##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-QSB
 
 Amendment
No. 2
 
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarter ended June 30, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number333-120926
 SOLAR ENERTECH CORP.
  Nevada
    
    98-0434357State or other jurisdiction of 
incorporation or organization
    
    (I.R.S. Employer
Identification No.)
 1600 Adams Drive  Menlo Park, CA 94025
 (650) 688-5800
 o þ
 þ o
 
 78,827,012
 
 o þ




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##### 



Table of Contents
 PART IFINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTS
    
    
    
    3ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
    
    
    
    25PART IISIGNATURES
    
    
    
    35EX-31.1 CERTIFICATION OF PRESIDENT AND CEOEX-31.2 CERTIFICATION OF CFOEX-32.1 CEO CERTIFICATION TO SECTION 906EX-32.2 CFO CERTIFICATION TO SECTION 906
  FORWARD-LOOKING STATEMENTS
    
    
    our expectations regarding the worldwide demand for electricity and the market for solar energy;
    
    our beliefs regarding the effects of environmental regulation, lack of infrastructure
reliability and long-term fossil fuel supply constraints;
    
    our beliefs regarding the inability of traditional fossil fuel-based generation technologies to
meet the demand for electricity;
    
    our beliefs regarding the importance of environmentally friendly power generation;
    
    our expectations regarding governmental support for the deployment of solar energy;
    
    our beliefs regarding the acceleration of adoption of solar technologies;
    
    our beliefs regarding the competitiveness of PV products;
    
    our expectations regarding the creation and development of our manufacturing capacity;
    
    our expectations with respect to revenue and sales and our ability to achieve profitability
resulting from increases in production volumes;
    
    our expectations with respect to our ability to secure raw materials in the future;
    
    our future business development, results of operations and financial condition; and
 2




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##### Table of Contents




    
    competition from other manufacturers of PV products and conventional energy suppliers.
 YOU SHOULD NOT PLACE UNDUE RELIANCE ON THESE FORWARD LOOKING STATEMENTS
  EXPLANATORY NOTE
  
  
  
 PART I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 PageNumberConsolidated Balance Sheets
    
    4Consolidated Statements of Operations
    
    5Consolidated Statement of Cash Flows
    
    6Notes to the Consolidated Financial Statements
    
    7
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##### Table of Contents



Solar Enertech Corp.
 
 Consolidated Balance Sheets
(Unaudited)
 September 30,2006June 30, 2007
    
    (Restated)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    11,069,310
    
    
    $
    2,798,957Accounts receivable
    
    
    85,329
    
    
    
    Prepaid expenses
    
    
    2,814,993
    
    
    
    40,579Inventory
    
    
    4,010,553
    
    
    
    Current portion of deferred financing costs
    
    
    10,797
    
    
    
    Total Current Assets
    
    $
    17,990,982
    
    
    $
    2,839,536Fixed assets, net of accumulated depreciation
    
    
    2,684,665
    
    
    
    18,751Plant being developed for own Use
    
    
    785,681
    
    
    
    790,036Deferred financing costs
    
    
    2,529,095
    
    
    
    Deposits
    
    
    184,492
    
    
    
    572,416Total Assets
    
    $
    24,174,915
    
    
    $
    4,220,739LIABILITIES AND STOCKHOLDERS EQUITY / (Deficit)Current Liabilities:Accounts payable and accrued liabilities
    
    
    3,663,698
    
    
    
    2,183,289Accounts payable and accrued liabilities, related parties
    
    
    54,562
    
    
    
    89,292Demand note payable to a related party
    
    
    450,000
    
    
    
    450,000Demand notes payable
    
    
    700,000
    
    
    
    600,000Derivative liabilities
    
    
    22,100,000
    
    
    
    Warrant liabilities
    
    
    22,526,912
    
    
    
    Deferred revenues
    
    
    794,087
    
    
    
    Total Current Liabilities
    
    $
    50,289,259
    
    
    $
    3,322,581Convertible notes, net of discount
    
    
    1,957
    
    
    
    Total Liabilities
    
    $
    50,291,216
    
    
    $
    3,322,581STOCKHOLDERS EQUITY / (Deficit):Common stock - 200,000,000 Shares authorized at $0.001
par value 78,807,012 and 76,307,012 shares issued and
outstanding at June 30, 2007 and September 30, 2006,
respectively
    
    
    78,807
    
    
    
    76,307Additional paid in capital
    
    
    36,199,586
    
    
    
    28,764,155Other comprehensive gain / (loss)
    
    
    79,969
    
    
    
    (3,995
    )Accumulated deficit
    
    
    (62,474,663
    )
    
    
    (27,938,309
    )Total Stockholders Equity / (Deficit)
    
    $
    (26,116,301
    )
    
    $
    898,158Total Liabilities and Stockholders Equity / (Deficit)
    
    $
    24,174,915
    
    
    $
    4,220,739
  4




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Solar Enertech Corp.
 
 Consolidated Statements of Operations
(Unaudited)
 Three Months Ended June 30,
    
    Nine Months Ended June 30,2007
    
    2006
    
    2007
    
    2006(Restated)
    
    
    
    (Restated)Sales
    
    $
    1,516,549
    
    
    $
    
    
    
    $
    1,519,757
    
    
    $
    Cost of sales
    
    
    (1,507,208
    )
    
    
    
    
    
    
    (1,513,166
    )
    
    
    Gross Profit
    
    
    9,341
    
    
    
    
    
    
    
    6,591
    
    
    
    Operating expenseSelling and general & administrative
    
    
    2,797,531
    
    
    
    2,407,828
    
    
    
    7,732,851
    
    
    
    12,618,276Research & development
    
    
    7,248
    
    
    
    
    
    
    
    113,032
    
    
    
    Operating Expense
    
    
    2,804,779
    
    
    
    2,407,828
    
    
    
    7,845,883
    
    
    
    12,618,276Interest income
    
    
    27,461
    
    
    
    
    
    
    
    40,281
    
    
    
    Interest expense
    
    
    (279,977
    )
    
    
    
    
    
    
    (334,005
    )
    
    
    Registration payment
    
    
    (281,060
    )
    
    
    
    
    
    
    (281,060
    )
    
    
    Loss on issuance of convertible notes
    
    
    
    
    
    
    
    
    
    
    (15,209,311
    )
    
    
    Gain / (loss) on fair market value of compound
embedded derivative
    
    
    7,100,000
    
    
    
    
    
    
    
    (5,500,000
    )
    
    
    Gain / (loss) on fair market value of warrant liability
    
    
    4,531,112
    
    
    
    
    
    
    
    (5,427,481
    )
    
    
    Other income
    
    
    14,514
    
    
    
    
    
    
    
    14,514
    
    
    
    Income / (loss) from Continuing Operations
    
    
    8,316,612
    
    
    
    (2,407,828
    )
    
    
    (34,536,354
    )
    
    
    (12,618,276
    )Loss from Discontinued Operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,041
    )Net Income / (Loss)
    
    $
    8,316,612
    
    
    $
    (2,407,828
    )
    
    $
    (34,536,354
    )
    
    $
    (12,639,317
    )Net income (loss) per share  basic:Continuing operations
    
    $
    0.11
    
    
    $
    (0.03
    )
    
    $
    (0.44
    )
    
    $
    (0.12
    )Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss per share  diluted:Continuing operations
    
    $
    (0.03
    )
    
    $
    (0.03
    )
    
    $
    (0.44
    )
    
    $
    (0.12
    )Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted-average common shares outstanding  basic
    
    
    78,807,012
    
    
    
    73,579,474
    
    
    
    78,257,561
    
    
    
    107,293,159Weighted-average common shares outstanding  diluted
    
    
    119,343,005
    
    
    
    73,579,474
    
    
    
    78,257,561
    
    
    
    107,293,159
  5




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Solar Enertech Corp.
 
 Consolidated Statements of Cash Flows
(Unaudited)
 Nine months ended June 30,2007
    
    2006(Restated)Cash Flows from Operating ActivitiesNet Loss
    
    $
    (34,536,354
    )
    
    $
    (12,639,317
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation of fixed assets
    
    
    9,614
    
    
    
    2,227Stock based compensation
    
    
    6,348,737
    
    
    
    12,322,955Amortization of discount on convertible notes and deferred financing cost
    
    
    1,957
    
    
    
    Loss on issuance of convertible notes
    
    
    15,209,311
    
    
    
    Loss on fair market value of compound embedded derivative
    
    
    5,500,000
    
    
    
    Loss on fair market value of warrant liability
    
    
    5,427,481
    
    
    
    Changes in:
    
    
    
    
    
    
    Accounts receivable
    
    
    (85,329
    )
    
    
    (1,738
    )Prepaid expenses
    
    
    (2,774,414
    )
    
    
    (30,326
    )Inventory
    
    
    (4,010,553
    )
    
    
    Deferred revenue
    
    
    794,087
    
    
    
    Deposits
    
    
    
    
    
    
    (33,826
    )Accounts payable and accrued liabilities
    
    
    1,480,409
    
    
    
    151,194Accounts payable and accrued liabilities, related parties
    
    
    (34,730
    )
    
    
    Cash used in operating activities
    
    $
    (6,669,784
    )
    
    $
    (228,831
    )Cash flows from investing ActivitiesAcquisition of fixed assets
    
    
    (2,671,173
    )
    
    
    (336,212
    )Deposits on equipment
    
    
    387,924Cash used in investing actives
    
    $
    (2,283,249
    )
    
    $
    (336,212
    )Cash flows from Financing ActivitiesProceeds from note payables
    
    
    100,000
    
    
    
    100,000Proceeds from advances from a related party
    
    
    
    
    
    
    449,980Proceeds from convertible notes, net of offering cost
    
    
    15,949,939
    
    
    
    Proceeds from issuance of common stock, net of offering cost
    
    
    1,089,192
    
    
    
    2,823,000Cash provided by financing activities
    
    $
    17,139,131
    
    
    $
    3,372,980Effect of exchange rate on cash
    
    
    84,255
    
    
    
    
    
    
    
    Net increase in cash
    
    
    8,270,353
    
    
    
    2,807,937Cash, Beginning of Period
    
    
    2,798,957
    
    
    
    48,401Cash, End of Period
    
    $
    11,069,310
    
    
    $
    2,856,338Non-cash investing and financing activitiesWarrants issued to placement agent in connection with convertible notes
    
    $
    1,190,120
    
    
    $
    Warrants issued to note holders
    
    $
    15,909,312
    
    
    $
    Capitalized interest related to leasehold improvements  plant
    
    $
    22,438
    
    
    $
    
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SOLAR ENERTECH CORP.
 
 Notes to Consolidated Financial Statements
June 30, 2007 (Unaudited)
 NOTE 1  BASIS OF PRESENTATION
   NOTE 2  RESTATEMENTS
  
    
    Balance sheet as of September 30, 2006
    
    Statement of operation for quarter and nine months ended June 30, 2006
    
    Statement of operation of previous quarters which are reflected in the statement of
operation for nine months ended June 30, 2007
 Balance sheet as of September 30, 2006
 Original Form 10-KSB
    
    Adjustments
    
    As restated inJune
2007Form 10-QSBBalance Sheet  September 30, 2006Accounts payable and
accrued liabilities
    
    $
    64,766
    
    
    $
    2,118,523
    
    
    $
    2,183,289Accounts payable and
accrued liabilities,
related parties
    
    $
    58,168
    
    
    $
    31,124
    
    
    $
    89,292Additional paid in capital
    
    $
    3,664,817
    
    
    $
    25,099,338
    
    
    $
    28,764,155Deficit accumulated
during development stage
    
    $
    (689,326
    )
    
    $
    (27,248,983
    )
    
    $
    (27,938,309
    )
 7




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##### Table of Contents



1.
    
    The fair value of the options granted under the option agreements issued to the President/CEO
and a director was estimated using the Black-Scholes stock price valuation model with the
following assumptions:
 §
    
    Volatility of 82.57%§
    
    Risk- free interest rate of 4.65%§
    
    Expected lives   4 years§
    
    No dividend yield§
    
    Market value per share of stock on measurement date of $0.70.
 The Black Scholes model valued the options at $26.41 million which is being amortized over the
service period: $14.44 million in fiscal year 2006, $8.45 million in fiscal year 2007 and $3.52
million in fiscal year 2008. Based on the revised calculation, we increased stock compensation by
$14.44 million in fiscal year 2006.2.
    
    The fair value of the shares transferred to employees was $10.70 million using the market
price on July 6, 2006, the date of transfer. We recorded $10.70 million of compensation
expense in fiscal year 2006.3.
    
    The Company recorded an additional compensation expense of $2.1 million related to
withholding tax obligations arising from the exercise of stock options by the President and a
US employee.The fiscal year 2006 adjustments resulted in additional accounts payable and accrued liabilities of
$2.1 million, additional paid in capital of $25 million and an increase in accumulated deficit of
$27 million.
 
  Statement of operation for quarter and nine months ended June 30, 2006
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Statement of Operations
 Previously
    
    
    
    
    
    As restated in JuneReported
    
    Adjustments
    
    2007 Form 10-QSBFor the
quarter ended June 30, 2006Selling and general & administrative
    
    $
    295,321
    
    
    $
    2,112,507
    
    
    $
    2,407,828Net Loss
    
    $
    (295,321
    )
    
    $
    (2,112,507
    )
    
    $
    (2,407,828
    )Loss per share
    
    
    
    
    
    $
    (0.03
    )
    
    $
    (0.03
    )For the nine months ended June 30, 2006Selling and general & administrative
    
    $
    316,362
    
    
    $
    12,301,914
    
    
    $
    12,618,276Net Loss
    
    $
    (316,362
    )
    
    $
    (12,322,955
    )
    
    $
    (12,639,317
    )Loss per share
    
    $
    
    
    
    $
    (0.12
    )
    
    $
    (0.12
    )
  Statement of operation of previous quarters which are reflected in the statement of operation for
nine months ended June 30, 2007
  Statement of Operations
 Original March 2007Form 10-QSB
    
    Adjustments
    
    Restated*For the 6 months ended March 31, 2007Selling, general and administrative expense
    
    $
    727,859
    
    
    $
    4,207,461
    
    
    $
    4,935,320Interest expense
    
    $
    (355,354
    )
    
    $
    301,326
    
    
    $
    (54,028
    )Loss on issuance of convertible notes
    
    
    
    
    
    $
    (15,209,311
    )
    
    $
    (15,209,311
    )Loss on fair market value of warrant liability
    
    
    
    
    
    $
    (9,958,593
    )
    
    $
    (9,958,593
    )Loss on fair market value of compound embedded derivative
    
    
    
    
    
    $
    (12,600,000
    )
    
    $
    (12,600,000
    )Net Loss
    
    $
    (1,178,927
    )
    
    $
    (41,674,039
    )
    
    $
    (42,852,966
    )Weighted Average Shares Outstanding
(as of June 30, 2007)
    
    
    
    
    
    
    78,257,561Loss per share
    
    
    
    
    
    $
    (0.53
    )
 
 *
    -
    6 months ended March 31, 2007 numbers are included in operating results for 9 months ended June 30, 2007. 9




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1.
    
    Revised the calculation of stock compensation expense  please refer to the previous
paragraphs for discussion.2.
    
    Revised the accounting treatment for convertible note contracts and related warrants entered
into in March 2007.The Company evaluated the convertible notes entered into in March 2007 for derivative accounting
considerations under SFAS 133, Accounting for Derivative Instruments and Hedging Activities(SFAS
133), and EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Companys Own Stock(EITF 00-19). Upon reconsideration, the Company determined that
the notes contain two embedded derivative features, the conversion option and a redemption
privilege accruing to the holder if certain conditions exist (the Compound Embedded Derivative).
The Compound Embedded Derivative is measured at fair value both initially and in subsequent
periods. Change in fair value of the Compound Embedded Derivative is recorded as part of income /
(loss) from continuing operation in the accompanying consolidated statements of operations.The Warrants (including the warrants issued to the placement agent) are classified as a liability
as required by SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity(SFAS 150), and related FASB Staff Positions (FSPs), because the
warrant agreements contain a cash redemption provision in the event of a Fundamental Transaction,
which is defined below. The warrants are measured at fair value both initially and in subsequent
periods. Change in fair value of the Warrants is recorded as part of income/(loss) from continuing
operations in the accompanying consolidated statement of operations.The Compound Embedded Derivative was valued by management at $16.6 million at issuance, $29.2
million at March 31, 2007 and $22.1 million at June 30, 2007. The increase in liability of $12.6
million was recorded to loss on fair market value of compound embedded derivative in the quarter
ended March 31, 2007.The warrant liability was valued by management as
$17.1 million at issuance, $27.1 million at March
31, 2007 and $22.5 at June 30, 2007. The increase in liability of $10 million was recorded to
loss on fair market value of warrant liability in the quarter ended March 31, 2007.We also recorded a loss on issuance of convertible notes of $15.2 million relating to the excess
of fair value of the warrants issued to note holders and compound embedded derivative liabilities
over the loan principal balance at issuance.
    Original June 2006Form 10-QSB/A
    
    
    Adjustments
    
    
    Restated*Statement of Cash FlowsNine months ended June 30, 2006Net Loss
    
    $
    (316,362
    )
    
    $
    (12,322,955
    )*
    
    $
    (12,639,317
    )Depreciation of fixed assets
    
    $
    2,227
    
    
    
    
    
    
    $
    2,227Stock based compensation
    
    
    
    
    
    $
    12,322,955
    *
    
    $
    12,322,955Accounts receivable
    
    $
    (1,738
    )
    
    
    
    
    
    $
    (1,738
    )Prepaid expenses
    
    $
    (30,326
    )
    
    
    
    
    
    $
    (30,326
    )Deposits
    
    $
    (33,826
    )
    
    
    
    
    
    $
    (33,826
    )Accounts payable and accrued liabilities
    
    $
    151,194
    
    
    
    
    
    
    $
    151,194Cash used in operating activities
    
    $
    (228,831
    )
    
    
    
    
    
    $
    (228,831
    )
  10




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NOTE 3
 SIGNIFICANT ACCOUNTING POLICIES
 Principles of consolidation and basis of accounting
        11




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Inventory
    Derivative Financial Instruments
       Fair Value of Warrants
 Warrants issued in March 2007
 
 
 Warrants issued prior to March 2007
  Stock Based Compensation
 Share-Based Payment, Accounting for Stock Issued to Employees,
       
  
 Valuation of Privately-Held-Company Equity Securities Issued as
Compensation
  12




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##### Table of Contents



Revenue Recognition
  Research and Development Cost
  Recent Accounting Pronouncements
 Fair Value Measurements
 The Fair Value Option for Financial
Assets and Financial LiabilitiesIncluding an Amendment of FASB Statement No. 115
 NOTE 4
 FINANCIAL INSTRUMENTS
 Credit risk
  Fair values
  13




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##### Table of Contents



Foreign exchange risk
  NOTE 5
 INVENTORY
  AmountRaw materials
    
    $
    2,219,862Work in process
    
    
    899,955Finished goods
    
    
    890,736Total
    
    $
    4,010,553
  NOTE 6
 CONVERTIBLE NOTES
  
    
    $5,000,000 in principal amount of Series A Convertible Notes and warrants to purchase
7,246,377 shares (exercise price of $1.21 per share) of its common stock;
    
    $3,300,000 in principal amount of Series B Convertible Notes and warrants to purchase
5,789,474 shares (exercise price of $0.90 per share) of its common stock , and;
    
    $9,000,000 in principal amount of Series B Convertible Notes and warrants to purchase
15,789,474 shares (exercise price of $0.90 per share) of its common stock.
    14




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##### Table of Contents



AmountProceeds of convertible notes
    
    $
    17,300,000Allocation of proceeds:Fair value of warrant liability (excluding Advisor Warrants)
    
    
    (15,909,311
    )Fair value of compound embedded derivative liability
    
    
    (16,600,000
    )Loss on issuance of convertible notes
    
    
    15,209,311Carrying amount of notes at grant date
    
    $
    Amortization of note discount
    
    
    1,957Carrying amount of notes at June 30, 2007
    
    $
    1,957Fair value of warrant liability (including Advisor Warrants) at issuance
    
    $
    17,099,431Loss on fair market value of warrant liability
    
    
    9,958,593Fair value of warrant liability at March 31, 2007
    
    $
    27,058,024Gain on fair market value of warrant liability
    
    
    (4,531,112
    )Fair value of warrant liability at June 30, 2007
    
    $
    22,526,912Fair value of compound embedded derivative at grant date
    
    $
    16,600,000Loss on fair
market value of embedded derivative liability
    
    
    12,600,000Fair value of compound embedded derivative at March 31, 2007
    
    $
    29,200,000Loss on fair
market value of embedded derivative liability
    
    
    (7,100,000
    )Fair value of compound embedded derivative at June 30, 2007
    
    $
    22,100,000
   As of
    
    As ofAt Issuance
    
    March 31, 2007
    
    June 30, 2007Implied term (years)
    
    
    5.0
    
    
    
    4.9
    
    
    
    4.7Suboptimal exercise factor
    
    
    2.5
    
    
    
    2.5
    
    
    
    2.5Volatility
    
    
    82
    %
    
    
    82
    %
    
    
    72
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Risk free interest rate
    
    
    4.54
    %
    
    
    4.54
    %
    
    
    4.92
    %
 15




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##### Table of Contents



At Issuance
    
    March 31, 2007
    
    June 30, 2007Starting stock price
(Closing price on date
preceding valuation date)
    

    $1.05 & 1.35

    

    $1.76

    

    $1.55Annual Volatility of Stock
    

    81.98%

    

    81.98%

    

    71.53%Risk Free Rate (Based on
3yr TBill)
    
    
    4.48% & 4.51%
    
    

    4.54%

    

    4.89%
   Interest Payments
 , :
 16




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##### Table of Contents



Registration Rights (Series A Convertible Notes)
  
    
    File an initial registration statement within 45 days after closing (1.0% per month of the
aggregate purchase price until such failure is cured);
    
    Cause effectiveness of the registration statement within 120 days after closing (1.0% per
month of the aggregate purchase price until such failure is cured);
    
    Maintain effectiveness of the registration statement for the period in which the Notes and
Warrants are issued and outstanding (1.0% per month of the aggregate purchase price until such
failure is cured); or
    
    File additional registration statements, as required for any shares cutback from the
initial registration statement as a result of Rule 415(a) limitations (0.25% per month of the
aggregate purchase price until such failure is cured commencing after 150 days after closing).
     Voting Rights
  Dividends
  Conversion
 1)
    
    At any time or times on or after the issuance date of the Notes, the holder is entitled to
convert, at the holders sole option, any portion of the outstanding and unpaid conversion
amount (principal, accrued and unpaid interest and accrued and unpaid late charges) into fully
paid and nonassessable shares of common stock, at the conversion rate (as defined below).
 17




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##### Table of Contents



2)
    
    Forced Conversion. Upon thirty (30) days prior written notice to all of the holders,
the Company shall have the right to call all, but not less than all, of the Notes for
conversion at the conversion price (as defined below) provided that for each of the twenty
(20) trading days immediately preceding the forced conversion date:
 
    
    The Companys common stock has closed at a price equal to or greater than 300% of the then
applicable Series A conversion price, as described below;
    
    There is either an effective registration statement providing for the resale of the shares
of common stock underlying the Notes or all of the shares of common stock underlying the Notes
may be resold pursuant to Rule 144(k) of the Securities Act without restriction; and
    
    The common stock has traded an average of 500,000 shares per day.
 Conversion
Rate.
   Redemptions
 :
 1)
    
    Series A Only A failure relating to the registration statement (such as failure to file the
registration statement within 45 days after the closing, the failure to have the registration
statement declared effective within 150 days after the closing, or the failure to maintain the
registration statement during the period which the securities are outstanding) that cannot be
cured for a period of ten (10) consecutive days or for more than an aggregate of thirty (30)
days in any 365-day period (other than days during an allowable grace period);
 2)
    
    The suspension from trading or failure of the common stock to be listed on the principal
market or an eligible market for a period of five (5) consecutive trading days or for more
than an aggregate of ten (10) trading days in any 365-day period;
 3)
    
    The Companys (A) failure to cure a conversion failure by delivery of the required number of
shares of common stock within ten (10) trading days after the applicable conversion date or
(B) notice, written or oral, to any holder of the Notes, including by way of public
announcement or through any of its agents, at any time, of its intention not to comply with a
request for conversion of any Notes into shares of common stock that is tendered in accordance
with the provisions of the Notes;
 4)
    
    At any time following the tenth (10th) consecutive business day that the holders
authorized share allocation is less than the number of shares of common stock that the holder
would be entitled to receive upon a conversion of the full conversion amount of the Notes
(without regard to any limitations on conversion);
 18




---



##### Table of Contents



5)
    
    The Companys failure to pay to the holder any amount of principal (including, without
limitation, any redemption payments), interest, late charges or other amounts when and as due
under the Notes or any other transaction document (as defined in the securities purchase
agreement) or any other agreement, document, certificate or other instrument delivered in
connection with the transactions to which the holder is a party, except, in the case of a
failure to pay any interest and late charges when and as due, in which case only if such
failure continues for a period of at least five (5) business days;
 6)
    
    A) The occurrence of any payment default or other default under any indebtedness of the
Company or any of its subsidiaries that results in a redemption of or acceleration prior to
maturity of $100,000 or more of such indebtedness in the aggregate, or (B) the occurrence of
any material default under any indebtedness of the Company or any of its subsidiaries having
an aggregate outstanding balance in excess of $100,000 and such default continues uncured for
more than ten (10) business days, other than, in each case (A) or (B) above, or a default with
respect to any other notes;
 7)
    
    The Company or any of its subsidiaries, pursuant to or within the meaning of Title 11, U.S.
Code, or any similar Federal, foreign or state law for the relief of debtors (A) commences a
voluntary case, (B) consents to the entry of an order for relief against it in an involuntary
case, (C) consents to the appointment of a receiver, trustee, assignee, liquidator or similar
official,(D) makes a general assignment for the benefit of its creditors or (E) admits in
writing that it is generally unable to pay its debts as they become due;
 8)
    
    A court of competent jurisdiction enters an order or decree under any bankruptcy law that (A)
is for relief against the Company or any of its subsidiaries in an involuntary case, (B)
appoints a custodian of the Company or any of its subsidiaries or (C) orders the liquidation
of the Company or any of its subsidiaries;
 9)
    
    A final judgment or judgments for the payment of money aggregating in excess of $250,000 are
rendered against the Company or any of its subsidiaries and which judgments are not, within
sixty (60) days after the entry thereof, bonded, discharged or stayed pending appeal, or are
not discharged within sixty (60) days after the expiration of such stay; provided, however,
that any judgment which is covered by insurance or an indemnity from a credit worthy party
shall not be included in calculating the $250,000 amount set forth above so long as the
Company provides the holder with a written statement from such insurer or indemnity provider
(which written statement shall be reasonably satisfactory to the holder) to the effect that
such judgment is covered by insurance or an indemnity and the Company will receive the
proceeds of such insurance or indemnity within thirty (30) days of the issuance of such
judgment;
 10)
    
    The Company breaches any representation, warranty, covenant or other term or condition of any
transaction document, except, in the case of a breach of a covenant which is curable, only if
such breach continues for a period of at least ten (10) consecutive business days;
 11)
    
    Any breach or failure in any respect to comply with the terms of the Notes; or
 12)
    
    Any trigger event that occurs with respect to any other obligations of the Company.
 ,
 19




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##### Table of Contents



Change of Control
 1)
    
    Assumption. The Company may not enter into or be party to a Fundamental Transaction
(as defined below) unless:
 
    
    The successor entity assumes in writing all of the obligations of the Company under the
Notes and related documents; and
    
    The successor entity (including its parent entity) is a publicly traded corporation whose
common stock is quoted on or listed for trading on an eligible market.
 2)
    
    Redemption Right. At any time during the period beginning on the date of the holders
receipt of a change of control notice and ending twenty (20) trading days after the
consummation of such change of control, the holder may require the Company to redeem all or
any portion of the Notes in cash for an amount equal to any accrued and unpaid liquidated
damages, plus the greater of (i) the product of (x) the conversion amount being redeemed and
(y) the quotient determined by dividing (A) the greater of the closing sale price of the
common stock immediately prior to the consummation of the change of control, the closing sale
price immediately following the public announcement of such proposed change of control and the
closing sale price of the common stock immediately prior to the public announcement of such
proposed change of control by (B) the conversion price and (ii) 125% of the conversion amount
being redeemed.
  Exercise of Warrant and Exercise Price.
 ,
 Fundamental Transaction.
 20




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##### Table of Contents



NOTE 7  EQUITY TRANSACTIONS
 Common stock issued for cash
  Warrants
     Issuers Accounting for Freestanding Financial Instruments
Composed of More Than One Option or Forward Contract Embodying Obligations under FASB Statement
No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities
and Equity,
 21




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##### Table of Contents



FairNumber of

    
    Exercise

    
    Expiration

    
    Value

    
    RecognizedShares

    
    Price

    
    Date

    
    at Issuance

    
    AsOutstanding at March 31, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Granted in connection with
Common Stock Purchase
    
    
    2,825,000
    
    
    
    1.00
    
    
    May-June 2007
    
    $
    915,616
    
    
    Additional Paid in CapitalOutstanding at June 30, 2006
    
    
    2,825,000
    
    
    
    
    
    
    
    
    
    
    
    915,616Granted in
connection with Common Stock Purchase
    
    
    782,000
    
    
    
    1.00
    
    
    July-Sept 2007
    
    
    233,008
    
    
    Additional Paid in 
CapitalOutstanding at September 30,
2006
    
    
    3,607,000
    
    
    
    
    
    
    
    
    
    
    
    1,148,624Granted in connection with
Common Stock Purchase
    
    
    2,500,000
    
    
    
    1.00
    
    
    November 2007
    
    
    364,950
    
    
    Additional Paid in CapitalOutstanding at December 31,
2006
    
    
    6,107,000
    
    
    
    
    
    
    
    
    
    
    
    1,513,574Granted in connection with
convertible note  Series A
    
    
    7,246,377
    
    
    
    1.21
    
    
    March 2012
    
    
    3,235,563
    
    
    Discount to note payableGranted in connection with
convertible note  Series B
    
    
    21,578,948
    
    
    
    0.90
    
    
    March 2012
    
    
    12,673,748
    
    
    Discount to note payableGranted in connection with
placement service
    
    
    507,247
    
    
    
    0.69
    
    
    March 2012
    
    
    250,112
    
    
    Deferred financing costGranted in connection with
placement service
    
    
    1,510,528
    
    
    
    0.57
    
    
    March 2012
    
    
    940,008
    
    
    Deferred financing costOutstanding at March 31, 2007
    
    
    36,950,100
    
    
    
    
    
    
    
    
    
    
    
    18,613,005Expired warrants
    
    
    (2,825,000
    )
    
    
    
    
    
    
    
    
    
    
    (915,616
    )Outstanding at June 30, 2007
    
    
    34,125,100
    
    
    
    
    
    
    
    
    
    
    $
    17,697,389
   Warrants Outstanding and ExercisableWeighted-Weighted-
    
    AverageRange of
    
    
    
    
    
    Average
    
    RemainingWarrant
    
    Number of
    
    Exercise
    
    ContractualExercise Price
    
    Warrants
    
    Price
    
    Life$0.57 - $0.69
    
    
    2,017,775
    
    
    
    0.60
    
    
    
    4.72$.90 - $1.00
    
    
    24,860,948
    
    
    
    0.91
    
    
    
    4.14$1.21
    
    
    7,246,377
    
    
    
    1.21
    
    
    
    4.69
 Options
  22




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##### Table of Contents



§
    
    Volatility of 82.57%§
    
    Risk- free interest rate of 4.65%§
    
    Expected lives   4 years§
    
    No dividend yield§
    
    Market value per share of stock on measurement date of $0.70.
 
  
 Valuation of Privately-Held-Company Equity
Securities Issued as Compensation
   Options OutstandingWeightedNumber
    
    
    Average
    
    
    Weighted# of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding
    
    
    Remaining
    
    
    AverageOptions
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    as at June
    
    
    Contractual
    
    
    ExerciseGranted
    
    
    Expiry

    
    Price
    
    
    Exercised
    
    
    30, 2007
    
    
    Life (year)
    
    
    PriceGranted to Leo
Young, the
President, March 1, 2006
    
    
    36,000,000
    
    
    10-Feb-10
    
    $
    0.0001
    
    
    
    10,750,000
    
    
    
    25,250,000
    
    
    
    2.71
    
    
    $
    0.0001Granted to Frank
Fang Xie, a
director,
March 1, 2006
    
    
    1,500,000
    
    
    10-Feb-10
    
    $
    0.0001
    
    
    
    
    
    
    
    1,500,000
    
    
    
    0.16
    
    
    $
    0.000037,500,000
    
    
    
    
    
    
    
    
    
    
    
    10,750,000
    
    
    
    26,750,000
    
    
    2.87 years
    
    
    $
    0.0001
    23




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##### Table of Contents



NOTE 8  COMMITMENTS AND CONTINGENCIES
 Capital investments
  Year
    
    Amount2007 (remaining balance)
    
    $
    403,0002008
    
    
    723,0002009
    
    
    826,0002010
    
    
    826,0002011
    
    
    981,000Total
    
    $
    3,759,000
     NOTE 9  NOTE PAYABLE
  NOTE 10  RELATED PARTY TRANSACTIONS
  NOTE
11  BASIC AND DILUTED NET INCOME (LOSS) PER SHARE OF COMMON STOCK
 June 30 2007Three Months EndedCalculation of net income per share  basic:Net income
    
    $
    8,316,612Weighted-average number of common shares outstanding
    
    
    78,807,012Net income per share  basic
    
    $
    0.11Calculation of net loss per share  diluted:Net income
    
    $
    8,316,612Gain on fair market value of warrant liability
    
    
    (4,531,112
    )Gain on fair market value of compounded embedded derivative
    
    
    (7,100,000
    )Interest expense attributable to 6% convertible notes
    
    
    258,789Amortization of discount on 6% convertible notes and deferred financing cost
    
    
    1,888Net loss assuming dilution
    
    $
    (3,053,823
    )Weighted-average number of common shares outstanding
    
    
    78,807,012Effect of potentially dilutive securities:Warrants on 6% convertible notes and advisor warrants
    
    
    11,710,6686% convertible notes
    
    
    28,825,325Weighted-average number of common shares outstanding
assuming dilution
    
    
    119,343,005Net loss per share  diluted
    
    $
    (0.03
    )
  24




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##### Table of Contents



Item 2. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
 The following discussion contains forward-looking statements. In some cases, readers can
identify forward-looking statements by terminology such as may, will, should, could,
expects, plans, anticipates, believes, estimates, predicts, potential, or continue.
These statements involve known and unknown risks, uncertainties and other factors that may cause
our actual results, performance or achievements to be materially different from those stated
herein. Although management believes that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, performance, or achievements. The
following discussion should be read in conjunction with the consolidated financial statements and
the notes thereto included elsewhere in this Form 10-QSB .
 Overview
    
    
    we plan to research and test theories of PV, thermo-physics, physics of materials and
chemistry;
    
    we plan to develop efficient and ultra-efficient PV cells with light/electricity
conversion rates of up to 20% to 35%;
    
    we plan to develop environmentally friendly high conversion rate manufacturing
technology of chemical compound film PV cell materials;
    
    we plan to develop highly reliably, low-cost manufacturing technology and equipment for
thin film PV cells;
    
    we plan to research and develop key material for low-cost flexible film PV cells and
non-vacuum technology; and
    
    we plan to research and develop key technology and fundamental theory for
third-generation PV cells.
 25




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26




---



##### Table of Contents



Critical Accounting Policies
   Principles of consolidation and basis of accounting
      27




---



##### Table of Contents



Currency and foreign exchange
  Foreign Currency Translation,
  Stock-based Compensation
 Share-Based Payment, Accounting for Stock Issued to Employees,
 28




---



##### Table of Contents



Fair Value of Warrants
 Warrants issued in March 2007
  Warrants issued prior to March 2007
  Stock-Based Compensation
 Share-Based Payment, Accounting
for Stock Issued to Employees,
       
  
 Valuation of Privately-Held-Company Equity Securities Issued as Compensation
  Revenue Recognition
  Inventory
    Derivative Financial Instruments
  29




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##### Table of Contents



Fair Value of Warrants
 Warrants issued in March 2007
 
 
 Warrants issued prior to March 2007
 
  
 Recent Accounting Pronouncements
   Results of Operations
 Three and nine month periods ended June 30, 2007 compared to three and nine months periods ended
June 30, 2006
 30




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##### Table of Contents



Revenues, Cost of Sales and Gross Margin
 Quarter Ended June 30,
    
    Nine Months Ended June 30,2007
    
    2006
    
    Change
    
    % change
    
    2007
    
    2006
    
    Change
    
    % changeSales
    
    $
    1,516,549
    
    
    $
    
    
    
    $
    1,516,549
    
    
    $
    
    
    
    $
    1,519,757
    
    
    $
    
    
    
    $
    1,519,757
    
    
    $
    Cost of sales
    
    $
    (1,507,208
    )
    
    $
    
    
    
    $
    (1,507,208
    )
    
    $
    
    
    
    $
    (1,513,166
    )
    
    $
    
    
    
    $
    (1,513,166
    )
    
    $
    Gross profit
    
    $
    9,341
    
    
    $
    
    
    
    $
    9,341
    
    
    $
    
    
    
    $
    6,591
    
    
    $
    
    
    
    $
    6,591
    
    
    $
    Gross margin as % of net sales
    
    
    0.62
    %
    
    
    
    
    
    
    0.62
    %
    
    
    
    
    
    
    0.43
    %
    
    
    
    
    
    
    0.43
    %
    Selling and general & administrative
 Quarter Ended June 30,
    
    Nine Months Ended June 30,2007
    
    2006
    
    Change
    
    % change
    
    2007
    
    2006
    
    Change
    
    % changeSelling and general
& administrative
    
    $
    2,797,531
    
    
    
    2,407,828
    
    
    $
    389,703
    
    
    
    16
    %
    
    
    7,732,851
    
    
    
    12,618,276
    
    
    
    (4,885,425
    )
    
    
    -39
    %As % of net sales
    
    
    184
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    509
    %
   31




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##### Table of Contents



Research & development
 Quarter Ended June 30,
    
    Nine Months Ended June 30,2007
    
    2006
    
    Change
    
    % change
    
    2007
    
    2006
    
    Change
    
    % changeResearch & development
    
    $
    7,248
    
    
    $
    
    
    
    $
    7,248
    
    
    
    
    
    
    
    113,032
    
    
    
    
    
    
    
    113,032As % of net sales
    
    
    0
    %
    
    
    
    
    
    
    0
    %
    
    
    
    
    
    
    7
    %
    
    
    
    
    
    
    7
    %
  Other income and expense
 Quarter Ended June 30,
    
    Nine Months Ended June 30,2007
    
    2006
    
    Change
    
    % change
    
    2007
    
    2006
    
    Change
    
    % changeInterest income
    
    $
    27,461
    
    
    
    
    
    
    $
    27,461
    
    
    
    
    
    
    
    40,281
    
    
    
    
    
    
    
    40,281Registration payment
    
    $
    (281,060
    )
    
    $
    
    
    
    $
    (281,060
    )
    
    
    
    
    
    
    (281,060
    )
    
    
    
    
    
    
    (281,060
    )Loss on issuance of
convertible notes
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    (15,209,311
    )
    
    
    
    
    
    
    (15,209,311
    )Gain / (loss) on
fair market value
of warrant
liability
    
    $
    4,531,112
    
    
    
    
    
    
    $
    4,531,112
    
    
    
    
    
    
    
    (5,427,481
    )
    
    
    
    
    
    
    (5,427,481
    )Gain / (loss) on
fair market value
of compound
embedded derivative
    
    $
    7,100,000
    
    
    
    
    
    
    $
    7,100,000
    
    
    
    
    
    
    
    (5,500,000
    )
    
    
    
    
    
    
    (5,500,000
    )Interest expense
    
    $
    (279,977
    )
    
    $
    
    
    
    $
    (279,977
    )
    
    
    
    
    
    
    (334,005
    )
    
    
    
    
    
    
    (334,005
    )Other
    
    $
    14,514
    
    
    
    
    
    
    $
    14,514
    
    
    
    
    
    
    
    14,514
    
    
    
    
    
    
    
    14,514Total
    
    $
    11,112,050
    
    
    $
    
    
    
    $
    11,112,050
    
    
    $
    
    
    
    $
    (26,697,062
    )
    
    $
    
    
    
    $
    (26,697,062
    )
    
    $
    
   32




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##### Table of Contents



Liquidity and Capital Resources
  Nine Months Ended2007
    
    2006Net cash provided by/(used in):Operating activities
    
    $
    (6,669,784
    )
    
    $
    (228,831
    )Investing activities
    
    $
    (2,283,249
    )
    
    $
    (336,212
    )Financing activities
    
    $
    17,139,131
    
    
    $
    3,372,980Effect of exchange rate changes
on cash and cash equivalents
    
    $
    84,255
    
    
    $
    Net increase in cash and cash
equivalents
    
    $
    8,270,353
    
    
    $
    2,807,937
   33




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Off-Balance Sheet Arrangements
  34




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##### Table of Contents



SIGNATURES
 
  
 
 SOLAR ENERTECH CORP.Date: November 9, 2007By:
    
    /s/ Leo Shi YoungLeo Shi YoungPresident and CEO  Principal
Executive OfficerDate: November 9, 2007By:
    
    /s/ Ming Wai Anthea ChungMing Wai Anthea ChungChief Financial Officer
 
 35