UNITED STATES
 SECURITIES AND EXCHANGE
COMMISSION
 Washington, D.C.
20549
 
 FORM 10-Q
 
 x
              QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For the quarterly period ended
      December 31, 2008ORo
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF
      1934For the transition period
      from ________________ to
  _________________
 
 Commission File Number333-120926
 
 SOLAR
ENERTECH CORP.
 (Exact name of registrant as specified
in its charter)
 
 Delaware
              
              98-0434357State or other jurisdiction
      of
              
              (I.R.S.
      Employerincorporation or
      organization
              
              Identification
      No.)
 
 1600 Adams Drive
 Menlo Park,
CA 94025
 (Address of principal executive offices)
(Zip Code)
 
 Registrant’s telephone number, including
area code(650) 688-5800
 
 Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
YesxNoo
 
 Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
 
 Large accelerated
      filer
              o
              
              Accelerated
      FileroNon-accelerated
      filer
              o
              
              Smaller reporting
      companyx
 
 Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ̈Nox
 
 Number of shares outstanding of
registrant’s class of common stock as of February 9, 2009:112,975,764
 
  1
  Table of Contents
 
 SOLAR ENERTECH CORP
 
 FORM 10-Q
 
 INDEX
  PAGEPart I.
      Financial InformationItem 1.
                  Financial
      StatementsConsolidated Balance Sheets –
      December 31, 2008 (Unaudited) and September 30, 2008(Audited)
                  
                  3UnauditedConsolidated Statements of
      Operations – Three Months Ended December 31, 2008and 2007
                  
                  4UnauditedConsolidated Statements of Cash
      Flows – Three Months Ended December 31, 2008 and
      2007
                  
                  5Notes to Unaudited Consolidated
      Financial Statements
                  
                  6Item 2.
                  Management’s Discussion and
      Analysis of Financial Condition and Results of
      Operations
                  
                  19Item 3.
                  Quantitative and Qualitative
      Disclosures about Market Risks
                  
                  25Item 4T.
                  Controls and
      Procedures
                  
                  25Part II. Other
      InformationItem 1.
                  Legal
      Proceedings
                  
                  26Item 1A.
                  Risk
Factors
                  
                  26Item 2.
                  Unregistered Sale of Equity
      Securities and Use of Proceeds
                  
                  26Item 3.
                  Defaults upon Senior
      Securities
                  
                  26Item 4.
                  Submission of Matters to a Vote of
      Security Holders
                  
                  26Item 5.
                  Other
      Information
                  
                  26Item 6.
                  Exhibits
                  
                  26Signatures
                  
                  27
  2
  PART I
  ITEM 1. FINANCIAL
STATEMENTS
 Solar EnerTech Corp.
 Consolidated Balance
Sheets
  December 31,
      2008
                                                  
                                                  
                                                  September 30,
      2008(Unaudited)
                                                  
                                                  
                                                  AuditedASSETSCurrent
    assets:Cash and cash
      equivalents
                                                  
                                                  $
                                                  5,675,000
                                                  
                                                  
                                                  $
                                                  3,238,000Accounts receivable,
      net
                                                  
                                                  
                                                  327,000
                                                  
                                                  
                                                  
                                                  1,875,000Advance payments and
      other
                                                  
                                                  
                                                  1,047,000
                                                  
                                                  
                                                  
                                                  3,175,000Inventories,
      net
                                                  
                                                  
                                                  2,902,000
                                                  
                                                  
                                                  
                                                  4,886,000VAT
    receivable
                                                  
                                                  
                                                  1,919,000
                                                  
                                                  
                                                  
                                                  2,436,000Other
      receivable
                                                  
                                                  
                                                  134,000
                                                  
                                                  
                                                  
                                                  730,000Total current
      assets
                                                  
                                                  
                                                  12,004,000
                                                  
                                                  
                                                  
                                                  16,340,000Property and equipment,
      net
                                                  
                                                  
                                                  13,176,000
                                                  
                                                  
                                                  
                                                  12,934,000Investment
                                                  
                                                  
                                                  1,000,000
                                                  
                                                  
                                                  
                                                  1,000,000Deferred financing costs, net of
      accumulated amortization
                                                  
                                                  
                                                  1,721,000
                                                  
                                                  
                                                  
                                                  1,812,000Deposits
                                                  
                                                  
                                                  167,000
                                                  
                                                  
                                                  
                                                  701,000Total
assets
                                                  
                                                  $
                                                  28,068,000
                                                  
                                                  
                                                  $
                                                  32,787,000LIABILITIES AND STOCKHOLDER'S
      EQUITYCurrent
      liabilities:Accounts
      payable
                                                  
                                                  $
                                                  1,072,000
                                                  
                                                  
                                                  $
                                                  1,771,000Customer advance
      payment
                                                  
                                                  
                                                  233,000
                                                  
                                                  
                                                  
                                                  96,000Accrued
      expenses
                                                  
                                                  
                                                  730,000
                                                  
                                                  
                                                  
                                                  910,000Accounts payable and accrued
      liabilities, related parties
                                                  
                                                  
                                                  5,512,000
                                                  
                                                  
                                                  
                                                  5,450,000Derivative
      liabilities
                                                  
                                                  
                                                  491,000
                                                  
                                                  
                                                  
                                                  980,000Warrant
      liabilities
                                                  
                                                  
                                                  1,768,000
                                                  
                                                  
                                                  
                                                  3,412,000Total current
      liabilities
                                                  
                                                  
                                                  9,806,000
                                                  
                                                  
                                                  
                                                  12,619,000Convertible notes, net of
      discount
                                                  
                                                  
                                                  354,000
                                                  
                                                  
                                                  
                                                  85,000Total
      liabilities
                                                  
                                                  
                                                  10,160,000
                                                  
                                                  
                                                  
                                                  12,704,000STOCKHOLDER'S
      EQUITY:Common stock - 400,000,000 shares
      authorized at $0.001 par value 112,624,550and 112,052,012 shares issued and
      outstanding at December 31, 2008 andSeptember 30, 2008,
      respectively
                                                  
                                                  
                                                  113,000
                                                  
                                                  
                                                  
                                                  112,000Additional paid in
      capital
                                                  
                                                  
                                                  73,291,000
                                                  
                                                  
                                                  
                                                  71,627,000Other comprehensive
      income
                                                  
                                                  
                                                  2,446,000
                                                  
                                                  
                                                  
                                                  2,485,000Accumulated
      deficit
                                                  
                                                  
                                                  (57,942,000
                                                  )
                                                  
                                                  
                                                  (54,141,000
                                                  )Total stockholders'
      equity
                                                  
                                                  
                                                  17,908,000
                                                  
                                                  
                                                  
                                                  20,083,000Total liabilities and
      stockholders' equity
                                                  
                                                  $
                                                  28,068,000
                                                  
                                                  
                                                  $
                                                  32,787,000
 The accompanying notes are an integral
part of these consolidated financial statements.
  3
 Solar EnerTech Corp.
 Consolidated Statements of
Operations
 (Unaudited)
  Quarter Ended December
      31,2008
                                            
                                            
                                            2007Net sales
                                            
                                            $
                                            5,084,000
                                            
                                            
                                            $
                                            4,839,000Cost of
    sales
                                            
                                            
                                            (7,420,000
                                            )
                                            
                                            
                                            (5,305,000
                                            )Gross
      loss
                                            
                                            
                                            (2,336,000
                                            )
                                            
                                            
                                            (466,000
                                            )Operating
      expenses:Selling, general &
      administrative
                                            
                                            
                                            2,561,000
                                            
                                            
                                            
                                            3,885,000Research &
      development
                                            
                                            
                                            335,000
                                            
                                            
                                            
                                            97,000Loss on debt
      extinguishment
                                            
                                            
                                            310,000
                                            
                                            
                                            
                                            362,000Total operating
      expenses
                                            
                                            
                                            3,206,000
                                            
                                            
                                            
                                            4,344,000Operating
      loss
                                            
                                            
                                            (5,542,000
                                            )
                                            
                                            
                                            (4,810,000
                                            )Other income
      (expense):Interest
    income
                                            
                                            
                                            7,000
                                            
                                            
                                            
                                            10,000Interest
      expense
                                            
                                            
                                            (365,000
                                            )
                                            
                                            
                                            (278,000
                                            )Gain on change in fair market
      value of compound embedded derivative
                                            
                                            
                                            475,000
                                            
                                            
                                            
                                            1,099,000Gain on change in fair market
      value of warrant liability
                                            
                                            
                                            1,644,000
                                            
                                            
                                            
                                            115,000Other
    expense
                                            
                                            
                                            (20,000
                                            )
                                            
                                            
                                            (38,000
                                            )Net loss
                                            
                                            $
                                            (3,801,000
                                            )
                                            
                                            $
                                            (3,902,000
                                            )Net loss per share -
      basic
                                            
                                            $
                                            (0.04
                                            )
                                            
                                            $
                                            (0.05
                                            )Net loss per share -
      diluted
                                            
                                            $
                                            (0.04
                                            )
                                            
                                            $
                                            (0.05
                                            )Weighted average shares
      outstanding - basic
                                            
                                            
                                            87,043,800
                                            
                                            
                                            
                                            79,168,174Weighted average shares
      outstanding - diluted
                                            
                                            
                                            87,043,800
                                            
                                            
                                            
                                            79,168,174
  The accompanying notes are an integral
part of these consolidated financial
statements.
 
 4
 
 Solar EnerTech Corp.
 Statements of Cash
Flows
 (Unaudited)
  Quarter Ended December
      31,2008
                                        
                                        
                                        2007Cash flows from operating
      activities:Net loss
                                        
                                        $
                                        (3,801,000
                                        )
                                        
                                        $
                                        (3,902,000
                                        )Adjustments to reconcile net loss
      to net cash provided by (used in) operating
    activities:Depreciation of fixed
      assets
                                        
                                        
                                        526,000
                                        
                                        
                                        
                                        320,000Stock-based
      compensation
                                        
                                        
                                        1,519,000
                                        
                                        
                                        
                                        2,446,000Loss on debt
      extinguishment
                                        
                                        
                                        310,000
                                        
                                        
                                        
                                        362,000Amortization of note discount and
      deferred financing cost
                                        
                                        
                                        182,000
                                        
                                        
                                        
                                        9,000Gain on change in fair market
      value of compound embedded derivative
                                        
                                        
                                        (475,000
                                        )
                                        
                                        
                                        (1,099,000
                                        )Gain on change in fair market
      value of warrant liability
                                        
                                        
                                        (1,644,000
                                        )
                                        
                                        
                                        (115,000
                                        )Changes in operating assets and
      liabilities:Accounts receivable,
      net
                                        
                                        
                                        1,545,000
                                        
                                        
                                        
                                        (900,000
                                        )Advance payments and
      other
                                        
                                        
                                        2,123,000
                                        
                                        
                                        
                                        1,469,000Inventories,
      net
                                        
                                        
                                        1,974,000
                                        
                                        
                                        
                                        958,000VAT
    receivable
                                        
                                        
                                        511,000
                                        
                                        
                                        
                                        (45,000
                                        )Other
      receivable
                                        
                                        
                                        595,000
                                        
                                        
                                        
                                        39,000Accounts payable, accrued
      liabilities and customer advance payment
                                        
                                        
                                        (735,000
                                        )
                                        
                                        
                                        (333,000
                                        )Accounts payable and accrued
      liabilities, related parties
                                        
                                        
                                        62,000
                                        
                                        
                                        
                                        -Net cash provided by (used in)
      operating activities
                                        
                                        
                                        2,692,000
                                        
                                        
                                        
                                        (791,000
                                        )Cash flows from investing
      activities:Acquisition of property and
      equipment
                                        
                                        
                                        (264,000
                                        )
                                        
                                        
                                        (1,682,000
                                        )Net cash used in investing
      activities
                                        
                                        
                                        (264,000
                                        )
                                        
                                        
                                        (1,682,000
                                        )Effect of exchange rate on cash
      and cash equivalents
                                        
                                        
                                        9,000
                                        
                                        
                                        
                                        469,000Net increase (decrease) in cash
      and cash equivalents
                                        
                                        
                                        2,437,000
                                        
                                        
                                        
                                        (2,004,000
                                        )Cash and cash equivalents,
      beginning of period
                                        
                                        
                                        3,238,000
                                        
                                        
                                        
                                        3,908,000Cash and cash equivalents, end of
      period
                                        
                                        $
                                        5,675,000
                                        
                                        
                                        $
                                        1,904,000
 The accompanying notes are an integral
part of these consolidated financial statements.
 
 
 5
 
 SOLAR ENERTECH CORP.
 
 Notes to Consolidated Financial
Statements
 December 31, 2008
(Unaudited)
 
 NOTE 1 — ORGANIZATION
AND NATURE OF OPERATIONS
 
 Solar EnerTech Corp. was originally
incorporated under the laws of the State of Nevada on July 7, 2004 as Safer
Residence Corporation and was reincorporated to the State of Delaware on August
13, 2008 (“Solar EnerTech” or the “Company”).  The Company engaged in
a variety of businesses until March 2006, when the Company began its current
operations as a photovoltaic (“PV”) solar energy cell (“PV Cell”) manufacturer.
The Company’s management decided that, to facilitate a change in business that
was focused on the PV Cell industry, it was appropriate to change the Company’s
name. A plan of merger between Safer Residence Corporation and Solar EnerTech
Corp., a wholly-owned inactive subsidiary of Safer Residence Corporation, was
approved on March 27, 2006, under which the Company was to be renamed “Solar
EnerTech Corp.” On April 7, 2006, the Company changed its name to Solar
EnerTech Corp.
 
 The Company’s management in February
2008 decided that it was in the Company’s and its shareholders best interests to
change the Company’s state of domicile from Nevada to Delaware (the
“Reincorporation”).  On August 13, 2008, the Company, a Nevada entity
at the time, entered into an Agreement and Plan of Merger with Solar EnerTech
Corp., a Delaware corporation and wholly-owned subsidiary of the Nevada entity,
(the “Delaware Subsidiary”), whereby the Nevada entity merged with and into the
Delaware Subsidiary in order to effect the Reincorporation. After the
Reincorporation, the Nevada entity ceased to exist and the Company survived as a
Delaware entity.
 
 The Reincorporation was duly approved by
both the Company’s Board of Directors and a majority of the Company’s
stockholders at its annual meeting of stockholders held on May 5, 2008. On
August 13, 2008, the Reincorporation was completed. The Reincorporation into
Delaware did not result in any change to the Company’s business, management,
employees, directors, capitalization, assets or liabilities.
 
 NOTE 2 — SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
 
 Principles of consolidation and basis of
accounting
 
 Prior to August 19, 2008, the Company
operated its business in the People’s Republic of China through Infotech Hong
Kong New Energy Technologies, Limited (“Infotech HK”) and Solar EnerTech
(Shanghai) Co., Ltd (“Infotech Shanghai,” and together with Infotech HK,
“Infotech”). While the Company did not own Infotech, the Company’s financial
statements have included the results of the financials of each of Infotech HK
and Infotech Shanghai since these entities were wholly-controlled variable
interest entities of the Company through an Agency Agreement dated
April 10, 2006 by and between the Company and Infotech (the “Agency
Agreement”). Under the Agency Agreement the Company engaged Infotech to
undertake all activities necessary to build a solar technology business in
China, including the acquisition of manufacturing facilities and equipment,
employees and inventory. The Agency Agreement continued through April 10,
2008 and then on a month to month basis thereafter until August 19,
2008.
 
 To permanently consolidate Infotech with
the Company through legal ownership, the Company acquired Infotech at a nominal
amount on August 19, 2008 through a series of agreements (the “Acquisition”). In
connection with executing these agreements, the Company terminated the original
agency relationship with Infotech.
  The Company had previously consolidated
the financial statements of Infotech with its financial statements pursuant to
FASB Interpretation No. 46(R) due to the agency relationship between the Company
and Infotech, notwithstanding the termination of the Agency Agreement, the
Company continues to consolidate the financial statements of Infotech with its
financial statements since Infotech became a wholly-owned subsidiary of the
Company as a result of the acquisition.
 
 The Company’s consolidated financial
statements include the accounts of Solar EnerTech Corp. and its subsidiaries.
All intercompany balances and transactions have been eliminated in
consolidation. These consolidated financial statements have been prepared in
U.S. dollars and in accordance with the U.S. generally accepted accounting
principles.
 
 Use of estimates
 
 The preparation of consolidated
financial statements in conformity with the United States generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
  6
  Cash and cash
equivalents
 
 Cash and cash equivalents are defined as
cash on hand, demand deposits and short-term, highly liquid investments that are
readily convertible to known amounts of cash within ninety days of
deposit.
 
 Currency and foreign
exchange
 
 The Company’s functional currency is the
Renminbi as substantially all of our operations are in China. The Company’s
reporting currency is the U.S. dollar.
 
 Transactions and balances originally
denominated in U.S. dollars are presented at their original amounts.
Transactions and balances in other currencies are converted into U.S. dollars in
accordance with SFAS No. 52,Foreign Currency
Translation,and are
included in determining net income or loss.
 
 For foreign operations with the local
currency as the functional currency, assets and liabilities are translated from
the local currencies into U.S. dollars at the exchange rate prevailing at the
balance sheet date. Revenues and expenses are translated at weighted average
exchange rates for the period to approximate translation at the exchange rates
prevailing at the dates those elements are recognized in the consolidated
financial statements. Translation adjustments resulting from the process of
translating the local currency consolidated financial statements into U.S.
dollars are included in determining comprehensive loss.
 
 Property and
equipment
 
 Our property and equipment are stated at
cost net of accumulated depreciation. Depreciation is provided using the
straight — line method over the related estimated useful lives, as
follows:
 
 Useful Life (Years)Office
      equipment
                  
                  3 to 5Machinery
                  
                  10Production equipment
                  
                  5Automobiles
                  
                  5Furniture
                  
                  5Leasehold
      improvement
                  
                  the shorter of the lease term
      or  5
years
 
 Expenditures for maintenance and repairs
that do not improve or extend the lives of the related assets are expensed to
operations. Major repairs that improve or extend the lives of the related assets
are capitalized.
 
 Inventories
 
 Inventories are stated at the lower of
cost or market. Cost is determined by the weighted-average method. Raw material
cost is based on purchase costs while work-in-progress and finished goods are
comprised of direct materials, direct labor and an allocation of manufacturing
overhead costs. Inventory in-transit is included in finished goods and consists
of products shipped but not recognized as revenue because it does not meet the
revenue recognition criteria. Provisions are made for excess, slow moving and
obsolete inventory as well as inventory whose carrying value is in excess of net
realizable value.
 
 Warranty cost
 
 The Company provides product warranties
and accrues for estimated future warranty costs in the period in which the
revenue is recognized. Our standard solar modules are typically sold with a
two-year warranty for defects in materials and workmanship and a 10-year and
25-year warranty against declines of more than 10.0% and 20.0%, respectively, of
the initial minimum power generation capacity at the time of delivery. The
Company therefore maintains warranty reserves to cover potential liabilities
that could arise from our warranty obligations and accrues the estimated costs
of warranties based primarily on management’s best estimate. The Company has not
experienced any material warranty claims to date in connection with declines of
the power generation capacity of its solar modules and will prospectively revise
its actual rate to the extent that actual warranty costs differ from the
estimates.  The Company’s warranty costs for the three months ended
December 31, 2008 and 2007 were immaterial.
 
 Impairment of long lived
assets
 
 The Company reviews its long-lived
assets and identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. When such factors and circumstances exist, management compares the
projected undiscounted future cash flows associated with the future use and
disposal of the related asset or group of assets to their respective carrying
amounts. Impairment, if any, is measured as the excess of the carrying amount
over the fair value, based on market value when available, or discounted
expected cash flows, of those assets and is recorded in the period in which the
determination is made. As of December 31, 2008, management expects those assets
related to its continuing operations to be fully
recoverable.
  7
  Investments
 
 Investments in an entity where the
Company owns less than twenty percent of the voting stock of the entity and does
not exercise significant influence over operating and financial policies of the
entity are accounted for using the cost method. Investments in the entity where
the Company owns twenty percent or more but not in excess of fifty percent of
the voting stock of the entity or less than twenty percent and exercises
significant influence over operating and financial policies of the entity are
accounted for using the equity method. The Company has a policy in place to
review its investments at least annually, to evaluate the carrying value of the
investments in these companies. The fair value of a cost method investment is
not estimated if there are no identified events or changes in circumstance that
may have a significant adverse affect on the fair value of the investment. If
the Company believes that the carrying value of an investment is in excess of
estimated fair value, it is the Company’s policy to record an impairment charge
to adjust the carrying value to the estimated fair value, if the impairment is
considered other-than-temporary.
 
 On August 21, 2008 the Company entered
into an equity purchase agreement in which it acquired two million shares of
common stock of 21-Century Silicon, Inc., a polysilicon manufacturer based in
Dallas, Texas (“21-Century Silicon”) for $1.0 million cash. The two million
shares acquired by the Company constitute approximately 7.8% of 21-Century
Silicon’s outstanding equity.
  As of December 31, 2008, the Company
accounted for the investment in 21-Century Silicon companies at cost amounting
to $1.0 million.
 
 Income taxes
 
 The Company files federal and state
income tax returns in the United States for its United States operations, and
files separate foreign tax returns for its foreign subsidiary in the
jurisdictions in which this entity operates. The Company accounts for income
taxes under the provisions of SFAS No. 109, Accounting for Income Taxes
(“SFAS 109”).
 
 Under the provisions of SFAS 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between their financial statement
carrying amounts and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
 
 Valuation allowance
 
 Significant judgment is required in
determining any valuation allowance recorded against deferred tax assets. In
assessing the need for a valuation allowance, the Company considers all
available evidence including past operating results, estimates of future taxable
income, and the feasibility of tax planning strategies. In the event that the
Company change its determination as to the amount of deferred tax assets that
can be realized, the Company will adjust its valuation allowance with a
corresponding impact to the provision for income taxes in the period in which
such determination is made.
  Unrecognized Tax
Benefits
  Effective on October 1, 2007, the
Company adopted the provisions of Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109” (“FIN
48”).  Under FIN 48, the impact of an uncertain income tax position on the
income tax return must be recognized at the largest amount that is
more-likely-than-not to be sustained upon audit by the relevant taxing authority
based solely on the technical merits of the associated tax position.  An
uncertain income tax position will not be recognized if it has less than a 50%
likelihood of being sustained. The Company also elected the accounting policy
that requires interest and penalties to be recognized as a component of tax
expense. The Company classifies the unrecognized tax benefits that are expected
to result in payment or receipt of cash within one year as current liabilities,
otherwise, the unrecognized tax benefits will be classified as non-current
liabilities. Additionally, FIN 48 provides guidance on de-recognition,
accounting in interim periods, disclosure and transition.
  Derivative financial
instruments
 
 Statement of Financial Accounting
Standard (“SFAS”) No. 133, “Accounting for Derivative Instruments and
Hedging Activities,” as amended (“SFAS 133”), requires all derivatives to be
recorded on the balance sheet at fair value. These derivatives, including
embedded derivatives in our structured borrowings, are separately valued and
accounted for on the balance sheet. Fair values for exchange-traded securities
and derivatives are based on quoted market prices. Where market prices are not
readily available, fair values are determined using market based pricing models
incorporating readily observable market data and requiring judgment and
estimates.
  8
 In September 2000, the Emerging
Issues Task Force issued EITF 00-19, “Accounting for Derivative Financial
Instruments Indexed to and Potentially Settled in, a Company’s Own Stock” (“EITF
00-19”), which requires freestanding contracts that are settled in a company’s
own stock, including common stock warrants, to be designated as an equity
instrument, an asset or a liability. Under the provisions of EITF 00-19, a
contract designated as an asset or a liability must be carried at fair value on
a company’s balance sheet, with any changes in fair value recorded in the
company’s results of operations.
 
 The Company’s management used
market-based pricing models to determine the fair values of the Company’s
derivatives. The model uses market-sourced inputs such as interest rates,
exchange rates and option volatilities. Selection of these inputs involves
management’s judgment and may impact net income.
 
 The method used to estimate the value of
the compound embedded derivatives (“CED”) as of each valuation date was a Monte
Carlo simulation. Under this method the various features, restrictions,
obligations and option related to each component of the CED were analyzed and
spreadsheet models of the net expected proceeds resulting from exercise of the
CED (or non-exercise) were created. Each model is expressed in terms of the
expected timing of the event and the expected stock price as of that expected
timing.
 
 Because the potential timing and stock
price may vary over a range of possible values, a Monte Carlo simulation was
built based on the possible stock price paths (i.e., daily expected stock price
over a forecast period). Under this approach an individual potential stock price
path is simulated based on the initial stock price on the measurement date, and
the expected volatility and risk free interest rate over the forecast period.
Each path is compared against the logic describe above for potential exercise
events and the present value (or non-exercise which result in $0 value)
recorded. This is repeated over a significant number of trials, or individual
stock price paths, in order to generate an expected or mean value for the
present value of the CED.
 
 Fair Value of
Warrants
 
 The Company’s management used the
binomial valuation model to value the warrants issued in conjunction with
convertible notes entered into in March 2007. The model uses inputs such as
implied term, suboptimal exercise factor, volatility, dividend yield and risk
free interest rate. Selection of these inputs involves management’s judgment and
may impact estimated value. Management selected the binomial model to value
these warrants as opposed to the Black-Scholes model primarily because
management believes the binomial model produces a more reliable value for these
instruments because it uses an additional valuation input factor, the suboptimal
exercise factor, which accounts for expected holder exercise behavior which
management believes is a reasonable assumption with respect to the holders of
these warrants.
 
 Stock-Based
Compensation
 
 On January 1, 2006, Solar EnerTech
began recording compensation expense associated with stock options and other
forms of employee equity compensation in accordance with Statement of Financial
Accounting Standards No. 123R,Share-Based Payment,as interpreted by SEC Staff
Accounting Bulletin No. 107.
 
 The Company estimates the fair value of
stock options granted using the Black-Scholes-Merton option-pricing formula and
a single option award approach. This fair value is then amortized on a
straight-line basis over the requisite service periods of the awards, which is
generally the vesting period. The following assumptions are used in the
Black-Scholes-Merton option pricing model:
 
 Expected Term — The Company’s expected
term represents the period that the Company’s stock-based awards are expected to
be outstanding.
 
 Expected Volatility — The Company’s
expected volatilities are based on historical volatility of the Company’s stock,
adjusted where determined by management for unusual and non-representative stock
price activity not expected to recur. Due to the limited trading history, the
Company also considered volatility data of guidance
companies.
 
 Expected Dividend — The
Black-Scholes-Merton valuation model calls for a single expected dividend yield
as an input. The Company currently pays no dividends and does not expect to pay
dividends in the foreseeable future.
 
 Risk-Free Interest Rate — The Company
bases the risk-free interest rate on the implied yield currently available on
U.S. Treasury zero-coupon issues with an equivalent remaining
term.
 
 Estimated Forfeitures — When estimating
forfeitures, the Company takes into consideration the historical option
forfeitures over the expected term.
 
 Revenue Recognition
 
 The Company recognizes revenues from
product sales in accordance with Staff Accounting Bulletin (SAB) No. 104,
Revenue Recognition, which states that revenue is realized or realizable and
earned when all of the following criteria are met: persuasive evidence of an
arrangement exists; delivery has occurred or services have been rendered; the
price to the buyer is fixed or determinable; and collectability is reasonably
assured. Where a revenue transaction does not meet any of these criteria it is
deferred and recognized once all such criteria have been met. In instances where
final acceptance of the product, system, or solution is specified by the
customer, revenue is deferred until all acceptance criteria have been
met.
  9
  On a transaction by transaction basis,
the Company determines if the revenue should be recorded on a gross or net basis
based on criteria discussed in EITF99-19,Reporting Revenue
Gross as a Principal versus Net as an Agent(“EITF99-19”). The Company
consider the following factors when we determine the gross versus net
presentation: if the Company (i) acts as principal in the transaction; (ii)
takes title to the products; (iii) has risks and rewards of ownership, such as
the risk of loss for collection, delivery or return; and (iv) acts as an agent
or broker (including performing services, in substance, as an agent or broker)
with compensation on a commission or fee basis.
 
 Research and Development
Cost
 
 Expenditures for research activities
relating to product development are charged to expense as
incurred.
 
 Reclassifications
 
 Certain amounts in the prior year
consolidated financial statements have been reclassified to conform to the
current year presentation. These reclassifications have no effect on previously
reported results of operations.
 
 Segment Information
 
 The Company identifies its operating
segments based on its business activities and geographical locations. The
Company operates within a single operating segment - the manufacture of solar
energy cells and modules. The Company operates in the United States and in
China. Most of the Company’s business operations are conducted in China and a
majority of the Company’s fixed assets are located in China.
 
 Recent Accounting
Pronouncements
 
 In September 2006, the FASB issued SFAS
No. 157 (“SFAS 157”), “Fair Value Measurements.” SFAS 157 defines fair value to
measure assets and liabilities, establishes a framework for measuring fair
value, and requires additional disclosures about the use of fair value. SFAS 157
is applicable whenever another accounting pronouncement requires or permits
assets and liabilities to be measured at fair value. SFAS 157 does not expand or
require any new fair value measures. SFAS 157 is effective for fiscal years
beginning after November 15, 2007. The Companyadopted this statement for
financial assets and financial liabilities effective October 1, 2008, which had
no material impact on the Company’s financial and results of
operations.
 
 SFAS157 defines fair value and establishes a
hierarchal framework which prioritizes and ranks the market price observability
used in fair value measurements. Market price observability is affected by a
number of factors, including the type of asset or liability and the
characteristics specific to the asset or liability being measured. Assets and
liabilities with readily available, active, quoted market prices or for which
fair value can be measured from actively quoted prices generally are deemed to
have a higher degree of market price observability and a lesser degree of
judgment used in measuring
fair value. Under SFAS157,
the inputs used to measure fair value must be classified into one of three
levels as follows:
  Level 1 -
              Quoted prices in an active market
      for identical assets or liabilities;Level 2 -
              Observable inputs other than Level
      1, quoted prices for similar assets or liabilities in active markets,
      quoted prices for identical or similar assets and liabilities in markets
      that are not active, and model-derived prices whose inputs are observable
      or whose significant value drivers are observable;
    andLevel 3 -
              Assets and liabilities whose
      significant value drivers are
  unobservable.
 
 Observable inputs are based on market
data obtained from independent sources, while unobservable inputs are based on
the Company’s market assumptions. Unobservable inputs require significant
management judgment or estimation. In some cases, the inputs used to measure an
asset or liability may fall into different levels of the fair value hierarchy.
In those instances, the fair value measurement is required to be classified
using the lowest level of input that is significant to the fair value
measurement. Such determination requires significant management
judgment.
  10
  The Company’s liabilities
measured at fair value on a recurring basis consisted of the following types of
instruments as of December 31, 2008:
  Fair Value at
                                                                                    December 31,
                                                                                    2008
                                                                                  
                                                                                  
                                                                                  Quoted prices in active markets
      for identical assets
                                                                                  
                                                                                  
                                                                                  Significant other observable
                                                                                    inputs
                                                                                  
                                                                                  
                                                                                  Significant unobservable
      inputs(Level 1)
                                                                                  
                                                                                  
                                                                                  (Level 2)
                                                                                  
                                                                                  
                                                                                  (Level 3)Derivative
      liabilites
                                                                                  
                                                                                  $
                                                                                  491,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  491,000Warrant
      liabilities
                                                                                  
                                                                                  
                                                                                  1,768,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,768,000Total
      liabilities
                                                                                  
                                                                                  $
                                                                                  2,259,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  2,259,000
  The
Company’s valuation techniques used to measure the fair values of the derivative
liabilities and warrant liabilities were derived from management assumption or
estimationand are
discussed in Note 7 – Convertible Notes.
 
 In
February 2007, the FASB issued
SFAS No. 159 (“SFAS
159”), “The Fair Value Option for Financial
Assets and Financial Liabilities—Including an Amendment of FASB
Statement No. 115.”  SFAS
No. 159 provides companies with an option to report selected financial
assets and liabilities at fair value.  The standard establishes
presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes for similar types
of assets and liabilities.  SFAS No. 159 was effective for fiscal
years beginning after November 15, 2007.  The Company did not
elect to report any of its financial assets or liabilities at fair value, and as
a result, the adoption of SFAS No. 159 had no material impact on its
financial and results of operations.
 
 In December 2007, the FASB issued SFAS
No. 141 (revised) (“SFAS 141(R)”), “Business Combinations.” The standard
changes the accounting for business combinations, including the measurement of
acquirer shares issued in consideration for a business combination, the
recognition of contingent consideration, the accounting for pre-acquisition gain
and loss contingencies, the recognition of capitalized in-process research and
development, the accounting for acquisition-related restructuring cost accruals,
the treatment of acquisition related transaction costs, and the recognition of
changes in the acquirer’s income tax valuation allowance. SFAS 141(R) is
effective for the first annual reporting period beginning on or after
December 15, 2008. Thus, SFAS 141(R) will be effective for the Company
on October 1, 2009, with early adoption prohibited. The Company is evaluating
the potential impact of the implementation of Statement 141(R) on its financial
position and results of operations.
 
 In December 2007, the FASB issued SFAS
No. 160 (“SFAS 160”), “Non-controlling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51.” The standard changes the
accounting for non-controlling (minority) interests in consolidated financial
statements, including the requirements to classify non-controlling interests as
a component of consolidated stockholders’ equity, and the elimination of
“minority interest” accounting in results of operations with earnings
attributable to non-controlling interests reported as part of consolidated
earnings. Additionally, SFAS 160 revises the accounting for both increases
and decreases in a parent’s controlling ownership interest. SFAS 160 is
effective for the first annual reporting period beginning on or after
December 15, 2008. Thus, SFAS 160 will be effective for the Company on
October 1, 2009, with early adoption prohibited. The Company is evaluating the
potential impact of the implementation of SFAS 160 on its financial
position and results of operations.
 
 In March 2008, the FASB issued SFAS
No. 161 (“SFAS 161”), “Disclosuresabout Derivative Instruments and Hedging
Activities.” SFAS 161 requires additional disclosures related to the use of
derivative instruments, the accounting for derivatives and how derivatives
impact financial statements.  SFAS 161 is effective for fiscal years and
interim periods beginning after November 15, 2008.  Thus, the Company
is required to adopt this standard on January 1, 2009.  The Company is
currently evaluating the impact of adopting SFAS 161 on its financial position
and results of operations.
 
 In May 2008, the FASB issued SFAS No.
162 (“SFAS 162”), “The Hierarchy of Generally Accepted Accounting Principles”.
SFAS 162 identifies the sources of accounting principles and the framework for
selecting the principles to be used in the preparation of financial statements
of nongovernmental entities that are presented in conformity with generally
accepted accounting principles (GAAP) in the United States (the GAAP hierarchy).
This Statement is effective for financial statements issued 60 days following
the SEC’s approval of the Public Company Accounting Oversight Board amendments
to AU Section 411, The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles. The Company is currently evaluating
the impact of adopting SFAS 162 on its financial position and results of
operations.
  11
  NOTE 3 — INVENTORIES
 
 At December 31, 2008 and September 30,
2008, inventories consist of:
  December 31,
      2008
                                                    
                                                    
                                                    September 30,
      2008Raw
    materials
                                                    
                                                    $
                                                    859,000
                                                    
                                                    
                                                    $
                                                    2,111,000Work in
    process
                                                    
                                                    
                                                    96,000
                                                    
                                                    
                                                    
                                                    145,000Finished
    goods
                                                    
                                                    
                                                    1,947,000
                                                    
                                                    
                                                    
                                                    2,630,000Total
      inventories
                                                    
                                                    $
                                                    2,902,000
                                                    
                                                    
                                                    $
                                                    4,886,000
 NOTE 4 — ADVANCE PAYMENTS AND
OTHER
 
 At December 31, 2008 and September 30,
2008, advance payments and other consist of:
  December 31,
      2008
                                              
                                              
                                              September 30,
      2008Prepayment for raw
      materials
                                              
                                              $
                                              779,000
                                              
                                              
                                              $
                                              2,959,000Other
                                              
                                              
                                              268,000
                                              
                                              
                                              
                                              216,000Total advance payments and
      other
                                              
                                              $
                                              1,047,000
                                              
                                              
                                              $
                                              3,175,000
 NOTE 5 — FIXED
ASSETS
 
 At December 31, 2008 and September 30,
2008, fixed assets consist of:
  December 31,
      2008
                                                        
                                                        
                                                        September 30,
      2008Production
      equipment
                                                        
                                                        $
                                                        7,352,000
                                                        
                                                        
                                                        $
                                                        5,564,000Leasehold
      improvement
                                                        
                                                        
                                                        3,549,000
                                                        
                                                        
                                                        
                                                        3,201,000Automobiles
                                                        
                                                        
                                                        541,000
                                                        
                                                        
                                                        
                                                        542,000Office
      equipment
                                                        
                                                        
                                                        341,000
                                                        
                                                        
                                                        
                                                        339,000Machinery
                                                        
                                                        
                                                        2,714,000
                                                        
                                                        
                                                        
                                                        2,170,000Furniture
                                                        
                                                        
                                                        39,000
                                                        
                                                        
                                                        
                                                        39,000Construction in
      progress
                                                        
                                                        
                                                        997,000
                                                        
                                                        
                                                        
                                                        2,915,000Total Fixed
      Assets
                                                        
                                                        
                                                        15,533,000
                                                        
                                                        
                                                        
                                                        14,770,000Less:  Accumulated
      depreciation
                                                        
                                                        
                                                        (2,357,000
                                                        )
                                                        
                                                        
                                                        (1,836,000
                                                        )Net Fixed
      Assets
                                                        
                                                        $
                                                        13,176,000
                                                        
                                                        
                                                        $
                                                        12,934,000
 NOTE 6 — INCOME TAX
 
 The Company has no taxable income and no
provision for federal and state income taxes is required for the three months
ended December 31, 2008 and 2007, respectively, except certain minimum
taxes.
 
 The Company accounts for income taxes
using the liability method in accordance with Financial Accounting Standards
Board Statement No. 109 (“SFAS 109”), “Accounting for Income Taxes”. SFAS
109 requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company’s
financial statements, but have not been reflected in the Company’s taxable
income. A valuation allowance is established to reduce deferred tax assets to
their estimated realizable value. Therefore, the Company provides a valuation
allowance to the extent that the Company does not believe it is more likely than
not that the Company will generate sufficient taxable income in future periods
to realize the benefit of the Company’s deferred tax assets. As of December 31,
2008 and 2007, the deferred tax asset was subject to a 100% valuation allowance
and therefore is not recorded on the Company’s balance sheet as an
asset.
 
 Utilization of the net operating loss
carry forwards and credits may be subject to a substantial annual limitation due
to the ownership change limitations provided by the Internal Revenue Code of
1986, as amended and similar state provisions. The annual limitation may result
in the expiration of net operating losses and credits before utilization. The
Company also has net operating losses in its foreign jurisdiction and that loss
can be carried over 5 years from the year the loss was
incurred.
 
 The Company is subject to taxation in
the US and various states and foreign jurisdictions. There are no ongoing
examinations by taxing authorities at this time. The Company’s tax years
starting from 2006 to 2007 remain open in various tax jurisdictions. The Company
does not anticipate any significant change within the next 12 months of its
uncertain tax positions.
  12
  NOTE 7 — CONVERTIBLE
NOTES
 
 On March 7, 2007, the Company entered
into a securities purchase agreement to issue $17,300,000 of secured convertible
notes (the “notes”) and detachable stock purchase warrants (the “warrants”).
Accordingly, during the three months ended March 31, 2007, the Company sold
units consisting of:
  •
              $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.
 
 These notes bear interest at 6% per
annum and are due in 2010. The principal amount of the Series A Convertible
Notes may be converted at the initial rate of $0.69 per share for a total of
7,246,377 shares of common stock (which amount does not include shares of common
stock that may be issued for the payment of interest). The principal amount of
the Series B Convertible Notes may be converted at the initial rate of $0.57 per
share for a total of 21,578,948 shares of common stock (which amount does not
include shares of common stock that may be issued for the payment of
interest).
 
 In connection with the issuance of the
notes and warrants, the Company engaged an exclusive advisor and placement agent
(the “advisor”) and issued warrants to the advisor to purchase an aggregate of
1,510,528 shares at an exercise price of $0.57 per share and 507,247 shares at
an exercise price of $0.69 per share, of the Company’s common stock (the
“advisor warrants”). In addition to the issuance of the warrants, the Company
paid $1,038,000 in commissions, an advisory fee of $173,000, and other fees and
expenses of $84,025.
 
 The Company evaluated the notes for
derivative accounting considerations under SFAS 133 and EITF 00-19 and
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.
Changes in fair value of the compound embedded derivative are recorded in the
account “gain (loss) on fair market value of compound embedded derivative” in
the accompanying consolidated statements of operations.
 
 The warrants (including the advisor
warrants) are classified as a liability, as required by SFAS No. 150 (“SFAS
150”), “Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity”, due to the terms of the warrant agreement which
contains a cash redemption provision in the event of a fundamental transaction.
The warrants are measured at fair value both initially and in subsequent
periods. Changes in fair value of the warrants are recorded in the account “gain
(loss) on fair market value of warrant liability” in the accompanying
consolidated statements of operations.
  13
  The following table summarizes the
valuation of the notes, the warrants (including the advisor warrants), and the
compound embedded derivative:
  AmountProceeds of convertible
      notes
                                              
                                              $
                                              17,300,000Allocation of
      proceeds:Fair value of warrant
      liability (excluding advisor warrants)
                                              
                                              
                                              (15,909,000
                                              )Fair value of compound
      embedded derivative liability
                                              
                                              
                                              (16,600,000
                                              )Loss on issuance of convertible
      notes
                                              
                                              
                                              15,209,000Carrying amount of notes at grant
      date
                                              
                                              $
                                              -Carrying amount of notes at
      September 30, 2007
                                              
                                              $
                                              7,000Amortization of note discount and
      conversion effect
                                              
                                              
                                              78,000Carrying amount of notes at
      September 30, 2008
                                              
                                              
                                              85,000Amortization of note discount and
      conversion effect
                                              
                                              
                                              269,000Carrying amount of notes at
      December 31, 2008
                                              
                                              $
                                              354,000Fair value of warrant liability at
      September 30, 2007
                                              
                                              $
                                              17,390,000Gain on fair market value of
      warrant liability
                                              
                                              
                                              (13,978,000
                                              )Fair value of warrant liability at
      September 30, 2008
                                              
                                              
                                              3,412,000Gain on fair market value of
      warrant liability
                                              
                                              
                                              (1,644,000
                                              )Fair value of warrant liability at
      December 31, 2008
                                              
                                              $
                                              1,768,000Fair value of compound embedded
      derivative at September 30, 2007
                                              
                                              $
                                              16,800,000Gain on fair market value of
      embedded derivative liability
                                              
                                              
                                              (13,767,000
                                              )Conversion of Series A and B
      Notes
                                              
                                              
                                              (2,053,000
                                              )Fair value of compound embedded
      derivative at September 30, 2008
                                              
                                              
                                              980,000Gain on fair market value of
      embedded derivative liability
                                              
                                              
                                              (475,000
                                              )Conversion of Series A and B
      Notes
                                              
                                              
                                              (14,000
                                              )Fair value of compound embedded
      derivative at December 31, 2008
                                              
                                              $
                                              491,000
 The value of the warrants (including the
advisor warrants) was estimated using a binomial valuation model with the
following assumptions:
  December 31,
      2008
                        
                        
                        September 30,
      2008Implied term
      (years)
                        
                        
                        3.18
                        
                        
                        
                        3.43Suboptimal exercise
      factor
                        
                        
                        2.5
                        
                        
                        
                        2.5Volatility
                        
                        
                        112
                        %
                        
                        
                        84
                        %Dividend
    yield
                        
                        
                        0
                        %
                        
                        
                        0
                        %Risk free interest
      rate
                        
                        
                        1.10
                        %
                        
                        
                        2.58
                        %
 In conjunction with March 2007
financing, we recorded total deferred financing cost of $2.5 million, of which
$1.3 million represented cash payment and $1.2 million represented the fair
market value of the advisor warrants. The deferred financing cost is amortized
over the three year life of the notes using a method that approximates the
effective interest rate method. The advisor warrants were recorded as a
liability and adjusted to fair value in each subsequent period. As of December
31, 2008 and September 30, 2008, total unamortized deferred financing costwas $1.7
millionand $1.8 million,
respectively.
 
 The method used to estimate the value of
the compound embedded derivatives (“CED”) as of each valuation date was a Monte
Carlo simulation. Under this method the various features, restrictions,
obligations and option related to each component of the CED were analyzed and
spreadsheet models of the net expected proceeds resulting from exercise of the
CED (or non-exercise) were created. Each model is expressed in terms of the
expected timing of the event and the expected stock price as of that expected
timing.
 
 Because the potential timing and stock
price may vary over a range of possible values, a Monte Carlo simulation was
built based on the possible stock price paths (i.e., daily expected stock price
over a forecast period). Under this approach an individual potential stock price
path is simulated based on the initial stock price at the measurement date, the
expected volatility and risk free rate over the forecast period. Each path is
compared against the logic describe above for potential exercise events and the
present value (or non-exercise which result in $0 value) recorded. This is
repeated over a significant number of trials, or individual stock price paths,
in order to generate an expected or mean value for the present value of the
CED.
 
  14
  The significant assumptions used in
estimating stock price paths as of each valuation date are:
  December 31,
      2008
                                  
                                  
                                  September 30,
      2008Starting stock price (closing
      price on valuation date)
                                  
                                  $
                                  0.20
                                  
                                  
                                  $
                                  0.40Annual volatility of
      stock
                                  
                                  
                                  111.90
                                  %
                                  
                                  
                                  84.20
                                  %Risk free
    rate
                                  
                                  
                                  0.37
                                  %
                                  
                                  
                                  1.89
                                  %
 Additional assumptions were made
regarding the probability of occurrence of each exercise scenario, based on
stock price ranges (based on the assumption that scenario probability is
constant over narrow ranges of stock price). The key scenarios included public
offering, bankruptcy and other defaults.
 
 During thethree months endedDecember 31, 2008, $350,000 of Series A and B convertible
notes were converted into our common shares. We recorded a loss on debt
extinguishment of $310,000 as a result of the conversion based on the quoted
market closing price of our common shares on the conversion
dates.
 
 During the three months ended December
31, 2007, $947,000 of Series A convertible note was converted into our common
shares. We recorded a loss on debt extinguishment of $736,000 as a result of the
conversion based on the quoted market closing price of our common share on the
conversion dates. The $736,000 loss on debt extinguishment is offset by a gain
on debt extinguishment in the amount of $374,000 (see Note 8 below).  The
net amount of $362,000 loss on debt extinguishment is included in the
Consolidated Statements of Operations.
 
 The loss on debt extinguishment is
computed at the conversion dates as follow:
  Quarter Ended December
      31,2008
                                            
                                            
                                            2007Fair value of the common
      shares
                                            
                                            $
                                            146,000
                                            
                                            
                                            $
                                            1,299,000Unamortized deferred financing
      costs associated with the converted notes
                                            
                                            
                                            68,000
                                            
                                            
                                            
                                            139,000Fair value of the CED liability
      associated with the converted notes
                                            
                                            
                                            (14,000
                                            )
                                            
                                            
                                            (701,000
                                            )Accreted amount of the notes
      discount
                                            
                                            
                                            110,000
                                            
                                            
                                            
                                            (1,000
                                            )Loss on debt
      extinguishment
                                            
                                            $
                                            310,000
                                            
                                            
                                            $
                                            736,000
 NOTE 8 — EQUITY
TRANSACTIONS
 
 Common stock issued for repayment of
loans
 
 During the quarter ended December 31,
2007, the Company was informed by Thimble Capital that it had assigned the note
payable of $100,000 due from us to Coach Capital LLC. The Company was also
informed by Infotech Essentials Ltd. that it had assigned the note payable of
$450,000 due from us to Coach Capital LLC.
 
 On December 20, 2007, we entered into a
settlement agreement with Coach Capital LLC to settle all outstanding notes
payable in the amount of $1.2 million and related interest in exchange for the
issuance of the Company’s common stock. The share price stated in the settlement
agreement was $1.20 per share. The Company’s shares of common stock were valued
at $0.84 per share, the closing price, on December 20, 2007. As a result, the
Company recorded a gain on extinguishment of debt of $0.4
million.
 
 Warrants
 
 During March 2007, in conjunction with
the issuance of $17,300,000 in convertible debt, the board of directors approved
the issuance of warrants (as described in Note 7 above) to purchase shares of
the Company’s common stock. The 7,246,377 series A warrants and the 21,578,948
series B warrants are exercisable at $1.21 and $0.90, respectively and expire in
March 2012. In addition, in March 2007, as additional compensation for services
as placement agent for the convertible debt offering, the Company issued the
advisor warrants, which entitle the placement agent to purchase 507,247 and
1,510,528 shares of the Company’s common stock at exercise prices of $0.69 and
$0.57 per share, respectively. The advisor warrants expire in March
2012.
 
 The warrants (including the advisor
warrants) are classified as a liability in accordance with SFAS No. 150, as
interpreted by FASB Staff Position 150-1“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 BothLiabilities
and Equity”,due
to the terms of the warrant agreements which contain cash redemption provisions
in the event of a fundamental transaction, which provide that the Company would
repurchase any unexercised portion of the warrants at the date of the occurrence
of the fundamental transaction for the value as determined by the Black-Scholes
Merton valuation model. As a result, the warrants are measured at fair value
both initially and in subsequent periods. Changes in fair value of the warrants
are recorded in the account “gain (loss) on fair market value of warrant
liability” in the accompanying Consolidated Statements of
Operations.
  15
  On January 11, 2008, the Company sold
24,318,181 shares of its common stock and 24,318,181 Series C warrants to
purchase shares of Common Stock for an aggregate purchase price of $21.4 million
in a private placement offering to accredited investors. The exercise price of
the warrants is $1.00 per share. The warrants are exercisable for a period of 5
years from the date of issuance of the warrants.
 
 For the services in connection with this
closing, the placement agent and the selected dealer, Knight Capital Markets,
LLC and Ardour Capital Investments, received an aggregate of a 6.0% cash
commission, a 1.0% advisory fee and warrants to purchase 1,215,909 shares of
common stock at $0.88 per share, exercisable for a period of 5 years from the
date of issuance of the warrants. The net proceeds from issuing common stocks
and Series C warrants in January 2008 after all the financing costs were $19.9
million and were recorded in additional paid in capital and common stock.
Neither the shares of common stock nor the shares of common stock underlying the
warrants sold in this offering were granted registration rights. Additionally,
in connection with the offering all of our Series A and Series B
warrant holders waived their full ratchet anti-dilution and price protection
rights previously granted to them in connection with our March 2007
convertible note and warrant financing.
 
 
 A summary of warrant activities through
December 31, 2008 is as follows:
  Number of
      Shares
                                  
                                  Exercise Price
      ($)
                                  
                                  Recognized
    asGranted in connection with
      convertible notes — Series A
                                  
                                  7,246,377
                                  
                                  1.21
                                  
                                  Discount to notes
      payableGranted in connection with
      convertible notes — Series B
                                  
                                  21,578,948
                                  
                                  0.90
                                  
                                  Discount to notes
      payableGranted in connection with
      placement service
                                  
                                  507,247
                                  
                                  0.69
                                  
                                  Deferred financing
      costGranted in connection with
      placement service
                                  
                                  1,510,528
                                  
                                  0.57
                                  
                                  Deferred financing
      costGranted in connection with common
      stock purchase — Series C
                                  
                                  24,318,181
                                  
                                  1.00
                                  
                                  Additional paid in
      capitalGranted in connection with
      placement service
                                  
                                  1,215,909
                                  
                                  0.88
                                  
                                  Additional paid in
      capitalOutstanding at December 31,
      2008
                                  
                                  56,377,190
  At December 31, 2008, the range of
warrant prices for shares under warrants and the weighted-average remaining
contractual life is as follows:
  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
                              3.21$0.88-$1.00
                              47,113,038
                              $0.95
                              3.66$1.21
                              7,246,377
                              $1.21
                              3.18
  Restricted Stock
 
 On August 19, 2008, Mr. Leo Young, our
Chief Executive Officer, entered into a Stock Option Cancellation and Share
Contribution Agreement with Jean Blanchard, a former officer, to provide for (i)
the cancellation of a stock option agreement by and between Mr. Young and Ms.
Blanchard dated on or about March 1, 2006 and (ii) the contribution to the
Company by Ms. Blanchard of the remaining 25,250,000 shares of common stock
underlying the cancelled option agreement.
 
 On the same day, an Independent
Committee of the Company’s Board adopted the 2008 Restricted Stock Plan (the
“2008 Plan”) providing for the issuance of 25,250,000 shares of restricted
common stock to be granted to the Company’s employees pursuant to forms of
restricted stock agreements.
 
 The 2008 Plan provides for the issuance
of a maximum of 25,250,000 shares of restricted stock in connection with awards
under the 2008 Plan. The 2008 Plan is administered by the Company’s Compensation
Committee, a subcommittee of our Board of Directors, and has a term of
10 years. Restricted stock vest over a three year period and unvested
restricted stock are forfeited and cancelled as of the date that employment
terminates. Participation is limited to employees, directors and consultants of
the Company and its subsidiaries and other affiliates. During any period in
which shares acquired pursuant to the 2008 Plan remain subject to vesting
conditions, the participant shall have all of the rights of a stockholder of the
Company holding shares of stock, including the right to vote such shares and to
receive all dividends and other distributions paid with respect to such
shares.  If a participant terminates his or her service for any reason
(other than death or disability), or the participant’s service is terminated by
the Company for cause, then the participant shall forfeit to the Company any
shares acquired by the participant which remain subject to vesting Conditions as
of the date of the participant’s termination of service. If a participant’s
service is terminated by the Company without cause, or due to the death or
disability of the participant, then the vesting of any restricted stock award
shall be accelerated in full as of the effective date of the participant’s
termination of service.
  16
  The total unvested restricted stock and
weighted average grant date fair value of the restricted stock as of December
31, 2008 were 25,250,000 shares and $0.62 per share, respectively. There were no
changes during the three months ended December 31, 2008.
  Stock-based compensation cost for
restricted stock for the three months ended December 31, 2008 was $1.3
million.As of December 31,
2008, the total unrecognized compensation cost net of forfeitures relate to
unvested awards not yet recognizedis $13.8 million and is expected to be
amortized over a weighted average period of 2.6 years.
 
 Options
 
 Amended and Restated 2007 Equity
Incentive Plan
 
 In September 2007, the Company
adopted the 2007 Equity Incentive Plan (the “2007 Plan”) that allows the Company
to grant non-statutory stock options to employees, consultants and directors. A
total of 10 million shares of the Company’s common stock are authorized for
issuance under the 2007 Plan. The maximum number of shares that may be issued
under the 2007 Plan will be increased for any options granted that expire, are
terminated or repurchased by the Company for an amount not greater than the
holder’s purchase price and may also be adjusted subject to action by the
stockholders for changes in capital structure. Stock options may have exercise
prices of not less than 100% of the fair value of a share of stock at the
effective date of the grant of the option.
 
 On February 5, 2008, the Board of
Directors of Solar EnerTech Nevada adopted the Amended and Restated 2007 Equity
Incentive Plan (the “Amended 2007 Plan”), which increases the number of shares
authorized for issuance from 10 million to 15 million shares of common stock and
was to be effective upon approval of the Company’s stockholders and upon the
Company’s reincorporation into the State of
Delaware.
 
 On May 5, 2008, at the Company’s Annual
Meeting of Stockholders, the Company’s stockholders approved the Amended 2007
Plan.  On August 13, 2008, the Company reincorporated into the State
of Delaware. As of December 31, 2008 and September 30, 2008,9,009,166 and 7,339,375 shares of common
stock, respectively remain available for future grants under the Amended 2007
Plan.
 
 These options vest over various periods
up to four years and expire no more than ten years from the date of grant. A
summary of activity under the Amended 2007 Plan is as
follows:
  Shares
      AvailableFor
                                                                        Grant
                                                                      
                                                                      
                                                                      Number
      of Shares
                                                                      
                                                                      
                                                                      Weighted
      Average Fair Value Per Share
                                                                      
                                                                      
                                                                      Weighted
      Average
                                                                        Exercise
      Price Per ShareBalance at September 30,
      2007
                                                                      
                                                                      
                                                                      2,700,000
                                                                      
                                                                      
                                                                      
                                                                      7,300,000
                                                                      
                                                                      
                                                                      $
                                                                      0.66
                                                                      
                                                                      
                                                                      $
                                                                      1.20Additional shares
      reserved
                                                                      
                                                                      
                                                                      5,000,000
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —Options
    granted
                                                                      
                                                                      
                                                                      (870,000
                                                                      )
                                                                      
                                                                      
                                                                      870,000
                                                                      
                                                                      
                                                                      $
                                                                      0.37
                                                                      
                                                                      
                                                                      $
                                                                      0.61Options
      cancelled
                                                                      
                                                                      
                                                                      509,375
                                                                      
                                                                      
                                                                      
                                                                      (509,375
                                                                      )
                                                                      
                                                                      $
                                                                      0.42
                                                                      
                                                                      
                                                                      $
                                                                      0.85Balance at September 30,
      2008
                                                                      
                                                                      
                                                                      7,339,375
                                                                      
                                                                      
                                                                      
                                                                      7,660,625
                                                                      
                                                                      
                                                                      $
                                                                      0.39
                                                                      
                                                                      
                                                                      $
                                                                      0.62Options
      cancelled
                                                                      
                                                                      
                                                                      1,669,791
                                                                      
                                                                      
                                                                      
                                                                      (1,669,791
                                                                      )
                                                                      
                                                                      $
                                                                      0.41
                                                                      
                                                                      
                                                                      $
                                                                      0.62Balance at December 31,
      2008
                                                                      
                                                                      
                                                                      9,009,166
                                                                      
                                                                      
                                                                      
                                                                      5,990,834
                                                                      
                                                                      
                                                                      $
                                                                      0.38
                                                                      
                                                                      
                                                                      $
                                                                      0.62
  The total fair value of shares vested
during the three months ended December 31, 2008 was $157,000.
 
 At December 31, 2008 and September 30,
2008, 5,990,834 and 7,660,625 options were outstanding, respectively and had a
weighted-average remaining contractual lifeof8.78years and 9.03 years, respectively. The weighted average
exercise price for outstanding options at December 31, 2008 and September 30,
2008was $0.62.Of these options, 3,808,757and 3,477,506 shares were vested and
exercisable on December 31, 2008 and September 30, 2008, respectively.  The
weighted-averageexercise
price and weighted-average remaining contractual term of options currentlyexercisable were $0.62 and
8.78 years, respectively.
  17
  The fair values of employee stock
options granted during the three months ended December 31, 2007 were estimated
to be between $0.41 and $0.72 per share on the date of grant using the
Black-Scholes option-pricing model with the following
assumptions:
  •        
 Volatility of
84%
  •       
  Risk-free interest
rates ranging from 4% to 4.13%
  •         
Expected lives
ranging between 1 and 3.5 years
  •         
No dividend
yield
  •        
 Market value per
share of stock on measurement date of $1.20 and $1.65.
 There
were no stock options granted during the three months ended December 31,
2008.
 
 On May 9, 2008, the Compensation
Committee of the Board of Directors of the Company authorized the repricing of
all outstanding options issued to current employees, directors, officers and
consultants prior to February 5, 2008 under the 2007 Plan to $0.62, determined
in accordance with the 2007 Plan as the closing price for shares of Common Stock
on the Over-the-Counter Bulletin Board on the date of the
repricing.
 
 The Company repriced a total of
7,720,000 shares of Common Stock underlying outstanding options. The other terms
of the options, including the vesting schedules, remained unchanged as a result
of the repricing. Total additional compensation expense on non-vested options
relating to the May 9, 2008 repricing is approximately $0.4 million which will
be expensed ratably over the remaining vesting period. Additional compensation
expense on vested options relating to the May 9, 2008 repricing is approximately
$0.3 million which was fully expensed as of June 30, 2008. The repriced options
had originally been issued with $0.94 to $1.65 per share option exercise prices,
which prices reflected the then current market prices of our stock on the dates
of original grant. As a result of the recent sharp reduction in our stock price,
our Board of Directors believed that such options no longer would properly
incentivize our employees, officers, directors and consultants who held such
options to work in the best interests of our company and
stockholders.
 
 In accordance with the provisions of
SFAS 123(R), the Company has recorded stock-based compensation expenseof $1.5 million and $2.4
million for the three months ended December 31, 2008 and 2007, respectively,
which include the compensation effect for theoptions repriced. The stock-based
compensation expense is based on the fair value of the options at the grant
date.  We recognized compensation expense for share-based awards based
upon their value on the date of grant amortized over the applicable service
period, less an allowance estimated future forfeited awards.
 
 NOTE 9 — COMPREHENSIVE
LOSS
 
 The components of comprehensive
loss were as follows:
  Quarter Ended December
      31,2008
                                                
                                                
                                                2007Net loss
                                                
                                                $
                                                (3,801,000
                                                )
                                                
                                                $
                                                (3,902,000
                                                )Other comprehensive
      income:Change in foreign currency
      translation
                                                
                                                
                                                (39,000
                                                )
                                                
                                                
                                                469,000Comprehensive
      loss
                                                
                                                $
                                                (3,840,000
                                                )
                                                
                                                $
                                                (3,433,000
                                                )
  Accumulated other comprehensive
incomeat December 31, 2008
and September 30, 2008 is comprised of accumulated translation adjustments
of $2.4million and $ 2.5 million, respectively.
  18
  NOTE 10— COMMITMENTS AND
CONTINGENCIES
 
 Capital investments
 
 Pursuant to a joint research and
development laboratory agreement with Shanghai University, dated
December 15, 2006 and expiring on December 15, 2016, Solar EnerTech is
committed to fund the establishment of laboratories and completion of research
and development activities. The Company committed to invest no less than RMB5
million each year for the first three years and no less than RMB30 million
cumulatively for the first five years. The following table summarizes the
commitments in U.S. dollars based upon a translation of the RMB amounts into
U.S. dollars at an exchange rate of 6.8346.
  Year
                                    
                                    Amount2009 (Remaining
      balance)*
                                    
                                    $
                                    1,797,0002010
                                    
                                    
                                    936,0002011
                                    
                                    
                                    1,112,000Total
                                    
                                    $
                                    3,845,000
 *
              The amount includes approximately
      $41,000 and $819,000 of 2007 and 2008 commitments, respectively, which
      remained unpaid as of December 31, 2008. The Company intends to increase
      research and development spending as we grow our business. The payment to
      Shanghai University will be used to fund program expenses and equipment
      purchase. The delay in the payment of remaining fiscal years 2007 and 2008
      commitments of $860,000 could lead to Shanghai University requesting the
      Company pay the committed amount within a short time frame. If the Company
      does not pay and is unable to correct the breach within the requested time
      frame, Shanghai University could seek compensation up to an additional 15%
      of the total committed amount for approximately $658,000. As of the date
      of this report, the Company has not received any compensation request from
      Shanghai University.
 
 The agreement is for shared investment
in research and development on fundamental and applied technology in the fields
of semi-conductive photovoltaic theory, materials, cells and modules. The
agreement calls for Shanghai University to provide equipment, personnel and
facilities for joint laboratories. The Company will provide funding, personnel
and facilities for conducting research and testing. Research and development
achievements from this joint research and development agreement will be
available to both parties. The Company is entitled to intellectual property
rights including copyrights and patents obtained as a result of this
research.
 
 Expenditures under this agreement will
be accounted for as research and development expenditures under Statement of
Financial Accounting Standard No. 2 – ‘Accounting for Research and Development
Costs’ and expensed as incurred.
 
 NOTE 11 — RELATED
PARTY TRANSACTIONS
 
 At December 31, 2008 and September 30,
2008, the accounts payable and accrued liabilities, related party balance was$5.5 million. The $5.5
million accrued liability represents $4.5 million of compensation expense
related to the Company’s obligation to withhold tax upon exercise of stock
options by Mr. Young in the fiscal year 2006 and the related interest and
penalties, and $1.0 million of indemnification provided by the Company to Mr.
Young  for any liabilities he may incur as a result of previous stock
options granted to him by Ms. Blanchard, a former officer, in conjunction with
the purchase of Infotech on August 19, 2008.
 
 ITEM 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  All references to “Solar EnerTech”, the
“Company,” “we,” “our,” and “us” refer to Solar EnerTech Corp. and its
subsidiaries.
 
 The following discussion contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 that relate to our current expectations and views
of future events. 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 relate to events that involve known and unknown risks,
uncertainties and other factors, including those listed under the heading “Risks
Related to Our Business,” “Risks Related to an Investment in Our Securities” and
under the heading “Risks Related To an Investment in Our Securities” in our Form
10-K filed with the Securities and Exchange Commission (the “SEC”) on December
22, 2008 as well as other relevant risks detailed in our filings with the SEC
which may cause our actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements. The information set forth in this
report on Form 10-Q should be read in light of such risks and in conjunction
with the consolidated financial statements and the notes thereto included
elsewhere in this Form 10-Q.
  19
  Overview
 
 We originally incorporated under the
laws of the State of Nevada on July 7, 2004 and reincorporated to the State
of Delaware on August 13, 2008. We engaged in a variety of businesses, including
home security assistance, until March 2006, when we began our current
operations. We manufacture and sell photovoltaic (commonly known as “PV”) cells
and modules. PV modules consist of solar cells that produce electricity from the
sun’s rays. Our manufacturing operations consisted of two 25MW solar cell
production lines and 50MW of solar module production facility.  Our 63,000
square foot manufacturing facility is located in Shanghai,
China.
 
 Our solar cells and modules are sold
under the brand name “SolarE”.  Our total revenue for the three months
ended December 31, 2008 and 2007 were $5.1 million and $4.8 million,
respectively. Our end users are mainly in Europe.  In anticipation of
entering the US market, we had established a marketing, purchasing and
distribution office in Menlo Park, California. Our goal is to become a worldwide
supplier of PV cells and modules.
 
 We purchase our key raw materials,
silicon wafer, from the spot market.  We do not have a long term
contract with any silicon supplier.  However, on August 21, 2008, we
entered into an equity purchase agreement with 21-Century Silicon, Inc., a
polysilicon manufacturer based in Dallas, Texas (“21-Century Silicon”) to
acquire two million shares of common stock, for $1 million cash. The two million
shares acquired by the Company constitute approximately 7.8% of 21-Century
Silicon’s outstanding equity.  Related to the equity purchase
agreement, the Company has also signed a memorandum of understanding with
21-Century Silicon for a four-year supply framework agreement for polysilicon
shipments. Through its proprietary technology, processes and methods, 21-Century
Silicon is planning to manufacture solar-grade polysilicon at a lower
manufacturing and plant setup cost, as well as a shorter plant setup time than
those of its major competitors. If its manufacturing goals are met, 21-Century
Silicon's customers, in turn, will benefit from the Company's cost advantages
and will expect to receive a high-purity product at a price significantly lower
than that offered elsewhere within the industry.
 
 In December 2006, we entered into a
joint venture with Shanghai University to operate a research facility to study
various aspects of advanced PV technology. Our joint venture with Shanghai
University is for shared investment in research and development on fundamental
and applied technologies in the fields of semi-conductive photovoltaic theory,
materials, cells and modules. The agreement calls for Shanghai University to
provide equipment, personnel and facilities for joint laboratories. It is our
responsibility to provide funding, personnel and facilities for conducting
research and testing. Research and development achievements from this joint
research and development agreement will be available for use by both parties. We
are entitled to the intellectual property rights, including copyrights and
patents, obtained as a result of this research. The research and development we
will undertake pursuant to this agreement includes the
following:
 
 •
              
              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 ranging
      from 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
      reliable, 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.
 
 To date, we have raised money for the
development of our business through the sale of our equity
securities.  On January 11, 2008, we sold 24,318,181 shares of our
common stock and 24,318,181 Series C warrants to purchase shares of common stock
for an aggregate purchase price of $21.4 million in a private placement offering
to accredited investors. The exercise price of the warrants is $1.00 per share.
The warrants are exercisable for a period of 5 years from the date of issuance
of the warrants. We used the net proceeds from the offering for working capital
and general corporate purposes.   In March 2007 we also
raised $17.3 million through sales of units consisting of our Series A
and Series B Convertible Notes and warrants. The proceeds were used to
complete our production line and working capital purpose.
 
 Our future operations are dependent upon
the identification and successful completion of additional long-term or
permanent equity financing, the support of creditors and shareholders, and,
ultimately, the achievement of profitable operations. Other than as discussed in
this report, we know of no trends, events or uncertainties that are reasonably
likely to impact our future liquidity.
  20
  Critical Accounting
Policies
 
 We consider our accounting policies
related to principles of consolidation, revenue recognition, inventory reserve,
and stock based compensation, fair value of equity instruments and derivative
financial instruments to be critical accounting policies. A number of
significant estimates, assumptions, and judgments are inherent in determining
our consolidation policy, when to recognize revenue, how to evaluate our equity
instruments and derivative financial instruments, and the calculation of our
inventory reserve and stock-based compensation expense. We base our estimates
and judgments on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances. Actual results could differ
materially from these estimates. Management believes that there have been no
significant changes during the three months ended December 31, 2008 to the items
that we disclosed as our critical accounting policies and estimates in
Management’s Discussion and Analysis or Plan of Operations in our Annual Report
on Form 10-K filed for the year ended September 30, 2008 with the Securities and
Exchange Commission. For a description of those critical accounting policies,
please refer to our 2008 Annual Report on Form 10-K.
 
 Recent Accounting
Pronouncements
 
 In September 2006, the FASB issued SFAS
No. 157 (“SFAS 157”), “Fair Value Measurements.” SFAS 157 defines fair value to
measure assets and liabilities, establishes a framework for measuring fair
value, and requires additional disclosures about the use of fair value. SFAS 157
is applicable whenever another accounting pronouncement requires or permits
assets and liabilities to be measured at fair value. SFAS 157 does not expand or
require any new fair value measures. SFAS 157 is effective for fiscal years
beginning after November 15, 2007. The Companyadopted this statement for
financial assets and financial liabilities effective October 1, 2008, which had
no material impact on the Company’s financial and results of
operations.
 
 SFAS157 defines fair value and establishes a
hierarchal framework which prioritizes and ranks the market price observability
used in fair value measurements. Market price observability is affected by a
number of factors, including the type of asset or liability and the
characteristics specific to the asset or liability being measured. Assets and
liabilities with readily available, active, quoted market prices or for which
fair value can be measured from actively quoted prices generally are deemed to
have a higher degree of market price observability and a lesser degree of
judgment used in measuring
fair value. Under SFAS157,
the inputs used to measure fair value must be classified into one of three
levels as follows:
  Level 1 -
              Quoted prices in an active market
      for identical assets or liabilities;Level 2 -
              Observable inputs other than Level
      1, quoted prices for similar assets or liabilities in active markets,
      quoted prices for identical or similar assets and liabilities in markets
      that are not active, and model-derived prices whose inputs are observable
      or whose significant value drivers are observable;
    andLevel 3 -
              Assets and liabilities whose
      significant value drivers are
  unobservable.
 
 Observable inputs are based on market
data obtained from independent sources, while unobservable inputs are based on
the Company’s market assumptions. Unobservable inputs require significant
management judgment or estimation. In some cases, the inputs used to measure an
asset or liability may fall into different levels of the fair value hierarchy.
In those instances, the fair value measurement is required to be classified
using the lowest level of input that is significant to the fair value
measurement. Such determination requires significant management
judgment.
 
 The Company’s liabilities
measured at fair value on a recurring basis consisted of the following types of
instruments as of December 31, 2008:
  Fair Value at
                                                                                      December 31,
                                                                                      2008
                                                                                    
                                                                                    
                                                                                    Quoted prices in active markets
      for identical assets
                                                                                    
                                                                                    
                                                                                    Significant other observable
                                                                                      inputs
                                                                                    
                                                                                    
                                                                                    Significant unobservable
      inputs(Level 1)
                                                                                    
                                                                                    
                                                                                    (Level 2)
                                                                                    
                                                                                    
                                                                                    (Level 3)Derivative
      liabilites
                                                                                    
                                                                                    $
                                                                                    491,000
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    $
                                                                                    491,000Warrant
      liabilities
                                                                                    
                                                                                    
                                                                                    1,768,000
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    1,768,000Total
      liabilities
                                                                                    
                                                                                    $
                                                                                    2,259,000
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    $
                                                                                    2,259,000
  The
Company’s valuation techniques used to measure the fair values of the derivative
liabilities and warrant liabilities were derived from management assumption or
estimationand are
discussed in Note 7 – Convertible Notes.
  21
  In
February 2007, the FASB
issued SFAS No. 159
(“SFAS 159”), “The Fair Value Option for Financial
Assets and Financial Liabilities—Including an Amendment of FASB
Statement No. 115.”  SFAS
No. 159 provides companies with an option to report selected financial
assets and liabilities at fair value.  The standard establishes
presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes for similar types
of assets and liabilities.  SFAS No. 159 was effective for fiscal
years beginning after November 15, 2007.  The Company did not
elect to report any of its financial assets or liabilities at fair value, and as
a result, the adoption of SFAS No. 159 had no material impact on its
financial and results of operations.
 
 In December 2007, the FASB issued SFAS
No. 141 (revised) (“SFAS 141(R)”), “Business Combinations.” The standard
changes the accounting for business combinations, including the measurement of
acquirer shares issued in consideration for a business combination, the
recognition of contingent consideration, the accounting for pre-acquisition gain
and loss contingencies, the recognition of capitalized in-process research and
development, the accounting for acquisition-related restructuring cost accruals,
the treatment of acquisition related transaction costs, and the recognition of
changes in the acquirer’s income tax valuation allowance. SFAS 141(R) is
effective for the first annual reporting period beginning on or after
December 15, 2008. Thus, SFAS 141(R) will be effective for the Company
on October 1, 2009, with early adoption prohibited. The Company is evaluating
the potential impact of the implementation of Statement 141(R) on its financial
position and results of operations.
 
 In December 2007, the FASB issued SFAS
No. 160 (“SFAS 160”), “Non-controlling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51.” The standard changes the
accounting for non-controlling (minority) interests in consolidated financial
statements, including the requirements to classify non-controlling interests as
a component of consolidated stockholders’ equity, and the elimination of
“minority interest” accounting in results of operations with earnings
attributable to non-controlling interests reported as part of consolidated
earnings. Additionally, SFAS 160 revises the accounting for both increases
and decreases in a parent’s controlling ownership interest. SFAS 160 is
effective for the first annual reporting period beginning on or after
December 15, 2008. Thus, SFAS 160 will be effective for the Company on
October 1, 2009, with early adoption prohibited. The Company is evaluating the
potential impact of the implementation of SFAS 160 on its financial
position and results of operations.
 
 In March 2008, the FASB issued SFAS
No. 161 (“SFAS 161”), “Disclosuresabout Derivative Instruments and Hedging
Activities.” SFAS 161 requires additional disclosures related to the use of
derivative instruments, the accounting for derivatives and how derivatives
impact financial statements.  SFAS 161 is effective for fiscal years and
interim periods beginning after November 15, 2008.  Thus, the Company
is required to adopt this standard on January 1, 2009.  The Company is
currently evaluating the impact of adopting SFAS 161 on its financial position
and results of operations.
 
 In May 2008, the FASB issued SFAS No.
162 (“SFAS 162”), “The Hierarchy of Generally Accepted Accounting Principles”.
SFAS 162 identifies the sources of accounting principles and the framework for
selecting the principles to be used in the preparation of financial statements
of nongovernmental entities that are presented in conformity with generally
accepted accounting principles (GAAP) in the United States (the GAAP hierarchy).
This Statement is effective for financial statements issued 60 days following
the SEC’s approval of the Public Company Accounting Oversight Board amendments
to AU Section 411, The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles. The Company is currently evaluating
the impact of adopting SFAS 162 on its financial position and results of
operations.
 
 
 Results of Operations for the three
months ended December 31, 2008 and 2007
 
 The following discussion of the
financial condition, results of operations, cash flows and changes in financial
position of our Company should be read in conjunction with our audited
consolidated financial statements and notes filed with the SEC on Form 10-K and
its subsequent amendments.
 
 Revenues, Cost of Sales and Gross
Margin
  Quarter
      Ended December 31, 2008
                              
                              
                              Quarter
      Ended December 31, 2007
                              
                              
                              Year-Over-Year
      ChangeAmount
                              
                              
                              %
      of net sales
                              
                              
                              Amount
                              
                              
                              %
      of net sales
                              
                              
                              Amount
                              
                              
                              %
      of changeNet
      sales
                              
                              $
                              5,084,000
                              
                              
                              
                              100.0
                              %
                              
                              $
                              4,839,000
                              
                              
                              
                              100.0
                              %
                              
                              $
                              245,000
                              
                              
                              
                              5.1
                              %Cost
      of sales
                              
                              
                              (7,420,000
                              )
                              
                              
                              (145.9
                              %)
                              
                              
                              (5,305,000
                              )
                              
                              
                              (109.6
                              %)
                              
                              
                              (2,115,000
                              )
                              
                              
                              39.9
                              %Gross
      loss
                              
                              $
                              (2,336,000
                              )
                              
                              
                              (45.9
                              %)
                              
                              $
                              (466,000
                              )
                              
                              
                              (9.6
                              %)
                              
                              $
                              (1,870,000
                              )
                              
                              
                              401.3
                              %
 For the
three months ended December 31, 2008, the Company reported total revenue of $5.1
million, representing an increase of $0.2 million or 5.1% compared to $4.8
million of revenue in the same period of the prior year.  Almost all
of our $5.1 million of revenue generated during the first fiscal quarter of 2009
related to solar modules sales while only $2.2 million of our first fiscal
quarter of 2008 revenue related to solar module sales and the remaining $2.6
million related to resell of raw materials.  Our module sales
increased significantly in the first fiscal quarter of 2009 because we ramped up
our production capacity during fiscal 2008.  We resold raw materials
in fiscal 2008 because we had limited production capacity a year ago and had
excess silicon wafers on hand which we resold with a small margin.
 
 22
 For the
three months ended December 31, 2008, we incurred a negative gross profit of
$2.3 million, representing an increase of $1.9 million or 401.3% compared to
$0.5 million in the same period of the prior year.  The decrease in
gross profit was primarily due to decrease in average sales price in the first
fiscal quarter of 2009.  Although the market price of silicon wafer,
our key raw materials, has also declined, inventories sold during the first
fiscal quarter of 2009 were manufactured using silicon wafers purchased in
previous quarters and at a higher cost.  This resulted in lower than
normal gross profit.  In addition, due to drop in silicon wafer market
price, our inventories were written down by $1.0 million in the first fiscal
quarter of 2009 as a result of a lower of cost or market inventory valuation
analysis.
 
 Selling, general &
administrative
  Quarter
      Ended December 31, 2008
                          
                          
                          Quarter
      Ended December 31, 2007
                          
                          
                          Year-Over-Year
      ChangeAmount
                          
                          
                          %
      of net sales
                          
                          
                          Amount
                          
                          
                          %
      of net sales
                          
                          
                          Amount
                          
                          
                          %
      of changeSelling,
      general & administrative
                          
                          $
                          2,561,000
                          
                          
                          
                          50.4
                          %
                          
                          $
                          3,885,000
                          
                          
                          
                          80.3
                          %
                          
                          $
                          (1,324,000
                          )
                          
                          
                          (34.1
                          %)
 For the three months ended December 31,
2008, we incurred selling, general and administrative expense of $2.6 million,
representing a decrease of $1.3 million or 34.1% from $3.9 million in the three
months ended December 31, 2007. Selling, general and administrative expense as a
percentage of net sales for the three months ended December 31, 2008 decreased
to 50.4% from 80.3% for the three months ended December 31, 2007. The decrease
of $1.3 million in selling, general and administrative expense was primarily due
to stock-based compensation expense related to employee optionsof $1.1 millionand $2.4 million for the three months
ended December 31, 2008 and 2007, respectively.
 
 Research &
development
  Quarter
      Ended December 31, 2008
                          
                          
                          Quarter
      Ended December 31, 2007
                          
                          
                          Year-Over-Year
      ChangeAmount
                          
                          
                          %
      of net sales
                          
                          
                          Amount
                          
                          
                          %
      of net sales
                          
                          
                          Amount
                          
                          
                          %
      of changeResearch
      & development
                          
                          $
                          335,000
                          
                          
                          
                          6.6
                          %
                          
                          $
                          97,000
                          
                          
                          
                          2.0
                          %
                          
                          $
                          238,000
                          
                          
                          
                          245.4
                          %
 Research and development expense
represents expense incurred in-house as well as for the joint research and
development program with Shanghai University. Research and development expense
in the three months ended December 31, 2008 of $0.3 million, represented an
increase of $0.2 million or 245.4% over $0.1 million for the three months ended
December 31, 2007. Research and development expense as a percentage of net sales
for the three months ended December 31, 2008 increased to 6.6% from 2.0% for the
three months ended December 31, 2007. The research and development expense
increased mainly as a result of our commitments to fund our development contract
with Shanghai University. In accordance with our joint research and development
laboratory agreement with Shanghai University, dated December 15, 2006 and
expiring on December 15, 2016, we are committed to funding an additional $3.8
million in the next 3 years. The delay in the payment of remaining fiscal years
2007 and 2008 commitments of $860,000 could lead to Shanghai University
requesting the Company pay the committed amount within a short time frame. If
the Company does not pay and is unable to correct the breach within the
requested time frame, Shanghai University could seek compensation up to an
additional 15% of the total committed amount for approximately $658,000. As of
the date of this report, we have not received any compensation request from
Shanghai University. We expect to increase our funding to research and
development activities as we grow our business.
 
 Loss on debt
extinguishment
  Quarter
      Ended December 31, 2008
                          
                          
                          Quarter
      Ended December 31, 2007
                          
                          
                          Year-Over-Year
      ChangeAmount
                          
                          
                          %
      of net sales
                          
                          
                          Amount
                          
                          
                          %
      of net sales
                          
                          
                          Amount
                          
                          
                          %
      of changeLoss
      on debt extinguishment
                          
                          $
                          310,000
                          
                          
                          
                          6.1
                          %
                          
                          $
                          362,000
                          
                          
                          
                          7.5
                          %
                          
                          $
                          (52,000
                          )
                          
                          
                          (14.4
                          %)
 For the three months ended December 31,
2008 and 2007, we incurred a loss on debt extinguishment of $0.3 million and
$0.4 million, respectively. During the quarter ended December 31, 2008, part of
our Series A and B convertible notes were converted into common stock which
resulted in the loss of $0.3 million. During the quarter ended December 31,
2007, loss on debt extinguishment of $0.4 million represented a loss of $0.7 on
converting $0.9 million of Series A convertible notes into common stock,
partially offset by a gain of $0.4 million on settlement of loan due to Coach
Capital LLC and Infotech Essentials Ltd.
  23
  Other income
  Quarter
      Ended December 31, 2008
                                    
                                    
                                    Quarter
      Ended December 31, 2007
                                    
                                    
                                    Year-Over-Year
      ChangeAmount
                                    
                                    
                                    %
      of net sales
                                    
                                    
                                    Amount
                                    
                                    
                                    %
      of net sales
                                    
                                    
                                    Amount
                                    
                                    
                                    %
      of changeInterest
      income
                                    
                                    $
                                    7,000
                                    
                                    
                                    
                                    0.1
                                    %
                                    
                                    $
                                    10,000
                                    
                                    
                                    
                                    0.2
                                    %
                                    
                                    $
                                    (3,000
                                    )
                                    
                                    
                                    (30.0
                                    %)Interest
      expense
                                    
                                    
                                    (365,000
                                    )
                                    
                                    
                                    (7.2
                                    %)
                                    
                                    
                                    (278,000
                                    )
                                    
                                    
                                    (5.7
                                    %)
                                    
                                    
                                    (87,000
                                    )
                                    
                                    
                                    31.3
                                    %Gain
      on change in fair market valueof
      compound embedded derivative
                                    
                                    
                                    475,000
                                    
                                    
                                    
                                    9.3
                                    %
                                    
                                    
                                    1,099,000
                                    
                                    
                                    
                                    22.7
                                    %
                                    
                                    
                                    (624,000
                                    )
                                    
                                    
                                    (56.8
                                    %)Gain
      on change in fair market valueof
      warrant liability
                                    
                                    
                                    1,644,000
                                    
                                    
                                    
                                    32.3
                                    %
                                    
                                    
                                    115,000
                                    
                                    
                                    
                                    2.4
                                    %
                                    
                                    
                                    1,529,000
                                    
                                    
                                    
                                    1329.6
                                    %Other
      expense
                                    
                                    
                                    (20,000
                                    )
                                    
                                    
                                    (0.4
                                    %)
                                    
                                    
                                    (38,000
                                    )
                                    
                                    
                                    (0.8
                                    %)
                                    
                                    
                                    18,000
                                    
                                    
                                    
                                    (47.4
                                    %)Total
      other income
                                    
                                    $
                                    1,741,000
                                    
                                    
                                    
                                    34.2
                                    %
                                    
                                    $
                                    908,000
                                    
                                    
                                    
                                    18.8
                                    %
                                    
                                    $
                                    833,000
                                    
                                    
                                    
                                    91.7
                                    %
  For the three months ended December 31,
2008, total other income was $1.7 million, representing an increase of $0.8
million or 91.7% compared to $0.9 million for the same period of the prior year.
Other income as a percentage of net sales for the three months ended December
31, 2008 increased to 34.2% from 18.8% for the three months ended December 31,
2007.
 
 We incurred interest expenses of $0.4
million and $0.3 million in the three months ended December 31, 2008 and 2007,
respectively primarily related to the 6% interest charges on Series A and B
convertible notes.
 
 In the three months ended December 31,
2008, we recorded a gain on change in fair market value of a compound embedded
derivative of $0.5 million and a gain on change in the fair market value of
warrant liability of $1.6 million. This compared to a gain on change in the fair
market value of a compound embedded derivative of $1.1 million and a gain on
change in fair market value of warrant liability of $0.1 million during the
three months ended December 31, 2007.
 
 Liquidity and Capital
Resources
  December 31,
      2008
                            
                            
                            September 30,
      2008
                            
                            
                            ChangeCash and cash
      equivalents
                            
                            $
                            5,675,000
                            
                            
                            $
                            3,238,000
                            
                            
                            $
                            2,437,000
 As of December 31, 2008, we had cash and
cashequivalents of $5.7
million, as compared to $3.2 million atSeptember 30, 2008. We require a
significant amount of cash to fund our operations. Changes in our operating
plans, an increase in our inventory, increased expenses, additional
acquisitions, or other events, may cause us to seek additional equity or debt
financing in the future. If we are not able to obtain funding in a timely manner
or on commercially acceptable terms or at all, we may curtail our operations or
take actions to reduce cost in order to continue our operations for the next 12
months.
  Quarter Ended December
      31,2008
                              
                              
                              2007
                              
                              
                              ChangeNet cash provided by (used
      in):Operating
      activities
                              
                              $
                              2,692,000
                              
                              
                              $
                              (791,000
                              )
                              
                              $
                              3,483,000Investing
      activities
                              
                              
                              (264,000
                              )
                              
                              
                              (1,682,000
                              )
                              
                              
                              1,418,000Effect of exchange rate changes on
      cash and cash equivalents
                              
                              
                              9,000
                              
                              
                              
                              469,000
                              
                              
                              
                              (460,000
                              )Net increase (decrease) in cash
      and cash equivalents
                              
                              $
                              2,437,000
                              
                              
                              $
                              (2,004,000
                              )
                              
                              $
                              4,441,000
 Net cash provided by (used in) operating
activities were$2.7
million and $0.8million
for the three months ended December 31, 2008 and 2007, respectively. The
increase of net cash provided by operating activitiesof $3.5million was primarily attributable to
the changes in operating assets and liabilities of $4.9 million, mainly from lower
accounts receivable,inventory purchases, advance payment for
raw material andVAT taxes
receivable,partially offset bylower accounts payablerelated to inventory purchases.
The increase of net cashprovided byoperating activitieswas partially offset by
$1.5million of lower
non-cash items adjustments mainly from gain on change in fair market value of warrant liability
andlower stock-based compensation expense,
partially offset bygain on
change in fair market value of compound embedded derivatives.
 
 Net cash used in investment activities
were $0.3 million and
$1.7million for the three
months ended December 31, 2008 and 2007, respectively.The decrease of $1.4million in net cash used in investing
activities was primarily due to lower property and equipment acquisition during
thequarter ended December
31, 2008 compared to the quarterended December 31,
2007.
 
 The exchange rate changes on cash and
cash equivalents were primarily from exchange gains of balances held in Chinese
Renminbi (RMB). The exchange rates at December 31, 2008 and 2007 were 1 U.S.
dollar for RMB 6.8346 and 1 U.S. dollar for RMB 7.3046,
respectively.
  24
  Our current cash requirements are
significant because, aside from our operational expenses, we are building our
inventory of silicon wafers. The average sales price of solar modules and cost
of silicon wafers, which are the primary cost of sales for our SolarE solar
modules, are currently volatile. We are uncertain of the extent to which these
will negatively affect our working capital in the near future. A significant
decrease in sale price or increase in the cost of silicon wafers could cause us
to run out of cash more quickly than our current operational plans provide,
requiring us to raise additional funds or curtail
operations.
 
 Off-Balance Sheet
Arrangements
  On August 21, 2008 the Company entered
into an equity purchase agreement in which it acquired two million shares of
common stock of 21-Century Silicon, Inc., a polysilicon manufacturer based in
Dallas, Texas (“21-Century Silicon”), for $1 million cash. The two million
shares acquired by the Company constitute approximately 7.8% of 21-Century
Silicon’s outstanding equity. The equity purchase agreement further provides
that the Company would acquire an additional two million shares upon 21-Century
Silicon meeting certain milestones.
 
 Under the terms of the equity purchase
agreement, the Company acquired two million shares of newly issued common stock
at a purchase price of $0.50 per share, and would acquire an additional two
million shares at the same per share price upon the first polysilicon shipment
meeting the quality specifications determined solely by the Company. Related to
the equity purchase agreement, the Company has also signed a memorandum of
understanding with 21-Century Silicon for a four-year supply framework agreement
for polysilicon shipments.
  ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
  As a Smaller Reporting Company as
defined Rule 12b-2 of the Exchange Act and in item 10(f)(1) of Regulation S-K,
we are electing scaled disclosure reporting obligations and therefore are not
required to provide the information requested by this Item
3.
 
 ITEM 4T. CONTROLS AND
PROCEDURES
  Disclosure Controls and
Procedures
  Management carried out an evaluation,
under the supervision and with the participation of our Chief Executive Officer
and Acting Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of the period
covered by this report. The evaluation was undertaken in consultation with our
accounting personnel. Based on that evaluation, the Chief Executive Officer and
Acting Chief Financial Officer concluded that our disclosure controls and
procedures are not effective to ensure that information required to be disclosed
by us in the reports that we file or submit under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms because of the lack of finance and
accounting personnel with an appropriate level of knowledge, experience and
training in the application of U.S. GAAP. Accordingly, management has determined
that this control deficiency constitutes a material
weakness.
 
 
 Internal Control Over Financial
Reporting
 
 Our management, with the participation
of our Chief Executive Officer and our Acting Chief Financial Officer, has
concluded there were no changes in our internal controls over financial
reporting that occurred during the fiscal quarter ended December 31, 2008 that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
  25
  PART II - OTHER INFORMATION
  ITEM 1. LEGAL
PROCEEDINGS
  None
  ITEM 1A. RISK
FACTORS
  There have been no material changes in
our risk factors from those disclosed in our 2008 Annual Report on
Form 10-K.
 
 ITEM 2. UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS
  None
  ITEM 3. DEFAULTS UPON SENIOR
SECURITIES
  None
  ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
  None
 
 ITEM 5. OTHER
INFORMATION
  Resignation
of Officers and Directors.
 
 Ms.
Anthea Chung resigned from her position as Chief Financial Officer, Treasurer and Secretary within
the Company effective December 22, 2008.  At the time of her
resignation, Mr. Leo Shi Young was the sole executive of the Company serving as
the President and Chief Executive Officer and its ActingChief Financial Officer, Acting Treasurer and Acting
Secretary.
  ITEM 6. EXHIBITS
  (a) Pursuant to Rule 601 of Regulation
S-K, the following exhibits are included herein or incorporated by
reference.
  2.1
                
                Agreement and Plan of Merger with
      Solar EnerTech Corp., a Nevada corporation and our predecessor in
      interest, dated August 13, 2008, incorporated by reference from Exhibit
      2.1 to our Form 8-K filed on August 14, 2008.3.1
                
                Certificate of Incorporation,
      Incorporated by reference from Exhibit 3.1 to our Form 8-K filed on August
      14, 2008.3.2
                
                By-laws, Incorporated by reference
      from Exhibit 3.2 to our Form 8-K filed on August 14,
      2008.31.1
                
                Section 302 Certification - Chief
      Executive Officer*31.2
                
                Section 302 Certification - Chief
      Financial Officer*32.1
                
                Certification Pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002 - Chief Executive
    Officer.*32.2
                
                Certification Pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002 - Chief Financial
    Officer.*
 
 * Filed herewith.
  26
 
 SIGNATURES
 
 Pursuant to the requirements 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.
  SOLAR ENERTECH CORP.
 
 Date:February 13, 2009
                By:
                /s/ Leo Shi
      YoungLeo Shi
    YoungPresident and Chief Executive
      Officer




27