2005. From June 2000 to September 2005, Mr. Saltman was
      a
      senior executive of BioComposites International, Inc., a company producing
      natural fiber reinforced plastics for a wide range of industrial applications,
      including automotive interiors, building materials and consumer products. Mr.
      Saltman served on the President's advisory council that created environmental
      purchasing guidelines for the federal government, and is the recipient of
      several awards from the American Marketing Association and the National
      Recycling Coalition for his work on sustainable technologies. Prior to his
      efforts in the energy sector, Mr. Saltman enjoyed a career in the entertainment
      industry, including being a founder of the "E!" Entertainment Network. Mr.
      Saltman is a former board member of the California League of Conservation Voters
      and currently sits on the board of CALEAP, a California clean energy bond
      initiative. In 1978, Mr. Saltman earned a Bachelor of Arts Degree in Motion
      Picture/Television Production from UCLA.




**Norman
      J. Dodd** has been
      a director of the Company since October 2005 and our President of East Coast
      Operations since April 1, 2006. He was previously the Chief Executive Officer
      of
      SRS, a position he held since March 2003. Mr. Dodd spent eleven years at Procter
      and Gamble before becoming a partner in a Sales Consulting and Organizational
      Development business called Sales Performance Group Inc. He has been a
      consultant to a variety of companies in a number of unique industries, including
      petro-chemical, hydro-generation, packaged goods and the public sector. In
      1999
      he became President and a partner of LabX.com, the second-largest on-line
      auction system for scientific equipment. In 1979, Mr. Dodd earned an H.B.A.
      from
      Brock University in Ontario, Canada.




**Ron
      Gangemi** founded
      CRE and has served as its Chief Executive Officer since 2000. Mr. Gangemi is
      also a director of the Company, a position he has held since December 2005
      and
      is now serving as the Company’s Chief Technology Officer. Over the past 30
      years, he has founded companies with leading edge technologies that have been
      acquired or become publicly traded. From 1996 through 1999 Mr. Gangemi was
      chairman of Pulse Energy Systems, Inc., which led the renewable energy charge
      controller market. He founded Connect by Computer, LLC in 2000. Earlier in
      his
      career, Mr. Gangemi was CEO of Creative Medical Development, Inc. (1991-1996),
      Chairman/VP R&D for Healthtek, Inc. (1985-1991), and CEO of TriMed
      (1973-1984). Mr. Gangemi holds eight patents on medical devices, including
      the "infusion pump" patent which is still in use today. In 1970, Mr. Gangemi
      studied Biomedical Engineering at Rochester Institute of Technology and attended
      classes at UCLA in business.


71





**Andrew
      M. Leitch** has been
      a director of the Company and Chair of the Audit Committee since March
      2006. He is currently an independent director for two other public companies,
      and he serves as Chairman of the Audit Committee for both Aldila, Inc. and
      Blackbaud, Inc. Until his retirement in 2000, Mr. Leitch was a senior
      partner at Deloitte & Touche and held senior executive positions at
      private companies for over five years.





**Derek
      May** is
      currently the Chair of the Board of Directors of the Company, a position he
      has held since November 2005. From February 2002 to February 2006 Mr. May served
      on the board of directors of SABIA Incorporated, an analytical instrumentation
      manufacturing company. Mr. May was a Senior Vice President of Qualcomm Inc.
      from
      1988 to 1999 and President of Qualcomm Personal Electronics from 1994 to 1997.
      Prior to this, Mr. May held senior-level management positions with GEC and
      Phillips Industries in the United Kingdom, serving as Deputy Director of
      Procurement with responsibility for over one hundred facilities and subsidiaries
      throughout the United Kingdom. Upon his relocation to the United States, Mr.
      May
      joined Teledyne as Vice President of Operations, managing their manufacturing
      and jet-engine overhaul facilities. He subsequently moved to San Diego where
      he
      joined National Advanced Systems. He was responsible for the entire mainframe
      computer manufacturing operations at that time. Mr. May was a management trainee
      with the English Electric Company from 1958 to 1960 receiving training in all
      aspects of its operation.




**Edward
      Douglas Ward** is
      currently a director and Chair of the Company's Compensation Committee. 
Since 1994 he has served as a Managing Director of Irvine Associates, Inc.,
      a
      privately held Corporate Finance Group that arranges credit facilities and
      equity infusions for under-financed technology companies.  Previously, he
      was President & Chief Operating Officer of Astrotech International
      Corporation, which had five operating companies and a commercial space
      venture.  Earlier, he was Vice President and General Manager, Executive
      Vice President, and President of five diverse commercial and aerospace
      companies.  In 1956, Mr. Ward received a Diploma in Aeronautical
      Engineering from Northrop Aeronautical Institute.




**Cheryl
      J. Bostater** is
      currently the Chief Financial Officer of the Company, a position she has held
      since November 2005. Since September 2005, Ms. Bostater has also served as
      President of CUSTOMatrix, Inc. From January 2000 to October 2005, Ms. Bostater
      worked at an accounting firm as a valuation expert. From January 1994 to January
      2000, Ms. Bostater worked as an investment banker for micro-cap public
      offerings, as an equity analyst for technology and telecommunications
      securities, and as a valuation expert valuing companies and advising on
      enhancing corporate value. From 1984 to 1994 she worked at Xerox, initially
      as a
      digital circuit designer, then later in technical support for sales. She holds
      an Accredited Senior Appraiser (ASA) designation in Business Valuation from
      the
      American Society of Appraisers, and has been awarded a Chartered Financial
      Analyst (CFA) designation by the CFA Institute. In 1985, Ms. Bostater earned
      a
      B.S. in Electrical Engineering from Cornell University and, in 1993, an M.B.A.
      in Finance from Loyola Marymount University.




**Robert
      A. Britts** was
      appointed to the position of Chief Operating Officer of the Company on
      April 1, 2006. From December 1996 to March 2006, Mr. Britts worked as an
      international sales manager for Hitachi Chemical Diagnostics in the medical
      diagnostics division and was responsible for recruiting and managing
      distributors and sales staff, with territories that included all of the Pacific
      Rim and Latin America. From 1980 to 1996, Mr. Britts was Vice President of
      Operations, Western Hemisphere, for a division of Sonat, an international oil
      and gas company. In 1972, he earned a B.A. in International Business and Finance
      from California State University of San Francisco and attended the Stanford
      University Graduate Business School's Executive program in 1986.




**Don
      Rogers** was
      appointed to the position of Executive Vice President of East Coast Operations
      of the Company on April 10, 2006. In April 2003 Mr. Rogers was appointed
      President of Solar Roofing Systems, Inc. and served as its President until
      he
      joined the Company in April 2006. Prior to that, Mr. Rogers was the President
      and founder of Rogers & Associates, a business consulting firm from March
      2001 to March 2003. In 1968, he earned a Bachelors Degree in Commerce from
      the
      University of Manitoba.





**Committees
      of the Board of Directors**





**Audit
      Committee**




The
      board
      of directors has an Audit Committee, which consists of Andrew M. Leitch (Chair),
      Ron Gangemi and Edward Douglas Ward. The board of directors has examined the
      composition of the Audit Committee in light of the listing standards of the
      Nasdaq Stock Market and the regulations under the Exchange Act applicable to
      audit committees. Based upon this examination, the board of directors has
      determined that each of the Audit Committee members other than Mr. Gangemi
      is an
      "independent" director within the meaning of such listing standards and the
      Exchange Act and the rules and regulations thereunder. The board of directors
      has also determined that Andrew M. Leitch qualifies as an "audit committee
      financial expert" as that term is defined in applicable regulations of the
      Securities and Exchange Commission.


72





**Governance
      Committee**




The
      Governance Committee of the board of directors is comprised of Doug
      Ward and David Saltman.





**Compensation
      Committee**




The
      board
      has a Compensation Committee comprised of Douglas Ward (Chair), Derek May,
      and Ron Gangemi.





**Technology
      Committee**




The
      Technology Committee of the board of directors is comprised of Ron Gangemi
      (Chair) and Derek May.





**CODE
      OF ETHICS**





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




1.
            honest
                and ethical conduct, including the ethical handling of actual or
                apparent
                conflicts of interest between personal and professional
                relationships;





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





3.
            compliance
                with applicable governmental laws, rules and
                regulations;





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





5.
            accountability
                for adherence to the Code of Business Conduct and
                Ethics.





Our
      Code
      of Business Conduct and Ethics requires, among other things, that all of our
      company’s personnel shall be accorded full access to our President and Chief
      Executive Officer with respect to any matter which may arise relating to the
      Code of Business Conduct and Ethics. Further, all of our company’s personnel are
      to be accorded full access to our company’s board of directors if any such
      matter involves an alleged breach of the Code of Business Conduct and Ethics
      by
      our President and Chief Executive Officer.





In
      addition, our Code of Business Conduct and Ethics emphasizes that all employees,
      and particularly managers and/or supervisors, have a responsibility for
      maintaining financial integrity within our company, consistent with generally
      accepted accounting principles, and federal, provincial and state securities
      laws. Any employee who becomes aware of any incidents involving financial or
      accounting manipulation or other irregularities, whether by witnessing the
      incident or being told of it, must report it to his or her immediate supervisor
      or to our President and Chief Executive Officer. If the incident involves an
      alleged breach of the Code of Business Conduct and Ethics by the President
      and
      Chief Executive Officer, the incident must be reported to any member of our
      board of directors. Any failure to report such inappropriate or irregular
      conduct of others is to be treated as a severe disciplinary matter. It is
      against our company policy to retaliate against any individual who reports
      in
      good faith the violation or potential violation of our Code of Business Conduct
      and Ethics by another.





**SECTION
      16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE**





Based
      solely on a review of copies of such reports furnished to us and written
      representations that no other reports were required during the fiscal year
      ended
      May 31, 2006, we believe that all persons subject to the reporting requirements
      of Section 16(a) filed the required reports on a timely basis with the SEC,
      except as follows:





David
      Saltman, an officer and director, filed late a Form 3 disclosing his holdings
      as
      of the date he became a director and one Form 4 reporting one transaction,
      a
      stock grant.  Cheryl Bostater, an officer, filed a late Form 3 disclosing
      her holdings as of the date she became an officer, and one Form 4 reporting
      one
      transaction, a stock option grant.  Robert A. Britts, an officer, filed a
      late Form 3 disclosing his holdings as of the date he became an officer, and
      one
      Form 4 reporting one transaction, a stock grant.  Norman Dodd, an officer
      and director, filed one late Form 4 disclosing three transactions, a stock
      grant, and the acquisition of beneficial ownership of shares in connection
      with
      the SRS acquisition. Ronald Gangemi, a director, filed one late Form 4
      disclosing three transactions, each a stock grant.  Ted Williams, a
      director, filed a late Form 3 disclosing his holdings as of the date he became
      a
      director.


73


**ITEM
      10.**  **EXECUTIVE
      COMPENSATION**





**Summary
      Compensation Table**




The
      following table sets forth certain information concerning compensation paid
      during fiscal years ended May 31, 2004, 2005 and 2006, to the persons who served
      as our Chief Executive Officer, and all of our other executive officers who
      earned over $100,000 in salary and bonus during fiscal 2006 (collectively,
      the
      "Named Executives"):




**Annual
                Compensation**
            
            **Long
                Term Compensation Awards****Name**
            
            **Year
                Ended May 31**
            
            **Salary
                ($)**
            
            **Other
                Annual Compensation ($)**
            
            **Restricted**
              **Stock**
              **Awards
                ($)(1)**
            
            **All
                Other**
              **Compen-**
              **sation
                ($)(2)**David
                Saltman(3)
            
            
            2006
            
            
            268,732(6
            )
            
            
            
            
            16,636,037(8
            )
            
            5,6002005
            
            
            —
            
            
            —
            
            
            —
            
            
            —2004
            
            
            —
            
            
            —
            
            
            —
            
            
            —Kerry
                Nagy(4)
            
            
            2006
            
            
            —
            
            
            —
            
            
            —
            
            
            —2005
            
            
            Nil
            
            
            7,500
            
            
            Nil
            
            
            Nil2004
            
            
            Nil
            
            
            Nil
            
            
            Nil
            
            
            NilCheryl
                J. Bostater(5)
            
            
            2006
            
            
            149,100(7
            )
            
            
            
            
            2,731,142(9
            )
            
            1,7502005
            
            
            —
            
            
            —
            
            
            —
            
            
            —2004
            
            
            —
            
            
            —
            
            
            —
            
            
            —




(1)
            As
                of May 31, 2006, the aggregate number of shares of restricted stock
                issued
                to Named Executives was 9,643,467, having an aggregate value of
                $12,922,246.(2)
            These
                numbers reflect the aggregate dollar value of automobile allowances
                paid
                to each of Mr. Saltman and Ms. Bostater. No named executive has received
                perquisites or other personal benefits, securities or property, in
                excess
                of 10% of his or her total annual salary and bonus
                reported.(3)
            David
                Saltman was appointed President and Chief Executive Officer on September
                13, 2005.(4)
            Kerry
                Nagy served as President and Secretary from October 26, 2004 until
                September 13, 2005.(5)
            Cheryl
                J. Bostater was appointed Chief Financial Officer on November 1,
                2005.(6)
            This
                amount includes $80,400, representing the market value of unrestricted,
                registered shares granted to David Saltman pursuant to the 2004 Consultant
                Compensation Plan, for consulting services rendered to
                us.(7)
            This
                amount includes $40,200, representing the market value of unrestricted,
                registered shares granted to Cheryl Bostater pursuant to the 2004
                Consultant Compensation Plan, for consulting services rendered to
                us.(8)
            Pursuant
                to the terms of Mr. Saltman’s employment agreement, he was granted a total
                of 8,235,662 shares of common stock on September 15, 2005, such
                shares vesting quarterly commencing on December 31, 2005, with 686,305
                shares vesting in each of the first eleven quarters and 686,307 shares
                vesting in the twelfth and final quarter. All unvested shares will
                be
                forfeited if the employment agreement is terminated by us for "Cause"
                or
                if Mr. Saltman terminates the employment agreement other than for
                "Good
                Reason", as defined in the employment agreement. Mr. Saltman is
                responsible for making arrangements with respect to tax
                withholdings. As of May 31, 2006, the value of these shares of
                restricted stock was $11,035,787.(9)
            Pursuant
                to the terms of Ms. Bostater’s employment agreement, she was granted a
                total of 1,407,805 shares of common stock on March 15, 2006. 117,317
                shares vested on each of March 15, 2006 and March 30, 2006, and 117,317
                shares vest at the end of each calendar quarter thereafter. All unvested
                shares will be forfeited if the employment agreement is terminated
                by us
                for "Cause" or if Ms. Bostater terminates the employment agreement
                other
                than for "Good Reason", as defined in the employment agreement. Ms.
                Bostater is responsible for making arrangements with respect to tax
                withholdings. As of May 31, 2006, the value of these shares of restricted
                stock was $1,886,459.





**Option
      Grants in Last Fiscal Year**




No
      stock
      options were granted to the Named Executives for the fiscal year ended May
      31,
      2006.


74





**Aggregated
      Option Exercises in Last Fiscal Year and Year-End Option
      Values**




No
      stock
      options were exercised or held by the Named Executive during the fiscal year
      ended May 31, 2006.





**Equity
      Compensation Plan Information**




The
      following table provides information, as of May 31, 2006, with respect to
      options outstanding and available under our 2004 Consultant Compensation Plan,
      which is our only equity compensation plan other than an employee benefit plan
      meeting the qualification requirements of Section 401(a) of the Internal Revenue
      Code:




**Plan
                Category**
            
            **Number
                of Securities to**
              **be
                Issued Upon Exercise**
              **of
                Outstanding Options,**
              **Warrants
                and Rights**
              **(a)**
            
            **Weighted-Average**
              **Exercise
                Price of**
              **Outstanding
                Options,**
              **Warrants
                and Rights**
              **(b)**
            
            **No.
                of Securities**
              **Remaining
                Available**
              **for
                Future Issuance**
              **Under
                Equity**
              **Compensation
                Plans**
              **(excluding
                securities**
              **reflected
                in Column (a)) (c)**Equity
                compensation plans approved by security holders
            
            
            N/A
            
            
            N/A
            
            
            N/AEquity
                compensation plans not approved by security holders
            
            
            0
            
            
            0
            
            
            8,576,000(1
            )TOTAL
            
            
            0
            
            
            
            
            
            8,576,000(1
            )




(1)
      No
      options are currently issuable, as a result of contractual restrictions.





On
      September 23, 2004, our board of directors unanimously approved and adopted
      the
      2004 Consultant Compensation Plan. The plan authorizes our board of
      directors to issue up to 9,771,000 shares of our common stock. Accordingly,
      (i)
      on October 12, 2004, we issued 1,095,000 shares of common stock pursuant to
      the plan to various consultants for services rendered and (ii) on March 15,
      2006, we issued 60,000 unrestricted shares of common stock to David Saltman,
      30,000 unrestricted shares to Cheryl Bostater and 10,000 unrestricted shares
      to
      another consultant pursuant to the plan for previous consulting services
      provided to us by Mr. Saltman, Ms. Bostater and the other
      consultant.




The
      securities purchase agreement between us and Cornell restricts us from issuing
      any further grants under this plan for so long as any debentures issued under
      such purchase agreement are outstanding.




**Employment
      and Consulting Agreements**




We
      entered into an Employment Agreement dated August 25, 2005, with David Saltman
      whereby we appointed Mr. Saltman as our President and Chief Executive
      Officer. The term of the employment agreement is from September 15, 2005 to
      September 30, 2008, and automatically extends for additional one-year terms
      unless either party gives notice of its election to terminate the agreement
      at
      least ninety days prior to the expiration of the then-current term. Pursuant
      to
      the terms of the employment agreement, we agreed to pay Mr. Saltman an annual
      base salary of $250,000 plus annual bonuses as determined by our board of
      directors, based upon our financial achievements. In addition, pursuant to
      the
      terms of Mr. Saltman’s employment agreement, and in partial consideration for
      the services of Mr. Saltman as President and Chief Executive Officer, he was
      granted a total of 8,235,662 shares of common stock on September 15, 2005.
      Such
      shares vest quarterly commencing on December 31, 2005, with 686,305 shares
      being
      issued for each of the first eleven quarters and 686,307 shares being issued
      in
      the twelfth and final quarter. All unvested shares will be forfeited if the
      employment agreement is terminated by us for cause or if Mr. Saltman
      terminates the employment agreement other than for good reason. Upon Mr.
      Saltman's death, disability, termination by us other than for cause, or
      termination by Mr. Saltman for good reason or upon a change of control, as
      provided in the employment agreement, all unvested shares shall immediately
      vest. Mr. Saltman is responsible for making arrangements with respect to
      tax withholdings. Finally, Mr. Saltman is entitled to certain benefits,
      reimbursement of qualified expenses, a $600 per month automobile allowance
      and
      reasonable office support services at our corporate headquarters, as set
      out in the employment agreement.




If
      we
      terminate the employment agreement for Mr. Saltman's death or disability or
      for
      cause, we will pay Mr. Saltman, or his legal representative, as applicable,
      a sum in cash of an amount equal to the accrued but unpaid salary and any
      applicable bonuses. If Mr. Saltman terminates the employment agreement for
      good
      reason, or if we terminate the employment agreement for any reason other
      than for cause, then we will pay Mr. Saltman a termination fee in cash of an
      amount equal to 250% of his unpaid salary and scheduled bonuses remaining
      through September 30, 2008, or the end of any subsequent renewal term which
      is
      no longer subject to our or Mr. Saltman’s right not to renew.


75





The
      employment agreement also grants Mr. Saltman the right to identify, in his
      sole
      discretion, a number of candidates for the company’s board of directors that
      will at all times constitute a majority of such directors. The company is
      required to use its best efforts to cause such designees to be elected to its
      board of directors. The employment agreement also grants Mr. Saltman the right
      to designate the company’s legal counsel, outside auditing firm and any investor
      relations firm.





The
      employment agreement defines cause to be conviction of a felony involving a
      crime against the company. The employment agreements defines good reason to
      include (a) any failure by the company to comply with any provision of the
      agreement, other than an isolated, insubstantial and inadvertent failure that
      is
      not taken in bad faith and is remedied by the company promptly after receipt
      of
      notice thereof from Mr. Saltman; (b) the assignment to Mr. Saltman of any duties
      or responsibilities inconsistent in any material respect with those customarily
      associated with the positions held by Mr. Saltman during the term, (c) the
      occurrence of a change of control or (d) the failure of the company’s
      shareholders to elect all of Mr. Saltman’s permitted director designees or the
      failure of the company to appoint any such designee when required to do
      so.




On
      November 1, 2005 we appointed Cheryl J. Bostater Chief Financial Officer and
      entered into an employment agreement with her. The term of the employment
      agreement is from November 1, 2005 to October 31, 2008, and automatically
      extends for additional one-year terms unless either party gives notice of its
      election to terminate the agreement at least sixty days prior to the expiration
      of the then-current term. Pursuant to the terms of the employment agreement,
      we
      agreed to pay Ms. Bostater an annual base salary of $150,000 plus annual bonuses
      as determined by our board of directors, based upon our financial achievements.
      In addition, pursuant to the terms of Ms. Bostater’s employment agreement, as
      amended, and in partial consideration for the services of Ms. Bostater as Chief
      Financial Officer, she was granted a total of 1,407,805 shares of common stock
      on March 15, 2006. 117,317 shares vested on each of March 15, 2006 and March
      30,
      2006, and 117,317 shares vest at the end of each calendar quarter thereafter.
      All unvested shares will be forfeited if the employment agreement is terminated
      by us for cause or if Ms. Bostater terminates the employment agreement other
      than for good reason, as defined in the employment agreement. Upon Ms.
      Bostater's death, disability, termination by us other than for cause, or
      termination by Ms. Bostater for good reason or upon a change of control, as
      provided in the employment agreement, all unvested shares shall immediately
      vest. Ms. Bostater is responsible for making arrangements with respect to tax
      withholdings. Finally, Ms. Bostater is entitled to certain benefits, a $250
      per
      month automobile allowance and reimbursement of qualified expenses, as set
      out
      in the employment agreement.




If
      we
      terminate the employment agreement for Ms. Bostater's death or disability or
      for
      cause, we will pay Ms. Bostater, or her legal representative, as applicable,
      a
      sum in cash of an amount equal to the accrued but unpaid salary. If Ms. Bostater
      terminates the employment agreement for good reason, or if we terminate the
      employment agreement for any reason other than for cause, then we will pay
      Ms.
      Bostater a termination fee in cash of an amount equal to 150% of her unpaid
      salary and scheduled bonuses remaining through October 31, 2008, or the end
      of
      any subsequent renewal term which is no longer subject to our or Ms. Bostater’s
      right not to renew.





The
      employment agreement defines cause to be conviction of a felony involving a
      crime against the company, or objectively measurable deficiencies in performance
      which are not corrected within 60 days following notice. The employment
      agreements defines good reason to include (a) any failure by the company to
      comply with any provision of the agreement, other than an isolated,
      insubstantial and inadvertent failure that is not taken in bad faith and is
      remedied by the company promptly after receipt of notice thereof from Mr.
      Saltman; (b) the assignment to Ms. Bostater of any duties or responsibilities
      inconsistent in any material respect with those customarily associated with
      the
      positions held by Mr. Bostater during the term, (c) the occurrence of a change
      of control or (d) the relocation of Ms. Bostater’s place of employment outside
      of San Diego County, California.




On
      April
      1, 2006, we appointed Robert A. Britts Chief Operating Officer and entered
      into
      an employment agreement with him. The term of the employment agreement is from
      April 1, 2006 to March 31, 2009. Pursuant to the terms of the employment
      agreement, we agreed to pay Mr. Britts an annual base salary of $131,000 plus
      annual bonuses as determined by our board of directors, based upon our financial
      achievements and Mr. Britts' performance. In addition, we agreed to provide
      150,000 shares of our common stock to Mr. Britts, such shares to be issued
      quarterly commencing on April 1, 2006, with the last installment being issued
      on
      December 31, 2008. In the event we terminate Mr. Britts' employment for any
      reason other than cause, then we are obligated to continue to pay Mr.
      Britts' base salary through the end of the initial term of his employment (March
      31, 2009), and all unissued shares of Mr. Britts' initial stock grant will
      immediately issue.


76





Mr
      Britts is responsible for making arrangements with respect to tax
      withholdings. Finally, Mr. Britts is entitled to certain benefits and
      reimbursement of qualified expenses, as set out in the employment
      agreement.




On
      April
      1, 2006 we appointed Norman J. Dodd our President of East Coast Operations
      and
      entered into an employment agreement with him. The term of his employment
      agreement is through March 31, 2007. Pursuant to such agreement, we agreed
      to
      pay him an annual base salary of CDN $167,000 plus annual bonuses as determined
      by our board of directors, based upon our financial performance and Mr. Dodd's
      performance. In addition, we agreed to grant Mr. Dodd an option exercisable
      for
      200,000 shares of our common stock, such option to vest quarterly, provided
      that
      he remains employed by us, through March 31, 2009, at a strike price of
      $1.50 per share. Such option has not yet been granted, and we intend
      to grant it under a special, non-stockholder approved option plan shortly
      after the date of this report. If Mr. Dodd is terminated without just cause
      after March 31, 2007, we are obligated to pay him the greater of six
      months’ base salary or the severance required by the laws of Aurora, Ontario in
      which he is employed. Finally, Mr. Dodd is entitled to certain benefits and
      reimbursement of expenses, as set out in the employment agreement.





On
      April
      1, 2006 we appointed Don Rogers Executive Vice President, East Coast Operations,
      and entered into an employment agreement with him. The term of his employment
      agreement is through March 31, 2007. Pursuant to such agreement, we agreed
      to
      pay him an annual base salary of CDN $150,000 plus annual bonuses as determined
      by our board of directors, based upon our financial performance and Mr. Roger's
      performance. In addition, we agreed to grant Mr. Rogers an option exercisable
      for 150,000 shares of our common stock, such options to vest quarterly, provided
      that he remains employed by us, through March 31, 2009, at a strike price
      of $1.50 per share. Such option has not yet been granted and we intend
      to grant it under a special, non-stockholder approved option plan shortly
      after the date of this report. If Mr. Rogers is terminated without just cause
      after March 31, 2007, we are obligated to pay him the greater of five
      months’ base salary or the severance required by the laws of Aurora, Ontario in
      which he is employed. Finally, Mr. Rogers is entitled to certain benefits and
      reimbursement of expenses, as set out in the employment agreement.




Pursuant
      to the terms of the merger agreement with CRE, on March 30, 2006, we entered
      into a consulting agreement with Connect by Computer, LLC (CBC), an entity
      wholly-owned by Mr. Gangemi, pursuant to which Mr. Gangemi has agreed to provide
      consulting services to us in the capacity of chief technology officer and a
      director for a period of three years. In consideration of such services, we
      agreed to pay $16,000 per month for each full month of services rendered. We
      also agreed to grant to CBC, 1,000,000 shares of our common stock effective
      as
      of the date of the merger and 2,000,000 additional shares of our common stock
      subject to the achievement of certain net sales targets. We do not have the
      right to terminate the consulting agreement before the end of the term, except
      upon the death or disability of Mr. Gangemi. Mr. Gangemi has agreed during
      the
      term of the consulting agreement and for a period of three years following
      the
      term, not to solicit customers or employees of our company. Mr. Gangemi is
      permitted under the agreement to be employed by or otherwise perform services
      for companies outside the alternative energy field.




The
      Compensation Committee intends to work with executives who have restricted
      stock
      or the right to receive stock, to restructure their compensation arrangements
      in
      a manner that can better address tax obligations in the future.





**Director
      Compensation**




In
      fiscal
      2006, we issued 40,000 shares of restricted stock to each of our directors,
      namely David Saltman, Norman Dodd, Derek May, Ron Gangemi, Andrew Leitch, E.
      Douglas Ward and Vera Pardee (a former director), with the exception of Tedman
      Williams (a former director), who received 60,000 shares in consideration for
      services rendered to us during his tenure as director. Mr. Leitch received
      an
      additional 20,000 shares for chairing the audit committee.




We
      have
      no formal director compensation or reimbursement policy, but rather the
      Compensation Committee or the board makes director compensation and
      reimbursement determinations on an ad hoc basis. Directors may be reimbursed
      for
      their expenses incurred for attending each board of directors meeting and may
      be
      paid a fixed sum for attendance at each meeting of the directors or a stated
      salary as director. No payment precludes any director from serving us in
      any other capacity and being compensated for the service. Members of special
      or
      standing committees may be allowed like reimbursement and compensation for
      attending committee meetings. During our fiscal year ended May 31, 2006, none
      of
      our directors were paid any fees to attend director meetings.





**ITEM
      11.**  **SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
      MATTERS**





The
      following table reflects, as of August 22, 2006, the beneficial common stock
      ownership of: (i) each of our directors, (ii) each person known by us to be
      a
      beneficial holder of 5% or more of our common stock, (iii) each Named Executive,
      and (iv) all of our executive officers and directors as a group. Cornell is
      not
      included in this table because the debentures and warrants held by them contain
      provisions that, in the absence of a default by us, cap the amount of our common
      stock they can own at any time at 4.99% (unless such is waived by Cornell upon
      65 days prior notice), and their rights to convert the debentures and exercise
      the warrants are limited by these caps. Additionally, the debentures provide
      that no more than $1 million of principal amount of such debentures may be
      converted in any 30-day period. As of August 22, 2006, the total number of
      shares of our common stock issuable upon conversion of these debentures and
      exercise of these warrants was 38,965,168. If Cornell had beneficial ownership
      of these issued and outstanding shares, it would have beneficial ownership
      of
      36.2% of our outstanding common stock.(1)


77




**Name
                and Address of Beneficial Owner****(1)**
            
            **Number
                of Shares**
              **Beneficially
                Owned**
            
            **Percentage**
              **Shares**
              **Beneficially**
              **Owned
                (2)**David
                Saltman(3)
            
            
            8,335,662
            
            
            11.96
            %Kerry
                Nagy
            
            
            2,481,250
            
            
            3.56
            %Norman
                J. Dodd(4)
            
            
            1,666,584
            
            
            2.34
            %Ron
                Gangemi(5)
            
            
            5,074,782
            
            
            7.28
            %Andrew
                M. Leitch
            
            
            60,000
            
            
            *Derek
                May
            
            
            40,000
            
            
            *Edward
                D. Ward
            
            
            40,000
            
            
            *Cheryl
                J. Bostater(6)
            
            
            1,437,805
            
            
            2.06
            %All
                directors and executive officers as a group (9 persons)(7)
            
            
            19,590,635
            
            
            27.31
            %




*Less
      than 1%.




(1)
            
            In
                accordance with a pledge and escrow agreement between us and Cornell,
                we
                deposited 44,117,647 shares into escrow and pledged those shares
                to
                Cornell as security for our obligations under the 5% Debentures and
                related agreements. We are registering all of those pledged shares.
                If we
                defaulted under the 5% Debentures or related agreements, Cornell
                could
                take possession of these shares and sell them into the market. Although
                Cornell may not take possession of the shares without 65 days prior
                notice, to the extent such possession would cause Cornell to own
                in excess
                of 9.99% of our outstanding common stock, this restriction does not
                prevent Cornell from selling shares and then taking possession of
                additional shares. In this way, Cornell could, over time, sell more
                than
                this limit.(2)
            
            Beneficial
                ownership is determined in accordance with the rules of the SEC.
                Shares of
                common stock subject to options or warrants currently exercisable
                or
                exercisable within 60 days of August 22, 2006, are deemed outstanding
                for
                computing the percentage ownership of the stockholder holding the
                options
                or warrants, but are not deemed outstanding for computing the percentage
                ownership of any other stockholder. Unless otherwise indicated in
                the
                footnotes to this table, we believe that stockholders named in the
                table
                have sole voting and sole investment power with respect to the shares
                set
                forth opposite such stockholder's name. Unless otherwise indicated,
                the
                officers, directors and stockholders can be reached at our principal
                offices. Percentage of ownership is based on 69,668,290 shares of
                our
                common stock outstanding as of August 22, 2006.(3)
            
            Includes
                8,235,662 shares of common stock granted to Mr. Saltman pursuant
                to the
                terms of his employment agreement on September 15, 2005, such shares
                vesting quarterly commencing on December 31, 2005, with 686,305 shares
                vesting in each of the first eleven quarters and 686,307 shares vesting
                in
                the twelfth and final quarter. All unvested shares will be forfeited
                if
                the employment agreement is terminated by us for cause or if Mr.
                Saltman
                terminates the employment agreement other than for good
                reason. Mr. Saltman is responsible for making arrangements with
                respect to tax withholdings.(4)
            
            Includes
                53,533 Class A shares of the SRS acquisition subsidiary, exchangeable
                upon the occurrence of certain events, one for one, into shares of
                our
                common stock, held by the Dodd Family Trust. Does not include 166,667
                options which will become exercisable for shares of common stock
                more than
                60 days after August 21, 2006.(5)
            
            Includes
                1,000,000 shares awarded to CBC pursuant to a consulting agreement,
                but
                does not include 2,000,000 shares awarded to CBC that will become
                issuable
                to CBC upon meeting certain future revenue milestones. All investment
                decisions of, and control of, CBC are held by Mr. Gangemi. Also includes
                2,000,000 shares held by Mr. Gangemi's wife.(6)
            
            Includes
                1,407,805 shares of common stock granted to Ms. Bostater’s pursuant to the
                terms of her employment agreement on March 15, 2006. 117,317 shares
                vested
                on each of March 15, 2006 and March 30, 2006, and 117,317 shares
                vest at
                the end of each calendar quarter thereafter. All unvested shares
                will be
                forfeited if the employment agreement is terminated by us for cause
                or if
                Ms. Bostater terminates the employment agreement other than for good
                reason. Ms. Bostater is responsible for making arrangements with
                respect to tax withholdings.




78





(7)
            
            Does
                not include 2,125,000 shares that will not have vested within 60
                days of
                August 22, 2006. Includes 392,052 Class A shares of the SRS
                acquisition subsidiary held by Don Rogers, exchangeable upon the
                occurrence of certain events, one for one, into shares of our common
                stock.





**ITEM
      12.**  **CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS**





We
      believe that we have executed all of the transactions set forth below on terms
      no less favorable to us than terms we could have obtained from unaffiliated
      third parties. It is our intention to ensure that all future transactions with
      a
      value above $60,000, including loans, between us and our officers, directors
      and
      principal stockholders and their affiliates, are approved by a majority of
      the
      board of directors, including a majority of the independent and disinterested
      members of the board of directors, and are on terms no less favorable to us
      than
      those that we could obtain from unaffiliated third parties.




**Acquisitions**





In
      September 2005 we acquired a controlling interest in SRS. In October of the
      same
      year, Norman J. Dodd, a shareholder and the Chief Executive Officer of SRS
      since
      March 2003, joined our board of directors. On April 10, 2006 we purchased
      the remaining stock of SRS and in connection with such acquisition, as
      consideration for the shares of SRS stock purchased from Mr. Dodd, we (i) paid
      Mr. Dodd CDN $928,535 (approximately $802,000), (ii) issued 796,627
      Class A shares of  the acquisition subsidary to Mr. Dodd,
      exchangeable upon the occurrence of certain events, one for one, into shares
      of
      our common stock, (iii) agreed to issue 796,627 additional Class A shares of
      the
      acquisition subsidary to Mr. Dodd if certain future revenue milestones are
      met
      and (iv) entered into an employment agreement with Mr. Dodd pursuant to which
      he
      became the president of our East Coast Operations.




In
      November 2005 we loaned $250,000 to CRE, an entity partly owned by Ron Gangemi,
      an individual who also served as the President of such entity. This loan was
      made to permit CRE to pay accounts payable in the ordinary course of business
      in
      order to remain in good standing with its vendors. Of the proceeds,
      approximately $143,000 was paid to CRE's supplier of photovoltaic cells. The
      loans were unsecured, bore interest at the rate of 8% per annum and were payable
      upon our demand. On December 5, 2005, Ron Gangemi joined our board of
      directors. On March 30, 2006, pursuant to an Agreement and Plan of Merger dated
      February 8, 2006, among us, CRE and the stockholders of CRE, we
      acquired CRE pursuant to a merger transaction between CRE and a wholly
      owned subsidiary of ours, resulting in Mr. Gangemi's shares of outstanding
      CRE stock being converted into 2,034,783 shares of our common stock.
      Pursuant to the terms of the merger agreement, we also entered into a consulting
      agreement with CBC, an affiliate of CRE solely owned by Mr. Gangemi. Such
      consulting agreement provides that Mr. Gangemi is to provide three years of
      consulting services and forego a pre-existing incentive compensation
      arrangement, in exchange for $16,000 per month of services rendered. 
Additionally, CBC received 1,000,000 shares of our common stock on March 30,
      2006 and was given an opportunity to earn up to an additional 2,000,000 shares
      of our common stock based on the meeting of future revenue
      milestones.




**Other**





During
      fiscal 2005, a company owned by a person related to a then-officer of our
      company advanced CDN $200,000 (approximately $171,000) to the former officer
      and
      the former officer then advanced the amount to our company. The amount was
      unsecured, non-interest bearing and had no fixed terms for repayment. We paid
      $204,557 in May 2006 to satisfy this claim.




During
      fiscal 2006, the Company repaid $859,557 in loans to Connect by Computer, LLC,
      which is wholly owned by a director of the Company. The loans were part of
      the
      acquisition price paid for the merger with Connect Renewable Energy,
      Inc .




As
      of May
      31, 2006, a total of $13,550 had been paid to Customatrix, Inc. for consulting
      services. Customatrix, Inc. is 50% owned by an officer of the
      Company.





**ITEM
      13.**  **EXHIBITS**





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


79





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




***Independent
      Public Accountants***




The
      Registrant's Board of Directors has appointed Peterson & Co. LLP as
      independent public accountant for the fiscal year ending May 31,
      2006.




***Principal
      Accounting Fees***




The
      following table presents the fees for professional audit services rendered
      by
      Peterson & Co. LLP and Dale Matheson **** Carr-Hilton
      LaBonte for the audits of the Registrant's annual financial statements for
      the
      years ended May 31, 2005 and May 31, 2006, respectively, and fees billed
      for other services rendered by such accounting firms during those periods.




2006
            
            2005Peterson
            
            Dale-MathesonAudit
                fees (1)
            
            $
            1,657
            
            $
            59,711Audit-related
                fees (2)
            
            $
            394
            
            $
            7,232Tax
                fees (3)
            
            $
            875
            
            $
            N/AAll
                other fees
            
            
            N/A
            
            
            N/A





(1)
Audit
      fees include fees and expensesfor
      professional services rendered for the audits of the Company's annual financial
      statements for those years and for the review of the financial statements
      included in the Company’s Quarterly Reports on Form 10-QSB during those
      years.


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


(3)
      Tax
      fees consist of preparation of federal and state tax returns, review of
      quarterly estimated payments, and consultation concerning tax compliance issues.
      We incurred no tax fees during the year ended May 31, 2005. All tax fees billed
      to us during the year ended May 31, 2006 were billed by Peterson & Co.,
      LLP.




The
      Board
      of Directors has considered whether the provision of non-audit services is
      compatible with maintaining the principal accountant's
      independence.


81




**SIGNATURES**





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





**OPEN
      ENERGY CORPORATION**


By:
            /s/ David
              Saltman
            
            
            Date:
              September 1, 2006David
                Saltman
              President
                and Chief Executive Officer
              (Principal
                Executive Officer)




Each
      person whose signature appears below hereby severally constitutes and appoints
      David Saltman and Cheryl J. Bostater, and each of them, his true and lawful
      attorney-in-fact and agent, with full power of substitution and resubstitution
      for him and in his name, place and stead, in any and all capacities to sign
      any
      and all amendments to this Report, and to file the same, with all exhibits
      thereto, and other documents in connection therewith, with the Commission,
      granting unto said attorney-in-fact and agents, and each of them, full power
      and
      authority to do and perform each and every act and thing requisite or necessary
      fully to all intents and purposes as he might or could do in person, hereby
      ratifying and confirming all that each said attorneys-in-fact and agents or
      any
      of them or their or his substitute or substitutes, may lawfully do or cause
      to
      be done by virtue hereof.





In
      accordance with the Securities Exchange Act of 1934, this report has been signed
      below by the following persons on behalf of registrant in their capacities
      and
      on September 1, 2006.




Signature
            
            
            Title


/s/ David
                Saltman
              
              
              Director,
                President and Chief Executive OfficerDavid Saltman




/s/ Cheryl
              J. Bostater
            
            
            Chief Financial OfficerCheryl J. Bostater
            
            
            (Principal 
Financial
                and
                Accounting Officer)




/s/ Norman
              J.
              Dodd
            
            
            DirectorNorman J. Dodd




/s/ Ron
              Gangemi
            
            
            DirectorRon Gangemi


/s/ Andrew
              M. Leitch
            
            
            DirectorAndrew M. Leitch




/s/ Derek
              May
            
            
            DirectorDerek May




/s/ Edward
              Douglas Ward
            
            
            DirectorEdward Douglas Ward







**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
            
            Securities
                Purchase Agreement, dated September 20, 2005, between our Company
                and
                Solar Roofing Systems, Inc., incorporated by reference from Exhibit
                99A to
                the December 13, 2005 Form 8-K.4.2
            
            Warrant,
                dated September 20, 2005, issued to our Company to purchase common
                shares
                of Solar Roofing Systems, Inc. for a price determined in accordance
                with
                the terms of the warrant, incorporated by reference from Exhibit
                99B to
                the December 13, 2005 Form 8-K.4.3
            
            Registration
                Rights Agreement, dated September 20, 2005, between our Company and
                Solar
                Roofing Systems, Inc., incorporated by reference from Exhibit 99C
                to the
                December 13, 2005 Form 8-K.4.4
            
            Amended
                and Restated Unanimous Shareholders' Agreement, dated September 20,
                2005,
                incorporated by reference from Exhibit 99D to the December 13, 2005
                Form
                8-K.4.5
            
            Stock
                Purchase Agreement dated February 8, 2006, between our Company, 2093603
                Ontario Inc., Solar Roofing Systems Inc. and the Stockholders of
                Solar
                Roofing Systems Inc., incorporated by reference from Exhibit 10.5
                to the
                February 14, 2006 Form 8-K.4.6
            
            Exchange
                Rights Agreement, dated February 8, 2006, between our Company, 2093603
                Ontario Inc. and the holders of Exchangeable Shares listed on Schedule
                A
                thereto, incorporated by reference from Exhibit 10.6 to the February
                14,
                2006 Form 8-K.4.7
            
            Form
                of Support Agreement between our Company, 2093603 Ontario Inc. and
                the
                parties listed on Schedule A thereto, incorporated by reference from
                Exhibit 10.7 to the February 14, 2006 Form 8-K.4.8
            
            Form
                of Registration Rights Agreement, between our Company, Norman Dodd,
                Jim
                Chaney, William Chislett, and Paul Cowley, incorporated by reference
                from
                Exhibit 10.8 to the February 14, 2006 Form 8-K.4.9
            
            Agreement
                and Plan of Merger dated February 6, 2006 between our Company,
                Barnabus/CRE Acquisition Corporation, Charles W. Dunn, Ronald J.
                Gangemi,
                John E. Hart and Timothy S. Parker and Connect Renewable Energy,
                Inc.,
                incorporated by reference from Exhibit 10.9 to the February 14, 2006
                Form
                8-K.4.10
            
            Investment
                Agreement dated February 8, 2006, between our Company and Coach Capital
                LLC, incorporated by reference from Exhibit 10.1 to the February
                14, 2006
                Form 8-K.4.11
            
            Registration
                Rights Agreement, dated February 8, 2006, between our Company and
                Coach
                Capital LLC, incorporated by reference from Exhibit 10.4 to the February
                14, 2006 Form 8-K.










4.12
            
            Second
                Amended and Restated Common Stock Purchase Warrant issued to Coach
                Capital
                LLC, incorporated by reference from Exhibit 99.1 to the Form 8-K
                filed August 18, 2006.4.13
            
            Second
                Amended and Restated Common Stock Purchase Warrant issued to Eversource
                Group Limited , incorporated by reference from Exhibit 99.2 to the
                Form 8-K filed August 18, 2006.4.14
            
            Second
                Amended and Restated Common Stock Purchase Warrant issued to Bank
                Sal.
                Oppenheim jr. & Cie. (Schweiz) AG, incorporated by reference from
                Exhibit 99.3 to the Form 8-K filed August 18, 2006.4.15
            
            Second
                Amended and Restated Common Stock Purchase Warrant issued to Nadelson
                Internacional S.A., incorporated by reference from Exhibit 99.4 to
                the
                Form 8-K filed August 18, 2006.4.16
            
            Second
                Amended and Restated 0% Subordinated Mandatory Convertible Debenture
                issued to Coach Capital LLC, incorporated by reference from Exhibit
                99.5 to the Form 8-K filed August 18, 2006.4.17
            
            Second
                Amended and Restated 0% Subordinated Mandatory Convertible Debenture
                issued to Eversource Group Limited, incorporated by reference from
                Exhibit 99.6 to the Form 8-K filed August 18, 2006.4.18
            
            Second
                Amended and Restated 0% Subordinated Mandatory Convertible Debenture
                issued to Bank Sal. Oppenheim jr. & Cie. (Schweiz)
                AG, incorporated by reference from Exhibit 99.7 to the Form 8-K filed
                August 18, 2006.4.19
            
            Second
                Amended and Restated 0% Subordinated Mandatory Convertible Debenture
                issued to Nadelson Internacional S.A., incorporated by reference from
                Exhibit 99.8 to the Form 8-K filed August 18, 2006.4.20
            
            Securities
                Purchase Agreement dated March 30, 2006 between our Company and Cornell
                Capital Partners, LP, incorporated by reference from Exhibit 99.1
                to the
                April 5, 2006 Form 8-K.4.20.1
            
            Amendment
                No. 1 to Securities Purchase Agreement with Cornell Capital Partners,
                LP, incorporated by reference from Exhibit 99.14 to the Form 8-K
                filed August 18, 2006.4.20.2
            
            Amendment
                No. 2 to Securities Purchase Agreement with Cornell Capital Partners,
                LP,
                incorporated by reference from Exhibit 99.10 to the Form 8-K filed
                August
                18, 2006.4.20.3
            
            Waiver
                with Cornell Capital Partners, LP, incorporated by reference from
                Exhibit
                99.12 to the Form 8-K filed August 18, 2006.4.21
            
            Investor
                Registration Rights Agreement with Cornell Capital Partners, LP.,
                incorporated by reference from Exhibit 99.2 to the April 5, 2006
                Form
                8-K.4.21.1
            
            Amendment
                No. 1 to Investor Registration Rights Agreement with Cornell Capital
                Partners, LP., incorporated by reference to Exhibit 4.21.1 to the
                Form
                SB-2 filed August 30, 2006.4.21.2
            
            Amendment
                No. 2 to Investor Registration Rights Agreement with Cornell Capital
                Partners, LP, incorporated by reference from Exhibit 99.9 to the
                Form 8-K
                filed August 18, 2006.4.22
            
            Pledge
                and Escrow Agreement dated March 31, 2006 between our Company and
                Cornell
                Capital Partners, LP, incorporated by reference from Exhibit 99.5
                to the
                April 5, 2006 Form 8-K.4.23
            
            Security
                Agreement dated March 31, 2006 between our Company and Cornell Capital
                Partners, LP, incorporated by reference from Exhibit 99.6 to the
                April 5,
                2006 Form 8-K.4.24
            
            Security
                Agreement dated March 31, 2006 between 2093603 Ontario Inc. and Cornell
                Capital Partners, LP, incorporated by reference from Exhibit 99.7
                to the
                April 5, 2006 Form 8-K.4.25
            
            Security
                Agreement dated March 31, 2006 between Barnabus/CRE Acquisition
                Corporation and Cornell Capital Partners, LP, incorporated by reference
                from Exhibit 99.8 to the April 5, 2006 Form
                8-K.










4.26
            
            Form of
                Secured Convertible Debenture issued in favor of Cornell Capital
                Partners,
                LP, incorporated by reference from Exhibit 99.3 to the April 5, 2006
                Form
                8-K.4.26.1
            
            Amendment
                No. 1 to Secured Convertible Debenture No. CCP-1 issued in favor
                of
                Cornell Capital Partners, LP, incorporated by reference from Exhibit
                99.15 to the Form 8-K filed August 18, 2006.4.26.2
            
            Amendment
                No. 1 to Secured Convertible Debenture No. CCP-2 issued in favor
                of
                Cornell Capital Partners, LP, incorporated by reference from Exhibit
                99.16 to the Form 8-K filed August 18, 2006.4.27
            
            Secured
                Convertible Debenture No. CCP-3 issued to Cornell Capital Partners,
                LP,
                incorporated by reference from Exhibit 99.13 to the Form 8-K filed
                August
                18, 2006.4.28
            
            Form
                of Common Stock Purchase Warrant issued in favor of Cornell Capital
                Partners, LP, incorporated by reference from Exhibit 99.4 to the
                April 5,
                2006 Form 8-K.4.28.1
            
            Amendment
                No. 1 to Warrant No. CCP-001 issued in favor of Cornell Capital Partners,
                LP, incorporated by reference from Exhibit 99.17 to the Form 8-K
                filed August 18, 2006.4.28.2
            
            Amendment
                No. 1 to Warrant No. CCP-002 issued in favor of Cornell Capital Partners,
                LP, incorporated by reference from Exhibit 99.18 to the Form 8-K
                filed August 18, 2006.4.29
            
            Warrant
                No. CCP-003 issued in favor of Cornell Capital Partners, LP, incorporated
                by reference from Exhibit 99.11 to the Form 8-K filed August 18,
                2006.4.30
            
            Form
                of Secured Convertible Debenture to be issued in favor of Cornell
                Capital
                Partners, LP, incorporated by reference to Exhibit 4.30 to the Form
                SB-2
                filed August 30, 2006.10.1
            
            Employment
                Agreement with Robert Britts, incorporated by reference from Exhibit
                10.5
                to the Form 10-Q filed April 19, 2006.10.2
            
            Employment
                Agreement with Cheryl Bostater, incorporated by reference from Exhibit
                10.13 to the Form 10-Q filed January 17, 2006.10.2.1
            
            Amendment
                No. 1 to Employment Agreement, dated March 15, 2006, and clarified
                by the
                Board of Directors on July 24, 2006, incorporated by reference to
                Exhibit
                10.2.1 to the Form SB-2 filed August 30, 2006.10.3
            
            Employment
                Agreement dated August 25, 2005, between our Company and David Saltman,
                incorporated by reference from Exhibit 10.1 to Form 8-K filed September
                20, 2005.10.4
            
            Norman
                Dodd Employment Agreement dated April 1, 2006, incorporated by reference
                to Exhibit 10.4 to the Form SB-2 filed August 30, 2006.10.5
            
            Don
                Rogers Employment Agreement dated April 4, 2006, incorporated by
                reference from Exhibit 99.23 to the Form 8-K filed August 18,
                2006.10.6
            
            Settlement
                Agreement dated November 28, 2005, between Company and MB Gas Inc.,
                incorporated by reference from Exhibit 99.1 to the January 17, 2006
                Form
                8-K.10.7
            
            Form
                of Debenture Pledge Agreement between our Company and Goldstar Gas
                Corp.,
                incorporated by reference from Exhibit 99.2 to the January 17, 2006
                Form
                8-K.10.8
            
            Debenture
                dated November 28, 2005, between our Company and Goldstar Gas Corp.,
                incorporated by reference from Exhibit 99.3 to the January 17, 2006
                Form
                8-K.









10.9
              
              Form
                  of CBC Consulting Agreement between our Company and Connect by
                  Computer,
                  LLC, incorporated by reference from Exhibit 10.10 to the February
                  14, 2006
                  Form 8-K.10.10
              
              Lease
                  Agreement between our Company and Generation Properties, L.P.,
                  dated
                  September 13, 2005, and amended May 17, 2006 (Solana Beach, incorporated
                  by reference to Exhibit 10.10 to the Form SB-2 filed August 30,
                  2006.10.11
              
              Lease
                  Agreement dated January 8, 2004, between Solar Roofing Systems
                  Inc. and
                  1141648 Ontario Limited (Ontario), incorporated by reference to
                  Exhibit
                  10.11 to the Form SB-2 filed August 30, 2006.10.12
              
              Lease
                  Agreement dated April 12, 2006, between our Company and JR Associates
                  II, a co-tenancy (Grass Valley), incorporated by reference from
                  Exhibit 99.22 to the Form 8-K filed August 18, 2006.10.13
              
              Financial
                  & Management Accounting Services Project Work Agreement dated May
                  18, 2006 between our Company and CUSTOMatrix, Inc., incorporated by
                  reference from Exhibit 99.24 to the Form 8-K filed August 18,
                  2006.10.14
              
              Amended
                  and Restated Technology License Agreement dated July 10, 2006 with
                  Dr. Melvin L. Prueitt, incorporated by reference from Exhibit 99.19
                  to the Form 8-K filed August 18, 2006.10.14.1
              
              Common
                  Stock Purchase Warrant dated July 10, 2006 issued to Dr. Mel
                  Prueitt, incorporated by reference from Exhibit 99.20 to the Form 8-K
                  filed August 18, 2006.10.15
              
              Technology
                  Consulting Agreement dated July 10, 2006 with Dr. Melvin L.
                  Prueitt, incorporated by reference from Exhibit 99.21 to the Form 8-K
                  filed August 18, 2006.14.1
              
              Code
                  of Ethics, incorporated by reference from Exhibit 14.1 to Form
                  10-KSB
                  filed September 12, 2005.21.1*
              
              List
                  of Subsidiaries23.1*
              
              Consent
                  of Dale Matheson Carr-Hilton Labonte.24.1*
              
              Power
                of Attorney (included on signature page)23.2*
              
              Consent
                  of Peterson & Company LLP.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.





*Filed
      herewith.