**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-K**




(Mark
      One)


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




For
      the
      fiscal year ended March 31, 2008




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




For
      the
      transition period from  to


Commission
      File Number: 000-51458







**HOKU
      SCIENTIFIC, INC.**


**(Exact
      name of registrant as specified in its charter)**




**Delaware**
            **99-0351487****(State
                or other jurisdiction of**
              **incorporation
                or organization)**
            **(I.R.S.
                Employer**
              **Identification
                Number)**







**1075
      Opakapaka Street, Kapolei, Hawaii 96707**


**(Address
      of principal executive offices, including zip code)**




**(808)
      682-7800**


**(Registrant’s
      telephone number, including area code)**









Securities
      registered under Section 12(b) of
      the Exchange Act:




**Title
                of each class**
            **Name
                of each exchange on which registered**Common
                Stock, par value $.001 per share
            The
                NASDAQ Stock Market, LLC(NASDAQ
                Global Market)




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







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




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




Indicate
      by a check mark whether the registrant (1) has filed all reports required
      to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
      during the preceding 12 months (or for 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  ̈




Indicate
        by check mark if disclosure of deliquent filers pursuant to Item 405 of
        Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
        be contained, to the best of the registrant's knowledge, in definitive proxy
        or
        information statements incorporated by reference in Part III of this Form
        10-K
        or any amendments to this Form 10-K.  ̈




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




Large accelerated filer  ̈
              Accelerated filer xNon-accelerated filer o(Do
                not check if a smaller reporting company)
              Smaller reporting company   ̈





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




The
        aggregate market value of the voting stock held by non-affiliates of the
        registrant as of September 30, 2007 was approximately $123.0 million (based
        on the closing sales price of the registrant’s common stock on
        September 30, 2007). Aggregate market value excludes an aggregate of
        4,122,840 shares of common stock held by officers and directors and by each
        person known by the registrant to own 5% or more of the outstanding common
        stock
        on such date. Exclusion of shares held by any of these persons should not
        be
        construed to indicate that such person possesses the power, direct or indirect,
        to direct or cause the direction of the management or policies of the
        registrant, or that such person is controlled by or under common control
        with
        the registrant.




As
      of
      April 30, 2008, 19,797,420 shares of the Registrant’s common stock were issued
      and outstanding.




**DOCUMENTS
      INCORPORATED BY REFERENCE**




The
      registrant has incorporated by reference portions of its Proxy Statement for
      its
      2008 Annual Meeting of Stockholders to be filed with the Securities and Exchange
      Commission by July 29, 2008.




---







**INDEX
      TO FORM 10-K**




**Part
                I**Item 1.
            Business
            3Item 1A.
            Risk
                Factors
            15Item 1B.
            Unresolved
                Staff Comments
            24Item 2.
            Properties
            24Item 3.
            Legal
                Proceedings
            24Item 4.
            Submission
                of Matters to a Vote of Security Holders
            24**Part
                II**Item 5.
            Market
                for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            24Item 6.
            Selected
                Financial Data
            25Item 7.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            26Item 7A.
            Quantitative
                and Qualitative Disclosures About Market Risk
            37Item 8.
            Financial
                Statements and Supplementary Data
            37Item 9.
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            37Item 9A.
            Controls
                and Procedures
            37Item 9B.
            Other
                Information
            38**Part
                III**Item 10.
            Directors,
                Executive Officers and Corporate Governance
            38Item 11.
            Executive
                Compensation
            38Item 12.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            46Item 13.
            Certain
                Relationships and Related Transactions, and Director
                Independence
            46Item 14.
            Principal
                Accountant Fees and Services
            47**Part
                IV**Item 15.
            Exhibits
                and Financial Statement Schedules
            47Signatures
            
            48




2




**PART
      I**





**Item 1.**
            **Business**




***Forward-Looking
      Statements***




*This
      Annual Report on Form 10-K contains forward-looking statements within the
      meaning of Section 27A of the Securities Act of 1933, as amended, and
      Section 21E of the Securities Exchange Act of 1934, as amended, that are
      based on our management’s beliefs and assumptions and on information currently
      available to our management. Forward-looking statements include all statements
      other than statements of historical fact contained in this Annual Report on
      Form
      10-K, including, but not limited to, statements about:*




•
            
            *our
                ability to raise sufficient funds to establish a polysilicon manufacturing
                facility, including payments for the engineering, procurement and
                construction management services from Stone & Webster, Inc.,
                construction services from JH Kelly LLC, the purchase and installation
                of
                the equipment from GEC Graeber Engineering Consultants GmbH and MSA
                Apparatus Construction for Chemical Equipment, Ltd., Idaho Power
                Company,
                Saft Power Systems USA, Inc.,**PVA
                Tepla Danmark and other vendors, contractors and consultants in general,
                and to comply with our obligations under our agreements with Sanyo
                Electric Company, Ltd., Wuxi Suntech Power Co., Ltd.,Global Expertise
                Wafer Division Ltd., and Solarfun Power Hong Kong
                Limited;*




•
            
            *whether
                or not we or Sanyo Electric Co., Ltd. terminate our polysilicon supply
                contract based on the financing deadline that expired on May 31,
                2008;*





•
            
            *whether
                or not we or Global Expertise Wafer Division terminate our polysilicon
                supply contract based on the financing deadline that expired on May
                31,
                2008;*




•
            
            *our
                cost to engineer, procure and construct our planned polysilicon
                facility;*





•
            
            *the
                ability of Stone & Webster, Inc., JH Kelly LLC, GEC Graeber
                Engineering Consultants GmbH and MSA Apparatus Construction for Chemical
                Equipment, Ltd., Idaho Power Company, Dynamic Engineering Inc., Saft
                Power
                Systems USA, Inc., PVA Tepla Danmark and our other vendors, contractors
                and consultants’ to meet the delivery schedules in their respective
                agreements with us;*




•
            
            *our
                ability to engineer and construct a production plant for
                polysilicon;*




•
            
            *our
                ability to produce
                polysilicon;*




•
              
              *our
                  ability to produce trichlorosilane, and the efficiency and potential
                  operating cost savings from the trichlorosilane production process
                  to be
                  designed by Dynamic Engineering
                  Inc.;*




•
            
            *our
                selection of the City of Pocatello, Idaho as our location for our
                planned
                polysilicon production
                facility;*




•
            
            *our
                ability to meet the quality, quantity and timing requirements under
                our
                supply agreements with Sanyo Electric Company, Ltd., Wuxi Suntech
                Power
                Co., Ltd., Global Expertise Wafer Division Ltd., and Solarfun Power
                Hong
                Kong Limited;*




•
            
            *the
                quality of polysilicon to be produced by
                us;*




•
            
            *our
                costs to produce polysilicon, and our ability to offer pricing that
                is
                competitive with competing
                products;*




•
            
            *our
                plans for future expansion of our polysilicon production
                facility;*




•
            
            *our
                forecasted revenue from the potential future sale of
                polysilicon;*





•
            
            *our
                ability to secure additional prepayments from the sale of 300-500
                metric
                tons of annual production
                capacity;*





•
              
              *our
                  ability to complete PV system installations, including potential
                  future
                  installations with Bank of Hawaii, The James Campbell Company,
                  Hawaiian
                  Electric Company, Paradise Beverages, Inc., and D.R. Horton-Schuler
                  Division;*




•
            
            *our
                ability to obtain solar modules from third party vendors and our
                ability
                to offer pricing for photovoltaic system installations that is competitive
                with competing products and installation
                providers;*




•
            
            *the
                performance and durability of the photovoltaic systems we
                install;*




•
            
            *the
                cost to procure and install photovoltaic
                systems;*




•
              
              *our
                  ability to offer pricing that is competitive with competing products
                  and
                  expected future revenue from the photovoltaic system installation
                  business;*





•
            
            *our
                ability to sell our land and facility located in Kapolei, Hawaii
                at a
                favorable price, or at all;*




3





•
            
            *our
                expectations regarding the potential size and growth of photovoltaic
                system installations and polysilicon markets in general and our revenues
                in particular;*




•
            
            *our
                expectations regarding the market acceptance of our
                products;*




•
            
            *our
                future financial performance;*




•
            
            *our
                business strategy and plans;
                and*




•
            
            *objectives
                of management for future
                operations.*




*In
      some cases, you can identify forward-looking statements by terms such as
“anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,”
“intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,”
“would” and similar expressions intended to identify forward-looking statements.
      These statements involve known and unknown risks, uncertainties and other
      factors that may cause our actual results, performance, time frames or
      achievements to be materially* *different from any future results, performance, time frames or achievements
      expressed or implied by the forward-looking statements. We discuss many of
      these
      risks, uncertainties and other factors in this Annual Report on Form 10-K in
      greater detail in Part I, Item IA. “Risk Factors.” Given these risks,
      uncertainties and other factors, you should not place undue reliance on these
      forward-looking statements. Also, these forward-looking statements represent
      our
      estimates and assumptions only as of the date hereof. We hereby qualify all
      of
      our forward-looking statements by these cautionary statements. Except as
      required by law, we assume no obligation to update these forward-looking
      statements publicly, or to update the reasons actual results could differ
      materially from those anticipated in these forward-looking statements, even
      if
      new information becomes available in the future.*




*The
      following discussion should be read in conjunction with our financial statements
      and the related notes contained elsewhere in this Annual Report on Form
      10-K.*




*Our
      fiscal year ends on March 31. We designate our fiscal year by the year in
      which that fiscal year ends; e.g., fiscal 2008 refers to our fiscal year ended
      March 31, 2008.*




**Overview**




Hoku
      Scientific, Inc. is a materials science company focused on clean energy
      technologies. We were incorporated in Hawaii in March 2001, as Pacific Energy
      Group, Inc. In July 2001, we changed our name to Hoku Scientific, Inc. In
      December 2004, we were reincorporated in Delaware.




We
      have
      historically focused our efforts on the design and development of fuel cell
      technologies, including our Hoku membrane electrode assemblies, or MEAs, and
      Hoku Membranes. In May 2006, we announced our plans to form an integrated
      photovoltaic, or PV, module business, and our plans to manufacture polysilicon,
      a primary material used in the manufacture of PV modules. In fiscal 2007, we
      reorganized our business into three business units: Hoku Materials, Hoku Solar
      and Hoku Fuel Cells. In February and March 2007, we incorporated Hoku Materials,
      Inc. and Hoku Solar, Inc., respectively, as wholly-owned subsidiaries to operate
      our polysilicon and solar businesses, respectively.




*Hoku
      Materials*




In
      February 2007, we incorporated Hoku Materials to manufacture polysilicon, a
      key
      material used in PV modules. We had originally planned to use the polysilicon
      internally by Hoku Solar to manufacture our own brand of solar modules, and
      for
      sale to the larger solar market. However, as a result of increased demand from
      third party customers, and our revised strategy for Hoku Solar, we intend to
      sell all of our planned output of polysilicon to third party customers.




In
      May
      2007, we commenced construction of our planned polysilicon manufacturing
      facility in Pocatello, Idaho . We
      have
      increased the annual capacity from the previously planned 2,500 metric tons
      per
      year to 3,500 metric tons per year. In April 2008, we issued a change order
      with
      Stone & Webster, Inc., our engineering, procurement, and construction
      management services provider, and as a result we revised our estimate of the
      total cost to construct and equip our polysilicon facility to $390 million
      from
      $400 million. We previously intended to finance the construction of this
      facility through project financing; however, as of May 2008, we now
      intend to raise up to $110 million in additional financing through one or more
      debt or equity offerings for the procurement and construction of our polysilicon
      manufacturing facility.




Once
      our
      plant is operating at full capacity, we expect that we will be able to meet
      the
      annual delivery requirements in our four existing polysilicon sales contracts.
      In addition, we have approximately 300 to 500 metric tons of unallocated annual
      polysilicon production capacity from our planned production output of 3,500
      metric tons per year, which may be sold under one or more new long-term
      contracts, reserved for strategic purposes, or sold on the spot market. If
      such
      polysilicon is sold under one or more long term contracts, such sales may
      provide additional prepayments that could reduce the amount of additional
      financing needed. Although we have increased the planned size of our
      polysilicon facility, we believe we are still on track to complete pilot
      demonstration of the manufacturing of polysilicon in the fourth quarter of
      calendar year 2008, deliver polysilicon in the first half of calendar year
      2009,
      and run at full 3,500 metric tons per year capacity in the first half of
      calendar year 2010. We also plan to expand our polysilicon manufacturing
      facility. We believe we have sufficient space to expand our polysilicon
      production to up to 8,000 metric tons per year on our existing 67-acre property;
      however the expansion size will primarily be determined based on new polysilicon
      sales contracts that we may sign.





4




*Hoku
      Solar*


In
      March
      2007, we incorporated Hoku Solar to assemble and install our own brand of PV
      modules. In June 2007, we announced a change in our strategy, which is to focus
      on the sale of turnkey PV system installations, and related services, and to
      exit the solar module manufacturing business. In connection with our new
      strategy, we resold our 15 megawatt-per-year solar module production line in
      July 2007, before it was delivered, for $1.8 million, and in September 2007,
      we
      resold our inventory of solar cells for $2.1 million and recognized a loss
      on
      the sale of $285,000. The module production line and the solar cells had been
      originally purchased for $1.9 million, and $2.8 million, respectively. In March
      2007, we recognized a write-down of $379,000 related to solar cell inventory
      and
      in June 2007 we wrote-down the solar module production line to $1.8 million.





We
      plan
      to continue to design, engineer and install turnkey PV systems, but will use
      modules purchased from third party suppliers, which we believe we can purchase
      at lower prices than the cost to manufacture our own brand of modules.
      Furthermore, due to the change in our business strategy to not manufacture
      solar
      modules along with our downsizing of our fuel cell business, we are exploring
      the sale of our land and facility in Kapolei, Hawaii and the relocation to
      a
      leased warehouse and office space on the island of Oahu, Hawaii.





*Hoku
      Fuel Cells*


Under
      the
      name Hoku Fuel Cells, we operated our fuel cell business, which has designed,
      developed and manufactured MEAs for proton exchange membrane, or PEM, fuel
      cells. Hoku MEAs are designed for the residential primary power, commercial
      back-up, and automotive hydrogen fuel cell markets. To date, our customers
      have
      not commercially deployed products incorporating Hoku MEAs or Hoku Membranes,
      and we have not sold any products commercially. In August 2007, we completed
      our
      contract with the U.S. Navy.





We
      intend
      to selectively pursue patent applications in order to protect our technology,
      inventions and improvements related to our fuel cell products; however we do
      not
      currently plan on actively pursuing any new contracts or committing resources
      to
      further develop our fuel cell products.




**Our
      Solar Businesses**




***Solar
      Industry Overview***




*Solar
      Power Systems*




Solar
      power systems convert sunlight directly into electricity. These systems are
      used
      for “on-grid” and “off-grid” residential, commercial and industrial
      applications, and for a variety of consumer applications. “On-grid” markets
      refer to applications where solar power is used to supplement a customer’s
      electricity purchased from the utility network, whereas “off-grid” markets
      include those applications where access to utility networks is not economical
      or
      physically feasible, including road signs, highway call boxes and communications
      support along remote pipelines and telecommunications equipment, as well as
      rural residential applications. Consumer applications include garden lights,
      other outdoor lighting and handheld devices such as calculators.




A
      solar
      power system consists of one or more PV modules electrically connected in
      series, and typically includes a power inverter to convert the direct current,
      or DC, electricity produced by the modules into alternative current, or AC,
      electricity that is required for most applications. For “on-grid” applications,
      an interconnect to the utility grid is required, and in “off-grid” applications,
      a battery may be required to provide power at night, and at other times when
      the
      sun is not providing enough solar radiation for the solar power system to
      generate sufficient electricity to power the electrical load. The key components
      of PV modules are PV cells, which are in turn made from silicon wafers. Silicon
      wafers are made from silicon ingots, which are in turn made from raw
      polysilicon. Following is a brief overview of these products and
      technologies.




*Polysilicon*




Polysilicon
      is an essential raw material in the production of PV cells. Polysilicon is
      created by refining quartz or sand to produce electronic-grade or solar-grade
      polysilicon. The key difference between electronic-grade and solar grade
      polysilicon is the purity requirement. The purity requirement for solar-grade
      polysilicon is typically 99.9999%-99.999999% pure, while electronic grade
      polysilicon tends to be at least 99.9999999% pure. The majority of polysilicon
      production begins with quartz or sand, which is refined into metallurgical
      grade
      silicon, or MG-Si. MG-Si is then purified by various chemical processes. There
      are two main methods in which this can be accomplished, namely silane-based
      and
      trichlorosilane (TCS)-based processes. There are two technologies for producing
      polysilicon from silane and TCS: the Siemens reactor method and the fluidized
      bed reactor, or FBR method. In the Siemens reactor process, the silane or TCS
      gas is introduced into a thermal decomposition furnace (reactor) with high
      temperature polysilicon rods inside a jacketed bell jar. The silicon contained
      in the gas will deposit on the heated rods, which gradually grow until the
      desired diameter has been reached. In the FBR process, silane or TCS gas is
      introduced into a tube-like reactor in which small polysilicon granules are
      suspended in the gas stream, referred to as the fluidized bed. The silicon
      contained in the gas deposits on the surface of the hot granules in the bed
      until the desired diameter has been reached. The end product is in the form
      of
      rods or chunks of polysilicon. The technology in the Siemens reactor was
      developed in the late 1950’s, is widely implemented, accounting for a majority
      of the polysilicon production today, and currently produces a higher purity
      of
      material.





5




*Silicon
      Ingots and Wafers*




Before
      polysilicon rods or chunks can be used in PV cells, they must first be converted
      into ingots, which are cut into wafers. There are two processes for making
      ingots from polysilicon: the monocrystalline and the multicrystalline process.
      To make monocrystalline ingots, a single crystal of polysilicon is grown,
      whereas, multicrystalline ingots are made by melting chunks of polysilicon
      together in a crucible to form a large block of multicrystalline polysilicon,
      which is then cut into smaller bricks. The monocrystalline
      ingot or the multicrystalline brick is then cut into thin wafers, typically
      using a cable saw. The end product is either a monocrystalline or a
      multicrystalline silicon wafer.




*PV
      Cells*




PV
      cells
      are made from silicon wafers. The wafer undergoes a process to combine positive
      and negative layers on the wafer, attach electrodes, and coat with
      anti-reflective materials. The performance of a PV cell is measured by its
      solar
      radiation conversion efficiency. The solar radiation conversion efficiency
      is a
      measure of the net percentage of energy from solar radiation that the PV cell
      converts into electricity. PV cells made from multicrystalline wafers may have
      efficiencies in the range of 13-18%, whereas PV cells made from monocrystalline
      wafers typically have higher efficiencies in the range of 20%, but are more
      expensive to produce.




*PV
      Modules*




PV
      modules are commonly known as solar panels. A PV module is made by electrically
      wiring together PV cells in series to increase the total voltage output. The
      connected cells are laminated in a glass or plastic covering and then framed.
      The wires connecting the PV cells terminate in a junction box to allow multiple
      PV modules to be electrically connected in series to further increase the
      voltage and power output.




***Hoku
      Materials***





*Business
      Strategy and Planned Polysilicon Product*


Our
      goal
      is to be a leading provider of polysilicon. We plan to manufacture polysilicon
      using TCS in a Siemens reactor. We believe it is the most proven process with
      the least technical risk.





*Customers*


We
      have
      contracted future revenue with four leading solar companies from the sale of
      up
      to $1.7 billion of polysilicon over a seven to ten year period.  Once
      our
      planned facility, which is being designed to produce up to 3,500 metric tons
      of
      polysilicon per year, is operating at full capacity, we expect that we will
      be
      able to meet the annual delivery requirements in our four existing polysilicon
      sales contracts. In addition, we have approximately 300 to 500 metric tons
      of
      unallocated annual polysilicon production capacity from our planned production
      output of 3,500 metric tons per year, which may be sold under one or more new
      long-term contracts, reserved for strategic purposes, or sold on the spot
      market. If such polysilicon is sold under one or more long term contracts,
      such
      sales may provide additional prepayments that could reduce the amount of
      additional financing needed. We also plan to expand our polysilicon production
      capabilities. We believe we have sufficient space to expand our polysilicon
      production to up to 8,000 metric tons per year on our existing 67-acre property;
      however the expansion size will primarily be determined based on new polysilicon
      sales contracts that we may sign.





*Sanyo
        Electric Co., Ltd.* In
        January 2007, we signed a fixed price/fixed volume contract with Sanyo Electric
        Company, Ltd., or Sanyo, to provide Sanyo with up to approximately $371 million
        of polysilicon sales over a seven year period. Pursuant to the contract,
        Sanyo
        advanced to us $2 million and deposited an additional $109 million into an
        escrow account at Bank of Hawaii to be released to us upon achievement of
        certain financing, polysilicon production and quality milestones. In January
        2008, we amended our polysilicon supply contract with Sanyo to increase the
        term
        of the contract from seven to ten years. The total amounts that may be payable
        to us under the contract have increased from up to approximately $371 million
        for the seven year contract, to up to approximately $530 million for the
        amended
        ten year contract. The contract provides for the delivery of predetermined
        volumes of polysilicon to Sanyo each year at set prices from January 2010
        through December 2019. The contract also extends the date when either party
        may
        terminate the supply agreement, at an earlier date under certain circumstances,
        including, but not limited to, our inability to complete the financing for
        our
        polysilicon production plant by May 31, 2008. We cannot guarantee that we
        or
        Sanyo will not elect to terminate as a result of our inability to complete
        financing by May 31, 2008. If the contract is terminated for any
        reason, our business will be materially harmed. In
        addition, if the contract with Sanyo is terminated we will be required to
        return
        any deposits and advance payments received up to the date of the termination,
        which is $2 million as of May 31, 2008, and we will need to secure new funds
        in
        order to finance the construction of our polysilicon production plant. Securing
        new funds may delay the anticipated timing of completion of the production
        plant, which delay may result in us failing to meet our delivery requirements
        under our other supply agreements. We may not be able to secure new funds
        on
        terms as favorable to us as those under the agreement with Sanyo or at all.
        If
        we are unable to secure new funds, we will not be able to complete construction
        of the production plant, our business will be materially and adversely affected
        and we may be forced to delay, alter or abandon our planned business
        operations.




*Wuxi
      Suntech Power Co. Ltd.* In June
      2007, we entered into a fixed price/fixed volume agreement with Wuxi Suntech
      Power Co., Ltd., or Suntech, to provide Suntech with up to approximately $678
      million of polysilicon sales over a ten year period. Pursuant to the agreement,
      Suntech advanced to us $2 million and will make $45 million in additional
      prepayments for products upon achievement of certain financing, polysilicon
      production and quality milestones. In August 2007, as a security for Suntech’s
      prepayment obligation, Suntech delivered a $45 million letter of credit issued
      to us by the Chicago branch of ABN AMRO Bank NV.




In
        May
        2008, we amended the agreement with Suntech whereby approximately $678 million
        may be payable by Suntech to us during a ten-year period, subject to the
        achievement of certain milestones, the acceptance of product deliveries and
        other conditions. Additional amounts may be payable for polysilicon products
        shipped in 2009. In addition, either party may elect to terminate the supply
        agreement, at an earlier date under certain circumstances, including, but
        not
        limited to, our inability to raise $75 million in gross aggregate proceeds
        to
        finance the construction of our polysilicon facility from bank debt, equity
        financing (including the $25 million in proceeds from our private placement
        of
        common stock on February 29, 2008), customer prepayments actually received
        in
        cash for polysilicon products (not including commitments for future prepayments,
        or amounts placed in escrow or secured by letters of credit), or any combination
        of the foregoing by December 31, 2008. If
        the
        contract is terminated for any reason, our business will be materially harmed.
        In addition, if the contract with Suntech is terminated we will be required
        to
        return any deposits and advance payments received up to the date of the
        termination, which is $2 million as of May 31, 2008, and we will need to
        secure
        new funds in order to finance the construction of our polysilicon production
        plant. Securing new funds may delay the anticipated timing of completion
        of the
        production plant, which delay may result in us failing to meet our delivery
        requirements under our other supply agreements. We may not be able to secure
        new
        funds on terms as favorable to us as those under the agreement with Suntech
        or
        at all. If we are unable to secure new funds, we will not be able to complete
        construction of the production plant, our business will be materially and
        adversely affected and we may be forced to delay, alter or abandon our planned
        business operations.





6





*Global
        Expertise Wafer Division Ltd.* In June
        2007, we entered into a fixed price/fixed volume agreement with Global Expertise
        Wafer Division Ltd., or GEWD, a wholly-owned subsidiary of Solar-Fabrik AG,
        to
        provide GEWD with up to approximately $185 million of polysilicon sales over
        a
        seven year period. Pursuant to the agreement, GEWD advanced to us $2 million
        and
        was required to make additional prepayments for products of $51 million in
        installments upon achievement of certain financing, polysilicon production
        and
        quality milestones. As security for GEWD’s $51 million prepayment obligation,
        GEWD obtained a $25 million letter of credit in our favor from Dresdner Bank
        AG.
        GEWD was also required to provide an additional $26 million bank letter of
        credit to us on or before September 30, 2007. As GEWD did not obtain the
        additional $26 million letter of credit, in December 2007, we exercised our
        option to reduce the predetermined volume of polysilicon and increased the
        predetermined price under the agreement. As a result, we will now provide
        GEWD
        with up to $117 million of polysilicon sales over a seven year period, and
        GEWD’s prepayment obligation has been reduced to $27 million, comprised of the
        $2 million already paid to us in cash and the $25 million that is supported
        by
        the Dresdner Bank standby letter of credit. In March 2008, we amended the
        agreement with GEWD, whereby either party may terminate the agreement if,
        on or
        before May 31, 2008, we have not secured financing to construct our planned
        polysilicon facility. We cannot guarantee that we or GEWD will not elect to
        terminate as a result of our inability to complete financing by May 31, 2008.
        If
        the contract is terminated for this reason, our business will be materially
        harmed. In
        addition, if the contract with GEWD is terminated, we will be required to
        return
        any deposits and advance payments received up to the date of the termination,
        which is $2 million as of May 31, 2008, and we will need to secure new funds
        in
        order to finance the construction of our polysilicon production plant. Securing
        new funds may delay the anticipated timing of completion of the production
        plant, which delay may result in us failing to meet our delivery requirements
        under our other supply agreements. We may not be able to secure new funds
        on
        terms as favorable to us as those under the agreement with GEWD or at all.
        If we
        are unable to secure new funds, we will not be able to complete construction
        of
        the production plant, our business will be materially and adversely affected
        and
        we may be forced to delay, alter or abandon our planned business
        operations.




*Solarfun
      Power Hong Kong Limited.* In
      November 2007, we entered into a fixed price/fixed volume agreement with
      Solarfun Power Hong Kong Limited, or Solarfun, a subsidiary of Solarfun Power
      Holdings Co., Ltd., to provide Solarfun with up to $306 million of polysilicon
      sales over an eight year period. Pursuant to this agreement, Solarfun paid
      us
      $10 million as a prepayment for future product deliveries. Under an amended
      contract executed in January 2008, Solarfun had until February 15, 2008 to
      obtain a $44 million standby letter of credit in our favor and requires Solarfun
      to pay us an additional $44 million in three installments: the first payment
      is
      due on September 30, 2008 and the final payment is due on March 31, 2010. In
      connection with the amended contract, Solarfun made an additional prepayment
      of
      $1 million, bringing the total prepayments made to date to $11 million. In
      February 2008, Solarfun delivered a $44 million letter of credit issued to
      us by
      Citibank, N.A.




In
        May
        2008, we amended the contract with Solarfun to increase the term of the supply
        commitment from eight to ten years, which increases the total amounts that
        may
        be payable to us from $306 million for the eight year term to approximately
        $384
        million for the ten year term. Under the Second Amended Solarfun Supply
        Agreement, Solarfun is required to pay Hoku Materials $44 million, as a
        prepayment for future product deliveries, in increments of $19 million, $20
        million, and $5 million on or before September 30, 2008, March 31, 2009,
        and
        March 31, 2010, respectively. In addition, either party may elect to terminate
        the supply agreement, at an earlier date under certain circumstances, including,
        but not limited to, our inability to raise $75 million in gross aggregate
        proceeds to finance the construction of our polysilicon facility from bank
        debt,
        equity financing (including the $25 million in proceeds from our private
        placement of common stock on February 29, 2008), customer prepayments actually
        received in cash for polysilicon products (not including commitments for
        future
        prepayments, or amounts placed in escrow or secured by letters of credit),
        or
        any combination of the foregoing by December 31, 2008. Solarfun may delay
        payment of the $44 million prepayment for products until such time as we
        have
        raised the $75 million in financing proceeds. If
        the
        contract is terminated for any reason, our business will be materially harmed.
        In addition, if the contract with Solarfun is terminated, we will be required
        to
        return any deposits and advance payments received up to the date of the
        termination, which is $11 million as of May 31, 2008, and we will need to
        secure
        new funds in order to finance the construction of our polysilicon production
        plant. Securing new funds may delay the anticipated timing of completion
        of the
        production plant, which delay may result in us failing to meet our delivery
        requirements under our other supply agreements. We may not be able to secure
        new
        funds on terms as favorable to us as those under the agreement with GEWD
        or at
        all. If we are unable to secure new funds, we will not be able to complete
        construction of the production plant, our business will be materially and
        adversely affected and we may be forced to delay, alter or abandon our planned
        business operations.




Please
      see Part II, Item 7. “Management’s Discussion and Analysis of Financial
      Condition and Results of Operations” for further information regarding our
      contracts with Sanyo, Suntech, GEWD and Solarfun.





***Hoku
      Solar***




*Business
      Strategy and PV Products*


Our
      goal
      is to be a leading provider in PV system installations. We plan to focus on
      designing, engineering and installing turnkey PV systems and related services
      in
      Hawaii using solar modules purchased from third party suppliers.





*Customers*




In
      fiscal
      2008, we completed installations for Paradise Beverages, Hardware Hawaii, Bank
      of Hawaii and other commercial and residential customers.




*Bank
      of Hawaii* .
      In
      December 2007, we completed the installation of a PV system on Bank of Hawaii’s
      historic Kohala (Kapa’au) branch, located on the Big Island of Hawaii. In July
      2007, we signed a non-binding letter of intent with Bank of Hawaii for us to
      explore additional turnkey PV system installations for Bank of Hawaii’s other
      neighbor island facilities on the islands of Hawaii, Maui and Kauai.




*Hawaiian
      Electric Company.* In
      May
      2008, the Hawaii Public Utilities Commission approved the contract for Hawaiian
      Electric Company to purchase electricity generated by a PV system that we would
      install. We plan to install a 218-kilowatt PV system, which is expected to
      be in
      service by the end of calendar year 2008, and sell the power generated by that
      system over a 20-year period to Hawaiian Electric Company.





*The
        James Campbell Company.*We are in discussions with
        The
        James Campbell Company to plan the Kapolei Sustainable Energy Park, which
        would
        be capable of generating approximately 1.5 megawatts of PV power and would
        be
        the largest PV facility on Oahu.




7





*Paradise
      Beverages, Inc.* In
      December 2007, we completed the installation of two PV systems for Paradise
      Beverages at its Kailua-Kona, Hawaii, and Lihue, Kauai, facilities. In March
      2008, we entered into an agreement with Paradise Beverages to install a PV
      system at its Oahu facility.





*D.R.
      Horton-Schuler Division.* In March
      2008, we joined D.R. Horton-Schuler Division, a wholly owned subsidiary of
      D.R.
      Horton, Inc. in a marketing program to offer two-kilowatt PV systems to
      homebuyers at the Kahiwelo at Makakilo Development in Kapolei,
      Hawaii.  The
      Kahiwelo project is planned to consist of 474 single-family homes and is
      scheduled to be built-out through 2015. The amount of potential revenue is
      contingent on whether the homebuyers choose to install a PV system.




**Our
      Fuel Cell Business**




***Fuel
      Cell Industry Overview***




Based
      on
      discussions with potential customers for our Hoku MEAs and Hoku Membranes during
      fiscal 2007, we determined that the potential for future revenue opportunities
      from our Hoku Fuel Cells division were uncertain. As a result, we do not plan
      on
      actively pursuing any new contracts or commit resources to further develop
      our
      fuel cell products. We will, however, consider new opportunities if it makes
      financial sense.





***Customers***


*U.S.
      Navy - Naval Air Warfare Center Weapons Division.* In March
      2005, we were awarded a contract with the U.S. Navy to develop and demonstrate
      a
      PEM fuel cell power plant prototype that incorporates our Hoku MEAs within
      IdaTech, LLC, or IdaTech, fuel cell stacks and integrated fuel cell systems.
      IdaTech is a subsidiary of IDACORP, Inc., a publicly-traded energy and
      technology holding company.




Pursuant
      to the contract, we manufactured 11 fuel cell power plants for delivery to
      the
      U.S. Navy. The U.S. Navy officially accepted the 11 fuel cell power plants
      and
      demonstrated 10 of these fuel cell power plants at Pearl Harbor, Hawaii. The
      aggregate amount of the contract was $4.5 million. We recognized $1.3 million
      and $3.2 million in revenue during fiscal 2008 and 2007, respectively. We
      completed all work related to this contract in August 2007.




We
      retain
      all intellectual property related to our Hoku Membranes and Hoku MEAs. We also
      retain the rights to any invention that is conceived while performing the work
      under this contract; however, the U.S. Government has a non-exclusive,
      non-transferable, irrevocable, paid-up license to use the invention throughout
      the world.





**Backlog**





As
      of
      March 31, 2008, we have entered into PV system installation and other related
      service contracts that we have not completed; however we do not have a
      backlog.





**Sales
      and Marketing**




As
      there
      is a shortage of polysilicon and our intent is to sign a few long-term contracts
      with key customers, there is not a need for a dedicated sales force for Hoku
      Materials. We have an employee that is focused on PV module installation for
      commercial, and to a lesser extent residential properties, in Hawaii. We are
      offering the sale and installation of our turnkey PV systems or the option
      of a
      power purchase arrangement where we would install and own the solar system
      and
      the end user would pay us for the electricity produced under a long-term
      contract.




**Research
      and Development**




***Hoku
      Materials and Hoku Solar***




We
      are at
      early stages of our expansion into the polysilicon and PV module market and
      have
      not to date conducted any research and development in this area.




Our
      research and development expenses were $86,000, $1.8 million and $1.3 million
      in
      fiscal years 2008, 2007 and 2006, respectively, and were related to our fuel
      cell business. As of March 31, 2008, we had no individuals on our research
      and
      development team for our polysilicon, PV system installation or fuel cell
      businesses.





8





**Intellectual
      Property**




***Hoku
      Materials and Hoku Solar***




We
      are at
      an early stage of our expansion into the polysilicon and PV systems installation
      market and have not developed or licensed any proprietary intellectual property
      addressed to this market. We may need to obtain licenses to manufacture and/or
      sell polysilicon and PV modules using the technology that we are planning to
      implement. However, based on our discussions with engineering firms and
      equipment suppliers, we believe that we can obtain any necessary licenses from
      these engineering firms and turnkey equipment suppliers that may be required
      to
      manufacture, market and/or sell the products made with their equipment. If
      we
      fail to successfully acquire the licenses necessary to manufacture and/or sell
      polysilicon, we will be unable to commence production of polysilicon and we
      may
      be forced to delay, alter or abandon our expansion into this market.




**Manufacturing**




***Hoku
      Materials*** ****


We
        estimate that it will cost approximately $390 million to engineer, procure
        and
        construct our planned 3,500 metric ton per annum polysilicon production
        facility. Sanyo, Suntech, Solarfun and GEWD have collectively committed $240
        million towards these costs, subject to the achievement of various operational
        and financial milestones, including those that were not met by May 31, 2008.
        In
        addition to the $240 million in customer commitments, we intend to contribute
        $40 million of our available cash, including amounts already paid by us.
        This
        leaves a shortfall of $110 million of additional capital that is required
        to
        fully fund the $390 million construction budget. We had previously announced
        our
        intention to work with Merrill Lynch for this additional funding in the form
        of
        project finance debt. In May 2008, we and Merrill Lynch mutually agreed to
        end
        this engagement, and instead, we intend to raise up to $110 million in
        additional financing through one or more debt or equity offerings for the
        procurement and construction of our polysilicon manufacturing facility.




We
        believe we will need to make aggregate payments of $111 million for engineering,
        procurement and construction in order to complete pilot production in the
        fourth
        quarter of calendar year 2008. If we successfully complete that milestone,
        the
        availability of customer prepayment commitments would fund continuing
        construction costs until our polysilicon facility is near commercial production.
        As of March 31, 2008, the amount contributed to the project is $29 million,
        a
        portion of which has been funded with advances on customer commitments, of
        which
        we have received $15 million in fiscal 2008 and $2 million in fiscal
        2007.




We
        intend
        to contribute an additional $28 million, which includes the proceeds from
        the
        $25 million private placement of our common stock to investors in February
        2008,
        and intend to raise approximately $54 million in additional debt or equity
        financing, which would secure the $111 million we believe is needed to complete
        pilot production. We would thereafter commence one or more subsequent debt
        or
        equity offerings to raise an additional $56 million, which together with
        the
        release of the remaining customer commitments, is expected to be sufficient
        to
        complete the construction of our polysilicon plant.





We
        also
        recently announced that we amended our polysilicon supply contracts with
        Suntech
        and Solarfun, to revise the financing deadline to December 31, 2008, and
        to
        reduce the amount of capital that we are required to raise by that date to
        $75
        million, including the $25 million previously raised through our private
        placement of our common stock. We have not amended the financing deadlines
        in
        our polysilicon agreements with Sanyo and GEWD, which deadlines expired on
        May
        31, 2008, and we cannot guarantee that we, Sanyo and GEWD will not terminate
        the
        respective agreements. If
        any of
        our contracts with Sanyo, GEWD, Suntech or Solarfun is terminated, our business
        will be materially harmed. In addition, we will be required to return any
        deposits and advance payments received up to the date of the termination,
        which
        is $17 million in aggregate of the four supply agreements and we will need
        to
        secure new funds in order to finance the construction of our polysilicon
        production plant. Securing new funds may delay the anticipated timing of
        completion of the production plant, which delay may result in us failing
        to meet
        our delivery requirements under our supply agreements. We may not be able
        to
        secure new funds on terms as favorable to us as those under the terminated
        agreements or at all. If we are unable to secure new funds, we will not be
        able
        to complete construction of the production plant, our business will be
        materially and adversely affected and we may be forced to delay, alter or
        abandon our planned business operations. In
        addition, we have approximately 300 to 500 metric tons of unallocated annual
        polysilicon production capacity from our planned production output of 3,500
        metric tons per year, which may be sold under one or more new long-term
        contracts, reserved for strategic purposes, or sold on the spot market. If
        such
        polysilicon is sold under one or more long term contracts, such sales may
        provide additional prepayments that could reduce the amount of additional
        financing needed.




*City
      of Pocatello.* In
      March
      2007, we entered into a 99-year ground lease with the City of Pocatello, Idaho,
      for approximately 67 acres of land, and in May 2007, the City of Pocatello
      approved an ordinance that would provide us with tax incentives related to
      the
      cost of infrastructure necessary for the completion of our planned polysilicon
      plant. We would receive up to $25.9 million in property tax reimbursements
      for
      infrastructure improvements and up to $17.4 million in property tax
      reimbursements based on employment numbers. Reimbursements are based on actual
      tax payments and are paid over time. The ordinance is in effect through year
      2030.




*Stone
      & Webster, Inc.* We
      entered into an agreement with Stone & Webster, Inc., or S&W, a
      subsidiary of The Shaw Group Inc., for engineering, procurement, and
      construction management services, or the EPCM Agreement, for the construction
      of
      a polysilicon production plant with an annual capacity of 3,500 metric tons.
      Under the EPCM Agreement, S&W will provide the engineering services to
      complete the design and plan for construction of the polysilicon plant, along
      with procurement and construction management services. S&W will be paid on a
      time and materials basis plus a fee for its services and incentives if certain
      schedule and cost targets are met. The target cost for the services to be
      provided under the EPCM Agreement is $50.0 million, plus up to $5.0 million
      of
      additional incentives that may be payable.




The
      incentives are based on:




•
            S&W's
                services costing less than $50 million,




•
            S&W
                achieving a total installed cost target for the project of $390 million,
                and




•
            S&W
                meeting scheduled targets of:




•
                pilot
                    test production of polysilicon in late
                    2008,





9




§
            mechanical
                and substantial completion allowing the commissioning and operation
                of
                processes for the production of trichlorosilane, the production of
                polysilicon, and the separation and recovery of the vent gases resulting
                from the production of polysilicon, in incremental production volumes,
                between January 2009 and September 2009, and




§
            final
                project completion by September 2009.




Each
      of
      these cost and schedule targets may be adjusted if we or our other contractors
      cause any delays, or request changes to the work that increase the cost or
      time
      for completion, or if force majeure or adverse weather events cause any delays.




Pursuant
      to the EPCM Agreement, S&W is not guaranteeing that the cost or schedule
      targets will be met, and we are obligated to pay for S&W's services
      regardless of whether these targets are ultimately achieved; however, S&W is
      required to pay liquidated damages of up to $1 million for schedule delays
      that
      are directly caused by S&W.




*JH
      Kelly LLC* .
      We
      entered into an agreement with JH Kelly LLC., or JH Kelly, for construction
      services for the construction of a polysilicon production plant with an annual
      capacity of 3,500 metric tons, or the Construction Agreement. We will pay JH
      Kelly on a time and materials basis plus a fee for its services and incentives
      if certain schedule, cost and safety targets are met. The target cost for the
      services to be provided under the Construction Agreement is $145.0 million,
      including up to $5.0 million of incentives that may be payable.




The
      incentives are based on:




•
            JH
                Kelly's total costs being less than $145.0 million;




•
            JH
                Kelly achieving specified safety targets;
                and




•
            JH
                Kelly meeting scheduled targets of:




§
            pilot
                test production of polysilicon in late
                2008;




§
            mechanical
                and substantial completion allowing the commissioning and operation
                of
                processes for the production of trichlorosilane, the production of
                polysilicon, and the separation and recovery of the vent gases resulting
                from the production of polysilicon, in incremental production volumes,
                between January 2009 and September 2009; and




§
            final
                project completion by September
                2009.




Each
      of
      these cost, safety and schedule targets may be adjusted if we or its other
      contractors cause any delays, or request changes to the work that increase
      the
      cost or time for completion, or if any delays caused by reasons not in the
      sole
      control of JH Kelly occur.




Pursuant
      to the Construction Agreement, JH Kelly is not guaranteeing that the cost or
      schedule targets will be met, and we are obligated to pay for JH Kelly's
      services regardless of whether these targets are ultimately achieved; however,
      JH Kelly is required to pay liquidated damages of up to $1 million for schedule
      delays that are directly caused by JH Kelly.




JH
      Kelly
      may terminate the Construction Agreement if we breach the agreement. JH Kelly
      may suspend work under the Construction Agreement upon two days written notice
      if we fail to make any payment when due, and we will be liable for wind-down
      and
      start-up costs in the event JH Kelly restarts its performance of services.
      We
      may terminate the Construction Agreement if JH Kelly fails to perform its
      obligations or if JH Kelly becomes insolvent or bankrupt. We may also terminate
      the Construction Agreement at any time for our convenience, in which case we
      are
      obligated to pay JH Kelly for all completed work, all work in progress and
      JH
      Kelly's reasonable termination expenses.




*Dynamic
      Engineering Inc.* In
      October 2007, we entered into an agreement with Dynamic Engineering Inc., or
      Dynamic, for design and engineering services, and a related technology license,
      for the process to produce and purify trichlorosilane, or TCS. Under the
      agreement, Dynamic is obligated to design and engineer a trichlorosilane, or
      TCS, production facility that is capable of producing 20,000 metric tons of
      TCS
      for our planned 3,500 metric tons per year polysilicon production plant in
      Pocatello, Idaho. The Dynamic process is to be integrated by S&W into the
      overall polysilicon production facility, and will be constructed by JH Kelly.
      Dynamic's engineering services will be provided and invoiced on a time and
      materials basis, and the license fee will be calculated upon the successful
      completion of the TCS production facility, and demonstration of certain TCS
      purity and production efficiency capabilities. The maximum aggregate amount
      that
      we may pay Dynamic for the engineering services and the technology license
      is
      $12.5 million, which includes an incentive for Dynamic to complete the
      engineering services under budget. Dynamic is guaranteeing the quantity and
      purity of the TCS to be produced at the completed facility, and has agreed
      to
      indemnify us for any third party claims of intellectual property infringement.




In
      April
      2008, we amended the agreement to eliminate our obligation to indemnify and
      hold
      Dynamic harmless from any damages in excess of $5 million that arise out of
      the
      agreement, and/or Dynamic’s performance under the agreement, including claims
      that Dynamic acted negligently, whether the damages arise from claims by us
      or
      any third party.




*GEC
      Graeber Engineering Consultants GmbH and MSA Apparatus Construction for Chemical
      Equipment Ltd* .
      In
      January 2007, we entered into an agreement with GEC Graeber Engineering
      Consultants GmbH, or GEC, and MSA Apparatus Construction for Chemical Equipment
      Ltd., or MSA, for the purchase and sale of hydrogen reduction reactors and
      converters, or the Equipment, capable of producing 2,000 metric tons of
      polysilicon per year, which is approximately 20.9 million Euros.




10




In
      May
      2007, we paid the initial deposit of 15%, or approximately $4.2 million, under
      the agreement for the Equipment capable of producing 2,000 metric tons of
      polysilicon per year. The payment of this initial deposit began the 15-month
      delivery deadline for Equipment capable of producing 1,500 metric tons of
      polysilicon per year, with the Equipment for an additional 500 metric tons
      per
      year being delivered within three months after the first delivery.




In
      October 2007, we amended and restated the agreement to require us to pay GEC
      and
      MSA up to 45% of the purchase price for Equipment capable of producing 2,000
      metric tons of polysilicon per year via wire transfer in six equal monthly
      increments from October 2007 through March 2008, and an additional 20% of the
      purchase price within four weeks after the Equipment is shipped from the Port
      of
      Hamburg, Germany. An additional 10% of the applicable purchase price for the
      Equipment is payable to GEC and MSA via wire transfer within four weeks after
      a
      successful test demonstration of the Equipment, and the final 10% of the
      applicable purchase price is payable to GEC and MSA upon the earlier of (a)
      30
      months after delivery; or (b) expiration of the warranty period, which is 18
      months after successful commissioning of the Equipment. As of May 31, 2008,
      we
      made payments of $8.8 million under this contract, approximating 30% of the
      purchase price. Our payments are less than the scheduled payment terms as we
      had
      not received the required written reports describing progress that is being
      made
      in the manufacturing of the reactors until May 2008. We expect to make
      additional payments in June 2008.




The
      amended agreement also contains an option to purchase additional Equipment
      that
      is capable of producing up to an additional 500 metric tons of polysilicon
      per
      year, or the Option Equipment, for a total purchase price of approximately
      6.7
      million Euros, or the Option Price. The amended agreement provides for an
      initial deposit equal to 15% of the Option Price to GEC and MSA within six
      months after signing the amended agreement. The Option Equipment shall be
      delivered within 12 months after we pay the 15% deposit. Hoku Materials is
      required to pay GEC and MSA up to 45% of the Option Price via wire transfer
      in
      12 equal monthly increments from the month after it pays the 15% deposit through
      the month of shipment, and an additional 20% of the Option Price within four
      weeks after the Option Equipment is shipped from Hamburg, Germany. An additional
      10% of the Option Price for the Option Equipment is payable to GEC and MSA
      via
      wire transfer within four weeks after a successful test demonstration of the
      Option Equipment, and the final 10% of the Option Price is payable to GEC and
      MSA upon the earlier of (a) 30 months after delivery; and (b) expiration of
      the
      warranty period, which is 18 months after successful commissioning of the Option
      Equipment.




In
      March
      2008, we entered into a new polysilicon reactor supply contract with GEC to
      give
      us the option to purchase additional polysilicon reactors for the production
      of
      up to 8,000 metric tons of polysilicon per year. Under this new agreement,
      we
      have an option, without obligation, to order reactors at any time over a
      twelve-month period at predetermined pricing and delivery terms. We expect
      we
      will exercise the option to purchase additional reactors necessary for our
      planned annual capacity of 3,500 metric tons of polysilicon; however, the amount
      of additional reactors beyond 3,500 metric tons of polysilicon per year will
      be
      contingent on additional customer contracts we may sign.




*Idaho
      Power Company* .
      In
      December 2007, we entered into an agreement with Idaho Power Company to complete
      the construction of the electric substation to provide power for our planned
      polysilicon production plant in Pocatello, Idaho. We are obligated to pay Idaho
      Power Company an aggregate of $14.8 million for the completion of the substation
      and associated facilities. In January 2008, we made an initial payment under
      the
      contract of $3.7 million. Under the terms of the agreement, the substation
      and
      associated facilities are scheduled to be completed on or before February 15,
      2009. The agreement provides that Idaho Power Company may invoice us additional
      amounts for temporary power to enable the start-up and operation of the planned
      polysilicon production plant prior to February 15, 2009.




*Bank
        of Hawaii* .
        In
        January 2008, we entered into agreements with Bank of Hawaii to purchase
        in
        increments an aggregate amount of 8.7 million Euros on various maturity dates
        beginning in April 2008 and ending in July 2010 at a fixed U.S dollar amount
        of
        $12.8 million. We expect to use the purchased Euros to make payments pursuant
        to
        the amended GEC and MSA contracts, for the purchase of hydrogen reduction
        and
        hydrogenation reactors for the production of polysilicon. The agreements
        are
        considered derivatives as the forward exchange contract with the Bank of
        Hawaii
        is used to hedge our commitment related to the acquisition of the reactors
        from
        GEC and MSA.  The fair value of these derivatives approximates $965,000.
        The purpose of our foreign currency hedging activity is to help protect us
        from
        risk that the eventual dollar cash flows from the acquisition of this asset
        will
        be adversely affected by changes in the exchange rate.  There was no gain
        or loss due to ineffectiveness.




As
      part
      of the agreements, we are required to place deposits with Bank of Hawaii for
      20%
      of the notional value of the outstanding transactions, which can fluctuate
      based
      on the U.S Dollar/Euro exchange rate. We will earn interest on our deposit,
      which will be recorded as restricted cash. As of April 30, 2008, our restricted
      cash balance related to these deposits was $2.6 million.




*Saft
      Power Systems USA, Inc.* In March
      2008, we entered into an agreement with Saft Power Systems USA, Inc., or Saft,
      for the purchase and sale of thyroboxes, earth fault detection systems, and
      related technical documentation and services. Under the agreement, Saft is
      obligated to manufacture and deliver the thyroboxes, earth fault detection
      systems, and related technical documentation and services, or the Deliverables,
      which are used as the power supplies for the polysilicon deposition reactors
      to
      be used in our planned 3,500 metric tons per year polysilicon production plant.
      The total fees payable to Saft for all Deliverables under the agreement is
      approximately $13 million, which is payable in five installments, beginning
      in
      April 2008. Provided that we are current on all payments, Saft guarantees the
      shipment dates of the Deliverables in stages, beginning in September 2008,
      with
      the final Deliverables shipping in February 2009. As of May 31, 2008, we have
      made payments of $1.3 million to Saft and believe we are current on our
      payments. Either party may terminate the agreement if the other party is in
      material breach of the agreement and has not cured such breach within 180 days
      after receipt of written notice of the breach, or if the other party is
      bankrupt, insolvent, or unable to pay its debts.





11





*PVA
      Tepla Danmark.* In April
      2008, we entered into an agreement with PVA Tepla Danmark, or PVA, for the
      purchase and sale of slim rod pullers and float zone crystal pullers. Under
      the
      agreement, PVA is obligated to manufacture and deliver the slim rod pullers
      and
      float zone crystal pullers for our planned 3,500 metric tons per year
      polysilicon production plant in. Slim rod pullers are used to make thin rods
      of
      polysilicon that are then transferred into polysilicon deposition reactors
      to be
      grown through a chemical vapor deposition process into polysilicon rods for
      commercial sale to our end customers. The float zone crystal pullers convert
      the
      slim rods into single crystal silicon for use in testing the quality and purity
      of the polysilicon. The total fees payable to PVA is approximately $6 million,
      which is payable in four installments beginning in August 2008. Provided that
      we
      are current on all payments, PVA guarantees all slim rod pullers and float
      zone
      crystal pullers will be shipped within ten months after we pay the first 30%
      of
      the total agreement amount. PVA has also agreed to use its best efforts to
      deliver at least one slim rod puller within six months after receipt of the
      30%
      initial payment. Either party may terminate the agreement if the other party
      is
      in material breach of the agreement and has not cured such breach within 180
      days after receipt of written notice of the breach, or if the other party is
      bankrupt, insolvent, or unable to pay its debts.




*Private
      Placement of Equity.* In
      February 2008, we issued 2,893,519 shares of our common stock pursuant to a
      Securities Purchase Agreement, by and among us and certain institutional
      investors, and a wholly owned subsidiary of Suntech Power Holdings Co., Ltd.
      The
      wholly owned subsidiary of Suntech Power Holdings Co., Ltd. acquired 2,314,815
      shares of our common stock. We received aggregate gross proceeds of
      approximately $25 million from the sale of our common stock which we expect
      to use to fund the construction of our polysilicon plant.




We
      also
      intend to raise up to $110 million of additional financing through one or more
      debt or equity offerings for the procurement and construction of our polysilicon
      manufacturing facility.




***Hoku
      Solar***




In
        June
        2007, we announced our strategy to focus on the sale of turnkey PV system
        installations, and related services, and our plan to exit the solar module
        manufacturing business. In connection with this focused strategy, we resold
        the
        15 megawatt per year module production line that we purchased from Spire
        Corporation for an aggregate purchase price of approximately $2.0 million.
        As a
        result, we canceled our plans to install the line in Hawaii, and to construct
        a
        plant capable of producing 30 megawatts of solar modules per year in Pocatello,
        Idaho. We also resold $2.8 million of solar cells that we purchased from
        E-Ton
        Solar Tech Co., Ltd. in October 2006. We plan to continue to market, sell
        and
        install turnkey PV systems, but will use modules purchased from third-party
        suppliers, which we believe we can purchase at lower prices than the cost
        to
        manufacture our own brand of modules. Furthermore, due to the change in our
        business strategy to not manufacture solar modules along with our downsizing
        of
        our fuel cell business, we are exploring the sale of our land and facility
        in
        Kapolei, Hawaii and the relocation to a leased warehouse and office space
        on the
        island of Oahu, Hawaii.




***Hoku
      Fuel Cells***




We
      are
      not currently manufacturing any membrane or MEA products due to our downsizing
      of our fuel cell business.





**Supplier
      Relationships**




There
      is
      currently an industry-wide shortage of polysilicon, an essential raw material
      in
      the production of PV modules. We believe that this shortage will continue
      through at least fiscal 2009 and potentially for a longer period. We utilize
      solar modules purchased through our supply relationship with Sanyo Energy
      (U.S.A.) Corporation and Wuxi Suntech Power Company, Ltd. for our PV system
      installations.





We
      have
      structured our agreements as firm purchase orders at a predetermined price
      or
      non-binding forecasts of our annual or quarterly product needs to our suppliers
      and then periodically issue purchase orders for specific projects. These
      suppliers are generally under no legal obligation to supply solar modules until
      they have accepted our purchase orders.




**Competition**




***Hoku
      Materials***




In
      the
      polysilicon market, we will compete with companies such as Hemlock Semiconductor
      Corporation, Renewable Energy Corporation ASA, Mitsubishi Polycrystalline
      Silicon America Corporation, Mitsubishi Materials Corporation, Tokuyama
      Corporation, MEMC Electronic Materials, Inc., and Wacker Chemie AG. In addition,
      we believe new companies may be emerging in China, Korea, India, Europe, Brazil,
      Australia, North America, and the Middle East, and new technologies, such as
      fluidized bed reactors, are emerging, which may have significant cost and other
      advantages over the Siemens process we are planning to use to manufacture
      polysilicon. These competitors may have longer operating histories, greater
      name
      recognition and greater financial, sales and marketing, technical and other
      resources than us. If we fail to compete successfully, we may be unable to
      successfully enter the market for polysilicon. Initially, we believe that the
      high demand for polysilicon will support further competition in the polysilicon
      market, enabling us to negotiate additional long-term sales contracts.





12




***Hoku
      Solar***




The
      market for PV installations is competitive and continually evolving. As a new
      entrant to this market, we expect to face substantial competition from companies
      such as Powerlight, a subsidiary of SunPower Corporation, and SunEdison, and
      other new and emerging companies in Asia, North America and Europe. Some of
      our
      known competitors are established players in the solar industry, and have a
      stronger market position than ours and have larger resources and recognition
      than we have. In addition, the PV market in general competes with other sources
      of renewable energy and conventional power generation. Initially, we believe
      that the high demand for PV installations will support further competition
      in
      the market, enabling us to sell our services, specifically in Hawaii where
      we
      are headquartered.




***Hoku
      Fuel Cells***




We
      are
      not actively seeking new contracts; however, we will consider new opportunities
      if they make financial sense.




**Government
      Regulation**




***Hoku
      Materials and Hoku Solar***




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 policies 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 products. For example, without a regulatory
      mandated exception for solar power systems, utility customers are often charged
      interconnection or standby fees for putting distributed power generation on
      the
      electric utility grid. These fees could increase the cost to consumers of solar
      power systems, which could decrease the market for PV installations, thereby
      harming our business, prospects, results of operations and financial condition.




The
      installation of PV systems is subject to oversight and regulation in accordance
      with national and local ordinances relating to building codes, safety,
      environmental protection, utility interconnection and metering and related
      matters. It is difficult to track the requirements of individual states and
      design equipment to comply with the varying standards. Any new government
      regulations or utility policies pertaining to PV systems may result in
      significant additional expenses to us and, as a result, could cause a
      significant reduction in demand for PV installations. In addition, the
      manufacture of polysilicon will involve the use of materials that are hazardous
      to human health and the environment, the storage, handling and disposal of
      which
      will be subject to government regulation. Under various Federal, state and
      local
      laws, ordinances and regulations, an owner or operator of real estate is liable
      for costs of removal or remediation of certain hazardous or toxic substances
      on
      or in such property. These laws often impose such liability without regard
      to
      whether the owner or operator knew of, or was responsible for, the presence
      of such substances.




Federal
      and Hawaii state tax credits are available for residential and commercial PV
      systems placed in service. The federal tax credit will no longer be available
      as
      of December 31, 2008. The elimination of tax credits  could
      reduce the demand for our services and harm our business.




**Financial
      Information by Business Segment and Geographic Data**


In
        fiscal
        2008, 59% of our total revenue was from our PV system installations, primarily
        from our contracts with Paradise Beverages and Hardware Hawaii, and the
        remaining 41% of our revenue was from our fuel cell contracts with the U.S
        Navy.
        All of the revenue was generated from customers in the United States. In
        fiscal
        2007 and 2006, 100% of our revenue was derived from our fuel cell business.
        In fiscal 2007, 97% of our revenue was from the U.S. Navy and Nissan. In
        fiscal
        2006, 99% of our revenue was from Sanyo and Nissan. Sanyo and Nissan are
        located
        in Japan and in fiscal 2007, 60% and 40% of our revenue was generated from
        customers in the United States and Japan, respectively. In fiscal 2006, 99%
        of
        our revenue was generated from customers in Japan.




**Employees**


As
      of
      March 31, 2008, we had 21 employees, consisting of six in Hoku Materials,
      seven in Hoku Solar and the remaining eight employees are general administrative
      employees in Hoku Scientific that provide support for all divisions, public
      company requirements and other corporate initiatives.




**Executive
      Officers of the Registrant**


Our
      executive officers and their ages and positions as of March 31, 2008, are
      as follows:




**Name**
            
            **Age**
            
            **Position**Dustin
                M. Shindo
            
            34
            
            Chairman
                of the Board of Directors, President and Chief Executive
                OfficerKarl
                M. Taft III
            
            35
            
            Chief
                Technology Officer and DirectorDarryl
                S. Nakamoto
            
            34
            
            Chief
                Financial Officer, Treasurer and SecretaryScott
                B. Paul
            
            34
            
            Vice
                President, Business Development and General
                Counsel




***Dustin
      M. Shindo*** ,
      one of
      our founders, has served as our Chairman of the Board of Directors, President
      and Chief Executive Officer since March 2001. From November 1999 to February
      2001, Mr. Shindo was a founder and Chief Executive Officer of Activitymax,
      Inc., a small privately-held travel reservation software company, where
      Mr. Shindo was responsible for managing customer relationships, developing
      the company’s marketing program and managing the operations of the company. From
      August 1999 to April 2000, Mr. Shindo was a business consultant at The
      Lucas Group, a strategic consulting firm, where Mr. Shindo focused on
      business strategy projects as part of multi-person engagement teams. In 1995,
      Mr. Shindo founded Mehana Brewing Company, a privately-held microbrewery,
      where he continues to serve as President and as a member of the board of
      directors. Mr. Shindo’s family manages the day-to-day operations of Mehana
      Brewing Company and Mr. Shindo’s time commitment is not significant. In
      2006,
      Mr. Shindo founded Kai Sensors, Inc., a privately held company formed to explore
      business opportunities related to medical devices, where he continues to serve
      as Chairman of the Board of Directors. Mr. Shindo’s time commitment to Kai
      Sensors, Inc. is not significant. Mr. Shindo
      devotes substantially all of his time to the management of Hoku Scientific.
      Mr. Shindo has a B.A. in Accounting from the University of Washington and
      an M.B.A. from the Darden Graduate School of Business Administration at the
      University of Virginia.





13







***Karl
      M. Taft III*** ,
      one of
      our founders, has served as our Chief Technology Officer since March 2001 and
      a
      member of our board of directors since August 2001. From October 1996 to March
      2001, Mr. Taft held various positions at PCC Structurals, Inc., a
      manufacturer of titanium casting parts, including Lead Manager for Research
      and
      Development, Industrial Engineer and Research Chemist. In 2000, Mr. Taft
      was an Adjunct Professor at Portland State University. Mr. Taft has a B.A.
      in Chemistry from Pacific University, an M.S. in Environmental Science and
      Engineering from Oregon Graduate Institute and an M.B.A. from Portland State
      University.




***Darryl
      S. Nakamoto*** has
      served as our Chief Financial Officer and Treasurer since January 2005 and
      our
      Secretary since March 2005. From January 2003 to December 2004,
      Mr. Nakamoto was a finance analyst for Frito-Lay of Hawaii, a division of
      PepsiCo, Inc. From May 2002 to January 2003, Mr. Nakamoto was not employed.
      From March 2001 to May 2002, Mr. Nakamoto was a sales and marketing
      executive for Syntera Solutions, the software development and document
      management division of Profitability of Hawaii, Inc., a software company. From
      April 2000 to February 2001, he served as the regional director of Activitymax,
      Inc., a travel reservation software company. From December 1996 to March 2000,
      Mr. Nakamoto was an accountant at KPMG LLP, an accounting firm, where he
      most recently was a senior accountant. Mr. Nakamoto has a B.A. in
      Accounting and Finance from the University of Washington and is a certified
      public accountant.




***Scott
      B. Paul*** has
      served as our Vice President, Business Development and General Counsel since
      July 2003. Mr. Paul was also our Secretary from November 2004 to March
      2005. From June 2002 to June 2003, Mr. Paul was Associate General Counsel
      and Director of Business Development at Read-Rite Corporation, a component
      supplier for hard disk and tape drives. From April 2000 to June 2002, he was
      an
      attorney in the Business and Technology Group at Brobeck, Phleger &
Harrison LLP, a law firm. From October 1999 to April 2000, Mr. Paul was an
      attorney in the Business Solutions Group at Reed Smith Crosby Heafey, LLP,
      a law
      firm, and from October 1998 to October 1999, he was an attorney at Ropers,
      Majeski, Kohn & Bentley, a law firm. Mr. Paul has a B.A. in
      Psychology from the University of California, Los Angeles and a J.D. from Santa
      Clara University School of Law.




**Available
      Information**


Our
      principal executive offices are located at 1075 Opakapaka Street, Kapolei,
      Hawaii 96707, and our telephone number is (808) 682-7800. We maintain a
      website with an Internet address of *www.hokuscientific.com* .
      The
      information contained on our website is not included as a part of, or
      incorporated by reference into, this Annual Report on Form 10-K. We make
      available free of charge, through our website, our Annual Report on Form 10-K,
      quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments
      to
      these reports, as soon as reasonably practicable after we have electronically
      filed such material with, or furnished such material to, the Securities and
      Exchange Commission.





14





**ITEM 1A.**
            **RISK
                FACTORS**




***Risks
      Related to Our Business***




**We
      have a limited operating history, and have recently determined to enter the
      photovoltaic installations and polysilicon markets and scale back our efforts
      in
      the fuel cell market. If we are unable to generate significant revenue, our
      business will be harmed.**




We
      were
      incorporated in March 2001 and have a limited operating history. We have
      cumulative net losses since our inception through the fiscal year ended March
      31, 2008. Hoku Materials does not currently generate any revenue and we do
      not
      expect to generate any revenue from Hoku Fuel Cells in the foreseeable future.
      During fiscal 2008, we completed PV system installation contracts related to
      Hoku Solar, and expect that all of our future revenue will be derived through
      PV
      system installations and related services and the sale of electricity until
      the
      first half of calendar year 2009, when Hoku Materials is expected to generate
      revenue through the sale of polysilicon. Our planned entry into the polysilicon
      market will require us to spend significant sums to support the construction
      of
      a facility to produce polysilicon, to purchase capital equipment, to fund new
      sales and marketing efforts, to pay for additional operating costs, and to
      significantly increase our headcount. As a result, we expect our costs to
      increase significantly, which will result in further losses before we can begin
      to generate significant revenue from our Hoku Materials and Hoku Solar
      divisions. If we are unable to generate significant revenue and achieve
      profitability, we will not be able to sustain our operations.




**Our
      operating results have fluctuated in the past, and we expect a number of factors
      to cause our operating results to continue to fluctuate in the future, making
      it
      difficult for us to accurately forecast our quarterly and annual operating
      results.**




We
        began
        installing PV systems during the second half of fiscal 2008 and will continue
        to
        have limited sources of revenue until we sign additional PV system installation
        contracts and successfully complete the installation of PV systems under
        those
        contracts. As of April 30, 2008, we had approximately $2.2 million in PV
        system
        installation and/or related services under contract that we expect to complete
        in fiscal 2009.




We
        also
        have signed a non-binding letter of intent with Bank of Hawaii to explore
        additional turnkey PV system installations for the Bank’s facilities on the
        islands of Hawaii, Maui and Kauai, and are in discussions with The James
        Campbell Company to plan the Kapolei Sustainable Energy Park, which would
        be
        capable of generating approximately 1.5 megawatts of PV power. In addition,
        in
        May 2008, the Hawaii Public Utilities Commission approved the contract for
        Hawaiian Electric Company to purchase electricity generated by a PV system
        that
        we would install. We plan to install a 218-kilowatt PV system and sell the
        power
        generated by that system, which is expected to be in service by the end of
        calendar year 2008,over a 20-year period to Hawaiian Electric Company. Finally,
        we joined D.R. Horton-Schuler Division, a wholly owned subsidiary of D.R.
        Horton, Inc. in a marketing program to offer two-kilowatt PV systems to
        homebuyers at the Kahiwelo at Makakilo Development in Kapolei, Hawaii. The
        amount of potential revenue is contingent on whether the homebuyers choose
        to
        install a PV system. While we anticipate generating revenue from these
        agreements, at this time there can be no assurance that such revenues will
        be
        realized. Our future operating results and cash flows will depend on many
        factors that impact Hoku Materials, Hoku Solar and Hoku Fuel Cells, including
        the following:




•
            the
                size and timing of customer orders, milestone achievement, product
                delivery and customer acceptance, if required;




•
            our
                success in obtaining prepayments from customers for future shipments
                of
                polysilicon;




•
            our
                success in maintaining and enhancing existing strategic relationships
                and
                developing new strategic relationships with potential customers;




•
            our
                ability to finance power purchase agreements for Hawaiian Electric
                Company
                and other potential customers;




•
            our
                ability to protect our intellectual property;




•
            actions
                taken by our competitors, including new product introductions and
                pricing
                changes;




•
            the
                costs of maintaining and expanding our operations;




•
            customer
                budget cycles and changes in these budget cycles; and




•
            external
                economic and industry conditions.




As
      a
      result of these factors, we believe that period-to-period comparisons of our
      results of operations are not necessarily meaningful and should not be relied
      upon as indications of future performance.




**We
      need approximately $390 million to construct and equip our planned polysilicon
      production plant and we may be unable to raise this additional capital on
      favorable terms or at all.**




We
        have
        announced our intention to form a polysilicon business as part of an integrated
        PV business. The polysilicon business includes developing production
        capabilities and the eventual production of polysilicon. Prior to our
        announcement, our business was solely focused on the stationary and automotive
        fuel cell markets and we had no prior experience in the polysilicon business.
        In
        order to be successful, we are devoting substantial management time, resources
        and funds to this new business. We intend to produce polysilicon at our planned
        polysilicon production facility in Pocatello, Idaho. We commenced construction
        in May 2007 and anticipate we will begin producing polysilicon beginning in
        the first half of calendar year 2009.





15







Based
      on
      our polysilicon supply agreements with customers, we plan to equip and construct
      a polysilicon production plant capable of producing up to 3,500 metric tons
      of
      polysilicon per year for an estimated total project cost of approximately $390
      million. We intend to use the $240 million in advance payment commitments from
      our polysilicon customer agreements to contribute to the financing of the
      construction and for working capital, subject to our successful achievement
      of
      various financing, polysilicon production and quality milestones for Sanyo,
      Suntech, GEWD and Solarfun. In addition to the $240 million in customer
      commitments, we intend to contribute $40 million, of our available cash,
      including $12 million already paid by us. This leaves a shortfall of $110
      million of additional capital that is required to fully fund the $390 million
      construction budget. We had previously announced our intention to work with
      Merrill Lynch for this additional funding in the form of project finance debt.
      In May 2008, we and Merrill Lynch mutually agreed to end this engagement, and
      instead, we intend to raise up to $110 million in additional financing through
      one or more debt or equity offerings for the procurement and construction of
      our
      polysilicon manufacturing facility.




We
        believe that prior to obtaining financing we will have to, among other things,
        satisfy potential lenders and investors that we have adequately addressed
        the
        principal risks that: (1) the construction of the polysilicon plant is not
        completed on time, on budget, or at all; (2) the polysilicon plant does not
        operate at its full capacity; (3) the polysilicon plant fails to generate
        sufficient revenue to service any debt, or (4) that the financing will not
        be
        sufficient to complete the construction, procurement and start-up of our
        planned
        polysilicon plant. In order to address these risks we believe that we will
        need
        to accomplish and address the following:




•
            if
                we finance through debt, obtain agreements from Sanyo Electric Company
                Ltd., Wuxi Suntech Power Co., Ltd., Global Expertise Wafer Division,
                Ltd.
                and Solarfun Power Hong Kong Limited to assign any purchase payments
                for
                polysilicon made to Hoku Materials to the lenders that may provide
                us with
                debt financing and to subordinate each of their pari passu security
                interests in Hoku Materials to the senior security interest of such
                lenders;




•
            if
                we finance through debt, obtain agreements from Stone & Webster, Inc.,
                JH Kelly LLC, GEC Graeber Engineering Consultants GmbH and MSA Apparatus
                Construction for Chemical Equipment, Ltd., Idaho Power Company, Dynamic
                Engineering Inc., Saft Power Systems USA, Inc., PVA Tepla Danmark
                and
                other potential vendors to assign their respective construction and/or
                service contracts to the lenders that may provide us with debt financing;




•
            secure
                permits with federal, state and local authorities, including building
                permits to continue to construct our polysilicon plant, and permits
                to
                operate our plant when construction is complete;




•
            obtain
                traditional road access to the site through one or more legally
                enforceable rights of access, such as an easement, from adjoining
                property
                owners; and




•
            obtain
                the report of an independent engineering firm which supports our
                construction plans, our operating plans and our pro forma financial
                models
                which support the feasibility of our operating plans and business
                model.




If
        we
        fail to successfully achieve any or all of the above objectives, we will
        be
        unable to complete construction of our planned production plant, our business
        will be materially and adversety affected, and we may be forced to delay,
        alter or abandon our planned business operations. In addition, any delay
        in
        achieving these objectives may result in additional expense which would harm
        our
        business.




**If
        our supply agreement with Sanyo Electric Company, Ltd. is terminated for
        any
        reason, our business will be materially harmed.**




**** In
      January 2008, we amended our supply agreement with Sanyo Electric Company,
      Ltd.,
      or Sanyo, for the sale and delivery of polysilicon, or the Sanyo Supply
      Agreement. Under the Sanyo Supply Agreement, up to approximately $530 million
      may be payable to us during the ten-year period, subject to the achievement
      of
      certain milestones, the acceptance of product deliveries and other conditions.
      The Sanyo Supply Agreement provides for the delivery of predetermined volumes
      of
      polysilicon to Sanyo each year at set prices from January 2010 through December
      2019. Pursuant to the Sanyo Supply Agreement, we granted Sanyo a security
      interest in all of the tangible and intangible assets related to Hoku Materials
      and all our equity interests in Hoku Materials, to serve as collateral for
      our
      obligations under the agreement. This security interest is pari-passu with
      the
      security interests granted to Wuxi Suntech Power Co., Ltd., Global Expertise
      Wafer Division, Ltd. and Solarfun Power Hong Kong Limited.




Each
      party may elect to terminate the Sanyo Supply Agreement prior to December 2019
      under certain circumstances, including, but not limited to:




•
              our
                  failure to secure financing by May 31, 2008 of at least $150 million
                  in
                  gross aggregate proceeds from long-term bank debt and customer
                  prepayments;




•
            the
                bankruptcy, assignment for the benefit of creditors or liquidation
                of the
                other party;




•
            or
                a material breach of the other party.





16







Sanyo
          may
          also terminate the agreement for the following material breaches, among
          others:
 •
                  if
                    the polysilicon we deliver to Sanyo repeatedly fails to meet
                    the quality
                    requirements specified in the
                    agreement;
 •
                if
                    we fail to deliver a predetermined quantity of our polysilicon
                    produced
                    product by April 2010;
 •
              if
                  we fail to deliver the minimum monthly quantity of product in any
                  month
                  beginning in April 2010;
  •
              if
                  we fail to deliver the minimum annual quantity of polysilicon product
                  in
                  any year beginning in calendar year 2010; or
  •
              if
                  we fail to complete successfully any of the polysilicon quality
                  and
                  production volume tests or the process implementation test set
                  forth in
                  the agreement within specified periods of time.
  We
          cannot
          guarantee that either we or Sanyo will not elect to terminate the
          agreement as a result of our inability to complete our financing by May
          31,
          2008. If the Sanyo Supply Agreement is terminated for any reason, our business
          will be materially harmed. In
          addition, if the Sanyo Supply Agreement is terminated, we will be required
          to
          return any deposits and advance payments received up to the date of the
          termination, which is $2 million as of May 31, 2008 and we will need to
          secure
          new funds in order to finance the construction of our polysilicon production
          plant. Securing new funds may delay the anticipated timing of completion
          of the
          production plant, which delay may result in us failing to meet our delivery
          requirements under our other supply agreements. We may not be able to secure
          new
          funds on terms as favorable to us as those under the Sanyo Supply Agreement
          or
          at all. If we are unable to secure new funds, we will not be able to complete
          construction of the production plant, our business will be materially and
          adversely affected and we may be forced to delay, alter or abandon our
          planned
          business operations.
 **If
          our supply agreement with Wuxi Suntech Power Co., Ltd. is terminated for
          any
          reason, our business will be materially harmed.**
  In
        May
        2008, we amended our polysilicon supply agreement with Wuxi Suntech Power
        Co.,
        Ltd., or Suntech, for the sale and delivery of polysilicon to Suntech over
        a
        ten-year period beginning in July 2009, or the Suntech Supply Agreement.
        Under
        the Suntech Supply Agreement, up to approximately $678 million may be payable
        to
        us during the ten-year period, subject to the achievement of milestones,
        the
        acceptance of product deliveries and other conditions. The Suntech Supply
        Agreement provides for the delivery of predetermined volumes of polysilicon
        by
        us and purchase of these volumes by Suntech each month and each year at set
        prices from or before July 1, 2009, for a continuous period of ten years.
        The
        term of the Suntech Supply Agreement is ten years from the date of the first
        shipment in 2009, which is approximately July 1, 2019. Pursuant to the Suntech
        Supply Agreement, we have granted to Suntech a security interest in all of
        our
        tangible and intangible assets related to our polysilicon business to serve
        as
        collateral for Hoku Materials' obligations under the Suntech Supply Agreement.
        Also, all of the equity ownership interest in Hoku Materials is to be pledged
        to
        secure the obligations of Hoku Materials under the Suntech Supply Agreement.
        These security interests are pari-passu with the security interests granted
        to
        Sanyo, Global Expertise Wafer Division, Ltd. and Solarfun Power Hong Kong
        Limited.
  Each
        party may elect to terminate the Suntech Supply Agreement under certain
        circumstances, including, but not limited to:
  •
              if
                  we fail to secure financing by December 31, 2008 of at least $75
                  million
                  in gross aggregate proceeds including the approximately $25 million
                  we
                  received from the sale of our common stock pursuant to a Securities
                  Purchase Agreement, which is described in our Current Report on
                  Form 8-K
                  that was filed on February 25, 2008;
  •
              the
                  bankruptcy, assignment for the benefit of creditors or liquidation
                  of the
                  other party; or
  •
              a
                  material breach of the other party.
  Suntech may
          also
          terminate the agreement for the following material breaches:
  •
              if
                  we fail to deliver a predetermined quantity of our polysilicon
                  product by
                  December 2009; or
  •
              if
                  we fail to complete successfully any of the polysilicon quality
                  and
                  production volume tests or the process implementation test set
                  forth in
                  the agreement within specified periods of time.
  If the
            Suntech Supply Agreement is terminated for any reason, our business will
            be
            materially harmed. In
            addition, if the Suntech Supply Agreement is terminated, we will be required
            to
            return any deposits and advance payments received up to the date of the
            termination, which is $2 million as of May 31, 2008 and we will need
            to secure
            new funds in order to finance the construction of our polysilicon production
            plant. Securing new funds may delay the anticipated timing of completion
            of the
            production plant, which delay may result in us failing to meet our delivery
            requirements under our other supply agreements. We may not be able to
            secure new
            funds on terms as favorable to us as those under the Suntech Supply Agreement
            or
            at all. If we are unable to secure new funds, we will not be able to
            complete
            construction of the production plant, our business will be materially
            and
            adversely affected and we may be forced to delay, alter or abandon our
            planned
            business operations.
 **If
          our supply agreement with Global Expertise Wafer Division Ltd. is terminated
          for
          any reason, our business will be materially harmed.**
  In
        June
        2007, we entered into a supply agreement with Global Expertise Wafer Division
        Ltd., or GEWD, a wholly-owned subsidiary of Solar-Fabrik AG, for the sale
        and
        delivery of polysilicon to GEWD over a seven-year period beginning in December
        2009, or the GEWD Supply Agreement. Under the GEWD Supply Agreement, up to
        approximately $117 million may be payable to us during the seven-year period,
        subject to the achievement of milestones, the acceptance of product deliveries
        and other conditions. The GEWD Supply Agreement provides for the delivery
        of
        predetermined volumes of polysilicon by us and purchase of these volumes
        by GEWD
        each month and each year at set prices from or before December 31, 2009,
        for a
        continuous period of seven years. Pursuant to the GEWD Supply Agreement,
        we
        granted to GEWD a security interest in all of our tangible and intangible
        assets
        related to our polysilicon business, and all equity interests in Hoku Materials,
        owned by Hoku Scientific, to serve as collateral for our obligations under
        the
        GEWD Supply Agreement. This security interest is pari-passu with the security
        interests granted to Sanyo, Suntech and Solarfun Power Hong Kong Limited.
  Each
        party may elect to terminate the GEWD Supply Agreement under certain
        circumstances, including, but not limited to:
  •
              our
                  failure to secure financing by May 31,
                  2008;
  17
   •
              the
                  bankruptcy, assignment for the benefit of creditors or liquidation
                  of the
                  other party; or
  •
              a
                  material breach of the other party.
  GEWD
        may
        also terminate the agreement for the following material breaches:
  •
              if
                  we fail to deliver a predetermined quantity of our polysilicon
                  product by
                  December 2009; or
  •
if
        the
        senior debt financing exceeds $185 million for the 2,000 metric ton annual
        capacity polysilicon production plant, plus reasonable additional debt to
        finance additional capacity.
  We
          cannot
          guarantee that either we or GEWD will not terminate the agreement as a
          result of
          our inability to complete our financing by May 31, 2008. If the GEWD Supply
          Agreement is terminated for any reason, our business will be harmed. In
          addition, if the GEWD Supply Agreement is terminated, we will be required
          to
          return any deposits and advance payments received up to the date of the
          termination, which is $2 million as of May 31, 2008 and we will need to
          secure
          new funds in order to finance the construction of our polysilicon production
          plant. Securing new funds may delay the anticipated timing of completion
          of the
          production plant, which delay may result in us failing to meet our delivery
          requirements under our other supply agreements. We may not be able to secure
          new
          funds on terms as favorable to us as those under the GEWD Supply Agreement
          or at
          all. If we are unable to secure new funds, we will not be able to complete
          construction of the production plant, our business will be materially and
          adversely affected and we may be forced to delay, alter or abandon our
          planned
          business operations. If the contract is terminated, we will be
          required to return any deposits and payment advances received prior to the
          date of termination.
  **If
          our supply agreement with Solarfun Power Hong Kong Limited is terminated
          for any
          reason, our business will be materially harmed.**
  In
        May
        2008, we entered into a supply agreement with Solarfun Power Hong Kong Limited,
        a subsidiary of Solarfun Power Holdings Co., Ltd., or Solarfun, for the sale
        and
        delivery of polysilicon to Solarfun over a ten-year period beginning in July
        2009, or the Solarfun Supply Agreement. Under the Solarfun Supply Agreement,
        up
        to approximately $384 million may be payable to us during the ten-year period,
        subject to the acceptance of product deliveries and other conditions. The
        Solarfun Supply Agreement provides for the delivery of predetermined volumes
        of
        polysilicon by us and purchase of these volumes by Solarfun each month and
        each
        year at set prices from the date of the first shipment in 2009, for a continuous
        period of ten years. Pursuant to the Solarfun Supply Agreement, we granted
        to
        Solarfun a security interest in all of our tangible and intangible assets
        related to our polysilicon business, and all equity interests in Hoku Materials,
        owned by Hoku Scientific, to serve as collateral for our obligations under
        the
        Solarfun Supply Agreement. This security interest is pari-passu with the
        security interests granted to Sanyo, Suntech and GEWD.
  Each
        party may elect to terminate the Solarfun Supply Agreement under certain
        circumstances, including, but not limited to:
  •
if
          we
          fail to secure financing by December 31, 2008 of at least $75 million in
          gross
          aggregate proceeds, including the approximately $25 million we received
          from the
          sale of our common stock pursuant to a Securities Purchase
          Agreement;
  •
the
        bankruptcy, assignment for the benefit of creditors or liquidation of the
        other
        party; or
  •
a
        material breach of the other party.
  Solarfun
        may also terminate the agreement if we fail to deliver a predetermined quantity
        of our polysilicon product by December 2009.
  If
          the
          Solarfun Supply Agreement is terminated for any reason, our business will
          be
          materially harmed. In
          addition, if the Solarfun Supply Agreement is terminated, we will be required
          to
          return any deposits and advance payments received up to the date of the
          termination, which is $11 million as of May 31, 2008 and we will need to
          secure
          new funds in order to finance the construction of our polysilicon production
          plant. Securing new funds may delay the anticipated timing of completion
          of the
          production plant, which delay may result in us failing to meet our delivery
          requirements under our other supply agreements. We may not be able to secure
          new
          funds on terms as favorable to us as those under the Solarfun Supply Agreement
          or at all. If we are unable to secure new funds, we will not be able to
          complete
          construction of the production plant, our business will be materially and
          adversely affected and we may be forced to delay, alter or abandon our
          planned
          business operations. If the contract is terminated, we will be required
          to return any deposits and advance payments received prior to the date of
          termination.
  **If
        our engineering and construction contractors and consultants fail to perform
        under their contracts with us on a timely basis, we will experience delays
        in
        the construction of our planned polysilicon production plant.**
  If
        Stone
& Webster, Inc., JH Kelly LLC, GEC Graeber Engineering Consultants GmbH and
        MSA Apparatus Construction for Chemical Equipment, Ltd., Idaho Power Company,
        Dynamic Engineering Inc., Saft Power Systems USA, Inc., PVA Tepla Danmark
        or any
        of our other consultants, engineers, vendors or service providers fail to
        perform on a timely basis under their respective agreements, then we will
        not be
        able to commence production of polysilicon at our planned polysilicon production
        facility on our current schedule. In addition, if we are required to seek
        alternative suppliers of the reactors, the TCS process, or electric substation
        for which we have already contracted, our costs could increase significantly
        and
        we would experience further delays. Any delays may result in a breach of
        our
        supply agreements with Sanyo, Suntech, GEWD and Solarfun which may allow
        them to
        terminate the supply agreements, which would harm our business.
  **If
        we do not obtain on a timely basis the necessary government permits and
        approvals to construct and operate our planned polysilicon production plant
        our
        construction costs could increase and our business could be harmed.**
  We
          have
          received the air permit and storm water prevention permit that are necessary
          to
          begin construction of our polysilicon plant; however, we need to apply
          for
          additional permits with federal, state and local authorities, including
          building
          permits to continue the construction our polysilicon plant, and permits
          to
          operate the plant when construction is complete. The government regulatory
          process is lengthy and unpredictable and delays could cause additional
          expense
          and increase our construction costs. In addition, we could be required
          to change
          our construction plans in order receive the required permits and such changes
          could also result in additional expense and delay. Any delay in completion
          of
          construction could result in us failing to meet our delivery deadlines
          under our
          supply agreements and give the other parties to these agreements the right
          to
          terminate the agreements.
  18
  **If
        we are unable to obtain an easement across property adjoining the site of
        our
        planned polysilicon production plant or experience delays in the construction
        of
        an overpass we may be unable to access our property to operate our plant.**
  We
        currently have limited construction access to our polysilicon plant site
        across
        both an at-grade railroad crossing pursuant to a private crossing agreement
        with
        Union Pacific Railroad that will expire on December 31, 2012, and pursuant
        to a
        temporary construction and access agreement between the City of Pocatello
        and
        the owner of a parcel adjacent to our facility that will expire in January
        2010.
 Both agreements limit our access for construction purposes only, and we do
        not currently have the right to cross the railroad or the adjacent property
        to
        operate our planned polysilicon plant.  We plan to ultimately build an
        overpass across the railroad or to work with the City of Pocatello to build
        a
        public road that would connect our property to the highway; however, prior
        to
        completion of the overpass or the public road, our investors or lenders may
        require that we obtain operational road access to the site through other
        legally
        enforceable rights of access, such as an easement, from adjoining property
        owners who are under no obligation to provide us with such legally enforceable
        rights of access. We have commenced discussions with the City of Pocatello
        and
        the property owners; however, the adjoining property owners are under no
        legal
        obligation to provide us with an easement or permit us to otherwise enter
        their
        property and we may not be able to obtain such access.
  **Even
        if we achieve our polysilicon and PV system installation objectives on a
        timely
        basis and complete the construction of polysilicon production plant as currently
        planned, we may still be unsuccessful in developing, producing and/or selling
        these products and services, which would harm our business.**
  If
        we are
        successful in our efforts to construct our polysilicon production facility,
        our
        ability to successfully compete in the polysilicon and PV system installation
        markets will depend on a number of factors, including:
  •
              our
                  ability to produce trichlrosilane and polysilicon, and purchase
                  PV modules
                  at a cost that allows us to achieve or maintain profitability in
                  these
                  businesses;
  •
              our
                  ability to successfully manage a much larger and growing enterprise,
                  with
                  a broader national and international presence;
  •
              our
                  ability to attract and expand new customer relationships;
  •
              our
                  ability to develop new technologies to become competitive through
                  cost
                  reductions and improvements in solar radiation conversion efficiencies;
  •
              our
                  ability to scale our business to be competitive;
  •
              future
                  product liability or warranty claims; and
  •
              our
                  ability to compete within a highly competitive market against companies
                  that have greater resources, longer operating histories and larger
                  market
                  share than we do.
  **Industry-wide
        shortages or overcapacity in the production of polysilicon could harm our
        business.**
  Polysilicon
        is an essential raw material in the production of PV cells, which are connected
        together to make modules. Polysilicon is created by refining quartz or sand,
        and
        is typically supplied to PV cell manufacturers in the form of silicon ingots
        that are sliced into wafers, or as pre-sliced wafers. Industry-wide shortages
        of
        polysilicon have created shortages of PV modules and increased prices. Our
        inability to obtain sufficient modules at commercially reasonable prices
        or at
        all would adversely affect our ability meet potential customer demand for
        our
        products or to provide products at competitive prices, and may delay the
        potential growth of PV system installations business, thereby harming our
        business.
  In
        light
        of these shortages, certain polysilicon producers have announced plans to
        invest
        heavily in the expansion of their production capacities in view of the current
        scarcity of solar-grade silicon, strong demand and the expected strong market
        growth. We currently expect significant additional capacity to come on-line
        in
        2010. This expansion of production capacities could result in an excess supply
        of solar-grade silicon. In addition, if an excess supply of electronic-grade
        silicon were to develop, producers of electronic-grade silicon could switch
        production to solar-grade silicon, eliminating the current scarcity of
        solar-grade silicon or causing it to decline more rapidly than we currently
        anticipate. The electronic-grade silicon market historically has experienced
        significant cyclicality; for example, that market experienced significant
        excess
        supply from 1998 through 2003. Moreover, the current scarcity of silicon
        could
        also be overcome in the medium term if the need for silicon is significantly
        reduced as a result of the introduction of new technologies that significantly
        reduce or eliminate the need for silicon in producing effective PV systems.
        If
        any of these events occurred, they could lead to considerable pressure on
        the
        world market price for solar-grade silicon, which, in turn, could place pressure
        on our margins in these businesses. Accordingly, overcapacity in polysilicon
        production could harm our business.
  **If
        government incentives to locate our planned polysilicon facility in the City
        of
        Pocatello, Idaho are not realized then the costs of establishing our facility
        may be higher than we currently estimate.**
  The
        State
        of Idaho and the local municipal government have approved a variety of
        incentives to attract Hoku Materials, including tax incentives, financial
        support for infrastructure improvements around our facility, and grants to
        fund
        the training of new employees. In December 2006, we received a letter from
        the
        City of Pocatello, Idaho outlining a variety of financial and other incentives
        that could be available to us if we ultimately complete the construction
        of our
        planned polysilicon production facility in the City of Pocatello, Idaho.
        This
        letter is not a legally binding agreement on the part of the City of Pocatello,
        Idaho or on us, and the various incentives described in the letter are subject
        to a number of risks, contingencies and uncertainties, including the actual
        availability of financial and other incentives, including favorable tax
        incentives and utility availability, at the time of completion of planned
        construction and thereafter.
  19
  In
          March
          2007, we entered into a 99-year ground lease with the City of Pocatello,
          for
          approximately 67 acres of land in Pocatello, Idaho and in May 2007 we commenced
          construction of our polysilicon facility. In May 2007, the City of Pocatello
          approved an ordinance that would provide us with tax incentives related
          to the
          infrastructure necessary for the completion of our planned polysilicon
          plant. We
          would receive up to $25.9 million in real property tax reimbursements for
          infrastructure improvements and up to $17.4 million in real property tax
          reimbursements based on employment numbers. The tax incentives expire on
          December 31, 2030. Except for the ground lease, we have not entered into
          any
          other definitive agreements with the State of Idaho or any municipal government
          and we may not realize the benefits of these other offered incentives including
          workforce training funds and utility capacities. If there are changes to
          the
          ordinance, which affects the amount of the incentives, and/or we are unable
          to realize these incentives the operating costs of our planned polysilicon
          facility in Idaho may be higher than we currently estimate.
  **If
        our competitors are able to develop and market products that customers prefer
        to
        our products, we may not be able to generate sufficient revenue to continue
        operations.**
  In
        the
        polysilicon market, we will also compete with companies such as Hemlock
        Semiconductor Corporation, Renewable Energy Corporation ASA, Mitsubishi
        Polycrystalline Silicon America Corporation, Mitsubishi Materials Corporation,
        Tokuyama Corporation, MEMC Electronic Materials, Inc., and Wacker Chemie
        AG. In
        addition, we believe new companies may be emerging in China, Korea, India,
        Europe, Brazil, Australia, North America, and the Middle East, and new
        technologies, such as fluidized bed reactors and direct solidification, are
        emerging, which may have significant cost and other advantages over the Siemens
        process we are planning to use to produce polysilicon at our production
        facility. These competitors may have longer operating histories, greater
        name
        recognition and greater financial, sales and marketing, technical and other
        resources than us. If we fail to compete successfully, we may be unable to
        successfully enter the market for polysilicon and PV modules.
  The
        market for PV systems installations is competitive and continually evolving.
        As
        a new entrant to this market, we expect to face substantial competition from
        companies such as PowerLight, a subsidiary of SunPower Corporation, SunEdison,
        and other new and emerging companies in Asia, North America and Europe. Many
        of
        our known competitors are established players in the solar industry, and
        have a
        stronger market position than ours and have larger resources and recognition
        than we have. Furthermore, the PV market in general competes with other sources
        of renewable energy and conventional power generation.
  **Our
        business and industry are subject to government regulation, which may harm
        our
        ability to market 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 policies 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 PV system installations. For example, without
          a
          regulatory mandated exception for solar power systems, utility customers
          are
          often charged interconnection or standby fees for putting distributed power
          generation on the electric utility grid. These fees could increase the
          cost to
          our customers of installing PV systems and make them less desirable, thereby
          harming our business, prospects, results of operations and financial condition.
          Furthermore, our discussions with The James Campbell Company to plan a
          Kapolei Sustainable Energy Park is subject to various conditions and government
          approvals related to the capped solid waste storage area on the site.
  The
        installation of PV systems is subject to oversight and regulation in accordance
        with national and local ordinances relating to building codes, safety,
        environmental protection, utility interconnection and metering and related
        matters. It is difficult to track the requirements of individual states and
        design equipment to comply with the varying standards. Any new government
        regulations or utility policies pertaining to PV system installations may
        result
        in significant additional expenses to us and, as a result, could cause a
        significant reduction in demand for our PV installation services.
  **The
        reduction or elimination of government and economic incentives for PV systems
        and related products could reduce the market opportunity for our PV installation
        services.**
  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 incentives. Because we plan to sell to the on-grid market, the
        reduction or elimination of government incentives may adversely affect the
        growth of this market or result in increased price competition, both of which
        adversely affect our ability to compete in this market. Currently, the U.S.
        federal solar tax credit is scheduled to expire at the end of calendar year
        2008. If similar tax or other federal government incentives are not available
        beyond calendar year 2008, it could harm our solar business.
  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 other forms of energy. These government economic
        incentives could be reduced or eliminated altogether. For example, Germany
        has
        been a strong supporter of solar power products and systems and political
        changes in Germany could result in significant reductions or eliminations
        of
        incentives, including the reduction of tariffs over time. Some solar program
        incentives expire, decline over time, are limited in total funding or require
        renewal of authority. Net metering policies in Japan could limit the amount
        of
        solar power installed there. Reductions in, or elimination or expiration
        of,
        governmental incentives could result in decreased demand for PV products,
        and
        reduce the size of the market for our planned PV system installation services.
  20
  **We
        may not be able to protect our intellectual property, and we could incur
        substantial costs defending ourselves against claims that our products infringe
        on the proprietary rights of others.**
  Our
        ability to compete effectively in the fuel cell market will depend on our
        ability to protect our intellectual property rights with respect to our Hoku
        MEAs, Hoku Membranes and manufacturing processes and any intellectual property
        we develop with respect to our polysilicon business. We rely in part on patents,
        trade secrets and policies and procedures related to confidentiality to protect
        our intellectual property. However, much of our intellectual property is
        not
        covered by any patent or patent application. Confidentiality agreements to
        which
        we are party may be breached, and we may not have adequate remedies for any
        breach. Our trade secrets may also become known without breach of these
        agreements or may be independently developed by our competitors. Our inability
        to maintain the proprietary nature of our technology and processes could
        allow
        our competitors to limit or eliminate any of our potential competitive
        advantages. Moreover, our patent applications may not result in the grant
        of
        patents either in the United States or elsewhere. Further, in the case of
        our
        issued patents or our patents that may issue, we do not know whether the
        claims
        allowed will be sufficiently broad to protect our technology or processes.
        Even
        if some or all of our patent applications issue are sufficiently broad, our
        patents may be challenged or invalidated and we may not be able to enforce
        them.
        We could incur substantial costs in prosecuting or defending patent infringement
        suits or otherwise protecting our intellectual property rights. We do not
        know
        whether we have been or will be completely successful in safeguarding and
        maintaining our proprietary rights. Moreover, patent applications filed in
        foreign countries may be subject to laws, rules and procedures that are
        substantially different from those of the United States, and any resulting
        foreign patents may be difficult and expensive to enforce. Further, our
        competitors may independently develop or patent technologies or processes
        that
        are substantially equivalent or superior to ours. If we are found to be
        infringing third-party patents, we could be required to pay substantial
        royalties and/or damages, and we do not know whether we will be able to obtain
        licenses to use these patents on acceptable terms, if at all. Failure to
        obtain
        needed licenses could delay or prevent the development, production or sale
        of
        our products, and could necessitate the expenditure of significant resources
        to
        develop or acquire non-infringing intellectual property.
  Asserting,
        defending and maintaining our intellectual property rights could be difficult
        and costly, and failure to do so might diminish our ability to compete
        effectively and harm our operating results. We may need to pursue lawsuits
        or
        legal actions in the future to enforce our intellectual property rights,
        to
        protect our trade secrets and domain names, and to determine the validity
        and
        scope of the proprietary rights of others. If third parties prepare and file
        applications for trademarks used or registered by us, we may oppose those
        applications and be required to participate in proceedings to determine priority
        of rights to the trademark.
  We
        cannot
        be certain that others have not filed patent applications for technology
        covered
        by our issued patent or our pending patent applications or that we were the
        first to invent technology because:
  •
              some
                  patent applications in the United States may be maintained in secrecy
                  until the patents are issued;
  •
              patent
                  applications in the United States and many foreign jurisdictions
                  are
                  typically not published until 18 months after filing; and
  •
              publications
                  in the scientific literature often lag behind actual discoveries
                  and the
                  filing of patents relating to those discoveries.
  Competitors
        may have filed applications for patents, may have received patents and may
        obtain additional patents and proprietary rights relating to products or
        technology that block or compete with our products and technology. Due to
        the
        various technologies involved in the development of fuel cell systems, including
        membrane and MEA technologies, and PV products, it is impracticable for us
        to
        affirmatively identify and review all issued patents that may affect our
        products. Although we have no knowledge that our products and technology
        infringe any third party’s intellectual property rights, we cannot be sure that
        we do not infringe any third party’s intellectual property rights. We may have
        to participate in interference proceedings to determine the priority of
        invention and the right to a patent for the technology. Litigation and
        interference proceedings, even if they are successful, are expensive to pursue
        and time-consuming, and we could use a substantial amount of our financial
        resources in either case.
  **The
        loss of any of our executive officers or the failure to attract or retain
        specialized technical and management personnel could impair our ability to
        grow
        our business.**
  We
        are
        highly dependent on our executive officers, including Dustin M. Shindo, our
        Chairman of the Board of Directors, President and Chief Executive Officer,
        and
        Karl M. Taft III, our Chief Technology Officer. Due to the specialized knowledge
        that each of our executive officers possesses with respect to our technology
        or
        operations, the loss of service of any of our executive officers would harm
        our
        business. We do not have employment agreements with any of our executive
        officers, and each may terminate his employment without notice and without
        cause
        or good reason. In addition, we do not carry key man life insurance on our
        executive officers.
  There
        is
        a limited pool of qualified applicants for our operations located in Hawaii
        capable of meeting our specialized needs. Our future success will depend,
        in
        part, on our ability to attract and retain qualified management and technical
        personnel, many of whom must be relocated from the continental United States
        or
        other countries. In addition, we will need to hire and train specialized
        engineers to manage and operate our planned polysilicon facility in Pocatello,
        Idaho. We may not be successful in hiring or retaining qualified personnel.
        Our
        inability to hire qualified personnel on a timely basis, or the departure
        of key
        employees, could harm our business.
  21
  **We
        may have difficulty managing change in our operations, which could harm our
        business.**
  We
        continue to undergo rapid change in the scope and breadth of our operations
        as
        we seek to grow our business. Our entry into the PV system installation and
        planned entry into the polysilicon markets involve a substantial change to
        our
        operations. Our potential growth has placed a significant strain on our senior
        management team and other resources. We will be required to make significant
        investments in our engineering, logistics, financial and management information
        systems. In particular, we currently have limited resources dedicated to
        sales
        and marketing activities and will need to expand our sales and marketing
        infrastructure to support our customers. Our entry into the PV installation
        business and planned entry into the polysilicon markets involves the
        construction of a polysilicon production facility, increased international
        activities, and the increase in our headcount and operating costs by a
        significant factor. Our business could be harmed if we encounter difficulties
        in
        effectively managing our planned growth. In addition, we may face difficulties
        in our ability to predict customer demands accurately, which could strain
        our
        support staff and our ability to meet those demands.
  **We
        rely on limited suppliers and, if these suppliers fail to deliver materials
        that
        meet our quality requirements in a timely manner or at all, the installation
        of
        PV products and production of polysilicon would be limited.**
  It
        is
        highly likely that we will procure materials for our PV system installation
        and
        our planned polysilicon businesses from companies that are also our competitors.
        These companies may choose in the future not to sell these materials to us
        at
        all, or may raise their prices to a level that would prevent us from selling
        our
        products on a profitable basis.
  **We
        will use materials that are considered hazardous in our planned manufacturing
        and production processes and, therefore, we could be liable for environmental
        damages resulting from our research, development, or manufacturing and
        production operations.**
  The
        production of polysilicon will involve the use of materials that are hazardous
        to human health and the environment, the storage, handling and disposal of
        which
        will be subject to government regulation. Compliance with environmental laws
        and
        regulations may be expensive, and current or future environmental regulations
        may increase our research and development or manufacturing costs and may
        require
        us to halt or suspend our operations until we regain compliance. If we have
        an
        accident at our facility involving a spill or release of these substances,
        we
        may be subject to civil and/or criminal penalties, including financial penalties
        and damages, and possibly injunctions preventing us from continuing our
        operations. Any liability for penalties or damages, and any injunction resulting
        from damages to the environment or public health and safety, could harm our
        business. In addition under various Federal, state and local laws, ordinances
        and regulations, an owner or operator of real estate is liable for costs
        of
        removal or remediation of certain hazardous or toxic substances on or in
        such
        property. These laws often impose such liability without regard to whether
        the
        owner or operator knew of, or was responsible for, the presence of such
        substances. We do not have any insurance for liabilities arising from the
        use
        and handling of hazardous materials.
  **Any
        significant and prolonged disruption of our operations in Hawaii could result
        in
        PV system installation delays that would reduce our revenue.**
  Hoku
        Solar is currently located in Hawaii, which is subject to the potential risk
        of
        earthquakes, hurricanes, tsunamis, floods and other natural disasters. The
        occurrence of an earthquake, hurricane, tsunami, flood or other natural disaster
        at or near our facility in Hawaii could result in damage, power outages and
        other disruptions that would interfere with our ability to conduct our business.
        In October 2006, Hawaii suffered a major earthquake causing significant damage
        throughout the state. Our facilities and operations; however, did not suffer
        any
        damage.
  Most
        of
        the materials we use must be delivered via air or sea, and some of the equipment
        used in our production process can only be delivered via sea. Hawaii has
        a large
        union presence and has historically experienced labor disputes, including
        dockworker strikes that have prevented or delayed cargo shipments. Any future
        dispute that delays shipments via air or sea could prevent us from procuring
        or
        installing our turnkey PV systems in time to meet our customers’ requirements,
        or might require us to seek alternative and more expensive freight forwarders
        or
        contract manufacturers, which could increase our expenses.
  **We
        have significant international activities and customers that subject us to
        additional business risks, including increased logistical complexity and
        regulatory requirements, which could result in a decline in our revenue.**
  We
        believe that international sales will account for a significant percentage
        of
        our revenue in the future. Hoku Materials’ largest polysilicon supply agreements
        are with Suntech, Sanyo, GEWD, and Solarfun which are located in The People’s
        Republic of China, Japan, Malaysia, and Hong Kong, respectively. International
        sales can be subject to many inherent risks that are difficult or impossible
        for
        us to predict or control, including:
  •
              political
                  and economic instability;
  •
              unexpected
                  changes in regulatory requirements and tariffs;
  •
              difficulties
                  and costs associated with staffing and managing foreign operations,
                  including foreign distributor relationships;
  •
              longer
                  accounts receivable collection cycles in certain foreign countries;
  22
  •
              adverse
                  economic or political changes;
  •
              unexpected
                  changes in regulatory requirements;
  •
              more
                  limited protection for intellectual property in some countries;
  •
              potential
                  trade restrictions, exchange controls and import and export licensing
                  requirements;
  •
              U.S.
                  and foreign government policy changes affecting the markets for
                  our
                  products;
  •
              problems
                  in collecting accounts receivable; and
  •
              potentially
                  adverse tax consequences of overlapping tax structures.
  All
        of
        our contracts are denominated in U.S. dollars except for our contract with
        GEC
        Graeber Engineering Consultants GmbH and MSA Apparatus Construction for Chemical
        Equipment Ltd. Therefore, increases in the exchange rate of the U.S. dollar
        to
        foreign currencies will cause our products to become relatively more expensive
        to customers in those countries, which could lead to a reduction in sales
        or
        profitability in some cases.
  **Our
        stock price is volatile and purchasers of our common stock could incur
        substantial losses.**
  Our
        stock
        price is volatile and during fiscal 2008, our stock has had closing low and
        high
        sales prices in the range of $4.07 to $14.19 per share. The stock market
        in
        general and the market for technology companies in particular have experienced
        extreme volatility that has often been unrelated to the operating performance
        of
        particular companies. The market price of our common stock may fluctuate
        significantly in response to a number of factors, including:
  •
              variations
                  in our financial results or those of our competitors and our customers;
  •
              announcements
                  by us, our competitors and our customers of acquisitions, new products,
                  significant contracts, commercial relationships or capital commitments;
  •
              failure
                  to meet the expectations of securities analysts or investors with
                  respect
                  to our financial results;
  •
              our
                  ability to develop and market new and enhanced products on a timely
                  basis;
  •
              litigation;
  •
              changes
                  in our management;
  •
              changes
                  in governmental regulations or in the status of our regulatory
                  approvals;
  •
              future
                  sales of our common stock by us and future sales of our common
                  stock by
                  our officers, directors and affiliates;
  •
              investors’
                  perceptions of us; and
  •
              general
                  economic, industry and market conditions.
  In
        addition, in the past, following periods of volatility and a decrease in
        the
        market price of a company’s securities, securities class action litigation has
        often been instituted against the company. Class action litigation, if
        instituted against us, could result in substantial costs and a diversion
        of our
        management’s attention and resources.
  **Anti-takeover
        defenses that we have in place could prevent or frustrate attempts by
        stockholders to change our directors or management.**
  Provisions
        in our amended and restated certificate of incorporation and bylaws may make
        it
        more difficult for or prevent a third party from acquiring control of us
        without
        the approval of our Board of Directors. These provisions:
  •
              establish
                  a classified Board of Directors, so that not all members of our
                  Board of
                  Directors may be elected at one time;
  •
              set
                  limitations on the removal of directors;
  •
              limit
                  who may call a special meeting of stockholders;
  •
              establish
                  advance notice requirements for nominations for election to our
                  Board of
                  Directors or for proposing matters that can be acted upon at stockholder
                  meetings;
  •
              prohibit
                  stockholder action by written consent, thereby requiring all stockholder
                  actions to be taken at a meeting of our stockholders; and
  23
  •
              provide
                  our Board of Directors the ability to designate the terms of and
                  issue new
                  series of preferred stock without stockholder approval.
  These
        provisions may have the effect of entrenching our management team and may
        deprive investors of the opportunity to sell their shares to potential acquirers
        at a premium over prevailing prices. This potential inability to obtain a
        control premium could reduce the price of our common stock.
  As
        a
        Delaware corporation, we are also subject to Delaware anti-takeover provisions.
        Our Board of Directors could rely on Delaware law to prevent or delay an
        acquisition.
 
 **Item 1B.**
              **Unresolved
                  Staff Comments**
  None.
 
 **Item 2.**
              **Properties**
  We
        own
        approximately 2.2 acres of land in Kapolei, Hawaii and have constructed a
        building of approximately 14,000 square feet of combined office, research
        and
        development, and manufacturing space on a portion of that land. Due to the
        change in our business strategy to not manufacture solar modules along with
        the
        downsizing of our fuel cell business, we are exploring the sale of our land
        and
        facility in Kapolei, Hawaii and the relocation to a leased warehouse and
        office
        space on the island of Oahu, Hawaii.
  In
        January 2007, we announced our selection of the City of Pocatello, Idaho
        as the
        planned location for Hoku Materials, where we plan to build and equip a
        polysilicon production facility. In March 2007, we entered into a 99-year
        ground
        lease with the City of Pocatello, for approximately 67 acres of land in
        Pocatello, Idaho. The annual rent for the ground lease is fixed at one dollar
        per year until the expiration of the lease on December 31, 2106. In addition
        to
        this 67-acre lease, we and the City of Pocatello have signed a separate
        agreement granting us an option to lease an additional 450 acres of land
        owned
        by the City of Pocatello, which we may use for future expansion. The terms
        of
        any future lease will be subject to good faith negotiations between us and
        the
        City of Pocatello.
  In
        March
        2007, we entered into a lease for approximately 1,200 square feet of temporary
        office space in Pocatello, Idaho. The lease expired in March 2008.
  **Item 3.**
              **Legal
                  Proceedings**
  From
        time
        to time, we may be involved in litigation relating to claims arising out
        of our
        operations. We are not currently involved in any material legal proceedings.
 
 **Item 4.**
              **Submission
                  of Matters to a Vote of Security
                  Holders**
  None.
  **PART
        II**
 
 **Item 5.**
              **Market
                  for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                  Purchases of Equity
                  Securities**
  **Market
        Information**
  Our
        common stock has traded on The NASDAQ Global Market, or NASDAQ, under the
        symbol
“HOKU” since August 5, 2005. The high and low sales prices of our common
        stock, as reported by the NASDAQ, for the quarters indicated are as
        follows:
  **Sales
                  prices****High**
              
              **Low****Fiscal
                  year ended March 31, 2008**1st
                  Quarter
              
              $
              12.80
              
              $
              4.002nd
                  Quarter
              
              $
              14.55
              
              $
              7.503rd
                  Quarter
              
              $
              13.53
              
              $
              5.874th
                  Quarter
              
              $
              14.88
              
              $
              7.05**Fiscal
                  year ended March 31, 2007**1st
                  Quarter
              
              $
              7.69
              
              $
              2.862nd
                  Quarter
              
              $
              4.90
              
              $
              2.123rd
                  Quarter
              
              $
              4.35
              
              $
              2.524th
                  Quarter
              
              $
              7.54
              
              $
              2.52
  As
        of
        April 23, 2008, there were 46 stockholders of record of our common stock.
        Such
        number does not include beneficial owners holding shares through nominee
        names.
  24
  **Dividend
        Policy**
  We
        have
        never declared or paid any cash dividends on our capital stock. We currently
        intend to retain any future earnings to finance the growth and development
        of
        our business and, therefore, do not anticipate paying any cash dividends
        in the
        foreseeable future. Any future determination to pay cash dividends will be at
        the discretion of our Board of Directors and will depend upon our financial
        condition, operating results and capital requirements, any contractual
        restrictions and other factors that our Board of Directors deems
        relevant.
  **Unregistered
        Sales of Equity Securities**
  On
          February 29, 2008, we entered into a securities purchase agreement with
          Suntech
          Power International Ltd., Investcorp Interlachen Multi-Strategy Master
          Fund
          Limited and Capital Ventures International under which we
          received aggregate gross proceeds of approximately $25 million from the
          sale of 2,893,519 shares of common stock. We registered for public resale
          these
          shares of common stock pursuant to a Registration Statement on Form S-3
          (File
          No. 333-149599), that was declared effective by the SEC on April 3, 2008.
          We intend to use these proceeds to help fund the construction of our
          polysilicon plant.
  We
        believe the offer and sale of the securities described above were exempt
        from the registration requirements of the Securities Act of 1933, for the
        private placement of these securities pursuant to Section 4(2) of
        the Securities Act and as Regulation D thereunder because the securities
        were sold in a transaction not involving a public offering.
 We
        also
        intend to raise up to $110 million in additional financing for the procurement
        and construction of our polysilicon manufacturing facility.
 **Equity
              Compensation Plan Information**
 
 The
              number of shares issuable upon exercise of outstanding stock options,
              the
              weighted-average exercise price of the outstanding options, and the
              number of
              stock options remaining for future issuance for each of our equity
              compensation
              plans as of March 31, 2008 are summarized as follows:
 
 **Plan Category**
                    
                    **Number of securities**
                      **to be issued upon**
                      **exercise of**
                      **outstanding options,**
                      **warrants and rights**
                    
                    **Weighted-average**
                      **exercise price of**
                      **outstanding options,**
                      **warrants and rights**
                    
                    **Number of securities**
                      **remaining available for**
                      **issuance under**
                      **equity compensation**
                      **plans (excluding securities**
                      **reflected in column (a))****(a)**
                    
                    **(b)**
                    
                    **(c)**Equity
                        compensation plans approved by security holders(1)
                    
                    
                    564,791
                    
                    $
                    2.20
                    (3)
                    
                    970,737
                    (4)Equity
                        compensation plans not approved by security holders(2)
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —Total
                    
                    
                    564,791
                    
                    $
                    2.20
                    (3)
                    
                    970,737
                    (4)
 
 (1)
                    This
                        row includes our 2002 Stock Plan, 2005 Equity Incentive Plan,
                        and 2005
                        Non-Employee Directors’ Stock Option
                        Plan.
 (2)
                    All
                        of our equity compensation plans have been approved by our
                        stockholders.
 (3)
                    Represents
                        weighted average exercise price of outstanding options
                        only.
 (4)
                    The
                        number of shares of common stock reserved for issuance under
                        our 2005
                        Equity Incentive Plan will automatically increase on April
                        1st of each
                        year, from 2006 through 2014, in an amount equal to the lesser
                        of 133,333
                        shares of our common stock or the number of shares of common
                        stock granted
                        pursuant to stock awards in the prior fiscal year. The number
                        of shares of
                        our common stock reserved for issuance under our 2005 Non-Employee
                        Directors’ Stock Option Plan will automatically increase on April 1st
                        of
                        each year, from 2006 through 2014, by the number of shares
                        of common stock
                        subject to options granted during the preceding fiscal year,
                        less the
                        number of shares that reverted back to the share reserve
                        during the
                        preceding fiscal year. Our Board has the authority to designate
                        a smaller
                        number of shares by which the authorized number of shares
                        of common stock
                        will be increased under both plans prior to the last day
                        of any fiscal
                        year.
 **Issuer
        Purchases of Equity Securities**
  None.
 
 **Item 6.**
              **Selected
                  Financial Data**
  The
        following selected financial data should be read in conjunction with our
        financial statements and the notes thereto, and with Item 7, “Management’s
        Discussion and Analysis of Financial Condition and Results of Operations.” The
        statement of operations data for the fiscal years ended March 31, 2008,
        March 31, 2007 and  March 31, 2006 and the balance sheet data as
        of March 31, 2008 and March 31, 2007 have been derived from and should be
        read in conjunction with our audited financial  statements
        and the notes thereto included elsewhere in this Annual Report on Form 10-K.
        The
        statement of operations data for the fiscal years ended March 31, 2005 and
        March 31, 2004 and the balance sheet data as of March 31, 2006 and
        March 31, 2005 is derived from audited financial statements and the notes
        thereto which are not included in this Annual Report on Form 10-K. Historical
        results are not necessarily indicative of future results.
 **Fiscal
                  Year Ended March 31,****2008**
              
              **2007**
              
              **2006**
              
              **2005**
              
              **2004****(in
                  thousands, except share and per share data)****Statements
                  of Operations Data:**Revenue:Service
                  and license revenue
              
              $
              3,229
              
              $
              5,368
              
              $
              5,505
              
              $
              2,933
              
              $
              55Total
                  revenue
              
              
              3,229
              
              
              5,368
              
              
              5,505
              
              
              2,933
              
              
              55Cost
                  of revenue:Cost
                  of service and license revenue(1)
              
              
              2,312
              
              
              3,173
              
              
              954
              
              
              458
              
              
              3Total
                  cost of revenue
              
              
              2,312
              
              
              3,173
              
              
              954
              
              
              458
              
              
              3Gross
                  margin
              
              
              917
              
              
              2,195
              
              
              4,551
              
              
              2,475
              
              
              52Operating
                  expenses:Selling,
                  general and administrative(1)
              
              
              6,207
              
              
              4,487
              
              
              2,743
              
              
              2,132
              
              
              2,009Research
                  and development(1)
              
              
              86
              
              
              1,774
              
              
              1,326
              
              
              1,419
              
              
              1,074Total
                  operating expenses
              
              
              6,293
              
              
              6,261
              
              
              4,069
              
              
              3,551
              
              
              3,083Income
                  (loss) from operations
              
              
              (5,376
              )
              
              (4,066
              )
              
              482
              
              
              (1,076
              )
              
              (3,031
              )Interest
                  and other income
              
              
              1,083
              
              
              1,039
              
              
              594
              
              
              98
              
              
              15Income
                  (loss) before income tax benefit
              
              
              (4,293
              )
              
              (3,027
              )
              
              1,076
              
              
              (978
              )
              
              (3,016
              )Income
                  tax expense (benefit)
              
              
              -
              
              
              (275
              )
              
              (268
              )
              
              (250
              )
              
              (151
              )Net
                  income (loss)
              
              $
              (4,293
              )
              $
              (2,752
              )
              $
              1,344
              
              $
              (728
              )
              $
              (2,865
              )Basic
                  net income (loss) per share
              
              $
              (0.26
              )
              $
              (0.17
              )
              $
              0.10
              
              $
              (0.13
              )
              $
              (0.72
              )Diluted
                  net income (loss) per share
              
              $
              (0.26
              )
              $
              (0.17
              )
              $
              0.09
              
              $
              (0.13
              )
              $
              (0.72
              )Shares
                  used in computing basic net income (loss) per share
              
              
              16,656,000
              
              
              16,449,537
              
              
              13,033,263
              
              
              5,474,499
              
              
              3,965,626Shares
                  used in computing diluted net income (loss) per share
              
              
              16,656,000
              
              
              16,449,537
              
              
              15,264,763
              
              
              5,474,499
              
              
              3,965,626(1)Includes
                  stock-based compensation as follows:Cost
                  of service and license revenue
              
              $
              42
              
              $
              126
              
              $
              38
              
              $
              24
              
              $
              —Selling,
                  general and administrative
              
              
              954
              
              
              593
              
              
              872
              
              
              979
              
              
              1,113Research
                  and development
              
              
              72
              
              
              501
              
              
              146
              
              
              261
              
              
              212Total
              
              $
              1,068
              
              $
              1,220
              
              $
              1,056
              
              $
              1,264
              
              $
              1,325
  25
 
 **As
                  of March 31,****2008**
              
              **2007**
              
              **2006**
              
              **2005**
              
              **2004****(in
                  thousands)****Balance
                  Sheet Data:**Cash,
                  cash equivalents and short-term investments
              
              $
              29,760
              
              $
              19,956
              
              $
              22,688
              
              $
              4,159
              
              $
              3,201Working
                  capital
              
              
              25,432
              
              
              20,896
              
              
              21,036
              
              
              3,688
              
              
              2,525Total
                  assets
              
              
              68,109
              
              
              30,625
              
              
              32,083
              
              
              10,782
              
              
              4,137Long-term
                  obligations
              
              
              13,000
              
              
              2,000
              
              
              —
              
              
              5
              
              
              15Total
                  stockholders’ equity
              
              
              45,995
              
              
              25,494
              
              
              27,392
              
              
              6,232
              
              
              3,056
  **Item 7.**
              **Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations**
  **Overview**
  Hoku
        Scientific, Inc. is a materials science company focused on clean energy
        technologies. We were incorporated in Hawaii in March 2001, as Pacific Energy
        Group, Inc. In July 2001, we changed our name to Hoku Scientific, Inc. In
        December 2004, we were reincorporated in Delaware.
  We
        have
        historically focused our efforts on the design and development of fuel cell
        technologies, including our Hoku membrane electrode assemblies, or MEAs,
        and
        Hoku Membranes. In May 2006, we announced our plans to form an integrated
        photovoltaic, or PV, module business, and our plans to manufacture polysilicon,
        a primary material used in the manufacture of PV modules. In fiscal 2007,
        we
        reorganized our business into three business units: Hoku Materials, Hoku
        Solar
        and Hoku Fuel Cells. In February and March 2007, we incorporated Hoku Materials,
        Inc. and Hoku Solar, Inc., respectively, as wholly-owned subsidiaries to
        operate
        our polysilicon and solar businesses, respectively.
  26
  ***Hoku
        Materials***
  In
        February 2007, we incorporated Hoku Materials to manufacture polysilicon,
        a key
        material used in PV modules. We had originally planned to use the polysilicon
        internally by Hoku Solar to manufacture our own brand of solar modules, and
        for
        sale to the larger solar market. However, as a result of increased demand
        from
        third party customers, and our revised strategy for Hoku Solar, we intend
        to
        sell all of our planned output of polysilicon to third party customers.
  In
        May
        2007, we commenced construction of our planned polysilicon manufacturing
        facility in Pocatello, Idaho . We
        have
        increased the annual capacity from the previously planned 2,500 metric tons
        per
        year to 3,500 metric tons per year. In April 2008, we issued a change order
        with
        Stone & Webster, Inc., our engineering, procurement, and construction
        management service provider, and as a result our estimate of the total cost
        to
        construct and equip our polysilicon facility decreased to $390 million from
        $400
        million. We previously intended to finance the construction of this facility
        through project financing; however, in May 2008, we now intend to raise up
        to
        $110 million in additional financing through one or more debt or equity
        offerings for the procurement and construction of our polysilicon manufacturing
        facility.
  Once
        our
        plant is operating at full capacity, we expect that we will be able to meet
        the
        annual delivery requirements in our four existing polysilicon sales contracts.
        In addition, we have approximately 300 to 500 metric tons of unallocated
        annual
        polysilicon production capacity from our planned production output of 3,500
        metric tons per year, which may be sold under one or more new long-term
        contracts, reserved for strategic purposes, or sold on the spot market. If
        this
        polysilicon is sold under one or more long term contracts, such sales may
        provide additional prepayments that could reduce the amount of additional
        financing needed. Although we have increased the planned size our polysilicon
        facility, we believe we are still on track to complete pilot demonstration
        of
        the manufacturing of polysilicon in the fourth quarter of calendar year 2008,
        deliver polysilicon in the first half of calendar year 2009, and run at full
        3,500 metric tons per year capacity in the first half of calendar year 2010.
        We
        also plan to expand our polysilicon facility. We believe we have sufficient
        space to expand our polysilicon production to up to 8,000 metric tons per
        year
        on our existing 67-acre property; however the expansion size will primarily
        be
        determined based on new polysilicon sales contracts that we may sign.
  *Hoku
        Solar*
 In
        March
        2007, we incorporated Hoku Solar to assemble and install our own brand of
        PV
        modules. In June 2007, we announced a change in our strategy, which is to
        focus
        on the sale of turnkey PV system installations, and related services, and
        to
        exit the solar module manufacturing business. In connection with our new
        strategy, we resold our 15 megawatt-per-year solar module production line
        in
        July 2007, before it was delivered, for $1.8 million, and in September 2007,
        we
        resold our inventory of solar cells for $2.1 million and recognized a loss
        on
        the sale of $285,000. The module production line and the solar cells had
        been
        originally purchased for $1.9 million, and $2.8 million, respectively. In
        March
        2007, we recognized a write-down of $379,000 related to solar cell inventory
        and
        in June 2007 we wrote-down the solar module production line to $1.8 million.
 
 We
        plan
        to continue to design, engineer and install turnkey PV systems, but will
        use
        modules purchased from third party suppliers, which we believe we can purchase
        at lower prices than the cost to manufacture our own brand of modules.
        Furthermore, due to the change in our business strategy to not manufacture
        solar
        modules along with our downsizing of our fuel cell business, we are exploring
        the sale of our land and facility in Kapolei, Hawaii and the relocation to
        a
        leased warehouse and office space on the island of Oahu, Hawaii.
 
 *Hoku
        Fuel Cells*
 Under
        the
        name Hoku Fuel Cells, we operated our fuel cell business, which has designed,
        developed and manufactured MEAs for proton exchange membrane, or PEM, fuel
        cells. Hoku MEAs are designed for the residential primary power, commercial
        back-up, and automotive hydrogen fuel cell markets. To date, our customers
        have
        not commercially deployed products incorporating Hoku MEAs or Hoku Membranes,
        and we have not sold any products commercially. In August 2007, we completed
        our
        contract with the U.S. Navy.
 
 We
        intend
        to selectively pursue patent applications in order to protect our technology,
        inventions and improvements related to our fuel cell products and we do not
        currently plan on actively pursuing any new contracts or committing resources
        to
        further develop our fuel cell products.
  **Financial
        Operations Review**
  ***Revenue***
  Beginning
        in the second half of fiscal 2008, we began recognizing revenue through the
        sale
        of PV system installations and related services. Prior to the sale of PV
        system
        installations all of our revenue was recognized through service and license
        agreements from our fuel cell business. We do not expect to recognize revenue
        from our fuel cell business in the foreseeable future as we have completed
        all
        of our fuel cell contracts and are not actively seeking new fuel cell contracts;
        however, we will consider new opportunities if it makes financial sense.
        We plan
        to expand the type of revenue recognized through the sale of polysilicon
        and
        electricity. In general, we recognize revenue when persuasive evidence of
        an
        arrangement exists, delivery of the service or product has occurred, the
        sales
        price is fixed or determinable, and collectability is reasonably assured.
  27
  ***Cost
        of Revenue***
  Our
        cost
        of revenue consists primarily of employee compensation, including stock-based
        compensation, and supplies and materials. Beginning in fiscal 2006, we began
        allocating overhead to our cost of revenue. Such costs were immaterial in
        all
        prior fiscal years. We expect our cost of revenue to increase on an absolute
        basis as our PV system installations increase.
  ***Selling,
        General and Administrative Expenses***
  Our
        selling, general and administrative expenses consist primarily of employee
        compensation, including stock-based compensation for executive, sales and
        marketing, finance and administrative personnel. Other significant costs
        include
        insurance costs and professional fees for accounting, legal and consulting
        services. We expect our selling, general and administrative expenses to increase
        by a significant factor as a result of our entry into the PV system installation
        and polysilicon markets.
  ***Research
        and Development Expenses***
  Research
        and development expenses consist primarily of compensation, including
        stock-based compensation, for research and development personnel. Other
        significant costs include facility costs, the cost of supplies and materials
        and
        depreciation. We expense research and development expenses as they are incurred.
        Although our research and development expenses have decreased significantly
        since we reduced our investment in our fuel cell business, we expect to invest
        in the research and development of new solar products, which will result
        in a
        significant increase in our research and development expenses in the future.
  **Consolidated
        Results of Operations**
  The
        following analysis of the consolidated financial condition and results of
        operations of Hoku Scientific, Inc. and its subsidiaries should be read in
        conjunction with the consolidated financial statements and the related notes
        thereto.
  ***Fiscal
        Year 2008 vs. Fiscal Year 2007***
  *Revenue.* Revenue
        was $3.2 million for fiscal 2008 compared to $5.4 million for fiscal 2007.
        Revenue for fiscal 2008 was comprised of PV system installations primarily
        from
        contracts with Paradise Beverages, Bank of Hawaii and Hardware Hawaii and
        fuel
        cell revenue from contracts with the U.S. Navy compared to fuel cell revenue
        primarily from contracts with the U.S. Navy and Nissan in fiscal 2007.
  *Cost
        of Revenue.* Cost of
        revenue was $2.3 million for fiscal 2008 compared to $3.2 million for fiscal
        2007. The cost of revenue for fiscal 2008 related primarily to PV system
        installation contracts and related services and from fuel cell contracts
        with
        the U.S Navy compared to only fuel cell revenue primarily from contracts
        with
        the U.S. Navy and Nissan in fiscal 2007. Cost of revenue primarily consisted
        of
        employee compensation and supplies and materials.
  *Selling,
        General and Administrative Expenses.* Selling,
        general and administrative expenses were $6.2 million for fiscal 2008 compared
        to $4.5 million for fiscal 2007. The increase of $1.7 million was primarily
        due
        to a $940,000 increase in compensation to executive officers in accordance
        with
        the Fiscal Year 2008 Executive Incentive Compensation Plan compared to the
        Fiscal Year 2007 Executive Incentive Compensation Plan. In addition, there
        were
        increases related to a redeployment of personnel and the application of other
        direct and indirect charges of $401,000, professional fees of $390,000 payroll,
        which includes stock compensation, of $117,000, and travel expenses of $106,000.
        Furthermore, we recognized expenses in fiscal 2008 related to the loss on
        the
        sale of solar cells of $286,000 and impairment of solar and fuel cell equipment
        of $103,000. The increase was off-set by an impairment to solar cells in
        fiscal
        2007 of $379,000 and a reduction in insurance of $89,000, Hawaii use tax
        of
        $97,000 and utilities expenses of $57,000.
  *Research
        and Development Expenses.* Research
        and development expenses were $86,000 for fiscal 2008 compared to $1.8 million
        for fiscal 2007. The decrease of $1.7 million was primarily due to the write
        down of capital equipment and inventory used in our fuel cell business of
        $928,000 and $57,000, respectively, and by a decrease of $318,000 in employee
        compensation, primarily due to a reduction in force in Hoku Fuel Cells. There
        was also a decrease of $150,000 in costs related to a redeployment of personnel,
        supplies and other costs, $128,000 in materials and services used for research
        and development and $80,000 in depreciation.
  *Interest
          and Other Income.* Interest
          and other income was $1.1 million for fiscal 2008 compared to $1.0 million
          for
          fiscal 2007.
  ***Fiscal
        Year 2007 vs. Fiscal Year 2006***
  *Revenue.* Revenue
        was $5.4 million for fiscal 2007 compared to $5.5 million for fiscal 2006.
        Revenue for fiscal 2007 was comprised of fuel cell revenue primarily from
        Nissan
        and the U.S. Navy compared to fuel cell revenue primarily from Nissan in
        fiscal
        2006.
  *Cost
        of Revenue.* Cost of
        revenue was $3.2 million for fiscal 2007 compared to $954,000 for fiscal
        2006.
        The increase was due to increased costs related to our contracts with the
        U.S.
        Navy. The costs associated with the contracts consisted of manufacturing
        expenses, including employee compensation which includes stock-based
        compensation and supplies and materials.
  28


*Selling,
        General and Administrative Expenses.* Selling,
        general and administrative expenses were $4.5 million for fiscal 2007 compared
        to $2.7 million for fiscal 2006. The increase of $1.8 million was primarily
        due
        to increases in professional fees of $689,000, a write-down of inventory
        of
        $379,000, payroll of $316,000, which includes stock-based compensation and
        tax
        expenses of $105,000 relating to taxes specific to the State of Hawaii. There
        was also an increase related to a redeployment of personnel (e.g. payroll
        related costs) and the application of other direct and indirect charges of
        $180,000 and an increase in payroll expense and stock-based compensation
        to the
        executive officers of $146,000. Furthermore, the increase was a result of
        increases in stock-based compensation to the Independent Members of our Board
        of
        Directors of $70,000, travel expense of $51,000 and insurance expenses of
        $43,000. The increase was off-set by a reduction in stock-based compensation
        of
        $225,000 related to the officers’ common stock that was previously subject to
        our repurchase right.
  *Research
          and Development Expenses.* Research
          and development expenses were $1.8 million for fiscal 2007 compared to
          $1.3
          million for fiscal 2006. The increase of $500,000 was primarily due to
          the write
          down of capital equipment and inventory used in our fuel cell business
          of
          $928,000 and $57,000, respectively, and by costs related to materials and
          services used for research and development of $42,000. The increase was
          offset
          by a decrease of $308,000 to employee compensation, primarily due to a
          reduction
          in force in Hoku Fuel Cells and a decrease in executive officer compensation
          expense in accordance with our executive compensation plan. The increase
          was
          further offset by a reduction of $154,000 in costs related to the redeployment
          of personnel (e.g. payroll related costs), supplies and other costs, and
          by a
          reduction in stock-based compensation of $47,000 related to an executive
          officer.
  *Interest
          and Other Income.* Interest
          and other income was $1.0 million for fiscal 2007 compared to $594,000
          for
          fiscal 2006. The increase of $445,000 was primarily due to higher average
          balances of cash equivalent and short-term investments, to a lesser extent,
          higher interest rates earned on short-term investments.
 
 ***Income
        Taxes***
  Income
        taxes are accounted for under the asset and liability method of Statement
        of
        Financial Accounting Standards No. 109, or SFAS No. 109, *Accounting
        for Income Taxes* ,
        which
        establishes financial accounting and reporting standards for the effect of
        income taxes. In accordance with SFAS No. 109, we recognize federal and
        state current tax liabilities or assets based on our estimate of taxes payable
        to or refundable by each tax jurisdiction in the current fiscal year.
  Deferred
        tax assets and liabilities are established for the temporary differences
        between
        the financial reporting bases and the tax bases of our assets and liabilities
        at
        the tax rates we expect to be in effect when these deferred tax assets or
        liabilities are anticipated to be recovered or settled. Our ultimate realization
        of deferred tax assets depends upon the generation of future taxable income
        during periods in which those temporary differences become deductible. Based
        on
        the best available objective evidence, it is more likely than not that our
        remaining net deferred tax assets will not be realized. Accordingly, we continue
        to provide a valuation allowance against our net deferred tax assets as of
        March 31, 2008.
  We
        have
        tax deductions from the exercise of certain stock options that exceed the
        amount
        of stock compensation expense recorded in the accompanying financial statements
        for the corresponding options (“Excess Tax Deductions”). The deferred tax assets
        of the Company are reported without inclusion of the Excess Tax Deductions.
        When
        realized, the tax benefit of the Excess Tax Deductions is accounted for as
        a
        credit to additional paid-in-capital rather than as a reduction of income
        tax
        expense.
  As
        of
        March 31, 2008, total deferred tax assets of the Company were comprised of
        net operating loss carryforwards of $1,479,000, fixed assets, depreciation
        and
        amortization of $431,000, Federal R&E tax credits of $336,000, and stock
        based compensation of $256,000. There were no deferred tax liabilities as
        of
        March 31, 2008.
  During
        fiscal 2007 and 2006, we qualified as a “Hawaii Qualified High Technology
        Business,” which provides certain tax credits to us for qualified research and
        experimentation, or R&E, costs. We estimated Hawaii R&E tax credits in
        the amount of approximately $0, $275,000 and $286,000 during fiscal 2008,
        2007
        and 2006, respectively.
  **Analysis
        of Operating Revenue and Profit (Loss) by Segment**
  ***Hoku
        Materials***
  We
          had
          revenue of $0 from the sale of polysilicon during fiscal 2008 and do not
          expect
          to generate revenue until the first half of calendar year 2009.
  Our
          operating losses of $ 3.6 million and $1.2 million for fiscal 2008 and
          2007,
          respectively, were primarily due to employee compensation which includes
          both
          payroll and stock-based compensation and professional fees. As we determined
          that we would enter the solar market in fiscal 2007, our expenses related
          to
          Hoku Materials totaled $0 in fiscal year 2006.
  ***Hoku
        Solar***
  In
          fiscal
          2008, we began recognizing revenue from PV system installations and related
          services of $1.9 million through contracts with Paradise Beverages, Hardware
          Hawaii, Bank of Hawaii and other commercial and residential customers.
  29




Our
        operating loss of $ 2.1 million and $1.3 million for fiscal 2008 and 2007,
        respectively, were primarily due to employee compensation, which includes
        stock-based compensation, and professional fees. In fiscal 2007, the loss
        was
        also due to a write-down of our inventory of $379,000. As we determined that
        we
        would enter the solar market in fiscal 2007, our expenses related to Hoku
        Solar
        totaled $0 in fiscal 2006.




***Hoku
      Fuel Cells***




Since
        inception to August 2007, 100% of our revenue was generated through our
        fuel cell division. In fiscal 2008, we recognized $1.3 million in fuel cell
        revenue through our contracts with the U.S. Navy, which were completed in
        August
        2007. In fiscal 2007, $5.4 million of revenue was primarily from the U.S.
        Navy
        and Nissan of $3.2 million and $2.0 million, respectively. In fiscal 2006,
        virtually all of the $5.5 million of revenue was generated from contracts
        with
        Nissan.





Our
        operating profit was $245,000 for fiscal 2008 compared to an operating loss
        of
        $1.7 million for fiscal 2007. The increase was primarily due to the reduction
        in
        operating expenses as we significantly scaled back our expenditures and
        investments in the fuel cell business.




**Critical
      Accounting Policies and Significant Judgments and
      Estimates**




Our
      management’s discussion and analysis of our financial condition and results of
      operations are based on our financial statements, which have been prepared
      in
      accordance with U.S. generally accepted accounting principles. The preparation
      of these financial statements requires us to make estimates and assumptions
      relating to the reported amounts of assets and liabilities and the disclosure
      of
      contingent assets and liabilities at the date of the financial statements as
      well as the reported amounts of revenue and expenses during the reporting
      periods. We evaluate our estimates and judgments on an ongoing basis. We base
      our estimates on historical experience and on various other factors that we
      believe are reasonable under the circumstances, the results of which form the
      basis for making judgments about the carrying value of assets and liabilities
      that are not readily apparent from other sources. Our management has discussed
      the development and selection of these critical accounting policies and
      estimates with the audit committee of our board of directors and the audit
      committee has reviewed our disclosures relating to our critical accounting
      policies and estimates in this report. Actual results may differ from these
      estimates.




While
      our
      significant accounting policies are more fully described in note 1 to the
      financial statements included elsewhere in this Annual Report on Form 10-K,
      we
      believe that the following accounting policies and estimates are critical to
      a
      full understanding and evaluation of our reported financial
      results.




*Revenue
      Recognition.* Revenue
      from polysilicon and PV system installations is recognized in accordance with
      Staff Accounting Bulletin No. 104, *Revenue
      Recognition* ,
      when
      there is evidence of an arrangement, delivery has occurred or services have
      been
      rendered, the arrangement fee is fixed or determinable, and collectability
      of
      the arrangement fee is reasonably assured. PV system installation contracts
      may
      have several different phases with corresponding progress billings, however,
      revenue is recognized when the installation is complete and accepted by the
      customer.




We
      have
      also provided testing and engineering services to customers pursuant to
      milestone-based contracts that are not multi-element arrangements. These
      contracts sometimes provided for periodic invoicing as we completed a milestone.
      Customer acceptance is usually required prior to invoicing. We recognized
      revenue for these arrangements under the completed contract method in accordance
      with Statement of Position 81-1, *Accounting
      for Performance of Construction-Type and Certain Production-Type
      Contracts* .
      Under
      the completed-contract method, we deferred the contract fulfillment costs and
      any advance payments received from the customer and recognized the costs and
      revenue in our statement of operations once the contract was complete and the
      final customer acceptance, if required, had been obtained.




*Stock-Based
      Compensation* .
      We
      account for stock-based employee compensation arrangements using the fair value
      method in accordance with the provisions of Statement of Financial Accounting
      Standards No. 123(R), *Share-Based
      Payment* ,
      or SFAS
      123(R). In accordance with SFAS 123(R), the fair value of stock options and/or
      restricted stock awards granted to our employees and non-employees is determined
      using the Black-Scholes pricing model. The Black-Scholes pricing model requires
      the input of several subjective assumptions including the expected life of
      the
      option/restricted award and the expected volatility of the option/restricted
      award at the time the option/restricted award is granted. The fair value of
      our
      option/restricted award, as determined by the Black-Scholes pricing model,
      is
      expensed over the requisite service period, which is generally five years for
      stock options and varies between two and five years for restricted stock awards.




Prior
      to
      our initial public offering, there was an absence of an active market for our
      common stock, and therefore our board of directors estimated the market value
      of
      our common stock on the date of grant of the stock option based on several
      factors, including progress and milestones achieved in our business and sales
      of
      our preferred stock. We did not obtain contemporaneous valuations from a
      valuation specialist during this period. Subsequent to our initial public
      offering, the market value is based on the public market for our common stock.
      Due to the Company’s limited operating history, we have assumed a volatility of
      100% based on competitive benchmarks and management’s judgment and an expected
      life based on the average of the typical vesting period and the option’s
      contractual life which ranges from 6.5 to 7.5 years.




The
      assumptions used in calculating the fair value of our stock options and
      restricted stock awards represent management’s best estimates, but these
      estimates involve inherent uncertainties and the application of management
      judgment. As a result, changes in these inputs and assumptions can materially
      affect the measure of the estimated fair value of our stock options and
      restricted stock awards. In addition, we are required to estimate the expected
      forfeiture rate and only recognize expense for those options and shares expected
      to vest. If our actual forfeiture rate is materially different from our
      estimate, the stock-based compensation expense could be significantly different
      from what we have recorded in the current period. Furthermore, this accounting
      estimate is reasonably likely to change from period to period as further stock
      options and restricted stock awards are granted and adjustments are made for
      stock option and restricted stock awards forfeitures and cancellations. In
      accordance with SFAS 123(R), we do not record any deferred stock-based
      compensation on our balance sheet for our stock options and restricted stock
      awards.





30





We
      expect
      to incur an aggregate of $956,000 of future stock-based compensation expense
      and
      associated with unvested stock options and restricted stock awards outstanding
      as of March 31, 2008 through fiscal 2013 as set forth in the table below. We
      expect that some of the amounts noted below will be included as costs of
      delivering our products and services and as such, will be deferred and
      recognized as cost of revenue in conjunction with the recognition of revenue.





**Fiscal
                Year Ending March 31,****2009**
            
            **2010**
            
            **2011**
            
            **2012**
            
            **2013**
            
            **Total****(in
                thousands)**$        455
            
            $
            351
            
            $
            104
            
            $
            38
            
            $
            8
            
            $
            956




We
      expect
      our stock-based compensation expense from restricted stock awards to increase
      as
      we expand our operations and hire new employees. These expenses will increase
      our overall expenses and may increase our losses for the foreseeable future.
      As
      a restricted stock award is a non-cash expense, it will not have any effect
      upon
      our liquidity or capital resources.




*Accounting
      for the Impairment or Disposal of Long Lived Assets.* In
      accordance with Statement of Financial Accounting Standards No. 144, or
      SFAS No. 144, *Accounting
      for the Impairment or Disposal for Long-Lived Assets,* we
      evaluate the carrying value of our long-lived assets whenever certain events
      or
      changes in circumstances indicate that the carrying amount of these assets
      may
      not be recoverable. Such events or circumstances include, but are not limited
      to, a prolonged industry downturn, a significant decline in our market value,
      or
      significant reductions in projected future cash flows.




We
        believe that our future revenue opportunities for our fuel cell division
        are
        uncertain and believe that the fuel cell industry as a whole is experiencing
        similar challenges in sustaining future revenue. As a result, in December
        2006,
        we recorded an aggregate write-down of equipment and inventory used by Hoku
        Fuel
        Cells of $729,000 and $57,000, respectively, and in March 2007, we recorded
        a
        further write-down of equipment used in our fuel cell business of $200,000.
        In
        March 2007, we recorded a write-down of our solar cell inventory of $379,000
        to
        reflect the lower of cost or market and in June 2007, we recorded a write-down
        of our solar module production equipment of $67,000. In assessing the
        recoverability of our long-lived assets, we compared the carrying value to
        the
        undiscounted future cash flows the assets are expected to generate. As the
        total
        of the undiscounted future cash flows was less than the carrying amount of
        the
        assets, we wrote down such assets based on the excess of the carrying amount
        over the fair value of the assets. Fair value was determined based on
        discussions with third party equipment and inventory providers.




As
      a
      result of the downsizing of our fuel cell business, and the change in business
      strategy to not manufacture solar modules, we are exploring the potential sale
      of our land and facility in Kapolei, and our relocation to a leased warehouse
      and office space on Oahu. As we have not exited any business and are only
      exploring the possibility of the sale of the land and facility, there are no
      costs to be recorded in accordance with SFAS No. 144.




**Recent
      Accounting Pronouncements**




In
      June
      2006, the FASB issued FIN No. 48, *Accounting
      for Uncertainty in Income Taxes - an interpretation of FASB Statement
      No. 109* ,
      or FIN
      48, which clarifies the accounting for uncertainty in income taxes recognized
      in
      an enterprise’s financial statements in accordance with FASB Statement
      No. 109, *Accounting
      for Income Taxes .* This
      Interpretation prescribes a recognition threshold and measurement attribute
      for
      the financial statement recognition and measurement of a tax position taken
      or
      expected to be taken in a tax return. This Interpretation also provides guidance
      on derecognition, classification, interest and penalties, accounting in interim
      periods, disclosure, and transition. We adopted FIN 48 on April 1, 2007.
      The adoption of this interpretation did not have a material impact on the our
      consolidated financial statements. We have not identified any unrecognized
      tax
      benefits as of March 31, 2008. Any interest expense and penalties related to
      unrecognized tax benefits and interest income on tax overpayments will be
      recorded as components of income tax expense.




In
      September 2006, the Financial Accounting Standards Board, or FASB, issued
      Statement of Financial Accounting Standards No. 157, *Fair
      Value Measurements* ,
      or SFAS
      157. This new standard establishes a framework for measuring the fair value
      of
      assets and liabilities. This framework is intended to provide increased
      consistency in how fair value determinations are made under various existing
      accounting standards which permit, or in some cases require, estimates of fair
      market value. SFAS 157 also expands financial statement disclosure requirements
      about a company’s use of fair value measurements, including the effect of such
      measures on earnings. This standard is effective for fiscal years beginning
      after November 15, 2007, and interim periods within those fiscal years. We
      adopted SFAS 157 on April 1, 2008, and adoption of this statement did not have
      a
      material impact on our consolidated financial statements.




In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial Liabilities Including
      an
      Amendment of SFAS No. 115* ,
      or SFAS
      159. This new standard permits companies to choose to measure many financial
      instruments and certain other items at fair value that are currently not
      required to be measured at fair value. This standard is effective for fiscal
      years beginning after November 15, 2007. We adopted SFAS 159 on April 1, 2008,
      and adoption of this statement did not have a material impact on our
      consolidated financial statements.





31





In
      March
      2008, the FASB issued SFAS No. 161, *Disclosures
      about Derivative Instruments and Hedging Activities -an amendment of SFAS
      133* ,
      or SFAS
      161. SFAS 161 seeks to improve financial reporting for derivative instruments
      and hedging activities by requiring enhanced disclosures regarding the impact
      on
      financial position, financial performance, and cash flows. To achieve this
      increased transparency, SFAS 161 requires: (1) the disclosure of the fair value
      of derivative instruments and gains and losses in a tabular format; (2) the
      disclosure of derivative features that are credit risk-related; and (3)
      cross-referencing within the footnotes. This
      standard shall be effective for financial statements issued for fiscal years
      and
      interim periods beginning after November 15, 2008 and early application is
      encouraged. We
      are in
      the process of evaluating the new disclosure requirements under SFAS 161 and
      do
      not expect the adoption to have a material impact on our consolidated financial
      statements.




***Variability
      of Results***




Although
        we have begun installation of PV systems, in the near term, we have limited
        sources of revenue. As of April 30, 2008 we have $2.2 million in PV system
        installation and/or related services under contract that we expect to complete
        in fiscal 2009. We also signed a non-binding letter of intent with Bank of
        Hawaii for us to explore additional turnkey PV system installations for Bank
        of
        Hawaii’s other neighbor island facilities on the islands of Hawaii, Maui and
        Kauai, and are in discussions with The James Campbell Company to plan the
        Kapolei Sustainable Energy Park, which would be capable of generating
        approximately 1.5 megawatts of PV power. In addition, in May 2008, the Hawaii
        Public Utilities Commission approved the contract for Hawaiian Electric Company
        to purchase electricity generated by a PV system that we would install. We
        plan
        to install a 218 kilowatt PV system and sell the power generated by that
        system,
        which is expected to be in service by the end of calendar year 2008, over
        a
        20-year period to Hawaiian Electric Company. Finally, we joined D.R.
        Horton-Schuler Division, a wholly owned subsidiary of D.R. Horton, Inc. in
        a
        marketing program to offer two-kilowatt PV systems to homebuyers at the Kahiwelo
        at Makakilo Development in Kapolei, Hawaii. The amount of potential revenue
        is
        contingent on whether the homebuyers choose to install a PV system. While
        there
        is a possibility that we will generate revenue through these agreements,
        at this
        time, it is not guaranteed.




Our
      future operating results and cash flows will depend on many factors that impact
      Hoku Materials, Hoku Solar and Hoku Fuel Cells including the
      following:




•
            
            the
                size and timing of customer orders, milestone achievement, product
                installation or delivery and customer acceptance, if
                required;




•
            
            our
                success in obtaining pre-payments from customers for future shipments
                of
                polysilicon;





•
            
            our
                ability to finance power purchase agreements for Hawaiian Electric
                Company
                and other potential customers;





•
            
            the
                extension of federal tax credits relate to PV system installations
                beyond
                December 31, 2008;





•
            
            our
                success in maintaining and enhancing existing strategic relationships
                and
                developing new strategic relationships with potential
                customers;




•
            
            actions
                taken by our competitors, including new product introductions and
                pricing
                changes;




•
            
            the
                costs of maintaining and expanding our
                operations;




•
            
            customer
                budget cycles and changes in these budget cycles;




•
            
            external
                economic and industry conditions;
                and




•
            
            our
                ability to protect our intellectual
                property.




As
      a
      result of these factors, we believe that period-to-period comparisons of our
      results of operations are not necessarily meaningful and should not be relied
      upon as indications of future performance.




**Liquidity
      and Capital Resources**




We
      had
      net income for fiscal 2006; however, we incurred cumulative net losses since
      our
      inception through March 31, 2008. As of March 31, 2008, we had an
      accumulated deficit of $12.2 million. Hoku Materials does not currently generate
      any revenue and we do not anticipate revenue from Hoku Materials until the
      first
      half of calendar year 2009. During fiscal 2008, our revenue was limited to
      our
      contract with the U.S. Navy from Hoku Fuel Cells which was completed in August
      2007 and from PV system installations and related services primarily from Hoku
      Solar contracts with Paradise Beverages, Bank of Hawaii and Hardware Hawaii.
      At
      this time, we do not believe we will receive any meaningful revenue from Hoku
      Fuel Cell products and services in the foreseeable future. We will also need
      approximately $390 million to successfully complete our planned construction
      of
      our polysilicon manufacturing facilities. See “Solar and Polysilicon Facilities”
below. The result is that we expect our costs to increase significantly, which
      will result in further losses.





32




In
      February 2008, we issued 2,893,519 shares of our common stock pursuant to a
      Securities Purchase Agreement, by and among us and certain institutional
      investors, and a wholly owned subsidiary of Suntech Power Holdings Co., Ltd.
      The
      wholly owned subsidiary of Suntech Power Holdings Co., Ltd acquired 2,314,815
      or
      our common stock. We received aggregate gross proceeds of approximately $25
      million from the sale of the common stock.




We
      also
      intend to raise up to $110 million in additional financing through one or more
      debt or equity offerings for the procurement and construction of our polysilicon
      manufacturing facility.




We
        believe we will need to make aggregate payments of $111 million for engineering,
        procurement and construction in order to complete pilot production in the
        fourth
        quarter of calendar year 2008. If we successfully complete that milestone,
        the
        availability of customer prepayment commitments would fund continuing
        construction costs until we are near commercial production. As of March 31,
        2008, the amount contributed to the project is $29 million, a portion of
        which
        has been funded with advances an customer commitments, of which we have received
        $15 million in fiscal 2008 and $2 million in fiscal 2007. We intend to
        contribute an additional $28 million, which includes the proceeds from the
        $25
        million private placement of our common stock to investors in February 2008,
        and
        intend to raise approximately $54 million in additional debt or equity
        financing, which would secure the $111 million we believe is needed to complete
        pilot production. We would thereafter commence one or more subsequent debt
        or
        equity offerings to raise an additional $56 million, which together with
        the
        release of the remaining customer commitments, is expected to be sufficient
        to
        complete the construction of our polysilicon plant.




We
        also
        recently announced that we have amended our polysilicon supply contracts
        with
        Suntech and Solarfun, to extend the financing deadline to December 31, 2008,
        and
        to reduce the amount of capital that we are required to raise to meet that
        deadline to $75 million, including the $25 million previously raised through
        our
        private placement of our common stock. We have not recently amended the
        financing deadlines in our polysilicon agreements with Sanyo and GEWD, which
        deadlines expired on May 31, 2008, and we cannot guarantee that we, Sanyo
        or
        GEWD will not elect to terminate the respective agreements. If any of our
        contracts with Sanyo, GEWD, Suntech or Solarfun is terminated, our business
        will
        be materially harmed. In addition, we will be required to return any deposits
        and advance payments received up to the date of the termination, which is
        $17
        million in aggregate of the four supply agreements and we will need to secure
        new funds in order to finance the construction of our polysilicon production
        plant. Securing new funds may delay the anticipated timing of completion
        of the
        production plant, which delay may result in us failing to meet our delivery
        requirements under our other supply agreements. We may not be able to secure
        new
        funds on terms as favorable to us as those under the terminated agreements
        or at
        all. If we are unable to secure new funds, we will not be able to complete
        construction of the production plant, our business will be materially and
        adversely affected and we may be forced to delay, alter or abandon our planned
        business operations.




***Net
        Cash Provided By (Used In) Operating Activities*** Net
        cash
        used in operating activities was $654,000 and $4.0 million in fiscal 2008
        and
        2007, respectively. Net cash provided by operating activities was $4.5 million
        in fiscal 2006. The net cash used in operating activities in fiscal 2008
        was a
        result of the net loss offset by adding back stock compensation expense,
        an
        increase in outstanding payables and accrued liabilities, an increase in
        other
        assets and decrease in inventory. The net cash used in operating activities
        in
        fiscal 2007 primarily was a result of the net loss, purchase of inventory
        and
        the recognition of revenue which was deferred in prior years. The net cash
        used
        in operating activities was primarily offset by a deposit from Sanyo related
        to
        our polysilicon agreement, the recognition of cost of service and license
        revenue which was recorded as cost of uncompleted contracts in prior years,
        non-cash stock based compensation and the non-cash write-down of equipment
        and
        inventory related to our fuel cell business. The net cash provided by operating
        activities in fiscal 2006 primarily reflected the net income and non-cash
        stock-based compensation.




***Net
        Cash Provided By (Used In) Investing Activities*** Net
        cash
        used in investing activities in fiscal 2008 was $12.6 million compared to
        net
        cash provided by investing activities of $4.4 million in fiscal 2007 and
        net
        cash used in investing activities of $25.5 million in fiscal 2006. Net cash
        provided by (used in) investing activities in fiscal 2008 and 2007 was primarily
        related to proceeds of short-term investments offset by the purchases of
        short-term investments and the addition of property and equipment related
        to the
        construction of our planned polysilicon facility in Pocatello, Idaho. Net
        cash
        used in investing activities in fiscal 2006 was primarily related to purchases
        of short-term investments and the addition of property and equipment, including
        $4.6 million for the construction and build-out of our combined office, research
        and development and manufacturing facility in Kapolei, Hawaii.




***Net
        Cash Provided By Financing Activities.*** Net cash
        provided by financing activities was $38.4 million, $2.0 million, and $18.6
        million in fiscal 2008, 2007 and 2006, respectively. The increase in cash
        provided by financing activities in fiscal 2008 is due to net proceeds from
        our
        sale of common stock of $23 million and deposits received related to long-term
        polysilicon contracts of $15 million, compared to $2 million net cash received
        from deposits in fiscal 2007. The net cash provided by financing activities
        in
        fiscal 2006 primarily related to proceeds received from the initial public
        offering.




**Contractual
      Obligations**




The
      following table summarizes the contractual obligations that existed at March
      31,
      2008:


**Payments
                    Due by Period****Contractual
                    Obligations**
                
                **Total**
                
                **Less Than**
                  **One Year**
                
                **One to**
                  **Three Years**
                
                **Three to**
                  **Five Years**
                
                **More Than**
                  **Five Years****(in
                    thousands)**Construction
                    in progress obligations
                
                $
                206,702,743
                
                $
                178,326,251
                
                $
                28,376,492
                
                $
                —
                
                $
                —Equipment
                    purchase obligations
                
                
                51,553,794
                
                
                46,562,503
                
                
                4,991,291
                
                
                —
                
                
                —Total
                
                $
                258,256,537
                
                $
                224,888,754
                
                $
                33,367,783
                
                $
                —
                
                $
                —





33




*Stone
      & Webster, Inc.* We
      entered into an agreement with Stone & Webster, Inc., or S&W, a
      subsidiary of The Shaw Group Inc., for engineering, procurement, and
      construction management services, or the EPCM Agreement, for the construction
      of
      a polysilicon production plant with an annual capacity of 3,500 metric tons.
      Under the EPCM Agreement, S&W will provide the engineering services to
      complete the design and plan for construction of our polysilicon plant, along
      with procurement and construction management services. S&W will be paid on a
      time and materials basis plus a fee for its services and incentives if certain
      schedule and cost targets are met. The target cost for the services to be
      provided under the EPCM Agreement is $50.0 million, plus up to $5.0 million
      of
      additional incentives that may be payable.




The
      incentives are based on:




•
            S&W's
                services costing less than $50 million,




•
            S&W
                achieving a total installed cost target for the project of $390 million,
                and




•
            S&W
                meeting scheduled targets of:




§
              pilot
                  test production of polysilicon in late
                  2008,
  §
              mechanical
                  and substantial completion allowing the commissioning and operation
                  of
                  processes for the production of trichlorosilane, the production
                  of
                  polysilicon, and the separation and recovery of the vent gases
                  resulting
                  from the production of polysilicon, in incremental production volumes,
                  between January 2009 and September 2009, and
  §
              final
                  project completion by September 2009.




Each
      of
      these cost and schedule targets may be adjusted if we or our other contractors
      cause any delays, or request changes to the work that increase the cost or
      time
      for completion, or if force majeure or adverse weather events cause any delays.




Pursuant
      to the EPCM Agreement, S&W is not guaranteeing that the cost or schedule
      targets will be met, and we are obligated to pay for S&W's services
      regardless of whether these targets are ultimately achieved; however, S&W is
      required to pay liquidated damages of up to $1 million for schedule delays
      that
      are directly caused by S&W.




*JH
      Kelly LLC* .
      We
      entered into an agreement with JH Kelly LLC., or JH Kelly, for construction
      services for the construction of a polysilicon production plant with an annual
      capacity of 3,500 metric tons, or the Construction Agreement. We will pay JH
      Kelly on a time and materials basis plus a fee for its services and incentives
      if certain schedule, cost and safety targets are met. The target cost for the
      services to be provided under the Construction Agreement is $145.0 million,
      including up to $5.0 million of incentives that may be payable.




The
      incentives are based on:




•
            JH
                Kelly's total costs being less than $145.0 million;




•
            JH
                Kelly achieving specified safety targets;
                and




•
            JH
                Kelly meeting scheduled targets of:




§
            pilot
                test production of polysilicon in late
                2008;




§
            mechanical
                and substantial completion allowing the commissioning and operation
                of
                processes for the production of trichlorosilane, the production of
                polysilicon, and the separation and recovery of the vent gases resulting
                from the production of polysilicon, in incremental production volumes,
                between January 2009 and September 2009; and




§
            final
                project completion by September
                2009.




Each
      of
      these cost, safety and schedule targets may be adjusted if we or its other
      contractors cause any delays, or request changes to the work that increase
      the
      cost or time for completion, or if any delays caused by reasons not in the
      sole
      control of JH Kelly occur.




Pursuant
      to the Construction Agreement, JH Kelly is not guaranteeing that the cost or
      schedule targets will be met, and we are obligated to pay for JH Kelly's
      services regardless of whether these targets are ultimately achieved; however,
      JH Kelly is required to pay liquidated damages of up to $1 million for schedule
      delays that are directly caused by JH Kelly.




JH
      Kelly
      may terminate the Construction Agreement if we breach the agreement. JH Kelly
      may suspend work under the Construction Agreement upon two days written notice
      if we fail to make any payment when due, and we will be liable for wind-down
      and
      start-up costs in the event JH Kelly restarts its performance of services.
      We
      may terminate the Construction Agreement if JH Kelly fails to perform its
      obligations or if JH Kelly becomes insolvent or bankrupt. We may also terminate
      the Construction Agreement at any time for our convenience, in which case we
      are
      obligated to pay JH Kelly for all completed work, all work in progress and
      JH
      Kelly's reasonable termination expenses.





34





*Dynamic
      Engineering Inc.* In
      October 2007, we entered into an agreement with Dynamic Engineering Inc., or
      Dynamic, for design and engineering services, and a related technology license,
      for the process to produce and purify trichlorosilane, or TCS. Under the
      agreement, Dynamic is obligated to design and engineer a trichlorosilane, or
      TCS, production facility that is capable of producing 20,000 metric tons of
      TCS
      for our planned 3,500 metric tons per year polysilicon production plant in
      Pocatello, Idaho. The Dynamic process is to be integrated by S&W into the
      overall polysilicon production facility, and will be constructed by JH Kelly.
      Dynamic's engineering services will be provided and invoiced on a time and
      materials basis, and the license fee will be calculated upon the successful
      completion of the TCS production facility, and demonstration of certain TCS
      purity and production efficiency capabilities. The maximum aggregate amount
      that
      we may pay Dynamic for the engineering services and the technology license
      is
      $12.5 million, which includes an incentive for Dynamic to complete the
      engineering services under budget. Dynamic is guaranteeing the quantity and
      purity of the TCS to be produced at the completed facility, and has agreed
      to
      indemnify us for any third party claims of intellectual property infringement.




In
      April
      2008, we amended the agreement to eliminate our obligation to indemnify and
      hold
      Dynamic harmless from any damages in excess of $5 million that arise out of
      the
      agreement, and/or Dynamic’s performance under the agreement, including claims
      that Dynamic acted negligently, whether the damages arise from claims by us
      or
      any third party.




*GEC
      Graeber Engineering Consultants GmbH and MSA Apparatus Construction for Chemical
      Equipment Ltd* .
      In
      January 2007, we entered into an agreement with GEC Graeber Engineering
      Consultants GmbH, or GEC, and MSA Apparatus Construction for Chemical Equipment
      Ltd., or MSA, for the purchase and sale of hydrogen reduction reactors and
      converters, or the Equipment, capable of producing 2,000 metric tons of
      polysilicon per year, which is approximately 20.9 million Euros.




In
      May
      2007, we paid the initial deposit of 15%, or approximately $4.2 million, under
      the agreement for the Equipment capable of producing 2,000 metric tons of
      polysilicon per year. The payment of this initial deposit began the 15-month
      delivery deadline for Equipment capable of producing 1,500 metric tons of
      polysilicon per year, with the Equipment for an additional 500 metric tons
      per
      year being delivered within three months after the first delivery.




In
      October 2007, we amended and restated the agreement to require us to pay GEC
      and
      MSA up to 45% of the purchase price for Equipment capable of producing 2,000
      metric tons of polysilicon per year via wire transfer in six equal monthly
      increments from October 2007 through March 2008, and an additional 20% of the
      purchase price within four weeks after the Equipment is shipped from the
      Hamburg, Germany. An additional 10% of the applicable purchase price for the
      Equipment is payable to GEC and MSA via wire transfer within four weeks after
      a
      successful test demonstration of the Equipment, and the final 10% of the
      applicable purchase price is payable to GEC and MSA upon the earlier of (a)
      30
      months after delivery; and (b) expiration of the warranty period, which is
      18
      months after successful commissioning of the Equipment. As of May 31, 2008,
      we
      made payments of $8.8 million under this contract, approximating 30% of the
      purchase price. Our payments are less than the scheduled payment terms as we
      had
      not received the required written reports describing progress that is being
      made
      in the manufacturing of the reactors until May 2008. We expect to make
      additional payments in June 2008.




The
      amended agreement also contains an option to purchase additional Equipment
      that
      is capable of producing up to an additional 500 metric tons of polysilicon
      per
      year, or the Option Equipment, for a total purchase price of approximately
      6.7
      million Euros, or the Option Price. The amended agreement provides for an
      initial deposit equal to 15% of the Option Price to GEC and MSA within six
      months after signing the amended agreement. The Option Equipment shall be
      delivered within 12 months after we pay the 15% deposit. Hoku Materials is
      required to pay GEC and MSA up to 45% of the Option Price via wire transfer
      in
      12 equal monthly increments from the month after it pays the 15% deposit through
      the month of shipment, and an additional 20% of the Option Price within four
      weeks after the Option Equipment is shipped from Hamburg, Germany. An additional
      10% of the Option Price for the Option Equipment is payable to GEC and MSA
      via
      wire transfer within four weeks after a successful test demonstration of the
      Option Equipment, and the final 10% of the Option Price is payable to GEC and
      MSA upon the earlier of (a) 30 months after delivery; and (b) expiration of
      the
      warranty period, which is 18 months after successful commissioning of the Option
      Equipment.




In
      March
      2008, we entered into a new polysilicon reactor supply contract with GEC to
      give
      us the option to purchase additional polysilicon reactors for the production
      of
      up to 8,000 metric tons of polysilicon per year. Under this new agreement,
      we
      have an option, without obligation, to order reactors at any time over a
      twelve-month period at predetermined pricing and delivery terms. We expect
      we
      will exercise the option to purchase additional reactors necessary for our
      planned annual capacity of 3,500 metric tons of polysilicon; however, the amount
      of additional reactors beyond 3,500 metric tons of polysilicon per year will
      be
      contingent on additional customer contracts we may sign.




*Idaho
      Power Company* .
      In
      December 2007, we entered into an agreement with Idaho Power Company to complete
      the construction of the electric substation to provide power for our planned
      polysilicon production plant in Pocatello, Idaho. We are obligated to pay Idaho
      Power Company an aggregate of $14.8 million for the completion of the substation
      and associated facilities. In January 2008, we made an initial payment under
      the
      contract of $3.7 million. Under the terms of the agreement, the substation
      and
      associated facilities are scheduled to be completed on or before February 15,
      2009. The agreement provides that Idaho Power Company may invoice us additional
      amounts for temporary power to enable the start-up and operation of the planned
      polysilicon production plant prior to February 15, 2009.




*Bank
        of Hawaii* .
        In
        January 2008, we entered into agreements with Bank of Hawaii to purchase
        in
        increments an aggregate amount of 8.7 million Euros on various maturity dates
        beginning in April 2008 and ending in July 2010 at a fixed U.S dollar amount
        of
        $12.8 million. We expect to use the purchased Euros to make payments pursuant
        to
        the amended GEC and MSA contracts, for the purchase of hydrogen reduction
        and
        hydrogenation reactors for the production of polysilicon. The agreements
        are
        considered derivatives as the forward exchange contract with the Bank of
        Hawaii
        is used to hedge our commitment related to the acquisition of the reactors
        from
        GEC and MSA.  The fair value of these derivatives approximates $965,000.
        The purpose of our foreign currency hedging activity is to help protect us
        from
        risk that the eventual dollar cash flows from the acquisition of this asset
        will
        be adversely affected by changes in the exchange rate.  There was no gain
        or loss due to ineffectiveness.




35




As
      part
      of the agreements, we are required to place deposits with Bank of Hawaii for
      20%
      of the notional value of the outstanding transactions, which can fluctuate
      based
      on the U.S Dollar/Euro exchange rate. We will earn interest on our deposit,
      which will be recorded as restricted cash. As of April 30, 2008, our restricted
      cash balance related to these deposits was $2.6 million.




*Saft
      Power Systems USA, Inc.* In March
      2008, we entered into an agreement with Saft Power Systems USA, Inc., or Saft,
      for the purchase and sale of thyroboxes, earth fault detection systems, and
      related technical documentation and services. Under the agreement, Saft is
      obligated to manufacture and deliver the thyroboxes, earth fault detection
      systems, and related technical documentation and services, or the Deliverables,
      which are used as the power supplies for the polysilicon deposition reactors
      to
      be used in our planned 3,500 metric tons per year polysilicon production plant.
      The total fees payable to Saft for all Deliverables under the agreement is
      approximately $13 million, which is payable in five installments beginning
      in
      April 2008. Provided that we are current on all payments, Saft guarantees the
      shipment dates of the Deliverables in stages, beginning in September 2008,
      with
      the final Deliverables shipping in February 2009. As of May 31, 2008, we have
      made payments of $1.3 million to Saft and believe we are current on our
      payments. Either party may terminate the agreement if the other party is in
      material breach of the agreement and has not cured such breach within 180 days
      after receipt of written notice of the breach, or if the other party is
      bankrupt, insolvent, or unable to pay its debts.




*PVA
      Tepla Danmark.* In April
      2008, we entered into an agreement with PVA Tepla Danmark, or PVA, for the
      purchase and sale of slim rod pullers and float zone crystal pullers. Under
      the
      agreement, PVA is obligated to manufacture and deliver the slim rod pullers
      and
      float zone crystal pullers for our planned 3,500 metric tons per year
      polysilicon production plant. Slim rod pullers are used to make thin rods of
      polysilicon that are then transferred into polysilicon deposition reactors
      to be
      grown through a chemical vapor deposition process into polysilicon rods for
      commercial sale to our end customers. The float zone crystal pullers convert
      the
      slim rods into single crystal silicon for use in testing the quality and purity
      of the polysilicon. The total fees payable to PVA is approximately $6 million,
      which is payable in four installments beginning in April 2008. Provided that
      we
      are current on all payments, PVA guarantees all slim rod pullers and float
      zone
      crystal pullers will be shipped within ten months after we pay the first 30%
      of
      the total agreement amount. PVA has also agreed to use its best efforts to
      deliver at least one slim rod puller within six months after receipt of the
      30%
      initial payment. Either party may terminate the agreement if the other party
      is
      in material breach of the agreement and has not cured such breach within 180
      days after receipt of written notice of the breach, or if the other party is
      bankrupt, insolvent, or unable to pay its debts.




**Operating
      Capital and Capital Expenditure Requirements**




As
      we
      invest resources towards our polysilicon manufacturing and PV systems
      installation service businesses, develop our products, expand our corporate
      infrastructure, prepare for the increased production of our products and
      evaluate new markets to grow our business, we expect that our expenses will
      continue to increase and, as a result, we will need to generate significant
      revenue to maintain profitability.




We
      do not
      expect to generate significant revenue until we successfully commence the
      manufacture and shipment of polysilicon and begin meeting the obligations under
      our supply contracts. We believe that our cash, cash equivalent and short-term
      investment balances will be sufficient to meet the anticipated capital
      expenditures and cash requirements for Hoku Solar and Hoku Fuel Cells through
      at
      least the next 12 months; however, we expect that we will need to raise $110
      million to support the construction of our planned polysilicon facility and
      operations of Hoku Materials. The sale of additional equity and convertible
      debt
      instruments may result in additional dilution to our current stockholders.
      If we
      raise additional funds through the issuance of convertible debt securities,
      these securities could have rights senior to those of our common stock and
      could
      contain covenants that would restrict our operations. We may require additional
      capital beyond our currently forecasted amounts. Any required additional capital
      may not be available on reasonable terms, if at all. If we are unable to obtain
      additional financing, we may be required to reduce the scope of, delay or
      eliminate some or all of our planned research, development and commercialization
      and manufacturing activities, which could harm our business. Our
      forecasts of the period of time through which our financial resources will
      be
      adequate to support our operations are forward-looking statements and involve
      risks and uncertainties. Actual results could vary as a result of a number
      of
      factors, including the factors discussed in Part II, Item 1.A. “Risk
      Factors” and the section above entitled “Forward-Looking
      Statements.”




**Related
      Party Transactions**




For
      a
      description of our related party transactions, see Part III, Item 13,
“Certain Relationships and Related Transactions, and Director
      Independence.”




**Off-Balance
      Sheet Arrangements**




In
        January 2008, we entered into agreements with Bank of Hawaii to purchase
        in
        increments an aggregate amount of 8.7 million Euros on various maturity dates
        beginning in April 2008 and ending in July 2010 at a fixed U.S dollar amount
        of
        $12.8 million. We expect to use the purchased Euros to make payments pursuant
        to
        the amended GEC and MSA contracts, for the purchase of hydrogen reduction
        and
        hydrogenation reactors for the production of polysilicon. The agreements
        are
        considered derivatives as the forward exchange contract with the Bank of
        Hawaii
        is used to hedge our commitment related to the acquisition of the reactors
        from
        GEC and MSA.  The fair value of these derivatives approximates $965,000.
        The purpose of our foreign currency hedging activity is to help protect us
        from
        risk that the eventual dollar cash flows from the acquisition of this asset
        will
        be adversely affected by changes in the exchange rate.  There was no gain
        or loss due to ineffectiveness.





36




As
      part
      of the agreements with Bank of Hawaii, we are required to place deposits with
      Bank of Hawaii for 20% of the notional value of the outstanding transactions,
      which can fluctuate based on the U.S Dollar/Euro exchange rate.  We earn
      interest on our deposits, which is recorded as restricted cash.  As of
      March 31, 2008, the restricted cash balance related to these deposits of $2.6
      million.




**Item 7A.**
            **Quantitative
                and Qualitative Disclosures about Market
                Risk**




The
        primary objective of our investment activities is to preserve our capital
        for
        the purpose of funding our operations. To achieve this objective, our investment
        policy allows us to maintain a portfolio of cash equivalents and short-term
        investments in a variety of securities, including corporate and government
        bonds
        and certificates of deposit. Our cash and cash equivalents and short-term
        investments as of March 31, 2008 were $29.8 million of which our short-term
        investments were invested in commercial paper.




Our
        contract with GEC and MSA for the purchase and sale of hydrogen reduction
        reactors and hydrogenation reactors for the production of polysilicon, and
        related engineering and installation services is denominated in Euros. In
        January 2008, we entered into agreements with Bank of Hawaii to purchase
        in
        increments an aggregate amount of up to 8.7 million Euros on various maturity
        dates beginning in April 2008 and ending in July 2010 at a fixed U.S dollar
        amount of $12.8 million. The agreements are considered derivatives as the
        forward exchange contract with the Bank of Hawaii is used to hedge our
        commitment related to the acquisition of the reactors from GEC and MSA.
 The fair value of these derivatives approximates $965,000. The purpose of
        our foreign currency hedging activity is to help protect us from risk that
        the
        eventual dollar cash flows from the acquisition of this asset will be adversely
        affected by changes in the exchange rate.  There was no gain or loss due to
        ineffectiveness.




All
      other
      contracts are denominated in U.S. dollars, and as such, there is no associated
      currency risk.





**Item 8.**
            **Financial
                Statements and Supplementary
                Data**




Our
      financial statements included in this Report beginning at page F-1 are
      incorporated in this Item 8 by reference.





**Item 9.**
            **Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure**




None.





**Item 9A.**
            **Controls
                and Procedures**





*Evaluation
      of Disclosure Controls and Procedures*





As
      of the
      end of the period covered by this report, we carried out an evaluation, under
      the supervision and with the participation of our management, including our
      Chief Executive Officer and Chief Financial Officer, of the effectiveness of
      the
      design and operation of our disclosure controls and procedures (as defined
      in
      the Securities Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on that
      evaluation, our Chief Executive Officer and Chief Financial Officer concluded
      that as of the end of the period covered by this report, our disclosure controls
      and procedures were effective to ensure that information required to be
      disclosed by us in reports we file or submit under the Exchange Act is (1)
      recorded, processed, summarized and reported within the time periods specified
      in SEC rules and forms, and (2) accumulated and communicated to our management,
      including our Chief Executive Officer and Chief Financial Officer, to allow
      timely decisions regarding required disclosure.




*Report
      of Management on Internal Control Over Financial Reporting*




Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting, as defined in Rule 13a-15(f) under the
      Exchange Act.




Under
      the
      supervision and with the participation of our management, we assessed the
      effectiveness of internal controls over financial reporting as of March 31,
      2008. In making this assessment, we used the criteria set forth by the Committee
      of Sponsoring Organizations of the Treadway Commission in Internal Control
      -
      Integrated Framework. Based on our assessment we determined that, as of March
      31, 2008, our internal control over financial reporting is effective based
      on
      those criteria.




Ernst
&
Young
        LLP, our independent registered public
        accounting firm, has independently assessed the effectiveness of our internal
        control over financial reporting. Ernst & Young LLP has issued an
        attestation report concuring with management’s assessment
        which
        is included below.




**Report
          of Independent Registered Public Accounting Firm**
 
 The
          Board
          of Directors and Stockholders
 Hoku
          Scientific, Inc.
 
  We
          have
          audited Hoku Scientific, Inc.’s internal control over financial reporting as of
          March 31, 2008, based on criteria established in Internal Control—Integrated
          Framework issued by the Committee of Sponsoring Organizations of the Treadway
          Commission (the COSO criteria). Hoku Scientific, Inc.’s management is
          responsible for maintaining effective internal control over financial reporting,
          and for its assessment of the effectiveness of internal control over financial
          reporting included in the accompanying Report of Management on Internal
          Control
          over Financial Reporting. Our responsibility is to express an opinion on
          the
          company’s internal control over financial reporting 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 effective
          internal control over financial reporting was maintained in all material
          respects. Our audit included obtaining an understanding of internal control
          over
          financial reporting, assessing the risk that a material weakness exists,
          testing
          and evaluating the design and operating effectiveness of internal control
          based
          on the assessed risk, and performing such other procedures as we considered
          necessary in the circumstances. We believe that our audit provides a reasonable
          basis for our opinion.
  A
          company’s internal control over financial reporting is a process designed to
          provide reasonable assurance regarding the reliability of financial reporting
          and the preparation of financial statements for external purposes in accordance
          with generally accepted accounting principles. A company’s internal control over
          financial reporting includes those policies and procedures that (1) pertain
          to
          the maintenance of records that, in reasonable detail, accurately and fairly
          reflect the transactions and dispositions of the assets of the company;
          (2)
          provide reasonable assurance that transactions are recorded as necessary
          to
          permit preparation of financial statements in accordance with generally
          accepted
          accounting principles, and that receipts and expenditures of the company
          are
          being made only in accordance with authorizations of management and directors
          of
          the company; and (3) provide reasonable assurance regarding prevention
          or timely
          detection of unauthorized acquisition, use, or disposition of the company’s
          assets that could have a material effect on the financial
          statements.
  Because
          of its inherent limitations, internal control over financial reporting
          may not
          prevent or detect misstatements. Also, projections of any evaluation of
          effectiveness to future periods are subject to the risk that controls may
          become
          inadequate because of changes in conditions, or that the degree of compliance
          with the policies or procedures may deteriorate.
  In
          our
          opinion, Hoku Scientific, Inc. maintained, in all material respects, effective
          internal control over financial reporting as of March 31, 2008, based on
          the
          COSO criteria.
  We
          also
          have audited, in accordance with the standards of the Public Company Accounting
          Oversight Board (United States), the consolidated balance sheets of Hoku
          Scientific, Inc. and subsidiaries as of March 31, 2008 and 2007, and the
          related
          consolidated statements of operations, stockholders’ equity and comprehensive
          income (loss), and cash flows for each of the three years in the period
          ended
          March 31, 2008 and our report dated June 6, 2008 expressed an unqualified
          opinion thereon.
  /s/
          Ernst
& Young LLP
 Honolulu,
          Hawaii
 June
          6,
          2008





37




*Changes
      in Internal Control over Financial Reporting*




There
      were no changes in our internal controls over financial reporting during our
      last fiscal quarter that have materially affected, or are reasonably likely
      to
      materially affect, our internal control over financial reporting.




**Item 9B.**
            **Other
                Information**




None.




**PART
      III**





**Item 10.**
            **Directors,
                Executive Officers and Corporate
                Governance**




**Identification
      of Directors**




Reference
      is made to the information regarding directors under the heading “Election of
      Directors” to be included in our 2008 Proxy Statement, which information is
      hereby incorporated by reference.




**Identification
      of Executive Officers**




Reference
      is made to the information regarding executive officers under the heading
“Executive Officers of the Registrant” in Part I, Item 1. “Business” of
      this Annual Report on Form 10-K, which information is hereby incorporated by
      reference.




**Identification
      of Audit Committee and Financial Expert**




Reference
      is made to the information regarding directors under the heading “Report of the
      Audit Committee of the Board of Directors” and “Information about the Board of
      Directors and Corporate Governance” to be included in our 2008 Proxy Statement,
      which information is hereby incorporated by reference.




**Material
      Changes to Procedures for Recommending Directors**




Reference
      is made to the information regarding directors under the heading “Proposal
      No. 1 - Election of Directors” to be included in our 2008 Proxy Statement,
      which information is hereby incorporated by reference.




**Compliance
      with Section 16(a) of the Exchange Act**




Reference
      is made to the information under the heading “Section 16(a) Beneficial Ownership
      Reporting Compliance” to be included in our 2008 Proxy Statement, which
      information is hereby incorporated by reference.




**Code
      of Ethics**




Reference
      is made to the information under the heading “Code of Business Conduct and
      Ethics” to be included in our 2008 Proxy Statement, which information is hereby
      incorporated by reference. The full text of our “Code of Business Conduct and
      Ethics” is published on our Internet website under the “Company Information”
page at www.hokuscientific.com.





**Item 11.**
            **Executive
                Compensation**




**COMPENSATION
      DISCUSSION AND ANALYSIS**




**Compensation
      Philosophy**




Our
      executive compensation policies and practices are established and administered
      by the independent members of our Board of Directors, which currently include
      Messrs. Eldridge and Hirata and Dr. Stahlkopf, collectively the Independent
      Members. The Independent Members have implemented compensation policies, plans
      and programs that seek to enhance stockholder value by aligning the financial
      interests of our executive officers with those of our stockholders. The overall
      goal of the Independent Members is to develop compensation practices to allow
      us
      to attract and retain the people needed to define, create and market
      industry-leading products. We only have four executive officers, each of whom
      for SEC reporting purposes is considered a named executive officer.




To
      achieve our goals, the Independent Members have approved executive compensation
      that is based on a combination of cash and equity compensation. We provide
      significant equity-based compensation pursuant to our 2005 Equity Incentive
      Plan. The 2005 Equity Incentive Plan is designed to provide a longer-term
      incentive to management to increase revenues, provide quality returns on
      investment, enhance stockholder value and contribute to our long-term growth.
      We
      also pay cash incentive payments to executive officers based on meeting
      performance goals.





38






The
      Independent Members have not adopted any formal guidelines for allocating total
      compensation between cash and equity compensation. We believe that performance
      and equity-based compensation are important components of the total executive
      compensation package for maximizing stockholder value while, at the same time,
      attracting, motivating and retaining high-quality executives.


**Annual
        Review of Cash and Equity Compensation**
  We
        conduct an annual review of the aggregate level of our executive compensation,
        as well as the mix of elements used to compensate our executive officers.
        The
        Independent Members have historically taken into account publicly available
        data
        relating to the compensation practices and policies of other companies within
        and outside our industry. We have not historically benchmarked our executive
        compensation against any peer companies; however, in fiscal 2007, the
        Independent Members reviewed data derived from the 2006 Radford Executive
        Survey
        in connection with their review of our executive compensation. In the fourth
        quarter of fiscal 2007, the Independent Members retained Watson Wyatt, a
        compensation consultant, to assist the Independent Members in their review
        of
        our executive compensation policies and procedures. Watson Wyatt has not
        been
        retained to provide any other services to us. Our Independent Members may
        in the
        future retain the services of third-party executive compensation specialists
        from time to time, as they see fit, in connection with the establishment
        of cash
        and equity compensation and related policies going forward.
  **Compensation
        Components**
  Our
        executive compensation is based on three components: (1) base salary, (2)
        cash
        incentive payments and (3) equity awards, each of which is intended to support
        the overall compensation philosophy.
  *Base
        Salary*
  The
        Independent Members recognize the importance of maintaining compensation
        levels
        competitive with other leading technology companies with which we compete
        for
        personnel. The Independent Members have maintained the base salary component
        of
        executive compensation at levels they believe to be below industry medians,
        other than for our chief executive officer commencing in fiscal 2008, and
        compensated for the lower salaries with performance-based cash incentive
        payments and equity awards as discussed below. The Independent Members review
        with the President and Chief Executive Officer an annual salary plan for
        our
        executive officers, other than the President and Chief Executive Officer.
        The
        annual salary plan is modified as deemed appropriate and approved by the
        Independent Members. The annual salary plan also takes into account past
        performance and expected future contributions of the individual executive
        officer. We do not apply specific formulas to determine base salary
        increases.
  *Cash
        Incentive Payments*
  We
        utilize cash incentive payments to reward performance achievements within
        a time
        horizon of approximately one year. The cash incentive payments are intended
        to
        compensate executive officers for achieving corporate objectives and for
        achieving what the Independent Members believe to be value-creating individual
        objectives, each as proposed by management. Our cash incentive payments are
        paid
        in cash in an amount reviewed and approved by the Independent Members. Final
        determinations as to cash incentive payments are in part based on the
        achievement of these corporate or individual objectives, as well as an
        assessment as to our overall success and the development of our business.
        In
        reviewing the performance of each executive officer, the Independent Members
        also consider each executive officer’s level of leadership, teamwork and general
        participation in the development of employees who report to the executive
        officer. These corporate and individual objectives, and the proportional
        emphasis placed on each objective may vary, from time to time, depending
        on our
        overall strategic objectives, but relate generally to factors such as revenue
        targets, progression of existing products under development, execution on
        our
        strategic solar initiatives and financial factors such as raising capital
        and
        improving our results of operations.
  *Equity
        Awards*
  We
        believe that superior long-term performance is achieved through an ownership
        culture that encourages performance by our executive officers through the
        use of
        stock and stock-based awards. Our 2005 Equity Incentive Plan has been
        established to provide our employees, including our executive officers, with
        incentives to help align those employees’ interests with the interests of our
        stockholders. We have not adopted stock ownership guidelines, and, other
        than
        for our co-founders, Messrs. Shindo and Taft, our 2005 Equity Incentive Plan
        has
        provided the principal method for our executive officers to acquire equity
        in
        Hoku. Long-term equity incentives are provided through grants of stock options
        and/or restricted stock awards to executive officers and other employees
        pursuant to our 2005 Equity Incentive Plan. This component of compensation
        is
        intended to retain and motivate employees to improve the performance of our
        common stock. Stock options are granted at not less than fair market value
        and
        have value only if our stock price increases. All stock options to our
        employees, including executive officers, and to our directors in fiscal 2007
        were granted at the closing price of our common stock as reported on the
        NASDAQ
        Global Market for the trading day preceding the date of grant. Under our
        current
        practice, we do not grant stock option or restricted stock awards to our
        executive officers and our employees at times when we are in possession of
        material non-public information. Mr. Shindo, our President and Chief Executive
        Officer, may grant stock options for up to an aggregate of 66,666 shares
        per
        fiscal quarter to employees, other than executive officers, pursuant to
        authority delegated to him by the Board of Directors.
  In
        fiscal
        2008, our named executive officers were awarded restricted stock awards under
        our 2005 Equity Incentive. Authority to make restricted stock grants to
        executive officers rests with the Independent Members, although, the Independent
        Members do consider the recommendations of our President and Chief Executive
        Officer for executive officers other than himself.
  39
  **Fiscal
        2008 Compensation Decisions and Plans**
  *Base
        Salary*
  The
        Independent Members, in consultation with Watson Wyatt, increased the base
        salary of Mr. Shindo, our President and Chief Executive Officer, by 58.3%,
        from $240,000 to $380,000 effective February 2007. This increase was designed
        to
        compensate Mr. Shindo at approximately the 50th percentile of chief
        executive officers at comparable companies. The Independent Members determined
        not to increase the base salaries of Mr. Nakamoto, our Chief Financial
        Officer, Treasurer and Secretary, Mr. Paul, our Vice President, Business
        Development and General Counsel, and Mr. Taft, our Chief Technology Officer
        in fiscal 2008. In March 2008, the Independent Members determined to increase
        the base salaries of each of Mr. Nakamoto, Mr. Paul and Mr. Taft
        to $120,000 in fiscal 2009.
  *Restricted
        Stock Awards*
  In
        February 2007, the Independent Members determined that Mr. Shindo should
        be
        granted a restricted stock award for 200,000 shares of common stock pursuant
        to
        our 2005 Equity Incentive Plan, and issued on the third business day following
        the announcement of our results for the fiscal year ended March 31, 2007,
        which was May 11, 2007. The restricted stock award will vest 1/24 per
        month, commencing on April 1, 2007. The restricted stock award will be
        subject to accelerated vesting such that 50% of the unvested shares subject
        to
        such restricted stock award shall automatically vest upon the consummation
        of a
        change of control of Hoku in the event that Mr. Shindo’s employment with us
        is terminated without cause or Mr. Shindo terminates his employment with us
        voluntarily for good reason within twelve months following a change of control,
        subject to his execution of a general release in favor of Hoku.
  In
        February 2007, the Independent Members determined that Mr. Nakamoto,
        Mr. Paul and Mr. Taft would be eligible to receive stock option grants
        for 18,000, 18,000 and 24,000 shares, respectively, of our common stock in
        fiscal 2008 and 2009, respectively, pursuant to our 2005 Equity Incentive
        Plan.
        Each stock option grant was to be issued on the third business day following
        the
        announcement of our results for the applicable fiscal year, subject to certain
        limitations. Each option grant was to vest monthly over a one year period,
        commencing on April 1, 2011 for the fiscal 2008 option grant and
        April 1, 2012 for the fiscal 2009 option grant. In March 2008, the
        Independent Members determined that Mr. Nakamoto, Mr. Paul and
        Mr. Taft would receive grants of restricted stock for 12,000, 12,000 and
        16,000 shares, respectively, of our common stock in each of fiscal 2008 and
        2009
        pursuant to our 2005 Equity Incentive Plan, in lieu of the grant of previously
        approved stock options which were never issued. Each restricted stock grant
        was
        issued on May 16, 2008, which was the third business day following the
        announcement of our results for the applicable fiscal year, subject to certain
        limitations. Each restricted stock grant shall vest quarterly over a one
        year
        period, commencing on April 1, 2010 for the fiscal 2008 restricted stock
        grant and April 1, 2011 for the fiscal 2009 restricted stock grant. In
        order for an executive officer to be eligible to receive a restricted stock
        or
        stock option grant in the applicable fiscal year, the executive officer must
        continue to be our employee as of the last day of the applicable fiscal year
        and
        on the applicable date of grant. Each restricted stock or stock option grant
        described above will be subject to accelerated vesting such that 50% of the
        unvested shares subject to each such restricted stock or stock option grant
        will
        automatically vest upon the consummation of a change of control of Hoku in
        the
        event that the executive officer’s employment with us is terminated without
        cause or the executive officer terminates his employment with us voluntarily
        for
        good reason within twelve months following a change of control, subject to
        the
        execution of a general release in favor of Hoku.
  *Bonus*
  In
        February 2007, the Independent Members approved corporate and individual
        objectives for each executive officer for fiscal 2008 within the following
        categories:
  •
              
              Capital
                  raising activities;
  •
              
              Operating
                  results, including revenue, gross margin and net income;
                  and
  •
              
              Implementation
                  of Sarbanes-Oxley initiatives.
  The
        target and maximum amount of an incentive payment an executive officer could
        receive upon achievement of the corporate targets was originally set at 200%
        of
        the executive officer’s base salary as of April 1, 2007. The amount of
        incentive payment allocated to each of the above categories was weighted
        differently for each executive officer.
  In
        March
        2008, the Independent Members determined that because of the dynamic nature
        of
        our business, the changing areas of our business focus, and our accomplishments
        during fiscal 2008, while productive, the corporate targets set in February
        2007
        should not be exclusively used to determine the incentive payments to be
        paid to
        the executive officers. The Independent Members believed that the executive
        officers had made significant progress during fiscal 2008 in line with our
        overall strategy and, therefore, such officers should also be evaluated based
        upon such achievements. In addition, the Independent Members believed that
        the
        changes in strategy required a shift in commitment by the executive officers
        away from certain retained aspects of our strategy which was not contemplated
        in
        February 2007. Furthermore, by adhering strictly to the corporate targets
        set
        February 2007, executive compensation would not be in line with the compensation
        levels provided by Watson Wyatt, a compensation consultant. Watson Wyatt
        was
        hired in fiscal 2007 to assist the Independent Members in their review of
        our
        executive compensation policies and procedures. In March 2008, the Independent
        Members also determined that 100% of the incentive payments under the Fiscal
        Year 2008 Executive Incentive Compensation Plan were to be allocated in
        cash.
  40
  Based
        on
        their revised evaluation of the contributions made by each executive officer,
        the Independent Members determined to award the following amounts at the
        following achievement levels:
  **Name**
                
                **Title**
                
                **Base**
                  **Salary as**
                  **of****April 1,**
                  **2007**
                
                **Cash**
                  **Bonus**
                
                **Percentage**
                  **Achievement**
                  **of Target(1)**Dustin M.
                    Shindo
                
                
                Chairman
                    of the Board of Directors, President and Chief Executive
                    Officer
                
                $
                380,000
                
                $
                760,000
                
                
                100
                %Karl
                    M. Taft III
                
                
                Chief
                    Technology Officer
                
                
                90,000
                
                
                180,000
                
                
                100Darryl
                    S. Nakamoto
                
                
                Chief
                    Financial Officer, Treasurer and Secretary
                
                
                90,000
                
                
                180,000
                
                
                100Scott
                    B. Paul
                
                
                Vice
                    President, Business Development and General Counsel
                
                
                90,000
                
                
                180,000
                
                
                100
  *Fiscal
        2009 Incentive Compensation Plan*
  In
          March
          2008, the Independent Members approved for fiscal 2009, respectively, (1)
          the
          base salary, (2) the stock bonus targets and (3) the substitution of
          restricted stock awards for previously-approved stock option targets for
          our
          executive officers other than our President and Chief Executive Officer.
          The
          Independent Members also approved corporate and individual objectives for
          each
          executive officer, except for our President and Chief Executive Officer,
          for
          fiscal 2009 within the following categories:
  •
              
              Securing
                  an additional $75 million in financing for construction of our
                  planned
                  polysilicon manufacturing facility in Pocatello, Idaho;
                  and
  •
              
              Execution
                  of the first reactor test at our planned polysilicon manufacturing
                  facility.
  *President
        and Chief Executive Officer*
  **Name**
                
                **Fiscal 2009**
                  **Base Salary($)(1)**
                
                **Fiscal 2009**
                  **Cash Value of Stock**
                  **Bonus Target($)(2)**Dustin M.
                    Shindo
                
                $
                380,000
                
                $
                760,000
 
 (1)
              This
                  increase in Mr. Shindo’s salary was effective as of February 7,
                  2007.(2)
              Mr. Shindo
                  will be entitled to receive a fully-vested stock award under our
                  2005
                  Equity Incentive Plan in the form of a stock bonus if certain corporate
                  performance targets are achieved that are set for Mr. Shindo by the
                  Independent Members for fiscal 2009 as may be modified by them
                  from time
                  to time. The cash value reflected in the table above represents
                  the
                  maximum potential stock bonus issuable to Mr. Shindo and is equal to
                  200% of Mr. Shindo’s annual base salary. The Independent Members will
                  ultimately determine the amounts and the timing of the issuance
                  of any
                  stock bonus to Mr. Shindo in their sole discretion. In order for
                  Mr. Shindo to be eligible to receive a stock bonus in the applicable
                  fiscal year, Mr. Shindo must also continue to be our employee as of
                  the last day of the applicable fiscal year and on the applicable
                  date of
                  issuance of the stock bonus.
  The
        Independent Members also approved the payment of personal expenses incurred
        by
        Mr. Shindo not to exceed $10,000 for fiscal 2009 and the hiring of an
        hourly employee to assist Mr. Shindo with personal responsibilities. The
        expected cost of the wages for this hourly employee is expected to be less
        than
        $30,000 per fiscal year. We will pay the associated wages of this assistant
        and
        will gross up Mr. Shindo’s compensation to cover the personal income tax
        expense incurred by Mr. Shindo in connection with these
        arrangements.
  *Other
        Executive Officers*
 **Name**
                
                **Fiscal 
                    2009**
                  **Base
                    Salary($)**
                
                **Fiscal
                    2009**
                  **Cash
                    Value of Stock**
                  **Bonus
                    Target($)(1)**
                
                **Fiscal 2009 Restricted
                    Stock(#)(2)**Karl
                    M. Taft III
                
                $
                120,000
                
                $
                500,000
                
                $
                16,000Darryl
                    S. Nakamoto
                
                
                120,000
                
                
                240,000
                
                
                12,000Scott
                    B. Paul
                
                
                120,000
                
                
                240,000
                
                
                12,000
 
 (1)
              The
                  executive officers named above will be entitled to receive a fully-vested
                  stock award under our 2005 Equity Incentive Plan in the form of
                  a stock
                  bonus if certain corporate performance targets are achieved that
                  are set
                  for each executive officer by the Independent Members for fiscal
                  2009 as
                  may be modified by the Independent Members from time to time. The
                  cash
                  values reflected in the table above represent the maximum potential
                  stock
                  bonus issuable to these executive officers and are equal to 200%
                  of each
                  executive officer’s annual base salary, other than for Mr. Taft in
                  fiscal 2009, which is equivalent to 417% of his annual base salary.
                  The
                  Independent Members will ultimately determine the amounts and the
                  timing
                  of the issuance of any stock bonus to these executive officers
                  in their
                  sole discretion. In order for these executive officers to be eligible
                  to
                  receive a stock bonus in the applicable fiscal year, each executive
                  officer must also continue to be our employee as of the last day
                  of the
                  applicable fiscal year and on the applicable date of
                  grant.
  41
 
 (2)
              The
                  executive officers named above will be eligible to receive a restricted
                  stock grant for the number shares of our common stock stated above
                  in
                  fiscal 2009 pursuant to our 2005 Equity Incentive Plan. Each restricted
                  stock grant will be issued on the third business day following
                  the
                  announcement of our results for the applicable fiscal year, subject
                  to
                  certain limitations. Each restricted stock grant shall vest quarterly
                  over
                  a one year period, commencing on April 1, 2011. In order for an
                  executive officer to be eligible to receive a restricted stock
                  grant in
                  the applicable fiscal year, the executive officer must continue
                  to be our
                  employee as of the last day of the applicable fiscal year and on
                  the
                  applicable date of grant. Each restricted stock grant described
                  above will
                  be subject to accelerated vesting such that 50% of the unvested
                  shares
                  subject to each such grant will automatically vest upon the consummation
                  of a change of control of Hoku in the event that the executive
                  officer’s
                  employment with us is terminated without cause or the executive
                  officer
                  terminates his employment with us voluntarily for good reason within
                  twelve months following a change of control, subject to the execution
                  of a
                  general release in favor of Hoku.
  The
        Independent Members also approved having one of our employees spend a portion
        of
        his time assisting Mr. Taft with personal matters. We will pay the
        associated wages of this assistant and will gross up Mr. Taft’s
        compensation to cover the personal income tax expense incurred by Mr. Taft
        in connection with this arrangement.
  *Indemnification
        Agreement and D&O Liability Insurance*
  We
        have
        entered and expect to continue to enter into agreements to indemnify our
        directors and executive officers as determined by the Board of Directors.
        These
        agreements provide for indemnification for related expenses including attorneys’
fees, judgments, fines and settlement amounts incurred by any of these
        individuals in any action or proceeding. We believe that indemnification
        agreements are necessary to attract and retain qualified persons as directors
        and executive officers. We also maintain directors’ and officers’ liability
        insurance for the benefit of such persons.
  *Benefits*
  We
        also
        provide the following benefits to our executive officers, generally on the
        same
        basis provided to all of our employees:
  •
              
              health,
                  dental insurance and vision;
  •
              
              medical
                  and dependent care flexible spending
                  account;
  •
              
              short-and
                  long-term disability, accidental death and
                  dismemberment; and
  We
        believe these benefits are consistent with companies with which we compete
        for
        employees. We also pay the medical premiums of the families of the executive
        officers as long as such family members did not have medical coverage separately
        available pursuant to another company-sponsored plan.
  **Stock
        Ownership Guidelines**
  While
        we
        believe equity ownership directly aligns the risk profile of our executive
        officers with that of the stockholders we have not at this time adopted any
        stock ownership guidelines for our executive officers.
  **Accounting
        and Tax Considerations**
  Section 162(m)
        of the Internal Revenue Code, as amended, limits the amount that we may deduct
        from our taxes for compensation paid to our three most highly compensated
        officers (other than our chief financial officer) to $1,000,000 per person
        per
        year, unless certain requirements are met. Section 162(m) provides
        exceptions from the application of the $1,000,000 limit for certain forms
        of
“performance-based” compensation as well as for gain recognized by an officer
        upon the exercise of qualifying compensatory stock options. We believe that
        the
        stock options we have granted in the past have satisfied the exceptions provided
        under Section 162(m) from the $1,000,000 limit. While the Independent
        Members have not adopted a formal policy regarding the tax deductibility
        of
        compensation paid to our officers, the Independent Members intend to consider
        the tax deductibility of compensation under Section 162(m) as a factor in
        future compensation decisions.
  We
        adopted SFAS No. 123(R) on April 1, 2005.
        SFAS No. 123(R) establishes accounting for stock-based awards
        exchanged for employee services. Accordingly, stock-based compensation cost
        is
        measured at grant date, based on the fair value of the awards, and is recognized
        as an expense over the requisite employee service period. The compensation
        committee has determined to retain for the foreseeable future our stock option
        program as the sole component of its long-term compensation program, and,
        therefore, to record this expense on an ongoing basis according to
        SFAS No. 123(R).
  42
   **EXECUTIVE
        COMPENSATION**
  The
        following table shows for fiscal 2008, compensation awarded or paid to, or
        earned by, our Chief Executive Officer, Chief Financial Officer and our other
        two most highly compensated executive officers in fiscal 2008 who received
        at
        least $100,000 of total compensation. We refer to such persons as our named
        executive officers.
  **Summary
        Compensation Table**
  **Name
                    and Principal Position**
                
                **Year**
                
                **Salary**
                  **($)**
                
                **Restricted**
                  **Stock**
                  **($) (1)**
                
                **Non-Equity**
                  **Incentive Plan**
                  **Compensation**
                
                **All Other**
                  **Compensation($)**
                
                **Total ($)**Dustin
                    M. Shindo
                  *President
                    and*
                  *Chief Executive Officer*
                
                
                2008
                
                $
                380,000
                
                $
                438,000
                  —
                
                $
                760,000
                
                $
                52,944
                (2)
                $
                1,630,944Darryl
                    S. Nakamoto
                  *Chief
                    Financial Officer, Treasurer and Secretary*
                
                
                2008
                
                
                90,000
                
                $
                —
                
                
                180,000
                
                
                —
                
                
                270,000Scott
                    B. Paul
                  *Vice
                    President, Business Development and*
                  *General Counsel*
                
                
                2008
                
                
                90,000
                
                
                —
                
                
                180,000
                
                
                6,587
                (3)
                
                276,587Karl
                    M. Taft, III
                  *Chief
                    Technology Officer*
                
                
                2008
                
                
                90,000
                
                
                —
                
                
                180,000
                
                
                3,929
                (4)
                
                273,929
 
 (1)
              The
                  amounts shown in this column reflect the dollar amount recognized for
                  financial statement reporting purposes for fiscal 2008, in accordance
                  with
                  SFAS No. 123(R) for restricted stock granted in fiscal 2008 and in
                  prior years. The assumptions used in the calculation of these amounts
                  are
                  included in Note 7, “Stockholders’ Equity—Stock-Based Compensation”.
                  The amounts shown exclude the impact of estimated forfeitures related
                  to
                  service-based vesting conditions.(2)
              This
                  amount includes $45,571 in fringe benefits and $7,373 for medical
                  benefits.(3)
              Represents
                  amount for medical benefits.(4)
              This
                  amount includes $1,445 for fringe benefits and $2,484 for medical
                  benefits.
 
 **Grants
        of Plan-Based Awards in Fiscal 2008**
 
 **Name**
              
              **Grant**
                **Date**
              
              **Approval**
                **Date of**
                **Grant**
              
              **Payouts
                  Under**
                **Non-Equity**
                **Incentive Plan**
                **Awards(1)**
              
              **Estimated Future**
                **Payouts
                  Under**
                **Equity
                  Incentive**
                **Plan
                  Awards(1)**
              
              **All
                  Other**
                **Stock**
                **Awards:**
                **Number of**
                **shares of stock
                  or units(#)(2)**
              
              **Exercise**
                **or Base**
                **Price of**
                **Option**
                **Awards**
                **($/Sh)**
              
              **Grant**
                **Date Fair**
                **Value
                  of**
                **Stock and**
                **Option**
                **Awards**
                **($)(3)****Threshold**
                **($)**
              
              **Target**
                **($)**
              
              **Maximum**
                **($)**
              
              **Threshold**
                **(#)**
              
              **Target**
                **(#)**
              
              **Maximum**
                **(#)**Dustin M. Shindo
              
              
              05/11/07
              
              
              02/7/07
              
              
              —
              
              $
              760,000
              
              $
              760,000
              
              
              —
              
              
              
              
              
              
              
              
              200,000
              
              $
              —
              
              $
              876,000Darryl S. Nakamoto
              
              
              03/21/08
              
              
              03/13/08
              
              
              —
              
              
              180,000
              
              
              180,000
              
              
              —
              
              
              
              
              
              
              
              
              —
              
              
              —
              
              
              —Scott
                  B. Paul
              
              
              03/21/08
              
              
              03/13/08
              
              
              —
              
              
              180,000
              
              
              180,000
              
              
              —
              
              
              
              
              
              
              
              
              —
              
              
              —
              
              
              —Karl
                  M. Taft III
              
              
              03/21/08
              
              
              03/13/08
              
              
              —
              
              
              180,000
              
              
              180,000
              
              
              —
              
              
              
              
              
              
              
              
              —
              
              
              —
              
              
              —
 
 (1)
              In
                  February 2007, the Independent Members approved our Fiscal 2008
                  Executive
                  Incentive Compensation Plan, or the 2008 Plan. Each incentive payment
                  under the 2008 Plan could consist of either a cash payment, a stock
                  award
                  pursuant to our 2005 Equity Incentive Plan or both, at the sole
                  discretion
                  of the Independent Members. The maximum amount of an incentive
                  payment an
                  executive officer could receive upon achievement of the corporate
                  targets
                  was 200% of the executive officer’s base salary as of April 1, 2007.
                  In March 2008, the Independent Members determined that 200% of
                  the
                  incentive payments under the 2008 Plan were to be allocated in
                  cash.(2)
              Represents
                  a restricted stock granted under our 2005 Equity Incentive Plan.
                  Restricted stock allows the holder to the right to a share of Hoku
                  common
                  stock over a vesting period. Restricted stock rights generally
                  terminate
                  after termination of an employee’s service.(3)
              Represents
                  the closing price of our common stock on May 11, 2007 as reported
                  on the
                  NASDAQ Global Market. Excludes the impact of estimated forfeitures
                  based
                  on service-based vesting conditions.
  43
  **Outstanding
        Equity Awards at Fiscal 2008 Year End**
 
 **Name**
                
                **Options
                    and Restricted Stock Awards****Number
                    of shares of stock or units****(#)****Exercisable(1)**
                
                **Number
                    of shares of stock or units (#)****Unexercisable(2)**
                
                **Option
                    Exercise Price****($)**
                
                **Option
                    Expiration Date**Dustin
                    M. Shindo
                
                
                200,000
                (3)
                
                —
                
                
                —
                
                
                NADarryl
                    S. Nakamoto
                
                
                32,667
                (4)
                
                —
                
                $
                0.525
                
                
                1/24/1560,000
                (5)
                
                —
                
                
                2.60
                
                
                7/24/16Scott
                    B. Paul
                
                
                40,000
                (4)
                
                —
                
                
                0.075
                
                
                7/18/1320,000
                (4)
                
                —
                
                
                0.15
                
                
                4/12/1433,333
                (4)
                
                —
                
                
                0.375
                
                
                12/13/1460,000
                (5)
                
                —
                
                
                2.60
                
                
                7/24/16Karl
                    M. Taft, III
                
                
                33,000
                (4)
                
                —
                
                
                0.075
                
                
                8/1/1360,000
                (5)
                
                —
                
                
                2.60
                
                
                7/24/16
 
  (1)
              Represents
                  a stock option or restricted stock granted under our 2005 Equity
                  Incentive
                  Plan. Stock options allow the holder to purchase a share of Hoku
                  common
                  stock at the fair market value per share of Hoku common stock on
                  the date
                  of grant. Restricted stock allow the holder the right to Hoku common
                  stock
                  over a period of time. Each restricted stock and stock option has
                  a ten
                  year term. Stock options generally terminate three months after
                  termination of an optionee’s service for any reason other than disability
                  or death, 12 months after termination due to disability and 18
                  months
                  after termination due to death. Restricted stock generally terminate
                  after
                  termination of an holder’s service. Vesting may accelerate pursuant to
                  certain agreements, please see “*Severance
                  and**Change
                  of Control Agreements*”
                  in this Item 11.(2)
              All
                  stock options held by our named executive officers may be early
                  exercised
                  subject to a lapsing right of repurchase in the event such executive
                  officer’s service terminates.(3)
              1/24thof
                  the shares vest will vest on a monthly basis beginning on April
                  1, 2007.(4)
              20%
                  of the shares vest on the one year anniversary of the date of grant
                  and
                  1/60thper
                  month thereafter.
 (5)
              1/36thof
                  the shares will vest on a monthly basis commencing on the second
                  year
                  anniversary of the date of the
                  grant.
  As
        of
        March 31, 2008, all shares of common stock held by our named executive
        officers were fully-vested, except for Mr. Shindo, as indicated above, and
        such
        executive officers did not hold any unvested stock awards.
  **Option
        Exercises and Stock Vested**
 
 **Name**
                
                **Number
                    of Options Exercised (#)**
                
                **Value
                    Realized on**
                  **Exercise ($)(7)**
                
                **Number of Shares**
                  **Acquired on Vesting(#)(1)**
                
                **Value Realized on**
                  **Vesting ($)(2)**Dustin
                    M. Shindo
                
                
                -
                
                $
                -
                
                
                100,000
                (3)
                $865,672Darryl
                    S. Nakamoto
                
                
                20,666
                
                
                190,749
                
                
                10,667
                (6)
                86,744Scott
                    B. Paul
                
                
                30,000
                
                
                247,100
                
                
                26,667
                (4)
                227,444Karl
                    M. Taft, III
                
                
                -
                
                
                -
                
                
                6,667
                (5)
                55,211
 
 (1)
              Represents
                  shares that vested during fiscal 2008 relating to previously granted
                  stock
                  options or restricted stock awards.(2)
              Value
                  determined based on the closing price of our common stock as reported
                  on
                  the NASDAQ Global Market on the date of vesting, less the applicable
                  exercise price, in the case of options, or sales price, in the
                  case of
                  restricted stock awards, multiplied by the number of options/restricted
                  awards vested during fiscal 2008.(3)
              Represents
                  a restricted stock award granted on 5/11/07.(4)
              Represents
                  16,000, 4,000, and 6,667 options vested for options granted on
                  7/18/03,
                  4/12/04, and 12/13/04, respectively, with an exercise price of
                  $0.075,
                  $0.15, and $0.375, respectively.(5)
              Represents
                  an option granted on 8/1/03 with an exercise price of
                  $0.075.(6)
              Represents
                  an option granted on 1/24/05 with an exercise price of
                  $0.525.(7)
              Value
                  determined based on the closing price of our common stock as reported
                  on
                  the NASDAQ Global Market on the date of exercise, less the exercise
                  price,
                  multiplied by the number of options
                  exercised.
  **Pension
        Benefits**
  Our
        named
        executive officers did not participate in, or otherwise receive any benefits
        under, any pension or retirement plan sponsored by us during fiscal
        2008.
  44
  **Nonqualified
        Deferred Compensation**
  Our
        named
        executive officers did not earn any nonqualified compensation benefits from
        us
        during fiscal 2008.
  **Employment
        Agreements**
  We
        have
        not entered into employment agreements with any of our named executive
        officers.
  **Severance
        and Change of Control Agreements**
  The
        following provides information regarding termination of employment and change
        of
        control arrangements with our named executive officers.
  *Dustin
        M. Shindo*
  In
        May
        2007, Dustin M. Shindo, our Chairman of the Board, President and Chief Executive
        Officer, was granted a restricted stock award for 200,000 shares of common
        stock
        pursuant to our 2005 Equity Incentive Plan. The restricted stock award vest
        1/24th per month, commencing on April 1, 2007. The restricted stock
        award is subject to accelerated vesting, such that 50% of the unvested shares
        subject to such restricted stock award shall automatically vest upon the
        consummation of a change of control of Hoku in the event that Mr. Shindo’s
        employment with us is terminated without cause or Mr. Shindo terminates his
        employment with us voluntarily for good reason within twelve months following
        a
        change of control, subject to his execution of a general release in favor
        of
        Hoku.
  *Darryl
        S. Nakamoto*
  Darryl
        S.
        Nakamoto, our Chief Financial Officer, Treasurer and Secretary, was granted
        a
        stock option to purchase 53,333 shares of our common stock at an exercise
        price
        of $0.525 per share in January 2005. In July 2006, Mr. Nakamoto was granted
        a
        stock option to purchase 60,000 shares of our common stock at an exercise
        price
        of $2.60 per share. The stock option agreement is subject to accelerated
        vesting, such that 50% of the unvested shares subject to such stock option
        shall
        automatically vest upon the consummation of a change of control of Hoku in
        the
        event that Mr. Nakamoto’s employment with us is terminated without cause or
        Mr. Nakamoto terminates his employment with us voluntarily for good reason
        within twelve months following a change of control, subject to his execution
        of
        a general release in favor of Hoku.
  *Scott
        B. Paul*
  Scott
        B.
        Paul, our Vice President, Business Development and General Counsel, was granted
        a stock option to purchase 80,000 shares of our common stock at an exercise
        price of $0.075 per share in July 2003. In April 2004, Mr. Paul was granted
        a stock option to purchase 20,000 shares of our common stock at an exercise
        price of $0.15 per share. In December 2004, Mr. Paul was granted a stock
        option to purchase 33,333 shares of our common stock at an exercise price
        of
        $0.375 per share. Each of Mr. Paul’s stock option agreements was amended
        prior to our initial public offering in August 2005 to provide that, if
        Mr. Paul is terminated without cause within 18 months of a change of
        control, 50% of his unvested shares would become vested on the date of
        termination.
  In
        July
        2006, Mr. Paul was granted a stock option to purchase 60,000 shares of our
        common stock at an exercise price of $2.60 per share. The stock option agreement
        is subject to accelerated vesting, such that 50% of the unvested shares subject
        to such stock option shall automatically vest upon the consummation of a
        change
        of control of Hoku in the event that Mr. Paul’s employment with us is
        terminated without cause or Mr. Paul terminates his employment with us
        voluntarily for good reason within twelve months following a change of control,
        subject to his execution of a general release in favor of Hoku.
  *Karl
        M. Taft III*
  Karl
        M.
        Taft, our Chief Technology Officer, was granted a stock option to purchase
        33,333 shares of our common stock at an exercise price of $0.075 per share
        in
        August 2003. In July 2006, Mr. Taft was granted a stock option to purchase
        60,000 shares of our common stock at an exercise price of $2.60 per share.
        The
        stock option agreement is subject to accelerated vesting, such that 50% of
        the
        unvested shares subject to such stock option shall automatically vest upon
        the
        consummation of a change of control of Hoku in the event that Mr. Taft’s
        employment with us is terminated without cause or Mr. Taft terminates his
        employment with us voluntarily for good reason within twelve months following
        a
        change of control, subject to his execution of a general release in favor
        of
        Hoku.
  The
        following table describes the potential value of equity acceleration to the
        named officers above upon their termination without cause within 12 and/or
        18
        months of a change of control change of control, depending on the agreement,
        as
        if such termination had occurred on March 31, 2008:
  45
  Equity
                  Acceleration
              
              **Termination without Cause**
                **Following a Change in Control**Dustin
                  M. Shindo
              
              $
              406,000Darryl
                  S. Nakamoto
              
              $
              81,016Scott
                  B. Paul
              
              $
              250,834Karl
                  M. Taft
              
              $
              176,775
 
 (1)
              Calculated
                  based on a termination without cause following a change of control
                  as of
                  March 31, 2008 and assuming a price per share of $8.12, which is the
                  closing price of our common shares as reported on the NASDAQ Global
                  Market
                  on March 31, 2008, the last market trading day for fiscal
                  2008.
  *Fiscal
        2008 and 2009Restricted Stock Grants*
  Each
        restricted stock grant to our named executive officers, which will be granted
        in
        fiscal 2009 and 2010 will be subject to accelerated vesting such that 50%
        of the
        unvested shares subject to each such stock option will automatically vest
        upon
        the consummation of a change of control of Hoku in the event that the executive
        officer’s employment with us is terminated without cause or the executive
        officer terminates his employment with us voluntarily for good reason within
        twelve months following a change of control, subject to the execution of
        a
        general release in favor of Hoku.
  
 **Item 12.**
              **Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters**
  **Beneficial
        Ownership**
  Reference
        is made to the information under the heading “Security Ownership of Certain
        Beneficial Owners and Management” to be included in our 2008 Proxy Statement,
        which information is hereby incorporated by reference.
  **Equity
        Compensation Plan Information**
  Reference
        is made to the information under the heading “Compensation-Equity Compensation
        Plan Information” to be included in our 2008 Proxy Statement, which information
        is hereby incorporated by reference.
  **Compensation
          Committee Interlocks and Insider Participation**
  We
          do not
          have a separate compensation committe. None of our executive officers currently
          serves, or has served during fiscal 2008, on the compensation committee
          or board
          of directors of any other entity that has one or more executive officers
          serving
          as a member of our Board of Directors.
   **Item 13.**
              **Certain
                  Relationships and Related Transactions, and Director
                  Independence**
  **Related
        Party Transaction Approval Policy**
  Related
        party transactions are governed by our Code of Conduct and our management
        monitors adherence to the Code of Conduct. In addition, each director and
        executive officer annually delivers to Hoku a questionnaire that includes,
        among
        other things, a request for information relating to any transactions in which
        both the director, executive officer, or their respective family members,
        and
        Hoku participates, and in which the director, executive officer, or such
        family
        member, has a material interest. The Audit Committee is responsible for the
        review, approval, or ratification of such related party transactions. Under
        SEC
        rules, a related party is a director, officer, nominee for director, or 5%
        stockholder of Hoku and their immediate family members. Transactions involving
        related parties are reviewed by the Audit Committee which determines whether
        the
        related party has a material interest in a transaction and may approve, ratify,
        rescind, or take other action with respect to the transaction in its
        discretion.
  **Related
        Party Transactions and Relationships**
  During
        fiscal 2008, we had the following related party relationships:
  *Registration
        Rights Agreement*
  We
        have
        entered into an agreement with certain holders of our common stock, including
        directors and executive officers, including entities with which certain of
        our
        directors are affiliated, that provides for certain rights relating to the
        registration of their shares of common stock that were issued upon conversion
        of
        their preferred stock upon the closing of our initial public offering in
        August
        2005. The directors and executive officers that are parties to this agreement
        are Dustin M. Shindo and Karl M. Taft III.
  In
        February 2008, we issued 2,893,519 shares of our common stock pursuant to
        a
        Securities Purchase Agreement, by and among us and certain institutional
        investors, and a wholly owned subsidiary of Suntech Power Holdings Co., Ltd.
        The
        wholly owned subsidiary of Suntech Power Holdings Co., Ltd acquired 2,314,815
        shares of our common stock.
  *Change
        of Control Arrangement*
  We
        have
        entered into a stock restriction and change of control agreement with Dustin
        M.
        Shindo, our Chairman of the Board, President and Chief Executive Officer,
        Darryl
        S. Nakamoto, our Chief Financial Officer, Treasurer and Secretary, Scott
        B.
        Paul, our Vice President, Business Development and General Counsel and Karl
        M.
        Taft, our Chief Technology Officer. For information regarding this agreement,
        see “Item 11. Executive Compensation – *Severance
        and*  *Change
        of Control Agreements* .”
  46




*Employment
      Relationship*




Ryan
          Shindo, our Operations Manager, is the brother of Dustin M. Shindo, our
          Chairman of the Board, President and Chief Executive Officer. Ryan Shindo
          has an
          annual salary of $50,000 that was effective July 1, 2007. Previously, Mr.
          Shindo’s annual salary was $40,000. Mr. Shindo received a stock award of 1,000
          shares of common stock in fiscal 2006, with a fair market value on the
          date of
          award of $6,400. In fiscal 2007, we awarded him 649 shares of common stock
          with
          a fair market value of $1,999. During fiscal 2007, we awarded 3,000 stock
          options at an exercise price of $2.75. During fiscal 2008, we expensed
          $16,968,
          relating to stock options granted to Ryan Shindo in fiscal 2007 and in
          prior
          fiscal years.
  *Consulting
        Agreement*
  Pursuant
        to a Consulting Agreement, dated August 20, 2006, by and between Hoku and
        Paul K. Yonamine, a former member of our Board of Directors, Mr. Yonamine
        has agreed to make introductions to senior level executives and to facilitate
        business discussions with companies in Japan as we may request. These services
        may include attending meetings in Japan, participating in conference calls,
        and
        drafting written correspondence on our behalf. In consideration for these
        services, all the stock options Mr. Yonamine received as a member of our
        Board of Directors will continue to vest in accordance with their terms as
        long
        as Mr. Yonamine continues to provide services pursuant to the Consulting
        Agreement. Mr. Yonamine holds stock options to purchase 19,259 shares of
        common stock. Mr. Yonamine will not receive any other cash or other
        compensation for his services. We will reimburse Mr. Yonamine for all
        pre-approved out-of-pocket expenses he incurs in rendering such services.
        The
        Consulting Agreement was effective as of September 7, 2006 and terminated
        on September 7, 2007.
  We
        believe that all of the transactions described above were made on terms no
        less
        favorable to us than could have been obtained from unaffiliated third
        parties.
  *Director
        and Officer Indemnification*
  Our
        amended and restated certificate of incorporation contains provisions limiting
        the liability of directors. In addition, as permitted by our bylaws, we have
        entered into agreements to indemnify our directors and executive officers
        to the
        fullest extent permitted under Delaware law.
  All
        future transactions between us and our executive officers, directors, principal
        stockholders and their affiliates will be approved by our Audit
        Committee.
 
 **Item 14.**
              **Principal
                  Accountant Fees and
                  Services**
  Reference
        is made to the information under the heading “Proposal No. 2 –
Ratification of Independent Registered Public Accounting Firm” in our 2008 Proxy
        Statement, which information is hereby incorporated by reference.
  **PART
        IV**
 
 **Item 15.**
              **Exhibits
                  and Financial Statement
                  Schedules**
  *(a)(1)
        Financial Statements*
  The
        financial statements and notes are listed in the Index to Financial Statements
        on page F-1 of this Report.
  *(a)(2)
        Financial Statement Schedules*
  Financial
        statement schedules not filed herein have been omitted as they are not
        applicable or the required information or equivalent information has been
        included in the financial statements or the notes thereto.
  *(a)(3) Exhibits*
  See
        Exhibit Index attached hereto and incorporated by reference herein.
  47
  **SIGNATURES**
  Pursuant
        to the requirements of Section 13 or 15(d) of the Securities Exchange Act
        of 1934, the registrant has duly caused this report to be signed on its behalf
        by the undersigned, thereunto duly authorized.
  HOKU
                  SCIENTIFIC, INC.By:
              /s/    DUSTINM.
                  SHINDO**Dustin
                  M. Shindo****Chairman
                  of the Board of Directors,****President
                  and Chief Executive
                  Officer**
  Date:
        June 6, 2008
  KNOW
        ALL
        PERSONS BY THESE PRESENTS, that each person whose signature appears below
        constitutes and appoints Dustin M. Shindo and Karl M. Taft III, and each
        or any
        one 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 Securities and Exchange Commission, granting unto said
        attorneys-in-facts and agents, and each of them, full power and authority
        to do
        and perform each and every act and thing requisite and necessary to be done
        in
        connection therewith, as fully to all intents and purposes as he might or
        could
        do in person, hereby ratifying and confirming all that said attorneys-in-fact
        and agents, or any of them, or their or his substitutes or substitutes, may
        lawfully do or cause to be done by virtue hereof.
  Pursuant
        to the requirements of the Securities Exchange Act of 1934, this report has
        been
        signed below by the following persons on behalf of the registrant and in
        the
        capacities and on the dates indicated.
  **Signature**
              
              **Title**
              
              **Date**/s/
                  DUSTIN M. SHINDO
              
              Chairman
                  of the Board of Directors, President and
              
              June
                  6, 2008**Dustin
                  M. Shindo**
              
              Chief
                  Executive Officer *(Principal Executive Officer)*/s/
                  DARRYL S. NAKAMOTO
              
              Chief
                  Financial Officer, Treasurer and Secretary
              
              June
                  6, 2008**Darryl
                  S. Nakamoto**
              
              *(Principal
                  Financial and Accounting Officer)*/s/
                  KARL M. TAFT III
              
              Chief
                  Technology Officer and Director
              
              June
                  6, 2008**Karl
                  M. Taft III**/s/
                  KARL E. STAHLKOPF
              
              Director
              
              June
                  6, 2008**Karl
                  E. Stahlkopf**/s/
                  KENTON T. ELDRIDGE
              
              Director
              
              June
                  6, 2008**Kenton
                  T. Eldridge**/s/
                  DEAN K. HIRATA
              
              Director
              
              June
                  6, 2008**Dean
                  K. Hirata**
  48




**HOKU
      SCIENTIFIC, INC.**




**INDEX
      TO FINANCIAL STATEMENTS**




**Page**Report
                    of Independent Registered Public Accounting Firm - Ernst & Young
                    LLP
                F-2Consolidated
                    Balance Sheets as of March 31, 2008 and 2007
                F-3Consolidated
                    Statements of Operations for the fiscal years ended March 31, 2008,
                    2007 and 2006
                F-4Consolidated
                    Statements of Stockholders’ Equity and Comprehensive Income (Loss) for the
                    fiscal years ended March 31, 2008, 2007 and 2006
                F-5Consolidated
                    Statements of Cash Flows for the fiscal years ended March 31, 2008,
                    2007 and 2006
                F-6Notes
                    to Consolidated Financial Statements
                F-7




F-1




**Report
      of Independent Registered Public Accounting Firm**




The
      Board
      of Directors and Stockholders


Hoku
      Scientific, Inc.





We
      have
      audited the accompanying consolidated balance sheets of Hoku Scientific, Inc.
      and subsidiaries as of March 31, 2008 and 2007, and the related consolidated
      statements of operations, stockholders’ equity and comprehensive income (loss),
      and cash flows for each of the three years in the period ended March 31, 2008.
      These financial statements are the responsibility of the Company's management.
      Our responsibility is to express an opinion on these financial statements based
      on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. 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 audits provide a
      reasonable basis for our opinion.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the consolidated financial position of Hoku Scientific,
      Inc.
      and subsidiaries at March 31, 2008 and 2007, and the consolidated results of
      their operations and their cash flows for each of the three years in the period
      ended March 31, 2008, in conformity with U.S. generally accepted accounting
      principles.





We
        also
        have audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), Hoku Scientific, Inc.’s internal control over
        financial reporting as of March 31, 2008, based on criteria established in
        Internal Control-Integrated Framework issued by the Committee of Sponsoring
        Organizations of the Treadway Commission and our report dated June 6, 2008
        expressed an unqualified opinion thereon.





/s/
      Ernst
& Young LLP





Honolulu,
      Hawaii


June
      6,
      2008


F-2


**HOKU
      SCIENTIFIC, INC. AND SUBSIDIARIES**




**CONSOLIDATED
      BALANCE SHEETS**


**(in
      thousands, except share data)**




**March 31,****2008**
            
            **2007****Assets**Cash
                and cash equivalents
            
            $
            27,768
            
            $
            2,567Short-term
                investments
            
            
            1,992
            
            
            17,389Accounts
                receivable
            
            
            113
            
            
            377Inventory
            
            
            803
            
            
            2,385Costs
                of uncompleted contracts
            
            
            54
            
            
            698Equipment
                held for sale
            
            
            29
            
            
            74Other
                current assets
            
            
            3,787
            
            
            537Total
                current assets
            
            
            34,546
            
            
            24,027Property,
                plant and equipment, net
            
            
            33,563
            
            
            5,795Other
                assets
            
            
            -
            
            
            803Total
                assets
            
            $
            68,109
            
            $
            30,625**Liabilities
                and Stockholders’ Equity**Accounts
                payable and accrued expenses
            
            
            3,258
            
            
            653Deferred
                revenue
            
            
            36
            
            
            990Deposits
            
            
            4,000
            
            
            -Other
                current liabilities
            
            
            1,820
            
            
            1,488Total
                current liabilities
            
            
            9,114
            
            
            3,131Deposits
            
            
            13,000
            
            
            2,000Total
                liabilities
            
            
            22,114
            
            
            5,131Commitments
                and ContingenciesStockholders’
                equity:Preferred
                stock, $0.001 par value. Authorized 5,000,000 shares ; no shares
                issued
                and outstanding as of March 31, 2008 and 2007.
            
            
            —
            
            
            —Common
                stock, $0.001par value. Authorized 100,000,000 shares; issued and
                outstanding 19,786,420 and 16,503,931 shares as of March 31, 2008 and
                2007, respectively.
            
            
            20
            
            
            17Additional
                paid-in capital
            
            
            58,182
            
            
            33,396Accumulated
                deficit
            
            
            (12,207
            )
            
            (7,914
            )Accumulated
                other comprehensive loss
            
            
            —
            
            
            (5
            )Total
                stockholders’ equity
            
            
            45,995
            
            
            25,494Total
                liabilities and stockholders’ equity
            
            $
            68,109
            
            $
            30,625




See
      accompanying notes to financial statements.


F-3




**HOKU
      SCIENTIFIC, INC. AND SUBSIDIARIES**




**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(in
      thousands, except share and per share data)**




Fiscal
                Year Ended March 31,2008
            
            2007
            
            2006**Statements
                of Operations Data:**Service
                and license revenue
            
            $
            3,229
            
            $
            5,368
            
            $
            5,505Cost
                of service and license revenue(1)
            
            
            2,312
            
            
            3,173
            
            
            954Gross
                margin
            
            
            917
            
            
            2,195
            
            
            4,551Operating
                expenses:Selling,
                general and administrative(1)
            
            
            6,207
            
            
            4,487
            
            
            2,743Research
                and development(1)
            
            
            86
            
            
            1,774
            
            
            1,326Total
                operating expenses
            
            
            6,293
            
            
            6,261
            
            
            4,069Income
                (loss) from operations
            
            
            (5,376
            )
            
            (4,066
            )
            
            482Interest
                and other income
            
            
            1,083
            
            
            1,039
            
            
            594Income
                (loss) before income taxes
            
            
            (4,293
            )
            
            (3,027
            )
            
            1,076Income
                tax expense (benefit)
            
            
            -
            
            
            (275
            )
            
            (268
            )Net
                income (loss)
            
            $
            (4,293
            )
            $
            (2,752
            )
            $
            1,344Basic
                net income (loss) per share
            
            $
            (0.26
            )
            $
            (0.17
            )
            $
            0.10Diluted
                net income (loss) per share
            
            $
            (0.26
            )
            $
            (0.17
            )
            $
            0.09Shares
                used in computing basic net income (loss) per share
            
            
            16,656,000
            
            
            16,449,537
            
            
            13,033,263Shares
                used in computing diluted net income (loss) per share
            
            
            16,656,000
            
            
            16,449,537
            
            
            15,264,763(1)Includes stock-based compensation as follows:Cost
                of service and license revenue
            
            $
            42
            
            $
            126
            
            $
            38Selling,
                general and administrative
            
            
            954
            
            
            593
            
            
            872Research
                and development
            
            
            72
            
            
            501
            
            
            146Total
            
            $
            1,068
            
            $
            1,220
            
            $
            1,056




See
      accompanying notes to financial statements.


F-4




**HOKU
      SCIENTIFIC, INC. AND SUBSIDIARIES**




**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
      (LOSS)**


**(in
      thousands, except share data)**





**Shares of**
              **Preferred**
              **Stock**
            
            **Preferred**
              **Stock**
            
            **Shares of**
              **Class A**
              **Common**
              **Stock**
            
            **Class A**
              **Common**
              **Stock**
            
            **Shares of**
              **Common**
              **Stock**
            
            **Common**
              **Stock**
            
            **Additional**
              **Paid-in**
              **Capital**
            
            **Accumulated**
              **Deficit**
            
            **Accumulated**
              **Other**
              **Comprehensive**
              **Loss**
            
            **Total**
              **Stockholders’**
              **Equity**
            
            **Comprehensive**
              **Income (Loss)**Balances as
                of March 31, 2005
            
            
            5,919,988
            
            $
            7,820
            
            
            —
            
            $
            —
            
            
            6,155,834
            
            
            6
            
            $
            4,959
            
            $
            (6,506
            )
            $
            (47
            )
            $
            6,232
            
            $
            (775
            )Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,344
            
            
            —
            
            
            1,344
            
            $
            1,344Stock-based
                compensation
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            377,841
            
            
            —
            
            
            1,127
            
            
            —
            
            
            —
            
            
            1,127
            
            
            —Initial
                public offering and over-allotment option proceeds, net of underwriter
                discounts and commissions
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            3,683,200
            
            
            4
            
            
            20,548
            
            
            —
            
            
            —
            
            
            20,552
            
            
            —Initial
                public offering costs
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (1,950
            )
            
            —
            
            
            —
            
            
            (1,950
            )
            
            —Unrealized
                gain or loss on available-for-sale securities
            
            
            —
            
            
            —
            
            
            —
            
            
            
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            30
            
            
            30
            
            
            30Conversion
                of preferred stock
            
            
            (5,919,988
            )
            
            (7,820
            )
            
            —
            
            
            
            
            
            5,919,988
            
            
            6
            
            
            7,814
            
            
            —
            
            
            —
            
            
            —
            
            
            —Exercise
                of common stock warrants and options
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            295,792
            
            
            —
            
            
            57
            
            
            —
            
            
            —
            
            
            57
            
            
            —Balances
                as of March 31, 2006
            
            
            —
            
            $
            —
            
            
            —
            
            $
            —
            
            
            16,432,655
            
            $
            16
            
            $
            32,555
            
            $
            (5,162
            )
            $
            (17
            )
            $
            27,392
            
            $
            1,374Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (2,752
            )
            
            —
            
            
            (2,752
            )
            $
            (2,752
            )Stock-based
                compensation
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            19,109
            
            
            —
            
            
            828
            
            
            —
            
            
            —
            
            
            828
            
            
            —Unrealized
                gain or loss on available-for-sale securities
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            12
            
            
            12
            
            
            12Exercise
                of common stock options
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            52,167
            
            
            1
            
            
            13
            
            
            —
            
            
            —
            
            
            14
            
            
            —Balances
                as of March 31, 2007
            
            
            —
            
            $
            —
            
            
            —
            
            $
            —
            
            
            16,503,931
            
            $
            17
            
            $
            33,396
            
            $
            (7,914
            )
            $
            (5
            )
            $
            25,494
            
            $
            (2,740
            )Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (4,293
            )
            
            —
            
            
            (4,293
            )
            $
            (4,293
            )Stock-based
                compensation
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            620
            
            
            —
            
            
            —
            
            
            620
            
            
            —Unrealized
                gain or loss on available-for-sale securities
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            5
            
            
            5
            
            
            5Exercise
                of common stock warrants and options
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            112,165
            
            
            —
            
            
            92
            
            
            —
            
            
            —
            
            
            92
            
            
            —Grants
                of stock awards
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            276,805
            
            
            
            
            
            739
            
            
            
            
            
            
            
            
            739Private
                investment in public equity proceeds
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,893,519
            
            
            3
            
            
            24,997
            
            
            
            
            
            
            
            
            25,000Private
                investment in public equity costs
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,662
            )
            
            
            
            
            
            
            
            (1,662
            )Balances
                as of March 31, 2008
            
            
            —
            
            $
            —
            
            
            —
            
            $
            —
            
            
            19,786,420
            
            $
            20
            
            $
            58,182
            
            $
            (12,207
            )
            $
            —
            
            $
            45,995
            
            $
            (4,288
            )





See
      accompanying notes to financial statements.


F-5




**HOKU
      SCIENTIFIC, INC. AND SUBSIDIARIES**




**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(in
      thousands)**




**Fiscal
                  Year Ended March 31,****2008**
              
              **2007**
              
              **2006****Cash
                  flows from operating activities:**Net
                  income (loss)
              
              $
              (4,293
              )
              $
              (2,752
              )
              $
              1,344Adjustments
                  to reconcile net income (loss) to net cash (used in) provided by
                  operating
                  activities:Depreciation
                  and amortization
              
              
              143
              
              
              221
              
              
              221Impairment
                  of production and research equipment, inventory and equipment held
                  for
                  sale
              
              
              103
              
              
              1,364
              
              
              —Contract
                  termination and impairment of leasehold improvements
              
              
              —
              
              
              —
              
              
              558Stock-based
                  compensation
              
              
              1,068
              
              
              828
              
              
              1,127Loss
                  on sale of inventory
              
              
              285
              
              
              —
              
              
              —Loss
                  on sale of equipment
              
              
              47
              
              
              —
              
              
              —Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              264
              
              
              (127
              )
              
              3,322Costs
                  of uncompleted contracts
              
              
              664
              
              
              1,391
              
              
              (1,768
              )Inventory
              
              
              1,297
              
              
              (2,638
              )
              
              (121
              )Equipment
                  held for sale
              
              
              (58
              )
              
              —
              
              
              —Other
                  current assets
              
              
              (3,250
              )
              
              41
              
              
              (398
              )Other
                  assets
              
              
              803
              
              
              (802
              )
              
              330Accounts
                  payable and accrued expenses
              
              
              2,895
              
              
              158
              
              
              (100
              )Deferred
                  revenue
              
              
              (954
              )
              
              (2,999
              )
              
              (255
              )Other
                  current liabilities
              
              
              332
              
              
              1,281
              
              
              195Net
                  cash (used in) provided by operating activities
              
              
              (654
              )
              
              (4,034
              )
              
              4,455**Cash
                  flows from investing activities:**Proceeds
                  from maturities of short-term investments
              
              
              57,702
              
              
              7,295
              
              
              7,093Purchases
                  of short-term investments
              
              
              (42,300
              )
              
              (2,150
              )
              
              (27,978
              )Acquisition
                  of property and equipment
              
              
              (28,039
              )
              
              (724
              )
              
              (4,601
              )Disposition
                  of property and equipment
              
              
              62
              
              
              —
              
              
              —Net
                  cash provided by (used in) investing activities
              
              
              (12,575
              )
              
              4,421
              
              
              (25,486
              )**Cash
                  flows from financing activities:**Principal
                  repayment of long-term obligations
              
              
              —
              
              
              —
              
              
              (14
              )Proceeds
                  from initial public offering
              
              
              —
              
              
              —
              
              
              20,552Initial
                  public offering costs
              
              
              —
              
              
              —
              
              
              (1,950
              )Proceeds
                  from private investment in public equity
              
              
              25,000
              
              
              —
              
              
              —Private
                  investment in public equity costs
              
              
              (1,662
              )
              
              —
              
              
              —Exercise
                  of common stock options
              
              
              92
              
              
              14
              
              
              57Deposits
                  received
              
              
              15,000
              
              
              2,000
              
              
              —Net
                  cash provided by financing activities
              
              
              38,430
              
              
              2,014
              
              
              18,645Net
                  increase (decrease) in cash and cash equivalents
              
              
              25,201
              
              
              2,401
              
              
              (2,386
              )Cash
                  and cash equivalents at beginning of year
              
              
              2,567
              
              
              166
              
              
              2,552Cash
                  and cash equivalents at end of year
              
              $
              27,768
              
              $
              2,567
              
              $
              166Supplemental
                  disclosure of non-cash investing activities:Acquisition
                  of property and equipment
              
              $
              2,934
              
              $
              248
              
              $
              333




See
      accompanying notes to financial statements.


F-6


**HOKU
      SCIENTIFIC, INC. AND SUBSIDIARIES**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**(1)**
            **Summary
                of Significant Accounting Policies and
                Practices**




***(a)***
            ***Description
                of Business***




Hoku
      Scientific, Inc. is a materials science company focused on clean energy
      technologies. The Company was incorporated in Hawaii in March 2001, as Pacific
      Energy Group, Inc. In July 2001, the Company changed its name to Hoku
      Scientific, Inc. In December 2004, the Company was reincorporated in Delaware.




The
      Company has historically focused its efforts on the design and development
      of
      fuel cell technologies, including its Hoku membrane electrode assemblies, or
      MEAs, and Hoku Membranes. In May 2006, the Company announced its plans to form
      an integrated photovoltaic, or PV, module business, and its plans to manufacture
      polysilicon, a primary material used in the manufacture of PV modules. In fiscal
      2007, the Company reorganized its business into three business units: Hoku
      Materials, Hoku Solar and Hoku Fuel Cells. In February and March 2007, the
      Company incorporated Hoku Materials, Inc. and Hoku Solar, Inc., respectively,
      as
      wholly-owned subsidiaries to operate its polysilicon and solar businesses,
      respectively.





***(b)***
            ***Basis
                of Presentation***


The
        Company has incurred operating losses in recent years as the Company has
        redirected its efforts to focus on the development of its polysilicon and
        solar
        businesses.  The Company's current operating plan anticipates raising cash
        over the next year through a combination of equity financing and polysilicon
        customer prepayments to enable the continued construction of the planned
        polysilicon production facility in Pocatello, Idaho.  As there have been
        delays in securing financing, the Company has failed to meet the contractual
        financing milestone included in the separate supply agreements with two of
        its
        customers.  A termination of any of the Company's supply agreements could
        require the Company to refund prepayments already received to-date.  Should
        there be continued delays in securing adequate financing, the Company may
        need
        to implement cost and expense reduction programs and other programs to generate
        cash that are not currently planned, but are responsive to the Company's
        liquidity requirements.  The Company believes that its current levels of
        working capital and cash flow expected to be generated through the Hoku Solar
        business is sufficient to fund operating activities for at least the next
        twelve
        months.  The Company also believes that the necessary financing will be
        made available through public or private offerings of equity or debt securities
        over the next twelve months.  Although the Company cannot assure the reader
        that such additional sources of financing will be available at acceptable
        terms,
        the implementation of a cost reduction program will help to mitigate this
        risk.
 An inability by the Company to reduce costs or expenditures or to raise
        sufficient capital to fund its operations would have a material adverse affect
        on the Company and could impact its ability to continue as a going
        concern.





***(c)***
            ***Principles
                of Consolidation***


The
      consolidated financial statements include the accounts of Hoku Scientific,
      Inc.
      and all wholly-owned subsidiaries, after elimination of significant intercompany
      amounts and transactions.







***(d)***
            ***Segment
                Information***


The
      Company has three operating segments in two industries: Fuel Cell and Solar.
      The
      Fuel Cell industry is comprised of the fuel cell segment. The Solar industry
      is
      comprised of the PV system installation and the polysilicon production segments.
      The Company reports segment information in the same way that the chief operating
      decision maker assesses segment performance. Additional information regarding
      these segments is found in Note 8.




***(e)***
            ***Use
                of Estimates***




The
      preparation of the Company’s financial statements in conformity with U.S.
      generally accepted accounting principles requires the Company’s management to
      make estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosures of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenue and expenses during
      the reporting period. Actual results could differ from those estimates. On
      an
      on-going basis, the Company evaluates its estimates, including those related
      to
      revenue recognition, accounts receivable, the carrying amounts of property,
      plant and equipment and inventory, income taxes and the valuation of deferred
      tax assets and stock options. These estimates are based on historical facts
      and
      various other assumptions that the Company believes are reasonable.




***(f)***
            ***Revenue
                Recognition***




Revenue
      from polysilicon and PV system installations is recognized in accordance with
      Staff Accounting Bulletin No. 104, *Revenue
      Recognition* ,
      when
      there is evidence of an arrangement, delivery has occurred or services have
      been
      rendered, the arrangement fee is fixed or determinable, and collectability
      of
      the arrangement fee is reasonably assured. PV system installation contracts
      may
      have several different phases with corresponding progress billings, however,
      revenue is recognized when the installation is complete and accepted by the
      customer.


F-7




The
      Company has also provided testing and engineering services to customers pursuant
      to milestone-based contracts that are not multi-element arrangements. These
      contracts sometimes provided for periodic invoicing as it completed a milestone.
      Customer acceptance is usually required prior to invoicing. The Company
      recognized revenue for these arrangements under the completed contract method
      in
      accordance with Statement of Position 81-1, *Accounting
      for Performance of Construction-Type and Certain Production-Type
      Contracts* .
      Under
      the completed-contract method, we deferred the contract fulfillment costs and
      any advance payments received from the customer and recognized the costs and
      revenue in its statement of operations once the contract was complete and the
      final customer acceptance, if required, had been obtained.




The
      Company charges the appropriate Hawaii general excise tax to its customers.
      The
      taxes collected from sales are excluded from revenues and recorded as a
      payable.




***(g)***
            ***Cost
                of Uncompleted
                Contracts***




Cost
      of
      uncompleted contracts represents services performed and/or materials used
      towards completing a customer contract. Based on the Company’s revenue
      recognition policy, these services and/or materials cannot be recognized as
      contract costs, and are deferred until the related revenue can be recognized.
      As
      of March 31, 2008, cost of uncompleted contracts was $54,000 related to PV
      system installation contracts. As of March 31, 2007, cost of uncompleted
      contracts was $698,000 related to fuel cell contracts.





***(h)***
            ***Concentration
                of Credit Risk***




Significant
      customers represent those customers that account for more than 10% of the
      Company’s total revenue or accounts receivable. Revenue and revenue as a
      percentage of total revenue and accounts receivable and accounts receivable
      as a
      percentage of total accounts receivable for significant customers were as
      follows:


**Revenue****Fiscal
                  Year Ended March 31,****2008**
              
              **2007**
              
              **2006****Customer**
              
              **$**
              
              **%**
              
              **$**
              
              **%**
              
              **$**
              
              **%****(dollars
                  in thousands)**U.S.
                  Navy – Naval Air Warfare Center Weapons Division
              
              $
              1,337
              
              
              41
              %
              $
              3,205
              
              
              60
              %
              $
              —
              
              
              —
              %Paradise
                  Beverages
              
              
              987
              
              
              31
              
              
              —
              
              
              —
              
              
              —
              
              
              —Hardware
                  Hawaii
              
              
              385
              
              
              12
              
              
              —
              
              
              —
              
              
              —
              
              
              —Nissan
              
              
              —
              
              
              —
              
              
              1,988
              
              
              37
              
              
              5,363
              
              
              97Sanyo
              
              
              —
              
              
              —
              
              
              149
              
              
              3
              
              
              113
              
              
              2




**Accounts
                Receivable****March
                31,****2008**
            
            **2007****Customer**
            
            **$**
            
            **%**
            
            **$**
            
            **%****(dollars
                in thousands)**Hardware
                Hawaii
            
            $
            38
            
            
            33
            %
            $
            —
            
            
            —
            %D.R.
                Horton – Kahiwelo
            
            
            26
            
            
            23
            
            
            —
            
            
            —General
                Growth Properties
            
            
            18
            
            
            16
            
            
            —
            
            
            —Residential
                Installations
            
            
            24
            
            
            21
            
            
            —
            
            
            —U.S.
                Navy - Naval Air Warfare Center Weapons Division
            
            
            —
            
            
            —
            
            
            377
            
            
            100




***(i)***
            ***Cash
                and Cash Equivalents***




The
      Company considers money market, savings and checking accounts as cash and cash
      equivalents. All other investments, including those with maturities of three
      months or less are considered short-term investments.




***(j)***
            ***Short-Term
                Investments***




The
      Company’s short-term investments include commercial paper and government bonds.
      These securities are highly liquid and may include investments with maturities
      of three months or less.




The
      Company accounts for its investment instruments in accordance with Statement
      of
      Financial Accounting Standards No. 115, or SFAS No. 115, *Accounting
      for Certain Investments in Debt and Equity Securities* .
      All of
      the Company’s short-term investments are treated as “available-for-sale” under
      SFAS No. 115. Short-term investments are recorded by the Company at fair
      market value. Dividend and interest income is recognized by the Company when
      earned. The Company reflects unrealized gains and losses  related
      to its short-term investments as a separate component of stockholders’ equity.
      Realized gains or losses from the sale of available-for-sale securities are
      determined using the specific-identification method.


F-8


A
      decline
      in the market value of any available-for-sale security below its cost that
      is
      deemed to be other-than-temporary results in a reduction in its carrying amount
      to its fair value. The impairment is charged to earnings and a new cost basis
      for the security is established. To determine whether the impairment is
      other-than-temporary, the Company considers whether it has the ability and
      intent to hold the investment until a market price recovery and considers
      whether evidence indicating the cost of the investment is recoverable outweighs
      evidence to the contrary. Evidence considered in this assessment by the Company
      includes the reasons for the impairment, the severity and duration of the
      impairment, changes in value subsequent to year-end and forecasted performance
      of the investee.




During
      fiscal years ended March 31, 2008 and 2007, the Company recorded no
      other-than-temporary impairments.




***(k)***
            ***Accounts
                Receivable***




Trade
      accounts receivable are recorded at the invoiced amount and do not bear
      interest. The Company had no allowance for doubtful accounts as of
      March 31, 2008 and 2007 and did not record bad debt expense in the periods
      presented.




Allowances
      for doubtful accounts represent the Company’s best estimate of the amount of
      probable credit losses in the Company’s accounts receivable. Past due balances
      over 90 days and over a specified amount will be reviewed individually for
      collectability. Account balances are charged off against the allowance after
      all
      means of collection have been exhausted and the potential for recovery is
      considered remote.




***(l)***
            ***Inventory***




Inventory
      is stated at the lower of average cost or market and consists of raw materials,
      work-in-progress and finished goods in accordance with Statement of Financial
      Accounting Standards No. 151, or SFAS No. 151, *Inventory
      Costs* .




***(m)***
            ***Property,
                Plant and Equipment***




Property,
      plant and equipment are stated at cost and depreciated using the straight-line
      method over the estimated useful life of the asset. For leasehold improvements,
      amortization is computed using the straight-line method over the shorter of
      the
      lease term or the estimated useful life of the asset.




Estimated
      useful lives of the Company’s assets are as follows:





Building
              
              1-39 yearsResearch
                  equipment
              
              1-7 yearsOffice
                  equipment and furniture
              
              1-7 yearsProduction
                  equipment
              
              1-7 yearsAutomobile
              
              1-5 years




The
      Company evaluates the assets for impairment in accordance with Statement of
      Financial Accounting Standards No. 144, or SFAS No. 144, *Accounting
      for the Impairment or Disposal of Long-lived Assets* .




***(n)***
            ***Income
                Taxes***




Income
      taxes are accounted for under the asset and liability method of Statement of
      Financial Accounting Standards No. 109, or SFAS No. 109, *Accounting
      for Income Taxes* ,
      which
      establishes financial accounting and reporting standards for the effect of
      income taxes. In accordance with SFAS No. 109, the Company recognizes
      federal and state current tax liabilities or assets based on the Company’s
      estimate of taxes payable to or refundable by each tax jurisdiction in the
      current fiscal year.




Deferred
      tax assets and liabilities are established for the temporary differences between
      the financial reporting bases and the tax bases of the Company’s assets and
      liabilities at the tax rates the Company expects to be in effect when these
      deferred tax assets or liabilities are anticipated to be recovered or settled.
      The Company’s ultimate realization of deferred tax assets is dependent upon the
      generation of future taxable income during periods in which those temporary
      differences become deductible. The Company also records a valuation allowance
      to
      reduce any deferred tax assets by the amount of any tax benefits that, based
      on
      available evidence and judgment, are not expected to be
      realized.




***(o)***
            ***Net
                Income (Loss) per
                Share***




Basic
      earnings per share is computed by dividing net income (loss) by the weighted
      average number of shares of common stock outstanding and not subject to
      repurchase during the period. Diluted net income (loss) per share is computed
      by
      dividing net income (loss) by the sum of the weighted average number of shares
      of common stock outstanding, and the dilutive potential common equivalent shares
      outstanding during the period. Dilutive potential common equivalent shares
      consist of dilutive shares of common stock subject to repurchase and dilutive
      shares of common stock issuable upon the exercise of outstanding options and
      warrants to purchase common stock, computed using the treasury stock method,
      and
      dilutive shares of common stock issuable upon the conversion of convertible
      preferred stock common stock.


F-9




The
      following table sets forth, for the periods presented, the computation of basic
      and diluted net income (loss) per share, including the reconciliation of the
      denominator used in the computation of basic and diluted net income (loss)
      per
      share:




**Fiscal Year Ended March 31,****2008**
            
            **2007**
            
            **2006****(in thousands, except share and per share****data)****Numerator:**Net
                income (loss)
            
            $
            (4,293
            )
            $
            (2,752
            )
            $
            1,344**Denominator:**Weighted
                average shares of common stock (basic)
            
            
            16,656,000
            
            
            16,449,537
            
            
            13,033,263Effect
                of Dilutive SecuritiesAdd:Weighted
                average convertible preferred shares
            
            
            —
            
            
            —
            
            
            1,973,329Weighted
                average stock options and warrants
            
            
            —
            
            
            —
            
            
            258,171Weighted
                average shares of common stock (diluted)
            
            
            16,656,000
            
            
            16,449,537
            
            
            15,264,763Basic
                net income (loss) per share
            
            $
            (0.26
            )
            $
            (0.17
            )
            $
            0.10Diluted
                net income (loss) per share
            
            $
            (0.26
            )
            $
            (0.17
            )
            $
            0.09




Due
      to
      the Company’s net losses in the fiscal years ended March 31, 2008 and 2007,
      all potential common equivalent shares were anti-dilutive and were excluded
      in
      computing diluted net loss per share. As of March 31, 2008, potential dilutive
      securities included options to purchase 387,470 shares of common stock at prices
      ranging from $0.08 to $5.68. As of March 31, 2007, potential dilutive securities
      included options to purchase 235,653 shares of common stock at prices ranging
      from $0.38 to $3.93.




***(p)***
            ***Stock-based
                Compensation***




The
      Company accounts for stock-based employee compensation arrangements using the
      fair value method in accordance with the provisions of Statement of Financial
      Accounting Standards No. 123(R), *Share-Based
      Payment* ,
      or SFAS
      123(R). In accordance with SFAS 123(R), the fair value of stock options and/or
      restricted stock awards granted to our employees and non-employees is determined
      using the Black-Scholes pricing model. The Black-Scholes pricing model requires
      the input of several subjective assumptions including the expected life of
      the
      option/restricted award and the expected volatility of the option/restricted
      award at the time the option/restricted award is granted. The fair value of
      our
      option/restricted award, as determined by the Black-Scholes pricing model,
      is
      expensed over the requisite service period, which is generally five years for
      stock options and varies between two and five years for restricted stock awards.




***(q)***
            ***Guarantees
                and Indemnifications***




In
      November 2002, the FASB issued FIN No. 45, *Guarantor’s
      Accounting and Disclosure Requirements for Guarantees, Including Indirect
      Guarantees of Indebtedness of Others.* FIN
      No. 45 requires that, upon issuance of a guarantee, the guarantor must
      recognize a liability for the fair value of the obligations it assumes under
      that guarantee.




The
      Company has entered into PV system installation contracts which warrants the
      installation against defects in workmanship, generally for a period of one
      year
      from the date of installation. There were no accruals for or expenses related
      to
      the warrants for any period presented.




The
      Company, as permitted under Delaware law and in accordance with its Bylaws,
      indemnifies its officers and directors for certain events or occurrences,
      subject to certain limits, while the officer or director is or was serving
      at
      the Company’s request in that capacity. The term of the indemnification period
      is equal to the officer’s or director’s lifetime. The Company has also entered
      into additional indemnification agreements with its officers and directors
      in
      connection with the initial public offering. The maximum amount of potential
      future indemnification is unlimited; however, the Company has obtained director
      and officer insurance that limits its exposure and may enable it to recover
      a
      portion of any future amounts paid. The Company believes the fair value for
      these indemnification obligations is minimal. Accordingly, the Company has
      not
      recognized any liabilities relating to these obligations as of March 31,
      2008 and 2007.




The
      Company has entered into customer contracts that contain indemnification
      provisions. In these provisions, the Company typically agrees to indemnify
      the
      customer against certain types of third-party claims. The Company would accrue
      for known indemnification issues when a loss is probable and could be reasonably
      estimated. The Company also would accrue for estimated incurred but unidentified
      indemnification issues based on historical activity. There were no accruals
      for
      or expenses related to indemnification issues for any period
      presented.


F-10





***(r)***
            ***Recently
                Issued Standards***




In
      September 2006, the Financial Accounting Standards Board, or FASB, issued
      Statement of Financial Accounting Standards No. 157, *Fair
      Value Measurements* ,
      or SFAS
      157. This new standard establishes a framework for measuring the fair value
      of
      assets and liabilities. This framework is intended to provide increased
      consistency in how fair value determinations are made under various existing
      accounting standards which permit, or in some cases require, estimates of fair
      market value. SFAS 157 also expands financial statement disclosure requirements
      about a company’s use of fair value measurements, including the effect of such
      measures on earnings. This standard is effective for fiscal years beginning
      after November 15, 2007, and interim periods within those fiscal years. The
      Company will adopt SFAS 157 on April 1, 2008, and the adoption of this statement
      did not have a material impact on its consolidated financial statements.




In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial Liabilities Including
      an
      Amendment of SFAS No. 115* ,
      or SFAS
      159. This new standard permits companies to choose to measure many financial
      instruments and certain other items at fair value that are currently not
      required to be measured at fair value. This standard is effective for fiscal
      years beginning after November 15, 2007. The Company adopted SFAS 159 on April
      1, 2008, and the adoption of this statement did not have a material impact
      on
      its consolidated financial statements.




In
      March
      2008, the FASB issued SFAS No. 161, *Disclosures
      about Derivative Instruments and Hedging Activities -an amendment of SFAS
      133* ,
      or SFAS
      161. SFAS 161 seeks to improve financial reporting for derivative instruments
      and hedging activities by requiring enhanced disclosures regarding the impact
      on
      financial position, financial performance, and cash flows. To achieve this
      increased transparency, SFAS 161 requires: (1) the disclosure of the fair value
      of derivative instruments and gains and losses in a tabular format; (2) the
      disclosure of derivative features that are credit risk-related; and (3)
      cross-referencing within the footnotes. This
      standard shall be effective for financial statements issued for fiscal years
      and
      interim periods beginning after November 15, 2008 and early application is
      encouraged. The
      Company is in the process of evaluating the new disclosure requirements under
      SFAS 161 and does not expect the adoption to have a material impact on its
      consolidated financial statements.




***(s)***
              ***Reclassifications***





Certain
      prior period amounts have been reclassified to conform to current period
      classifications.





**(2)**
            **Short-Term
                Investments**




The
      available-for-sale securities as of March 31, 2008 and 2007 were as
      follows:




**Amortized**
              **Cost**
            
            **Gross**
              **Unrealized**
              **Gains**
            
            **Gross**
              **Unrealized**
              **Losses**
            
            **Fair Value**
            
            **Gross Unrealized Losses Less**
              **Than 12 Months****Count**
            
            **Fair Value**
            
            **Amount****As
                of March 31, 2008**Commercial
                paper
            
            $
            1,992
            
            $
            —
            
            $
            —
            
            $
            1,992
            
            
            —
            
            $
            —
            
            $
            —Government
                bonds
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Total
                short-term investments
            
            $
            1,992
            
            $
            —
            
            $
            —
            
            $
            1,992
            
            
            —
            
            $
            —
            
            $
            —**As
                of March 31, 2007**Commercial
                paper
            
            $
            4,511
            
            $
            —
            
            $
            (4
            )
            $
            4,507
            
            
            4
            
            $
            4,507
            
            $
            (4
            )Government
                bonds
            
            
            12,883
            
            
            —
            
            
            (1
            )
            
            12,882
            
            
            12
            
            
            12,882
            
            
            (1
            )Total
                short-term investments
            
            $
            17,394
            
            $
            —
            
            $
            (5
            )
            $
            17,389
            
            
            16
            
            $
            17,389
            
            $
            (5
            )




The
      contractual maturities of the Company’s commercial paper and government bonds
      are less than one year and occur on various dates. Fair values for commercial
      paper and government bonds are determined based on market prices received from
      a
      third-party financial service provider. Current market rates and the likelihood
      of holding the investments until maturity were factors considered when
      determining whether the investments were other-than-temporarily impaired. As
      the
      Company will likely hold the investments until maturity, the Company determined
      that no securities in its portfolio with unrealized losses were
      other-than-temporarily impaired as of March 31, 2008 and
      2007.


F-11





**(3)**
            **Property,
                Plant and Equipment**




As
      of
      March 31, 2008 and 2007, property, plant and equipment consisted of the
      following:




**March 31,****2008**
              
              **2007****(in
                  thousands)**Building
              
              $
              3,830
              
              $
              3,830Land
              
              
              1,366
              
              
              1,366Construction
                  in progress
              
              
              28,515
              
              
              544Production
                  equipment
              
              
              108
              
              
              178Research
                  equipment
              
              
              —
              
              
              2Office
                  equipment and furniture
              
              
              87
              
              
              87Automobile
              
              
              98
              
              
              16Trade
                  show booth
              
              
              —
              
              
              7034,004
              
              
              6,093Less
                  accumulated depreciation and amortization
              
              
              (441
              )
              
              (298
              )Property,
                  plant and equipment, net
              
              $
              33,563
              
              $
              5,795




The
      Company owns approximately 2.2 acres of land in Kapolei, Hawaii on which the
      Company’s headquarters occupy an approximately 14,000 square foot facility of
      combined office, research and development, and manufacturing space on a portion
      of that land.




In
      March
      2007, the Company entered into a 99-year ground lease with the City of Pocatello
      for approximately 67 acres of land in Pocatello, Idaho. The annual rent for
      the
      ground lease is fixed at one dollar per year until the expiration of the lease
      on December 31, 2106.




In
      addition to this 67-acre lease, the Company and the City of Pocatello have
      signed a separate agreement granting the Company an option to lease an
      additional 450 acres of land owned by the City of Pocatello, which the Company
      may use for future expansion. The terms of any future lease will be subject
      to
      good faith negotiations between the City of Pocatello and the
      Company.




In
      assessing the recoverability of its long-lived assets, the Company compared
      the
      carrying value to the undiscounted future cash flows the assets are expected
      to
      generate. As the total of the undiscounted future cash flows was less than
      the
      carrying amount of the assets, the Company wrote down such assets based on
      the
      excess of the carrying amount over the fair value of the assets. Fair value
      was
      determined based on discussions with third-party equipment providers. During
      fiscal year 2008, the Company recorded a write-down of its solar module
      production equipment of $67,000 and a write-down of $36,000 related to certain
      production and research equipment, which is included in selling, general and
      administrative expenses for Hoku Solar and Hoku Fuel Cells, respectively. In
      addition, the Company sold certain fuel cell equipment during fiscal year 2008
      and recorded a net loss from these sales of $47,000 which is included in
      interest and other income in the consolidated statements of operations for
      fiscal 2008.




In
      May
      2007, the Company paid the initial deposit of 15%, or approximately $4.2
      million, under the agreement for certain equipment to be utilized in the
      production of polysilicon. In October 2007, the agreement was amended and
      restated to require the Company to pay the vendor up to 45% of the purchase
      price for the equipment in six equal monthly increments from October 2007
      through March 2008, and an additional 20% of the purchase price within four
      weeks after the equipment is shipped from the Hamburg, Germany. An additional
      10% of the applicable purchase price for the equipment is payable to the vendor
      via wire transfer within four weeks after a successful test demonstration of
      the
      equipment, and the final 10% of the applicable purchase price is payable to
      the
      vendor upon the earlier of (a) 30 months after delivery; and (b) expiration
      of
      the warranty period, which is 18 months after successful commissioning of the
      equipment. As of May 31, 2008, the Company made payments of $8.8 million under
      this contract, approximating 30% of the purchase price. The payments are less
      than the scheduled payment terms as the Company had not received the required
      written reports describing progress that is being made in the manufacturing
      of
      the reactors until May 2008. The Company expects to make additional payments
      in
      June 2008.


The
          Company estimates that it will cost approximately $390 million to engineer,
          procure and construct the planned 3,500 metric ton per annum polysilicon
          production facility in Pocatello, Idaho.   Through its four signed
          polysilicon supply agreements, $240 million in prepayments has been committed
          towards these costs, subject to the Company's achievements of various
          operational and financial milestones.  The additional $150 million is
          intended to be generated through a combination of one or more debt or equity
          offerings and cash generated through operations, including amounts already
          contributed to the project.  In connection therewith, the Company has
          entered into various contracts with third parties related to the construction
          of
          the facility.  Pursuant to the various terms of the contracts, the Company
          is required to pay for time and materials incurred for engineering, procurement,
          and construction services plus up to $10.0 million in incentives if specific
          targets are met, as outlined in the contracts.


As
      of
      March 31, 2008 and 2007, the Company had no physical assets located outside
      of the United States.




**(4)**
            **Other
                Current Assets**




In
        January 2008, Hoku Materials entered into agreements with Bank of Hawaii
        to
        purchase in increments an aggregate amount of up to 8.7 million Euros on
        various
        maturity dates beginning in April 2008 and ending in July 2010 at a fixed
        U.S
        dollar amount of $12.8 million. The Company expects to use the purchased
        Euros
        to make payments pursuant to the amended GEC and MSA contracts, for the purchase
        of hydrogen reduction and hydrogenation reactors for the production of
        polysilicon. The agreements are considered derivatives as the forward exchange
        contract with the Bank of Hawaii is used to hedge our commitment related
        to the
        acquisition of the reactors from GEC and MSA.  The fair value of these
        derivatives approximates $965,000 and is reflected in Other Current Assets
        or
        Other Current Liabilities, as appropriate. The purpose of our foreign currency
        hedging activity is to help protect the Company from risk that the eventual
        dollar cash flows from the acquisition of this asset will be adversely affected
        by changes in the exchange rate.  There was no gain or loss due to
        ineffectiveness.  Changes in fair value of these derivatives are recorded
        in Interest and Other Income .


F-12


As
        part
        of the agreements with Bank of Hawaii, the Company is required to place deposits
        with Bank of Hawaii for 20% of the notional value of the outstanding
        transactions, which can fluctuate based on the U.S Dollar/Euro exchange rate.
         The Company earns interest on its deposits, which is recorded as
        restricted cash.  As of March 31, 2008, the restricted cash balance related
        to these deposits of $2.6 million is included as Other Current Assets.  As
        of March 31, 2007, Other Current Assets of $537,000 was comprised of other
        receivables and prepaid expenses .





**(5)**
            **Deposits**





The
        Company received cash advances in the aggregate of $17 million under its
        polysilicon supply agreements with Sanyo Electric Company, Ltd., or Sanyo, Wuxi
        Suntech Power Co., Ltd., Global Expertise Wafer Division Ltd., or GEWD, and
        Solarfun Power Hong Kong Limited. The Company has recorded the cash receipts
        as
        deposits until it achieves certain milestones pursuant to each contract at
        which
        time the Company will consider reclassifying the cash advances as deferred
        revenue. The Company has recorded $4 million of the total deposits as a current
        liability while $13 million of the total deposits are classified as a long-term
        liability on the Company’s balance sheet. Under the agreements with Sanyo and
        GEWD, the Company, Sanyo or GEWD could terminate their respective agreements
        as
        it has not secured certain financing requirements by May 31, 2008. The Company cannot
        guarantee that any of the parties will not elect to terminate. The Company
        has
        classified the cash advances related to Sanyo and GEWD as current liability
        due
        to the possibility of these contracts being terminated.




**(6)**
            **Income
                Taxes**




The
      income tax benefits from operations for the years ended March 31, 2008, 2007,
      and 2006 consisted of the following:




**Current**
              
              **Deferred**
              
              **Total****(in
                  thousands)****Fiscal
                  Year Ended March 31, 2008**Federal
              
              $
              —
              
              $
              —
              
              $
              —State
              
              
              —
              
              
              —
              
              
              —Total
                  income tax benefit
              
              $
              —
              
              $
              —
              
              $
              —**Fiscal
                  Year Ended March 31, 2007**Federal
              
              $
              —
              
              $
              —
              
              $
              —State
              
              
              275
              
              
              —
              
              
              275Total
                  income tax benefit
              
              $
              275
              
              $
              —
              
              $
              275**Fiscal
                  Year Ended March 31, 2006**Federal
              
              $
              —
              
              $
              —
              
              $
              —State
              
              
              268
              
              
              —
              
              
              268Total
                  income tax benefit
              
              $
              268
              
              $
              —
              
              $
              268




There
      were no payments for federal and state income taxes for the years ended March
      31, 2008, 2007 and 2006.




A
      reconciliation of the U.S. statutory tax rate to the effective tax rate for
      the
      years ended March 31, 2008, 2007 and 2006 is as follows:





**Fiscal
                  Year Ended**
                **March 31,****2008**
              
              **2007**
              
              **2006****(in
                  thousands)**Expected
                  tax (expense) benefit (34%)
              
              $
              1,460
              
              $
              1,029
              
              $
              (366
              )State
                  tax (expense) benefit, net of federal benefit
              
              
              172
              
              
              121
              
              
              (43
              )Non-deductible
                  stock-based compensation
              
              
              (353
              )
              
              (137
              )
              
              (243
              )R&E
                  expenses
              
              
              -
              
              
              (265
              )
              
              (87
              )Change
                  in valuation allowance
              
              
              (1,297
              )
              
              (773
              )
              
              383State
                  R&E tax credit
              
              
              -
              
              
              275
              
              
              286Federal
                  R&E tax credit
              
              
              -
              
              
              12
              
              
              340Other
              
              
              18
              
              
              13
              
              
              (2
              )Effective
                  income tax benefit
              
              $
              -
              
              $
              275
              
              $
              268




During
      the fiscal years ended March 31, 2007 and 2006, the Company qualified as a
“Hawaii Qualified High Technology Business,” which provides potential tax
      credits to its investors as well as certain tax credits to the Company for
      qualified research and experimentation (R&E) costs. The Company recorded
      Hawaii R&E refundable tax credits of approximately $0, $275,000 and $286,000
      during the fiscal years ended March 31, 2008, 2007 and 2006, respectively.


F-13




Deferred
      tax assets and liabilities are established for the temporary differences between
      the financial reporting bases and the tax bases of the Company’s assets and
      liabilities at the tax rates the Company expects to be in effect when these
      deferred tax assets or liabilities are anticipated to be recovered or settled.
      A
      summary of the tax effects of the temporary differences is as
      follows:





**March 31,****2008**
              
              **2007****(in
                  thousands)**Deferred
                  tax assets:Deferred
                  revenue
              
              $
              -
              
              $
              376Federal
                  R&E tax credits
              
              
              336
              
              
              352Stock-based
                  compensation
              
              
              256
              
              
              201Fixed
                  assets
              
              
              431
              
              
              397Net
                  operating loss carryforwards
              
              
              1,479
              
              
              —Inventory
                  impairment
              
              
              -
              
              
              144Total
                  deferred tax assets
              
              
              2,502
              
              
              1,470Less
                  valuation allowance for deferred tax assets
              
              
              (2,502
              )
              
              (1,205
              )Net
                  deferred tax assets
              
              
              -
              
              
              265Deferred
                  tax liabilities:Costs
                  of uncompleted contracts
              
              
              -
              
              
              (265
              )Total
                  deferred tax liabilities
              
              
              -
              
              
              (265
              )Net
                  deferred taxes
              
              $
              —
              
              $
              —




The
      Company’s ultimate realization of deferred tax assets depends upon the
      generation of future taxable income during periods in which those temporary
      differences become deductible. Based on the best available objective evidence,
      it is more likely than not that the Company’s net deferred tax assets will not
      be realized. Accordingly, the Company has continued to provide a valuation
      allowance against its net deferred tax assets as of March 31,
      2008.




The
      valuation allowance for deferred tax assets increased by $1.3 million for the
      fiscal year ended March 31, 2008 and increased by $770,000 for fiscal year
      ended
      March 31, 2007.




In
      June
      2006, the FASB issued FIN No. 48, *Accounting
      for Uncertainty in Income Taxes - an interpretation of FASB Statement
      No. 109* ,
      or FIN
      48, which clarifies the accounting for uncertainty in income taxes recognized
      in
      an enterprise’s financial statements in accordance with FASB Statement
      No. 109, *Accounting
      for Income Taxes .* This
      Interpretation prescribes a recognition threshold and measurement attribute
      for
      the financial statement recognition and measurement of a tax position taken
      or
      expected to be taken in a tax return. This Interpretation also provides guidance
      on derecognition, classification, interest and penalties, accounting in interim
      periods, disclosure, and transition. The Company adopted FIN 48 on April 1,
      2007. The adoption of this interpretation did not have a material impact on
      the
      Company’s consolidated financial statements. The Company has not identified any
      unrecognized tax benefits as of March 31, 2008. Any
      interest expense and penalties related to unrecognized tax benefits and interest
      income on tax overpayments will be recorded as components of income tax expense.




The
      Company has tax deductions from the exercise of certain stock options that
      exceed the amount of stock compensation expense recorded in the accompanying
      financial statements for the corresponding options (“Excess Tax Deductions”).
      The deferred tax assets of the Company are reported without inclusion of the
      Excess Tax Deductions. When realized, the tax benefit of the Excess Tax
      Deductions is accounted for as a credit to additional paid-in-capital rather
      than as a reduction of income tax expense.





As
      of
      March 31, 2008, the Company had net operating loss (“NOL”) carryforwards of
      approximately $4.9 million and $4.6 million for federal and state tax purposes,
      respectively. If not utilized, the federal carryforwards will begin to expire
      in
      the fiscal year ending March 31, 2027. The Company’s utilization of these
      NOL carryforwards may be subject to annual limitations pursuant to
      Section 382 of the Internal Revenue Code, and similar state provisions, as
      a result of changes in the Company’s ownership structure. These annual
      limitations may result in the expiration of NOL carryforwards prior to
      utilization.




The
      Company has approximately $475,000 of Federal R&E tax credits as of March
      31, 2008, which, if not utilized, will begin to expire in the fiscal year ending
      March 31, 2023.







F-14




**(7)**
            **Stockholders’
                Equity**




***(a)***
            ***Reincorporation***




The
      Company was reincorporated in Delaware in December 2004. Immediately prior
      to
      the reincorporation and under its certificate of incorporation, the Company
      was
      authorized to issue 27,254,695 shares of capital stock, consisting of 8,587,095
      shares of preferred stock, par value $0.001, and 18,667,600 shares of common
      stock, par value $0.001. Of the authorized preferred stock, 2,036,768 shares
      were designated as Series A preferred stock, 333,350 as Series B preferred
      stock, 3,550,177 as Series C preferred stock and 2,666,800 as Series D preferred
      stock. In connection with the reincorporation, each share of Class A common
      stock outstanding immediately prior to the reincorporation was converted into
      one share of common stock, each outstanding option and warrant that was
      exercisable for shares of Class A common stock became exercisable for a
      like number of shares of common stock, and each outstanding share of Series
      A, B
      and C preferred stock, which was previously convertible into shares of
      Class A common stock, became convertible into shares of common stock. Prior
      to conversion in connection with the reincorporation, there were no differences
      in rights between the Company’s common stock and Class A common
      stock.




***(b)***
            ***Common
                and Preferred Stock***




As
      of
      March 31, 2008, the Company is authorized to issue 5,000,000 and
      100,000,000 shares of preferred and common stock, respectively, each with a
      par
      value of $0.001.




In
        February 2008, the Company issued 2,893,519 shares of its common stock pursuant
        to a Securities Purchase Agreement, by and among the Company and certain
        institutional investors, and a wholly owned subsidiary of Suntech Power Holdings
        Co., Ltd. The wholly owned subsidiary of Suntech Power Holdings Co., Ltd
        acquired 2,314,815 of the Company’s common stock. The Company received aggregate
        gross proceeds of approximately $25 million from the sale of the common stock
        which it will use to fund the construction of its polysilicon
        plant.




The
      Company has reserved the shares of common stock for future issuance at
      March 31, 2008 and 2007 as follows:




**2008**
            
            **2007**Stock
                options and awards outstanding
            
            
            564,791
            
            
            668,381Stock
                options and awards available for future grants
            
            
            970,737
            
            
            1,043,9961,535,528
            
            
            1,712,377




***(c)***
            ***Stock
                Options and Awards***




As
      of
      April 1, 2007, the Company had authorized 1,866,666 shares of common stock
      for
      issuance under the Company’s 2002 Stock Plan, 2005 Equity Incentive Plan, 2005
      Non-Employee Directors Stock Option Plan and Calendar Year 2005 Executive
      Incentive Compensation Plan. As of July 10, 2007, the Company authorized an
      additional 211,822 shares of common stock for issuance under the 2005
      Non-Employee Directors Stock Option Plan and Calendar Year 2005 Executive
      Incentive Compensation Plan, increasing the total authorized shares of common
      stock for issuance to 2,078,488. Stock options issued generally vest at the
      rate
      of 1/5 th on the
      first anniversary of the vesting commencement date and an additional
      1/60 th of the
      shares each month thereafter. The options also typically have a ten-year
      contractual term. Stock awards issued are generally fully-vested stock
      awards.




The
      following table summarizes stock option and award activity for fiscal years
      ended March 31, 2006 through 2008:




**Options Outstanding****Options and Awards**
              **Available for Grant**
            
            **Number**
              **of Shares**
            
            **Weighted Average**
              **Exercise Price**Balances as
                of March 31, 2005
            
            
            505,015
            
            
            659,984
            
            $
            0.72Authorized(1)
            
            
            733,332
            
            
            —Granted
            
            
            (36,483
            )
            
            36,483
            
            $
            6.89Exercised
            
            
            —
            
            
            (99,337
            )
            $
            0.57Cancelled
            
            
            54,266
            
            
            (54,266
            )
            $
            2.06Stock
                awards granted
            
            
            (15,341
            )
            
            —Balances
                as of March 31, 2006
            
            
            1,240,789
            
            
            542,864
            
            $
            1.02Authorized
            
            
            —
            
            
            —Granted
            
            
            (275,432
            )
            
            275,432
            
            $
            2.82Exercised
            
            
            —
            
            
            (52,167
            )
            $
            0.26Cancelled
            
            
            97,748
            
            
            (97,748
            )
            $
            1.80Stock
                awards granted
            
            
            (19,109
            )
            
            —Balances
                as of March 31, 2007
            
            
            1,043,996
            
            
            668,681
            
            $
            1.71Authorized
            
            
            211,822
            
            
            —Granted
            
            
            (19,998
            )
            
            19,998
            
            $
            10.39Exercised
            
            
            —
            
            
            (112,165
            )
            $
            0.82Cancelled
            
            
            11,723
            
            
            (11,723
            )
            $
            1.24Restricted
                stock awards granted
            
            
            (210,100
            )
            
            —
            
            
            2.20Stock
                awards granted
            
            
            (66,706
            )
            
            —Balances
                as of March 31, 2008
            
            
            970,737
            
            
            564,791
            
            $
            2.20





(1) Includes
      666,666 shares under the 2005 Equity Incentive Plan and 66,666 under the 2005
      Non-Employee Directors' Stock Option Plan


F-15




The
      weighted-average grant-date fair value of options granted during the fiscal
      years ended March 31, 2008, 2007 and 2006 was $10.39, $2.40 and $10.46,
      respectively. The total intrinsic value of options exercised during the fiscal
      years ended March 31, 2008, 2007 and 2006 was $892,000, $153,000 and
      $186,000, respectively. As of March 31, 2008, there was $956,000 of total
      unrecognized compensation cost related to nonvested stock-based compensation
      under the 2002 Stock Plan and 2005 Equity Incentive Plan combined; that cost
      is
      expected to be recognized over the respective vesting period.




To
      date,
      cancelled shares are a result of forfeitures rather than the expiration of
      options.




The
      following table summarizes options outstanding and exercisable as of
      March 31, 2008:


**Options
        Outstanding and Exercisable**
 **(dollars
        in thousands except for per share data)**
 **Price**
                  **Range**
                
                **Shares**
                
                **Weighted**
                  **Average**
                  **Remaining**
                  **Contractual**
                  **Life**
                
                **Weighted**
                  **Average**
                  **Exercise**
                  **Price**
                
                **Aggregate**
                  **Intrinsic**
                  **Value**$
                0.075-0.075
                
                
                94,690$
                0.15-0.375
                
                
                105,055$
                0.525-0.525
                
                
                35,633$
                2.60-2.60
                
                
                199,168$
                2.75-4.50
                
                
                96,063$
                5.68-5.68
                
                
                1,000$
                6.00-6.00
                
                
                12,334$
                6.11-6.11
                
                
                500$
                9.81-9.81
                
                
                350$
                10.39-10.39
                
                
                19,998564,791
                
                
                7.26
                
                $
                2.20
                
                $
                3,388




The
      following table summarizes options vested and exercisable as of March 31,
      2008:




**Options
      Vested and Exercisable**


**(dollars
        in thousands except for per share data)**
 
 **Price**
                **Range**
              
              
              **Shares**
              
              
              **Weighted**
                **Average**
                **Remaining**
                **Contractual**
                **Life**
              
              
              **Weighted**
                **Average**
                **Exercise**
                **Price**
              
              
              **Aggregate**
                **Intrinsic**
                **Value**$
              0.075-0.075
              
              
              84,277$
              0.15-0.375
              
              
              73,941$
              0.525-0.525
              
              
              11,632$
              2.60-2.60
              
              
              834$
              2.75-4.50
              
              
              62,461$
              5.68-5.68
              
              
              216$
              6.00-6.00
              
              
              5,666$
              6.11-6.11
              
              
              191$
              9.81-9.81
              
              
              163$
              10.39-10.39
              
              
              0239,381
              
              
              6.22
              
              $
              1.40
              
              $
              1,609




F-16





The
      following table summarizes the number of nonvested shares as of March 31,
      2008 and 2007 and changes during the fiscal years ended March 31, 2008 and
      2007:




**Number**
              **of
                Shares**
            
            **Weighted Average**
              **Grant
                Date Fair**
              **Value**Nonvested
                at March 31, 2006
            
            
            369,750
            
            $
            6.10Outstanding
            
            
            369,750
            
            $
            6.10Granted
            
            
            275,432
            
            $
            2.40Vested
            
            
            (123,869
            )
            $
            5.72Cancelled
            
            
            (97,748
            )
            $
            4.46Nonvested
                at March 31, 2007
            
            
            423,565
            
            $
            3.25Outstanding
            
            
            423,565
            
            $
            3.25Granted
            
            
            230,098
            
            $
            5.20Vested
            
            
            (206,730
            )
            $
            5.14Cancelled
            
            
            (11,723
            )
            $
            1.24Nonvested
                at March 31, 2008
            
            
            435,210
            
            $
            4.16




Stock-based
      awards were measured at the fair value of the equity instruments issued using
      the Black-Scholes option pricing model. The fair value of stock options granted
      is charged to expense over the requisite period. The fair value of options
      vested was $626,000, $708,000 and $755,000 for the fiscal years ended
      March 31, 2008, 2007 and 2006, respectively.




Cash
      received from option exercises for the years ended March 31, 2008, 2007 and
      2006 was $92,000, $14,000 and $57,000, respectively. There were no tax benefits
      realized for the tax deductions from the exercise of stock options and issuance
      of stock awards for the fiscal years ended March 31, 2008, 2007 and
      2006.




***(d)***
            ***Stock-based
                Compensation***




*Common
      Stock.* The
      Company entered into a restricted stock agreement with each of its three
      officers in June 2002, which placed a repurchase right on each officer’s common
      stock holdings, an aggregate of 6,666,666 shares of common stock that lapsed
      over time. The Company was entitled to repurchase the common stock held by
      these
      three officers at the original issue price upon the termination of each
      officer’s employment with the Company. The Company’s repurchase right lapsed as
      to 1/4th of the shares on June 21, 2002 and 1/48th of the shares per month
      thereafter through June 20, 2005. As of the fiscal year ended
      March 31, 2008, two of these three officers remained with the Company and
      none of these shares held by them remained subject to repurchase.




The
      Company entered into a separation agreement with one officer dated
      August 1, 2003 and effective July 15, 2003. At the time of separation,
      the officer held 866,666 shares of the Company’s common stock, 433,334 of which
      were fully vested. In connection with the officer’s separation, the Company
      repurchased 216,666 shares held by the officer at the original issuance price.
      The Company also agreed to accelerate the vesting of an additional 216,666
      shares of the officer’s common stock. The Company recorded a compensation charge
      of $163,000 associated with the accelerated vesting of the 216,666 shares of
      common stock held by the officer. The fair value of the award used in the
      calculation in the above-noted compensation charge was based upon the estimated
      fair value of the modified award as of the separation date as determined
      principally by the fair value of contemporaneously issued preferred stock of
      the
      Company. The Company possessed a right of repurchase in the event that the
      officer breaches the officer’s release agreement with the Company, which
      terminated upon the closing of the Company’s initial public
      offering.




For
      financial accounting purposes, the imposition of repurchase restrictions on
      the
      officers’ common stock pursuant to the restricted stock agreements was treated
      as a contribution of capital and the reissuance of shares of restricted common
      stock. The Company determined the fair value of the restricted shares on the
      date of reissuance to be $0.75 per share based upon the contemporaneous sale
      of
      the Company’s Series A preferred stock. This fair value is recorded as
      stock-based compensation expense as the Company’s repurchase rights lapse. The
      Company recorded stock-based compensation expense related to common stock
      subject to repurchase of $0, $0 and $272,000 during the fiscal years ended
      March 31, 2008, 2007 and 2006, respectively. The repurchase right lapsed in
      fiscal 2006.




*Stock
        Options* The
        Company granted options to purchase 19,998 shares, 275,432 shares and 36,483
        shares of common stock during the fiscal years ended March 31, 2008, 2007
        and 2006, respectively, under the Company’s 2002 Stock Plan and 2005 Equity
        Incentive Plan. The Company recorded stock-based compensation expense of
        $578,000, $1.2 million and $1.1 million during the fiscal years ended
        March 31, 2008, 2007 and 2006, respectively. The stock-based compensation
        expense excludes $13,000 and $30,000 which was capitalized to cost of
        uncompleted contracts and construction in progress, respectively, during
        fiscal
        year ended March 31, 2008. The stock-based compensation expense excludes
        $39,000
        and $127,000 which was capitalized to cost of uncompleted contracts and
        construction in progress, respectively, during fiscal year ended March 31,
        2007.
        During fiscal year ended March 31, 2006, $69,000 was capitalized to cost
        of
        uncompleted contracts.




F-17




The
      fair
      value of the stock options granted is calculated using the Black-Scholes option
      pricing model as allowed by Statement of Financial Accounting Standards
      No. 123(R), Share-Based Payment, or SFAS 123(R). The assumptions used to
      estimate fair value included:


**Fiscal
                  Years Ended March 31,****2008**
              
              **2007**
              
              **2006**Risk-free
                  interest rate
              
              
              4.20%
              
              
              4.74% - 5.10%
              
              
              3.83% - 4.55%Dividend yield
              
              
              None
              
              
              None
              
              
              NoneExpected
                  volatility
              
              
              100%
              
              
              100%
              
              
              100%Expected
                  life (in years)
              
              
              6.5
              
              
              6.5
                  - 7.5
              
              
              7.5




The
      risk-free interest rate is based on the market yield of U.S. Treasury securities
      with a five year constant maturity at the time of grant. The Company has not
      issued any dividends to date and due to the Company’s limited operating history,
      a volatility of 100% was assumed. The expected life is based on the average
      of
      the vesting and expiration term. The vesting term of options granted is
      generally three or five years and the contractual term is generally ten
      years.




Stock-based
        compensation expense is recognized on a straight-line basis as the stock
        options
        vest. The expected forfeiture rate was 30% and 35% for fiscal 2008 and 2007,
        respectively. The expected forfeiture rates are applied to
        reduce stock-based compensation expense, based on the Company’s historical
        experience. In fiscal 2008, the Company recognized a credit of approximately
        $76,000 related to stock option expense for the difference in actual forfeitures
        and the expected forfeiture rate used.




*Stock
      Awards.*




During
      the fiscal year ended March 31, 2008, the Company granted 210,100 restricted
      shares of common stock, which includes 200,000 shares of restricted stock
      awarded to the Chief Executive Officer under the Fiscal Year 2008 Executive
      Incentive Compensation Plan. The Company recorded stock-based compensation
      expense of $447,000 related to the restricted stock awards granted during fiscal
      year ended March 31, 2008. During the fiscal year ended March 31, 2007 and
      2006,
      no restricted stock awards were granted.




During
      fiscal years ended March 31, 2008 and 2007, the Company granted 66,706 and
      19,109 fully-vested common stock awards, respectively. The fully-vested stock
      awards were granted to executive officers in fiscal year 2008, in accordance
      with the 2007 Executive Incentive Compensation Plan. Although the fully-vested
      stock awards related to the 2007 Executive Incentive Compensation Plan were
      granted in fiscal 2008, the Company accrued the expense in fiscal 2007. In
      fiscal 2007, the Company recorded stock-based compensation for all fully-vested
      stock awards of $840,000, which excludes $122,000 which was capitalized to
      construction in progress. There was no stock-based compensation recorded in
      fiscal 2008 related to fully-vested stock awards.




**(8)**
            **Industry
                Segments**





Operating
      segments are components of an enterprise for which discrete financial
      information is available that is evaluated regularly by the chief operating
      decision maker, or decision-making group, in deciding how to allocate resources
      and in assessing performance. The Company’s chief operating decision-making
      group is made up of the Chief Executive Officer, Chief Financial Officer, Chief
      Technology Officer and the Vice President of Business Development and General
      Counsel.  The chief operating decision-making group manages the
      profitability, cash flows, and assets of each segment’s various product or
      service lines and businesses. The Company has three operating business units
      in
      two industries: Fuel Cell and Solar. The Fuel Cell industry is comprised of
      the
      fuel cell segment. The Solar industry is comprised of the PV module installation
      business unit (Hoku Solar) and polysilicon production business unit (Hoku
      Materials). A description of the products for each business unit is described
      in
      Note 1 of the Consolidated Financial Statements. Prior to fiscal 2007, only
      the
      Fuel Cell business unit existed.




F-18





**2008**
            
            **2007**
            
            **2006**For
                the fiscal yearRevenue:Hoku
                Fuel Cells
            
            $
            1,337
            
            $
            5,368
            
            $
            5,505Hoku
                Solar
            
            
            1,892
            
            
            —
            
            
            —Hoku
                Materials
            
            
            —
            
            
            —
            
            
            —Total
                consolidated revenue:
            
            $
            3,229
            
            $
            5,368
            
            $
            5,505





The
      reconciliation of segment operating results to the Company’s consolidated totals
      was as follows for the following fiscal years ended March 31:




**2008**
            
            **2007**
            
            **2006**Income
                (loss) from operations:Hoku
                Fuel Cells
            
            $
            245
            
            $
            (1,651
            )
            $
            482Hoku
                Solar
            
            
            (2,060
            )
            
            (1,256
            )
            
            —Hoku
                Materials
            
            
            (3,561
            )
            
            (1,159
            )
            
            —Total
                consolidated income (loss) from operations:
            
            $
            (5,376
            )
            $
            (4,066
            )
            $
            482




The
      reconciliation of segment operating results to the Company’s consolidated totals
      was as follows:





**Fiscal
                Years Ended March 31,****2008**
            
            **2007**
            
            **2006**Consolidated
                income (loss) from operations
            
            $
            (5,376
            )
            $
            (4,066
            )
            $
            482Interest
                and other income
            
            
            1,083
            
            
            1,039
            
            
            594Income
                (loss) before income taxes
            
            
            (4,293
            )
            
            (3,027
            )
            
            1,076Income
                tax expense (benefit)
            
            
            —
            
            
            (275
            )
            
            (268
            )Net
                income (loss)
            
            $
            (4,293
            )
            $
            (2,752
            )
            $
            1,344





The
      Company allocates its assets to its business units based on the primary business
      units benefiting from the assets. Unallocated assets are composed primarily
      of
      cash and cash equivalents and short-term investments. Capital additions for
      the
      Hoku Materials business unit relate to construction in progress, as such, no
      depreciation and amortization pertains to the Hoku Materials business
      unit.





**2008**
              
              **2007**For
                  the fiscal yearIdentifiable
                  assets:Hoku
                  Fuel Cells
              
              $
              140
              
              $
              1,250Hoku
                  Solar
              
              
              2,037
              
              
              3,150Hoku
                  Materials
              
              
              29,522
              
              
              2,763Unallocated
                  assets
              
              
              36,410
              
              
              23,462$
              68,109
              
              $
              30,625Capital
                  additions:Hoku
                  Fuel Cells
              
              $
              —
              
              $
              180Hoku
                  Solar
              
              
              50
              
              
              —Hoku
                  Materials
              
              
              27,989
              
              
              544$
              28,039
              
              $
              724Depreciation
                  and amortization:Hoku
                  Fuel Cells
              
              $
              9
              
              $
              221Hoku
                  Solar
              
              
              125
              
              
              —Hoku
                  Materials
              
              
              9
              
              
              —$
              143
              
              $
              221


F-19





**(9)**
            **Unaudited
                Quarterly Financial Data**





**Quarters Ended****March 31,**
                **2008**
              
              **December 31,**
                **2007**
              
              **September 30,**
                **2007**
              
              **June 30,**
                **2007****(amounts in thousands, except per share data)**Service
                  and license revenue
              
              $
              621
              
              $
              1,271
              
              $
              239
              
              $
              1,098Gross
                  profit
              
              
              67
              
              
              466
              
              
              44
              
              
              340Net
                  loss
              
              
              (2,098
              )
              
              (538
              )
              
              (1,004
              )
              
              (653
              )Basic
                  net loss per share
              
              
              (0.13
              )
              
              (0.03
              )
              
              (0.06
              )
              
              (0.04
              )Diluted
                  net loss per share
              
              
              (0.13
              )
              
              (0.03
              )
              
              (0.06
              )
              
              (0.04
              )





**March 31,**
              **2007**
            
            **December 31,**
              **2006**
            
            **September 30,**
              **2006**
            
            **June 30,**
              **2006**Service and license
                revenue
            
            $
            1,136
            
            $
            1,136
            
            $
            1,943
            
            $
            1,153Gross
                profit
            
            
            217
            
            
            158
            
            
            946
            
            
            874Net
                income (loss)
            
            
            (2,117
            )
            
            (1,251
            )
            
            303
            
            
            313Basic
                net income (loss) per share
            
            
            (0.13
            )
            
            (0.08
            )
            
            0.02
            
            
            0.02Diluted
                net income (loss) per share
            
            
            (0.13
            )
            
            (0.08
            )
            
            0.02
            
            
            0.02




Quarterly
      and year-to-date computations of per share amounts are made independently,
      therefore they may differ when comparing annual per share amounts to aggregated
      quarterly per share amounts.


F-20




**EXHIBIT
      INDEX**





**Exhibit**
              **No.**
            
            **Exhibit
                Description**
            
            **Form**
            
            **File Number**
            
            **Exhibit**
            
            **Filing**
              **Date**
            
            **Filed**
              **Herewith**3.1
            
            Amended
                and Restated Certificate of Incorporation.
            
            S-1/A#4
            
            333-124423
            
            3.1
            
            7/13/053.2
            
            Amended
                and Restated Bylaws
            
            8-K
            
            000-51458
            
            3.2
            
            10/23/074.1
            
            Reference
                is made to Exhibits 3.1 and 3.2.10.1
            
            Amended
                and Restated Rights Agreement dated December 31, 2003.
            
            S-1
            
            333-124423
            
            10.1
            
            4/28/0510.6+
            
            Form
                of Addendum to Stock Option Agreement under the 2002 Stock Plan,
                as
                amended, by and between Scott Paul and Hoku Scientific,
                Inc.
            
            S-1
            
            333-124423
            
            10.6
            
            4/28/0510.7+
            
            Form
                of Addendum to Stock Option Agreement under the 2002 Stock Plan,
                as
                amended, by and between each of the non-employee directors and Hoku
                Scientific, Inc.
            
            S-1
            
            333-124423
            
            10.7
            
            4/28/0510.8
            
            Form
                of Indemnity Agreement entered into between Hoku Scientific, Inc.
                and each
                of its directors and officers.
            
            S-1
            
            333-124423
            
            10.8
            
            4/28/0510.9+
            
            2002
                Stock Plan, as amended.
            
            S-1
            
            333-124423
            
            10.9
            
            4/28/0510.10+
            
            Form
                of Stock Option Agreement under the 2002 Stock Plan, as
                amended.
            
            S-1
            
            333-124423
            
            10.10
            
            4/28/0510.11+
            
            2005
                Equity Incentive Plan.
            
            8-K
            
            000-51458
            
            10.11
            
            9/13/0610.12+
            
            Form
                of Stock Option Agreement under the 2005 Equity Incentive
                Plan.
            
            8-K
            
            000-51458
            
            10.12
            
            9/13/0610.13+
            
            2005
                Non-Employee Directors’ Stock Option Plan.
            
            S-1/A#4
            
            333-124423
            
            10.13
            
            7/13/0510.14+
            
            Form
                of Stock Option Agreement under the 2005 Non-Employee Directors’ Stock
                Option Plan.
            
            S-1/A#4
            
            333-124423
            
            10.14
            
            7/13/0510.15
            
            2153
                King Street Lease, dated January 1, 2003, by and between Dreal Hawaii,
                LLC
                and Hoku Scientific, Inc.
            
            S-1
            
            333-124423
            
            10.15
            
            4/28/0510.16
            
            Letter
                Agreement for Modification of the 2153 King Street Lease, dated April
                9,
                2003, by and between Dreal Hawaii, LLC and Hoku Scientific,
                Inc.
            
            S-1
            
            333-124423
            
            10.16
            
            4/28/0510.17†
            
            MEA
                Engineering Agreement, dated September 1, 2004, by and between Nissan
                Motor Co., Ltd. and Hoku Scientific, Inc.
            
            S-1/A#7
            
            333-124423
            
            10.17
            
            8/3/0510.18†
            
            Membrane
                & MEA Purchase Agreement, dated September 1, 2004, by and between
                Nissan Motor Co., Ltd. and Hoku Scientific, Inc.
            
            S-1/A#7
            
            333-124423
            
            10.18
            
            8/3/0510.19†
            
            Collaboration
                Agreement, dated March 22, 2005, by and between Nissan Motor Co.,
                Ltd. and
                Hoku Scientific, Inc.
            
            S-1/A#7
            
            333-124423
            
            10.19
            
            8/3/0510.20
            
            Solicitation,
                Offer and Award, dated March 7, 2005, by and between the U.S. Navy,
                Naval
                Air Warfare Center Weapons Division and Hoku Scientific,
                Inc.
            
            S-1/A#5
            
            333-124423
            
            10.20
            
            7/26/0510.21†
            
            Agreement
                (Subcontract No. USN-001), dated April 7, 2005, by and between IdaTech,
                LLC and Hoku Scientific, Inc.
            
            S-1
            
            333-124423
            
            10.21
            
            4/28/0510.22†
            
            Agreement,
                dated March 17, 2003, by and between Sanyo Electric Co., Ltd. and
                Hoku
                Scientific, Inc.
            
            S-1/A#7
            
            333-124423
            
            10.22
            
            8/3/0510.23†
            
            Amendment
                to the Agreement dated March 17, 2003 by and between Sanyo Electric
                Co.,
                Ltd. and Registrant dated September 30, 2004.
            
            S-1/A#7
            
            333-124423
            
            10.23
            
            8/3/0510.24†
            
            Membrane
                Testing Agreement, dated March 19, 2004, by and between Nissan Motor
                Co.,
                Ltd. and Hoku Scientific, Inc.
            
            S-1/A#6
            
            333-124423
            
            10.24
            
            8/3/0510.25†
            
            Amendment
                No. 1 to Membrane Testing Agreement, dated May 17, 2004, by and between
                Nissan Motor Co., Ltd. and Hoku Scientific, Inc.
            
            S-1/A#6
            
            333-124423
            
            10.25
            
            6/23/05









10.27
            
            Amendment
                of Solicitation/Modification of Contract, dated September 30, 2005,
                by and
                between the U.S. Navy, Naval Air Warfare Center Weapons Division
                and Hoku
                Scientific, Inc.
            
            8-K
            
            000-51458
            
            10.30
            
            10/5/0510.28†
            
            Step
                3 Collaboration Agreement, dated February 13, 2006, by and between
                Nissan
                Motor Company, Ltd., and Hoku Scientific, Inc.
            
            10-Q
            
            000-51458
            
            10.31
            
            2/14/0610.29†
            
            Material
                Transfer & Collaborative Testing Agreement, dated December 5, 2005, by
                and between Sanyo Electric Company, Ltd., and Hoku Scientific,
                Inc.
            
            10-Q
            
            000-51458
            
            10.32
            
            2/14/0610.31
            
            Amendment
                of Solicitation/Modification of Contract, dated March 2, 2006, by
                and
                between the U.S. Navy, Naval Air Warfare Center Weapons Division
                and Hoku
                Scientific, Inc.
            
            10-K
            
            000-51458
            
            10.31
            
            6/29/0610.31
            
            Amendment
                of Solicitation/Modification of Contract, dated March 2, 2006, by
                and
                between the U.S. Navy, Naval Air Warfare Center Weapons Division
                and Hoku
                Scientific, Inc.
            
            10-K
            
            000-51458
            
            10.31
            
            6/29/06








10.32
            
            Amendment
                No. 1 to Agreement (Subcontract No. USN-001.01), dated March 7, 2006,
                by
                and between IdaTech, LLC and Hoku Scientific, Inc.
            
            10-K
            
            000-51458
            
            10.32
            
            6/29/0610.33
            
            Fiscal
                Year 2007 Executive Incentive Compensation Plan
            
            8-K
            
            000-51458
            
            10.33
            
            7/20/0610.34
            
            Consulting
                Agreement, dated August 20, 2006, by and between Paul Yonamine and
                Hoku
                Scientific, Inc.
            
            10-Q
            
            000-51458
            
            10.34
            
            11/6/0610.35†
            
            Swiss
                Wafer AG Agreement, dated October 14, 2006.
            
            10-Q
            
            000-51458
            
            10.35
            
            2/14/0710.36†
            
            Purchase
                Agreement, dated October 23, 2006, by and between E-Ton Solar Tech
                Co.,
                Ltd and Hoku Scientific, Inc.
            
            10-Q
            
            000-51458
            
            10.36
            
            2/14/0710.37†
            
            Purchase
                and Sale Agreement, dated October 13, 2006, by and between Spire
                Corporation and Hoku Scientific, Inc.
            
            10-Q
            
            000-51458
            
            10.37
            
            2/14/0710.38
            
            Ground
                Lease, dated March 22, 2007, by and between Hoku Materials, Inc.
                and The
                City of Pocatello.
            
            8-K
            
            000-51458
            
            10.38
            
            3/28/0710.39
            
            Credit
                Agreement, dated March 23, 2007, by and between Hoku Materials, Inc.
                and
                Bank of Hawaii.
            
            8-K
            
            000-51458
            
            10.39
            
            3/29/0710.40†
            
            Pledge
                and Security Agreement, dated March 23, 2007, by and between Hoku
                Materials, Inc. and Bank of Hawaii.
            
            8-K
            
            000-51458
            
            10.40
            
            3/29/0710.41
            
            Amendment
                No. 1 to Purchase and Sale Agreement, dated October 13, 2006, by
                and Spire
                Corporation and Hoku Scientific, Inc.
            
            8-K
            
            000-51458
            
            10.41
            
            6/20/0710.42†
            
            Supply
                Agreement , dated January 17, 2007, by and between Sanyo Electric
                Company,
                Ltd. and Hoku Scientific, Inc.
            
            10-K
            
            000-51458
            
            10.42
            
            6/29/0710.43†
            
            Contract
                dated January 21, 2007 by and between GEC Graeber Engineering Consultants
                GmbH and MSA Apparatus Construction for Chemical Equipment Ltd. and
                Hoku
                Scientific, Inc.
            
            10-K
            
            000-51458
            
            10.43
            
            6/29/0710.44
            
            Amendment
                No. 1 of Supply Agreement, dated May 26, 2007, by and between Sanyo
                Electric Company, Ltd. and Hoku Scientific, Inc.
            
            10-K
            
            000-51458
            
            10.44
            
            6/29/0710.45
            
            Amendment
                No. 1 to Contract, dated May 29, 2007, by and between Graeber Engineering
                Consultants GmbH and MSA Apparatus Construction for Chemical Equipment
                Ltd. and Hoku Scientific, Inc.
            
            10-K
            
            000-51458
              000-51458
            
            10.45
            
            6/29/0710.46†
            
            Supply
                Agreement, dated June 18, 2007, by and between and Global Expertise
                Wafer
                Division Ltd. and Hoku Materials, Inc.
            
            10-Q
            
            000-51458
            
            10.46
            
            08/06/0710.47†
            
            Agreement
                for Engineering of Hoku Electric Substation and Associated Facilities,
                dated June 14, 2007, by and between Idaho Power Co. and Hoku Materials,
                Inc.
            
            10-Q
            
            000-51458
            
            10.47
            
            08/06/0710.48†
            
            Supply
                Agreement, dated June 13, 2007, by and between Wuxi Suntech Power
                Co.,
                Ltd. and Hoku Materials, Inc.
            
            10-Q
            
            000-51458
            
            10.48
            
            08/06/0710.49
            
            Loan
                Modification Agreement, dated August 6, 2007, by and between Bank
                of
                Hawaii and Hoku Materials, Inc.
            
            10-Q
            
            000-51458
            
            10.49
            
            08/06/0710.50
            
            Amendment
                No. 1 of Supply Agreement, dated August 30, 2007, by and between
                Wuxi
                Suntech Power Co., Ltd. and Hoku Materials, Inc.
            
            8-K
            
            000-51458
            
            10.50
            
            08/31/0710.51
            
            Amendment
                No. 2 of Supply Agreement, dated October 12, 2007, by and between
                Sanyo
                Electric Company, Ltd. and Hoku Materials, Inc.
            
            8-K
            
            000-51458
            
            10.51
            
            10/16/0710.52†
            
            Cost
                Plus Incentive Construction Contract, dated August 8, 2007, by and
                between
                JH Kelly LLC and Hoku Materials, Inc.
            
            10-Q
            
            000-51458
            
            10.52
            
            11/13/0710.53†
            
            Engineering,
                Procurement and Construction Management Agreement, dated August 7,
                2007,
                by and between Stone & Webster, Inc. and Hoku Materials,
                Inc.
            
            10-Q
            
            000-51458
            
            10.53
            
            11/13/0710.54†
            
            Purchase
                and Sale Agreement,
                dated August 30, 2007, by and between Solar Energy Partners Pte Ltd.and
                Hoku Scientific, Inc.
            
            10-Q
            
            000-51458
            
            10.54
            
            11/13/0710.55†
            
            Engineering
                Services and Technology Transfer Agreement, dated October 6, 2007,
                by and
                between Dynamic Engineering Inc. and Hoku Materials, Inc.
            
            10-Q
            
            000-51458
            
            10.55
            
            11/13/07









10.56†
            
            Amendment
                and Restatement of Contract, dated October 15, 2007, by and between
                Graeber Engineering Consultants GmbH and MSA Apparatus Construction
                for
                Chemical Equipment Ltd. and Hoku Materials, Inc.
            
            10-Q
            
            000-51458
            
            10.56
            
            11/13/0710.57
            
            Amendment
                No. 3 to Supply Agreement, dated December 28, 2007, by and between
                Sanyo
                Electric Co., Ltd., and Hoku Materials, Inc.
            
            8-K
            
            000-51458
            
            10.57
            
            01/02/0810.58†
            
            Supply
                Agreement, dated November 19, 2007, by and between Solarfun Power
                Hong
                Kong Limited and Hoku Materials, Inc.
            
            10-Q
            
            000-51458
            
            10.58
            
            02/01/0810.59†
            
            Agreement
                for Construction of Hoku Electric Substation and Associated Facilities,
                dated December 28, 2007, by and between Idaho Power Company and Hoku
                Materials, Inc.
            
            10-Q
            
            000-51458
            
            10.59
            
            02/01/0810.60†
            
            First
                Amended & Restated Supply Agreement, dated January 7, 2008, by and
                between Solarfun Power Hong Kong Limited and Hoku Materials, Inc.
            
            10-Q
            
            000-51458
            
            10.60
            
            02/01/0810.61†
            
            First
                Amended & Restated Supply Agreement, dated January 30, 2008, by and
                between Sanyo Electric Co., Ltd., and Hoku Materials, Inc.
            
            10-Q
            
            000-51458
            
            10.61
            
            02/01/0810.62
            
            Amendment
                No. 2 to Supply Agreement, dated February 21, 2008, by and between
                Hoku
                Materials, Inc., and Wuxi Suntech Power Co., Ltd.
            
            8-K
            
            000-51458
            
            10.62
            
            02/25/0810.63
            
            Securities
                Purchase Agreement, dated February 21, 2008, by and between Hoku
                Scientific, Inc., and the Purchasers named therein.
            
            8-K
            
            000-51458
            
            10.63
            
            02/25/0810.64
            
            PowerPoint
                Presentation dated January 2008.
            
            8-K
            
            000-51458
            
            10.64
            
            02/25/0810.65
            
            Registration
                Rights Agreement, dated February 29, 2008, by and among Hoku Scientific,
                Inc., and the Purchasers named therein.
            
            8-K
            
            000-51458
            
            10.65
            
            02/29/0810.66
            
            Amendment
                No. 1 to Supply Agreement, dated March 4, 2008, by and between Hoku
                Materials, Inc., and Global Expertise Wafer Division Ltd.
            
            8-K
            
            000-51458
            
            10.66
            
            03/05/0810.67
            
            Amendment
                No. 1 to Engineering Services & Technology Transfer Agreement, dated
                April 4, 2008, by and between Hoku Materials, Inc and Dynamic Engineering
                Inc.
            
            8-K
            
            000-51458
            
            10.67
            
            04/09/0810.68†
            
            Equipment
                Purchase & Sale Agreement, dated March 4, 2008, by and between Hoku
                Materials, Inc. and Saft Power Systems USA Inc.
            
            
            
            
            
            
            
            
            
            *10.69†
            
            Change
                Order Number 2 to Engineering, Procurement & Construction
                Management Agreement, dated April 8, 2008, by and between Hoku Materials,
                Inc. and Stone & Webster, Inc.
            
            
            
            
            
            
            
            
            
            *10.70†
            
            Change
                Order Number 2 to Cost Plus Incentive Construction Contract, dated
                April
                7, 2008, by and between Hoku Materials, Inc. and JH Kelly
                LLC.
            
            
            
            
            
            
            
            
            
            *10.71†
            
            Equipment
                Purchase & Sale Agreement, dated April 8, 2008, by and between Hoku
                Materials, Inc and PVA Tepla Danmark.
            
            
            
            
            
            
            
            
            
            *10.72†
            
            First
                Amended & Restated Supply Agreement, dated as of May 12,
                2008, by and between Hoku Materials, Inc. and Wuxi Suntech Power Co.,
                Ltd.
            
            
            
            
            
            
            
            
            
            *10.73†
            
            Second
                Amended and Restated Supply Agreement, dated as of May 13, 2008, by
                and between Hoku Materials, Inc. and Solarfun Power Hong Kong
                Limited.
            
            
            
            
            
            
            
            
            
            *16.1
            
            Letter
                regarding Change in Certifying Accountant pursuant to Item 304(a)(3)
                of
                Regulation S-K.
            
            8-K
            
            000-51458
            
            16.1
            
            12/28/0523.1
            
            Consent
                of independent registered public accounting firm.
            
            
            
            
            
            
            
            
            
            *24.1
            
            Power
                of Attorney (included in signature page).
            
            
            
            
            
            
            
            
            
            *31.1
            
            Certification
                of Chief Executive Officer required by Rule 13a-14(a) of the Securities
                Exchange Act of 1934, as amended.
            
            
            
            
            
            
            
            
            
            *31.2
            
            Certification
                required of Chief Financial officer as required by Rule 13a-14(a)
                of the
                Securities Exchange Act of 1934, as amended.
            
            
            
            
            
            
            
            
            
            *









32.1#
            
            Certification
                of Chief Executive Officer required by Rule 13a-14(b) of the Securities
                Exchange Act of 1934, as amended.
            
            
            
            
            
            
            
            
            
            *32.2#
            
            Certification
                of Chief Financial Officer required by Rule 13a-14(b) of the Securities
                Exchange Act of 1934, as amended.
            
            
            
            
            
            
            
            
            
            *




†
            Confidential
                treatment has been requested for portions of this exhibit. These
                portions
                have been omitted from this Annual Report on Form 10-K and have been
                filed
                separately with the Securities and Exchange
                Commission.




+
            Management
                contract, compensatory plan or
                arrangement.




#
            In
                accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC
                Release Nos. 33-8238 and 34-47986, Final Rule: Management’s Reports on
                Internal Control Over Financial Reporting and Certification of Disclosure
                in Exchange Act Periodic Reports, the certifications furnished in
                Exhibits
                32.1 and 32.2 hereto are deemed to accompany this Form 10-K and will
                not be deemed “filed” for purpose of Section 18 of the Exchange Act.
                Such certifications will not be deemed to be incorporated by reference
                into any filing under the Securities Act or the Exchange Act, except
                to
                the extent that the registrant specifically incorporates it by
                reference.