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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-QSB/A
 Amendment No. 2
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarter ended March 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission
File Number 333-120926
 SOLAR ENERTECH CORP.
  Nevada
    

98-0434357State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization
    
    Identification No.)
 1600 Adams DriveMenlo
Park, CA 94025(Address of principal executive offices) (Zip Code)
 (650) 688-5800
 o þ
 þ o
 78,807,012
 o þ




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##### 



Table of Contents
 PART IFINANCIAL INFORMATION
    
    8ITEM 1. FINANCIAL STATEMENTS
    
    8ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
    
    32ITEM 3. CONTROLS AND PROCEDURES
    
    48PART IIOTHER INFORMATION
    
    48ITEM 1. LEGAL PROCEEDINGS
    
    48ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
    
    48ITEM 3. DEFAULTS UPON SENIOR SECURITIES
    
    49ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    49ITEM 5. OTHER INFORMATION
    
    49ITEM 6. EXHIBITS
    
    49SIGNATURES
    
    51EX-31.1 SECTION 302 CERTIFICATION - CEOEX-31.2 SECTION 302 CERTIFICATION - CFOEX-32.1 CERTIFICATION PURSUANT TO SECTION 1350EX-32.2 CERTIFICATION PURSUANT TO SECTION 1350
  FORWARD-LOOKING STATEMENTS
    
    
    our expectations regarding the worldwide demand for electricity and the market for solar energy;
    
    our beliefs regarding the effects of environmental regulation, lack of infrastructure
reliability and long-term fossil fuel supply constraints;
    
    our beliefs regarding the inability of traditional fossil fuel-based generation technologies to
meet the demand for electricity;
    
    our beliefs regarding the importance of environmentally friendly power generation;
    
    our expectations regarding governmental support for the deployment of solar energy;
    
    our beliefs regarding the acceleration of adoption of solar technologies;
    
    our beliefs regarding the competitiveness of PV products;
    
    our expectations regarding the creation and development of our manufacturing capacity;
    
    our expectations with respect to revenue and sales and our ability to achieve profitability
resulting
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from increases in production volumes;
    
    our expectations with respect to our ability to secure raw materials in the future;
    
    our future business development, results of operations and financial condition; and
    
    competition from other manufacturers of PV products and conventional energy suppliers.
 YOU SHOULD NOT PLACE UNDUE RELIANCE ON THESE FORWARD LOOKING STATEMENTS
  EXPLANATORY NOTE
 Restatement of consolidated financial statements
  Amendment No.1
   Amendment No.2
  
    
    The conversion option embedded in the notes was determined to be an embedded derivative,
primarily as a result of cash settlement provisions triggered by certain change of control
type events, along with the previously identified redemption privilege derivative. Together
these derivatives represent a compound embedded derivative to be accounted for at fair value
at inception and at each subsequent reporting period. As a result of this determination this
compound embedded derivative was valued at $17 million and recorded as a separate liability in
the balance
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sheet which created an offsetting debt discount. The original derivative liability
totaling $1.2 million recorded in the Amendment No. 1 was reversed in this Amendment No.2 and
the value of the new compound embedded derivative was recorded.
    
    Since the conversion option was determined to be an embedded derivative, the Companys
prior accounting for the conversion option under EITF 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,
and EITF 00-27,  Application of Issue No. 98-5 to Certain Convertible Instruments ,
as a beneficial conversion feature was determined to be incorrect. As a result, the
related beneficial conversion feature recorded to equity with the offset to debt discount of
$17.3 million was reversed and the related amortization of this discount totaling $282,000 was
also reversed in this Amendment No 2.
    
    The warrants issued to the note holders as well as the placement agent were determined to
be liability instruments, primarily due to the existence of cash redemption provisions
contained in the warrants in the event of certain change of control-type events. The value of
the warrants issued to the note holders totaling $15.9 million has been recorded in this
amendment as a liability and related discount to the convertible notes at issuance with
changes in fair value in subsequent periods recorded as loss on fair market value of warrant
liability in the statement of operations. The warrants issued to the placement agent totaling
$1.2 million have been recorded in this Amendment No. 2 as a warrant liability and deferred
financing cost with changes in fair value in subsequent periods being recorded as loss on
fair market value of warrant liability in the statement of operations. The deferred financing
costs are being amortized to interest expense on a method that approximates the effective
interest rate method.
    
    The fair value changes of the compound embedded derivative and warrants totaling $22.6
million have been recorded as loss on fair market value of compound embedded derivative and
loss on fair market value of warrant liability in this Amendment No. 2.
    
    We recorded a loss on issuance of convertible notes of $15.2 million relating to the
excess of the fair value of the warrants issued to the note holders and compound embedded
derivative liabilities over loan principal balance at the issuance of the notes.Additionally, in responding to the second SEC comment letter, we reviewed certain historical
transactions that occurred prior to September 30, 2006 and made the following adjustments in
Amendment No. 3 to our Annual Report on Form 10-KSB. These revisions have been carried forward in
the balance sheet as of March 31, 2007.
    
    We recorded an additional compensation expense of $14.4 million related to the options
granted on March 1, 2006 to our President and to a director. The original Black Scholes model
used $0.002 as the fair value of the common stock, based on the most recent sale of our common
stock prior to the issuance date. However, shortly after the grant dates of these options,
our common stock traded in a public market at a significantly higher value. Management
revised the assumptions used in the Black Scholes model, most notably increasing the share
price from $0.002 to $0.70 per share based upon a valuation performed by our management. This
resulted in a significantly higher compensation expense.
    
    We recorded an additional compensation expense of $2.9 million related to the transfer of
5.75 million shares of our common stock by our President to various officers and employees of
Infotech Shanghai. The share price of $1.36 used in the original calculation was based on an
incorrect transaction date. The share price used in the revised calculation was $1.86 which
resulted in a significantly higher compensation expense.
    
    We recorded a withholding tax expense and liability of $2.1 million related to the exercise
of stock option grants by the President and a US employee who reside in the United States.
    
    We reclassified imputed interest on a related party loan of $54,000 from additional paid in
capital to accrued expense.
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Impact of Error on Previously filed Financial Statements
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Original Form
    
    
    
    
    
    
    Amendment10-QSB
    
    Adjustments
    
    
    No. 2 to Form 10-QSBBalance
Sheet  March 31, 2007Current portion of deferred financing costs
    
    $
    605,937
    
    
    $
    (601,149
    )
    
    
    $
    4,788Deferred financing costs
    
    $
    2,771,864
    
    
    $
    (236,518
    )
    
    
    $
    2,535,346Accounts payable and accrued liabilities
    
    $
    379,715
    
    
    $
    2,118,833
    
    
    
    $
    2,498,548Accounts payable and accrued liabilities, related parties
    
    $
    11,760
    
    
    $
    53,562
    
    
    
    $
    65,322Derivative liabilities
    
    
    
    
    
        $
    29,200,000
    
    
    
        $
    29,200,000Warrant liabilities
    
    
    
    
    
        $
    27,058,024
    
    
    
        $
    27,058,024Additional paid in capital
    
    $
    32,011,003
    
    
    $
    2,064,857
    
    
    
    $
    34,075,860Deficit accumulated during development stage
    
    
    (9,740,890
    )
    
    
    (61,050,385
    )
    
    
    $
    (70,791,275
    )Statement of OperationsFor the quarter ended March 31, 2007Selling, general and administrative expense
    
    $
    321,096
    
    
    $
    2,104,825
    
    
    
    $
    2,425,921Interest expense
    
    $
    (355,354
    )
    
    $
    301,326
    
    
    
    $
    (54,028
    )Loss on issuance of convertible notes
    
    
    
    
    
    $
    (15,209,311
    )
    
    
    $
    (15,209,311
    )Loss on fair market value of compound embedded derivative
    
    
    
    
    
    $
    (12,600,000
    )
    
    
    $
    (12,600,000
    )Loss on fair market value of warrant liability
    
    
    
    
    
    $
    (9,958,593
    )
    
    
    $
    (9,958,593
    )Net loss
    
    $
    (676,793
    )
    
    $
    (39,571,403
    )
    
    
    $
    (40,248,196
    )Net loss per share  Continuing operations
    
    $
    (0.01
    )
    
    $
    (0.50
    )
    
    
    $
    (0.51
    )Statement of OperationsFor the 6 months ended March 31, 2007Selling, general and administrative expense
    
    $
    772,859
    
    
    $
    4,162,461
    
    
    
        $
    4,935,320Interest expense
    
    $
    (355,354
    )
    
    $
    301,326
    
    
    
    $
    (54,028
    )Loss on issuance of convertible notes
    
    
    
    
    
    $
    (15,209,311
    )
    
    
    $
    (15,209,311
    )Loss on fair market value of compound embedded derivative
    
    
    
    
    
    $
    (12,600,000
    )
    
    
    $
    (12,600,000
    )Loss on fair market value of warrant liability
    
    
    
    
    
    $
    (9,958,593
    )
    
    
    $
    (9,958,593
    )Net loss
    
    $
    (1,178,927
    )
    
    $
    (41,674,039
    )
    
    
    $
    (42,852,966
    )Net loss per share  Continuing operations
    
    $
    (0.02
    )
    
    $
    (0.53
    )
    
    
    $
    (0.55
    )Statement of OperationsFrom inception (July 7, 2004) through March 31, 2007Selling, general and administrative expense
    
    $
    9,233,786
    
    
    $
    23,583,807
    
    
    
    $
    32,817,593Interest expense
    
    $
    (355,354
    )
    
    $
    301,326
    
    
    
    $
    (54,028
    )Loss on issuance of convertible notes
    
    
    
    
    
    $
    (15,209,311
    )
    
    
    $
    (15,209,311
    )Loss on fair market value of compound embedded derivative
    
    
    
    
    
    $
    (12,600,000
    )
    
    
    $
    (12,600,000
    )Loss on fair market value of warrant liability
    
    
    
    
    
    $
    (9,958,593
    )
    
    
    $
    (9,958,593
    )Net loss
    
    $
    (9,740,890
    )
    
    $
    (61,050,385
    )
    
    
    $
    (70,791,275
    )
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7




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PART I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 PageNumberConsolidated Balance Sheets
    
    
    9Consolidated Statements of Operations
    
    
    10Consolidated Statement of Stockholders Equity / (Deficit)
    
    
    11Consolidated Statement of Cash Flows
    
    
    12Notes to the Consolidated Financial Statements
    
    
    13
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Solar Enertech Corp.
A Development Stage Company
 
 Consolidated Balance Sheets
 (Unaudited)
 March 31,
    
    September 30,2007
    
    2006(Restated)
    
    (Restated)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    14,398,617
    
    
    $
    2,798,957Prepaid expenses and advances
    
    
    2,270,834
    
    
    
    40,579Inventory
    
    
    1,228,396
    
    
    
    Current portion of deferred financing costs
    
    
    4,788
    
    
    
    Total Current Assets
    
    
    17,902,635
    
    
    
    2,839,536Fixed assets, net of accumulated depreciation
    
    
    215,166
    
    
    
    18,751Plant being developed for own Use
    
    
    2,953,695
    
    
    
    790,036Deferred financing costs
    
    
    2,535,346
    
    
    
    Deposits
    
    
    512,935
    
    
    
    572,416Total Assets
    
    $
    24,119,777
    
    
    $
    4,220,739LIABILITIES AND STOCKHOLDERS EQUITY / (DEFICIT)Current Liabilities:Accounts payable and accrued liabilities
    
    $
    2,498,548
    
    
    $
    2,183,289Accounts payable and accrued liabilities, related parties
    
    
    65,322
    
    
    
    89,292Demand note payable to a related party
    
    
    450,000
    
    
    
    450,000Demand notes payable
    
    
    700,000
    
    
    
    600,000Derivative liabilities
    
    
    29,200,000
    
    
    
    Warrant liabilities
    
    
    27,058,024
    
    
    
    Deferred revenues
    
    
    778,233
    
    
    
    Total Liabilities
    
    $
    60,750,127
    
    
    $
    3,322,581STOCKHOLDERS EQUITY:Capital stockCommon  200,000,000 Shares Authorized at $0.001 par
Value 78,807,012 and 76,307,012 Shares Issued and
Outstanding at December 31, 2006 and September 30, 2006,
Respectively
    
    
    78,807
    
    
    
    76,307Additional paid in capital
    
    
    34,075,860
    
    
    
    28,764,155Other comprehensive loss
    
    
    6,258
    
    
    
    (3,995
    )Deficit accumulated during development stage
    
    
    (70,791,275
    )
    
    
    (27,938,309
    )Total Stockholders Equity / (Deficit)
    
    
    (36,630,350
    )
    
    
    898,158Total Liabilities and Stockholders Equity / (Deficit)
    
    $
    24,119,777
    
    
    $
    4,220,739
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Solar Enertech Corp.
A Development Stage Company
 
 Consolidated Statements of Operations
 (Unaudited)
 For the Periods Ended
 Cumulative FromJuly 7, 2004Three Months Ended March 31,
    
    Six Months Ended March 31,
    
    (inception) to2007
    
    2006
    
    2007
    
    2006
    
    March 31, 2007(Restated)
    
    (Restated)
    
    (Restated)
    
    (Restated)
    
    (Restated)Sales
    
    
    3,208
    
    
    
    
    
    
    
    3,208
    
    
    
    
    
    
    
    3,208Cost of sales
    
    
    (5,958
    )
    
    
    
    
    
    
    (5,958
    )
    
    
    
    
    
    
    (5,958
    )Gross Loss
    
    
    (2,750
    )
    
    
    
    
    
    
    (2,750
    )
    
    
    
    
    
    
    (2,750
    )Operating expenseSelling and general & administrative
    
    
    2,425,921
    
    
    
    10,210,448
    
    
    
    4,935,320
    
    
    
    10,210,448
    
    
    
    32,817,593Research & development
    
    
    3,986
    
    
    
    
    
    
    
    105,784
    
    
    
    
    
    
    
    105,784Operating Expense
    
    
    2,429,907
    
    
    
    10,210,448
    
    
    
    5,041,104
    
    
    
    10,210,448
    
    
    
    32,923,377Other (expense) incomeInterest income
    
    
    6,393
    
    
    
    
    
    
    
    12,820
    
    
    
    
    
    
    
    21,313Interest expense
    
    
    (54,028
    )
    
    
    
    
    
    
    (54,028
    )
    
    
    
    
    
    
    (54,028
    )Loss on issuance of convertible notes
    
    
    (15,209,311
    )
    
    
    
    
    
    
    (15,209,311
    )
    
    
    
    
    
    
    (15,209,311
    )Loss on fair market value of compound embedded derivative
    
    
    (12,600,000
    )
    
    
    
    
    
    
    (12,600,000
    )
    
    
    
    
    
    
    (12,600,000
    )Loss on fair market value of warrant liability
    
    
    (9,958,593
    )
    
    
    
    
    
    
    (9,958,593
    )
    
    
    
    
    
    
    (9,958,593
    )Loss from Continuing Operations
    
    
    (40,248,196
    )
    
    
    (10,210,448
    )
    
    
    (42,852,966
    )
    
    
    (10,210,448
    )
    
    
    (70,726,746
    )Loss from Discontinued Operations
    
    
    
    
    
    
    (14,428
    )
    
    
    
    
    
    
    (21,041
    )
    
    
    (64,529
    )Net Loss
    
    
    (40,248,196
    )
    
    
    (10,224,876
    )
    
    
    (42,852,966
    )
    
    
    (10,231,489
    )
    
    
    (70,791,275
    )Net Loss per Share  Basic and DilutedContinuing operations
    
    $
    (0.51
    )
    
    $
    (0.09
    )
    
    $
    (0.55
    )
    
    $
    (0.08
    )Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted Average Shares Outstanding
    
    
    78,807,012
    
    
    
    111,672,782
    
    
    
    77,982,836
    
    
    
    124,150,002
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Solar Enertech Corp.
A Development Stage Company
 
 Consolidated Statement of Shareholders Equity (Unaudited)
 For the period from July 7, 2004 [Inception] to March 31, 2007
 Additional
    
    Other
    
    AccumulatedCommon Stock
    
    Paid-In
    
    Comprehensive
    
    Deficit During
    
    Total StockholdersNumber
    
    Amount
    
    Capital
    
    Income
    
    Development Stage
    
    EquityBalances, at Inception
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Stock issued for cash
    
    
    101,200,000
    
    
    $
    101,200
    
    
    $
    (78,200
    )
    
    $
    
    
    
    $
    
    
    
    $
    23,000Net loss from inception (July 7, 2004) to September 30, 2004
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (2,701
    )
    
    $
    (2,701
    )Balances, September 30, 2004
    
    
    101,200,000
    
    
    $
    101,200
    
    
    $
    (78,200
    )
    
    $
    
    
    
    $
    (2,701
    )
    
    $
    20,299Stock issued for cash
    
    
    35,200,000
    
    
    $
    35,200
    
    
    $
    44,800
    
    
    
    
    
    
    
    
    
    
    $
    80,000Net loss for the year ended September 30, 2005
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (47,706
    )
    
    $
    (47,706
    )Balances, September 30, 2005
    
    
    136,400,000
    
    
    $
    136,400
    
    
    $
    (33,400
    )
    
    $
    
    
    
    $
    (50,407
    )
    
    $
    52,593Stock returned to treasury (no cost)
    
    
    (63,699,988
    )
    
    $
    (63,700
    )
    
    $
    63,700
    
    
    $
    
    
    
    $
    
    
    
    $
    Stock based compensation
    
    
    
    
    
    $
    
    
    
    $
    25,130,462
    
    
    $
    
    
    
    $
    
    
    
    $
    25,130,462Issuance of common stock and warrants
    
    
    3,607,000
    
    
    $
    3,607
    
    
    $
    3,603,393
    
    
    $
    
    
    
    $
    
    
    
    $
    3,607,000Currency translation adjustment
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (3,995
    )
    
    $
    
    
    
    $
    (3,995
    )Net loss for the year ended September 30, 2006
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    (27,887,902
    )
    
    $
    (27,887,902
    )Balances, September 30, 2006 (As restated)
    
    
    76,307,012
    
    
    $
    76,307
    
    
    $
    28,764,155
    
    
    $
    (3,995
    )
    
    $
    (27,938,309
    )
    
    $
    898,158Issue of stock and warrant, net of offering costs
    
    
    2,500,000
    
    
    $
    2,500
    
    
    $
    1,086,692
    
    
    $
    
    
    
    $
    
    
    
    $
    1,089,192Stock based compensation
    
    
    
    
    
    $
    
    
    
    $
    4,225,013
    
    
    $
    
    
    
    $
    
    
    
    $
    4,225,013Currency translation adjustment
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    10,253
    
    
    $
    
    
    
    $
    10,253Net loss for the period ended March 31, 2007 (Restated)
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (42,852,966
    )
    
    $
    (42,852,966
    )Balances, March 31, 2007 (As restated)
    
    
    78,807,012
    
    
    $
    78,807
    
    
    $
    34,075,860
    
    
    $
    6,258
    
    
    $
    (70,791,275
    )
    
    $
    (36,630,350
    )
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Solar Enertech Corp.
A Development Stage Company
 
 Consolidated Statements of Cash Flows
 (Unaudited)
 For the Periods Ended
 Cumulative fromJuly 7, 2004Six months ended March 31,
    
    (Inception) to March2007
    
    2006
    
    31, 2007(Restated)
    
    (Restated)
    
    (Restated)Cash Flows from Operating ActivitiesNet Loss
    
    $
    (42,852,966
    )
    
    $
    (10,231,489
    )
    
    $
    (70,791,275
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation of fixed assets
    
    
    8,832
    
    
    
    1,198
    
    
    
    12,766Stock based compensation
    
    
    4,225,013
    
    
    
    10,210,448
    
    
    
    29,355,475Loss on issuance of convertible notes
    
    
    15,209,311
    
    
    
    
    
    
    
    15,209,311Loss on fair market value of compound embedded derivative
    
    
    12,600,000
    
    
    
    
    
    
    
    12,600,000Loss on fair market value of warrant liability
    
    
    9,958,593
    
    
    
    
    
    
    
    9,958,593Changes in:Prepaid expenses
    
    
    (2,230,255
    )
    
    
    
    
    
    
    (2,270,834
    )Due from related party
    
    
    
    
    
    
    
    
    
    
    Inventory
    
    
    (1,228,396
    )
    
    
    
    
    
    
    (1,228,396
    )Deferred revenue
    
    
    778,233
    
    
    
    
    
    
    
    778,233Accounts payable and accrued expenses
    
    
    315,259
    
    
    
    5,809
    
    
    
    2,451,232Accounts payable and accrued expenses, related parties
    
    
    (68,846
    )
    
    
    
    
    
    
    20,446Cash used in operating activities
    
    $
    (3,285,222
    )
    
    $
    (14,034
    )
    
    $
    (3,904,449
    )Cash flows from investing Activities:Acquisition of equipment
    
    
    (205,247
    )
    
    
    
    
    
    
    (227,932
    )Deposit for equipment
    
    
    59,481
    
    
    
    
    
    
    
    (512,935
    )Leasehold improvements  plant
    
    
    (2,141,221
    )
    
    
    
    
    
    
    (2,883,941
    )Cash used in investing activites
    
    $
    (2,286,987
    )
    
    $
    
    
    
    $
    (3,624,808
    )Cash flows from Financing Activities:Proceeds from note payables
    
    
    100,000
    
    
    
    
    
    
    
    700,000Proceeds from advances from a related party
    
    
    
    
    
    
    
    
    
    
    450,000Proceeds from convertible notes, net of offering cost
    
    
    15,949,939
    
    
    
    
    
    
    
    15,949,939Proceeds from issue of common stock, net of offering costs
    
    
    1,089,192
    
    
    
    
    
    
    
    4,799,192Cash provided by financing activities
    
    $
    17,139,131
    
    
    $
    
    
    
    $
    21,899,131Effect of exchange rates on cash
    
    
    32,738
    
    
    
    
    
    
    
    28,743Net Increase in Cash
    
    
    11,599,660
    
    
    
    (14,034
    )
    
    
    14,398,617Cash, Beginning of Period
    
    
    2,798,957
    
    
    
    48,401Cash, End of Period
    
    $
    14,398,617
    
    
    $
    34,367
    
    
    $
    14,398,617SUPPLEMENTAL DISCLOSURES:Non-cash investing and financing activities:Warrants issued to placement agent in connection with convertible notes
    
    $
    1,893,652
    
    
    $
    
    
    
    $
    1,893,652Warrants issued to note holders
    
    $
    25,164,373
    
    
    $
    
    
    
    $
    25,164,373Capitalized interest related to leasehold improvements  plant
    
    $
    22,438
    
    
    $
    
    
    
    $
    69,754
  12




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##### Table of Contents



SOLAR ENERTECH CORP.
A Development Stage Company
 
 Notes to Consolidated Financial Statements
 March 31, 2007 (Unaudited)
 NOTE 1  BASIS OF PRESENTATION
  NOTE 2  SIGNIFICANT ACCOUNTING POLICIES
 Principles of consolidation and basis of accounting
      13




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##### Table of Contents



Inventory
  Derivative Financial Instruments
   14




---



##### Table of Contents



Revenue Recognition
  Research and Development Cost
  NOTE 3  FINANCIAL INSTRUMENTS
 Credit risk
  Fair values
  15




---



##### Table of Contents



Foreign exchange risk
  NOTE 4  INVENTORY
 Raw materials
    
    $
    841,000Work in process
    
    $
    387,396Total
    
    $
    1,228,396
   NOTE 5  NOTE PAYABLE
  NOTE 6  CONVERTIBLE NOTES
  
    
    $5,000,000 in principal amount of Series A Convertible Notes and warrants to purchase
7,246,377 shares (exercise price of $1.21 per share) of its common stock;
    
    $3,300,000 in principal amount of Series B Convertible Notes and warrants to purchase
5,789,474 shares (exercise price of $0.90 per share) of its common stock , and;
    
    $9,000,000 in principal amount of Series B Convertible Notes and warrants to purchase
15,789,474 shares (exercise price of $0.90 per share) of its common stock.
   16




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##### Table of Contents



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




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##### Table of Contents



At Issuance
    
    March 31, 2007Starting stock price (Closing price on
date preceding valuation date)
    
    
    $1.05 & 1.35
    
    
    
    $1.76Annual Volatility of Stock
    
    
    81.98%
    
    
    
    81.98%Risk Free
Rate (Based on 3yr T-Bill)
    
    
    4.48% &
4.51%
    
    
    
    4.54%
   Interest Payments
 , :
 Registration Rights (Series A Convertible Notes)
  18




---



##### Table of Contents




    
    File an initial registration statement within 45 days after closing (1.0% per month of the
aggregate purchase price until such failure is cured);
    
    Cause effectiveness of the registration statement within 120 days after closing (1.0% per
month of the aggregate purchase price until such failure is cured);
    
    Maintain effectiveness of the registration statement for the period in which the Notes and
Warrants are issued and outstanding (1.0% per month of the aggregate purchase price until such
failure is cured); or
    
    File additional registration statements, as required for any shares cutback from the
initial registration statement as a result of Rule 415(a) limitations (0.25% per month of the
aggregate purchase price until such failure is cured commencing after 150 days after closing).
    Voting Rights
  Dividends
  Conversion
 1)
    
    At any time or times on or after the issuance date of the Notes, the holder is entitled to
convert, at the holders sole option, any portion of the outstanding and unpaid conversion
amount (principal, accrued and unpaid interest and accrued and unpaid late charges) into fully
paid and nonassessable shares of common stock, at the conversion rate (as defined below).
 2)
    
    Forced Conversion.Upon thirty (30) days prior written notice to all of the holders,
the Company shall have the right to call all, but not less than all, of the Notes for
conversion at the conversion price (as defined below) provided that for each of the twenty
(20) trading days immediately preceding the forced conversion date:
 
    
    The Companys common stock has closed at a price equal to or greater than 300% of the then
 19




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##### Table of Contents



;
 
    
    There is either an effective registration statement providing for the resale of the shares
of common stock underlying the Notes or all of the shares of common stock underlying the Notes
may be resold pursuant to Rule 144(k) of the Securities Act without restriction; and
    
    The common stock has traded an average of 500,000 shares per day.
 Conversion Rate.
   Redemptions
 :
 1)
    
    Series A OnlyA failure relating to the registration statement (such as failure to file the
registration statement within 45 days after the closing, the failure to have the registration
statement declared effective within 150 days after the closing, or the failure to maintain the
registration statement during the period which the securities are outstanding) that cannot be
cured for a period of ten (10) consecutive days or for more than an aggregate of thirty (30)
days in any 365-day period (other than days during an allowable grace period);
 2)
    
    The suspension from trading or failure of the common stock to be listed on the principal
market or an eligible market for a period of five (5) consecutive trading days or for more
than an aggregate of ten (10) trading days in any 365-day period;
 3)
    
    The Companys (A) failure to cure a conversion failure by delivery of the required number of
shares of common stock within ten (10) trading days after the applicable conversion date or
(B) notice, written or oral, to any holder of the Notes, including by way of public
announcement or through any of its agents, at any time, of its intention not to comply with a
request for conversion of any Notes into shares of common stock that is tendered in accordance
with the provisions of the Notes;
 4)
    
    At any time following the tenth (10th) consecutive business day that the holders
authorized share allocation is less than the number of shares of common stock that the holder
would be entitled to receive upon a conversion of the full conversion amount of the Notes
(without regard to any limitations on conversion);
 5)
    
    The Companys failure to pay to the holder any amount of principal (including, without
limitation, any redemption payments), interest, late charges or other amounts when and as due
under the Notes or any other transaction document (as defined in the securities purchase
agreement) or any other agreement, document, certificate or other instrument delivered in
connection with the transactions to which the holder is a party, except, in the case of a
failure to pay any interest and late charges when and as due, in which case only if such
failure continues for a period of at least five (5) business days;
 20




---



##### Table of Contents



6)
    
    A) The occurrence of any payment default or other default under any indebtedness of the
Company or any of its subsidiaries that results in a redemption of or acceleration prior to
maturity of $100,000 or more of such indebtedness in the aggregate, or (B) the occurrence of
any material default under any indebtedness of the Company or any of its subsidiaries having
an aggregate outstanding balance in excess of $100,000 and such default continues uncured for
more than ten (10) business days, other than, in each case (A) or (B) above, or a default with
respect to any other notes;
 7)
    
    The Company or any of its subsidiaries, pursuant to or within the meaning of Title 11, U.S.
Code, or any similar Federal, foreign or state law for the relief of debtors (A) commences a
voluntary case, (B) consents to the entry of an order for relief against it in an involuntary
case, (C) consents to the appointment of a receiver, trustee, assignee, liquidator or similar
official,(D) makes a general assignment for the benefit of its creditors or (E) admits in
writing that it is generally unable to pay its debts as they become due;
 8)
    
    A court of competent jurisdiction enters an order or decree under any bankruptcy law that (A)
is for relief against the Company or any of its subsidiaries in an involuntary case, (B)
appoints a custodian of the Company or any of its subsidiaries or (C) orders the liquidation
of the Company or any of its subsidiaries;
 9)
    
    A final judgment or judgments for the payment of money aggregating in excess of $250,000 are
rendered against the Company or any of its subsidiaries and which judgments are not, within
sixty (60) days after the entry thereof, bonded, discharged or stayed pending appeal, or are
not discharged within sixty (60) days after the expiration of such stay; provided, however,
that any judgment which is covered by insurance or an indemnity from a credit worthy party
shall not be included in calculating the $250,000 amount set forth above so long as the
Company provides the holder with a written statement from such insurer or indemnity provider
(which written statement shall be reasonably satisfactory to the holder) to the effect that
such judgment is covered by insurance or an indemnity and the Company will receive the
proceeds of such insurance or indemnity within thirty (30) days of the issuance of such
judgment;
 10)
    
    The Company breaches any representation, warranty, covenant or other term or condition of any
transaction document, except, in the case of a breach of a covenant which is curable, only if
such breach continues for a period of at least ten (10) consecutive business days;
 11)
    
    Any breach or failure in any respect to comply with the terms of the Notes; or
 12)
    
    Any trigger event that occurs with respect to any other obligations of the Company.
 ,
 Change of Control
 1)
    
    Assumption.The Company may not enter into or be party to a Fundamental Transaction
(as defined below) unless:
 21




---



##### Table of Contents




    
    The successor entity assumes in writing all of the obligations of the Company under the
Notes and related documents; and
    
    The successor entity (including its parent entity) is a publicly traded corporation whose
common stock is quoted on or listed for trading on an eligible market.
 2)
    
    Redemption Right.At any time during the period beginning on the date of the holders
receipt of a change of control notice and ending twenty (20) trading days after the
consummation of such change of control, the holder may require the Company to redeem all or
any portion of the Notes in cash for an amount equal to any accrued and unpaid liquidated
damages, plus the greater of (i) the product of (x) the conversion amount being redeemed and
(y) the quotient determined by dividing (A) the greater of the closing sale price of the
common stock immediately prior to the consummation of the change of control, the closing sale
price immediately following the public announcement of such proposed change of control and the
closing sale price of the common stock immediately prior to the public announcement of such
proposed change of control by (B) the conversion price and (ii) 125% of the conversion amount
being redeemed.
  Exercise of Warrant and Exercise Price.
 ,
 Fundamental Transaction.
 NOTE 7  EQUITY TRANSACTIONS
 Common stock issued for cash
  Warrants
  22




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##### Table of Contents



Number of
    
    
    Exercise
    
    
    Expiration
    
    
    Fair Value
    
    
    RecognizedShares
    
    
    Price
    
    
    Date
    
    
    at Issuance
    
    
    AsOutstanding at March 31,
2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Granted in connection with
Common Stock Purchase
    
    
    2,825,000
    
    
    
    1.00
    
    
    May-June 2007
    
    $
    915,616
    
    
    Additional Paid in CapitalOutstanding at June 30, 2006
    
    
    2,825,000
    
    
    
    
    
    
    
    
    
    
    
    915,616Granted in connection with
Common Stock Purchase
    
    
    782,000
    
    
    
    1.00
    
    
    July-Sept 2007
    
    
    233,008
    
    
    Additional Paid in CapitalOutstanding at September
30, 2006
    
    
    3,607,000
    
    
    
    
    
    
    
    
    
    
    
    1,148,624Granted in connection with Common
Stock Purchase
    
    
    2,500,000
    
    
    
    1.00
    
    
    November 2007
    
    
    364,950
    
    
    Additional Paid in CapitalOutstanding at December 31,
2006
    
    
    6,107,000
    
    
    
    
    
    
    
    
    
    
    
    1,513,574Granted in connection with
convertible notes  Series
A
    
    
    7,246,377
    
    
    
    1.21
    
    
    March 2012
    
    
    3,235,563
    
    
    Discount to notes payableGranted in connection with
convertible notes  Series
B
    
    
    21,578,948
    
    
    
    0.90
    
    
    March 2012
    
    
    12,673,748
    
    
    Discount to notes payableGranted in connection with
placement service
    
    
    507,247
    
    
    
    0.69
    
    
    March 2012
    
    
    250,112
    
    
    Deferred financing costGranted in connection with
placement service
    
    
    1,510,528
    
    
    
    0.57
    
    
    March 2012
    
    
    940,008
    
    
    Deferred financing costOutstanding at March 31,
2007
    
    
    36,950,100
    
    
    
    
    
    
    
    
    
    
    $
    18,613,005
 23




---



##### Table of Contents



Warrants Outstanding and ExercisableWeighted-Weighted-
    
    AverageRange of
    
    
    
    
    
    Average
    
    RemainingWarrant
    
    Number of
    
    Exercise
    
    ContractualExercise Price
    
    Warrants
    
    Price
    
    Life$0.57 - $0.69
    
    
    2,017,775
    
    
    
    0.60
    
    
    
    4.97$.90 - $1.00
    
    
    27,685,948
    
    
    
    0.92
    
    
    
    3.96$1.21
    
    
    7,246,377
    
    
    
    1.21
    
    
    
    4.94
 Options
    §
    
    Volatility of 82.57%§
    
    Risk- free interest rate of 4.65%§
    
    Expected lives   4 years§
    
    No dividend yield§
    
    Market value per share of stock on measurement date of $0.70.
 
 
  Options OutstandingWeightedNumber
    
    Average
    
    Weighted# of
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding
    
    Remaining
    
    AverageOptions
    
    
    
    
    
    Exercise
    
    
    
    
    
    as at March
    
    Contractual
    
    ExerciseGranted
    
    
    Expiry
    
    Price
    
    Exercised
    
    31, 2007
    
    Life (year)
    
    PriceGranted to Leo Young, the President, March 1, 2006
    
    
    36,000,000
    
    
    10-Feb-10
    
    $
    0.0001
    
    
    
    10,750,000
    
    
    
    25,250,000
    
    
    
    2.71
    
    
    $
    0.0001Granted to
Frank Fang Xie, a director, March 1, 2006
    
    
    1,500,000
    
    
    10-Feb-10
    
    $
    0.0001
    
    
    
    
    
    
    
    1,500,000
    
    
    
    0.16
    
    
    $
    0.000037,500,000
    
    
    
    
    
    
    
    
    
    
    
    10,750,000
    
    
    
    26,750,000
    
    
    2.87 years
    
    $
    0.0001
 24




---



##### Table of Contents



NOTE 8  COMMITMENTS AND CONTINGENCIES
 Capital investments
  Year
    
    Amount2007 (remaining balance)
    
    $
    410,0002008
    
    
    723,0002009
    
    
    826,0002010
    
    
    826,0002011
    
    
    981,000Total
    
    $
    3,766,000
    25




---



##### Table of Contents



NOTE 9  RESTATEMENTS
  26




---



##### Table of Contents



Original Form
    
    
    
    
    
    
    
    
    
    Amendment10-QSB
    
    Adjustments
    
    Note
    
    No. 2Balance Sheet  March 31, 2007Current portion of deferred financing costs
    
    $
    605,937
    
    
    $
    (601,149
    )
    
    
    D
    
    
    $
    4,788Deferred financing costs
    
    $
    2,771,864
    
    
    $
    (236,518
    )
    
    
    D
    
    
    $
    2,535,346Accounts payable and accrued liabilities
    
    $
    379,715
    
    
    $
    2,118,833
    
    
    
    B
    
    
    $
    2,498,548Accounts payable and accrued liabilities, related parties
    
    $
    11,760
    
    
    $
    53,562
    
    
    
    C
    
    
    $
    65,322Derivative liabilities
    
    
    
    
    
    $
    29,200,000
    
    
    
    D
    
    
    $
    29,200,000Warrant liabilities
    
    
    
    
    
    $
    27,058,024
    
    
    
    D
    
    
    $
    27,058,024Additional paid in capital
    
    $
    32,011,003
    
    
    $
    2,064,857
    
    
    
    E
    
    
    $
    34,075,860Deficit accumulated during development stage
    
    
    (9,740,890
    )
    
    
    (61,050,385
    )
    
    
    F
    
    
    $
    (70,791,275
    )Statement of OperationsFor the quarter ended March 31, 2007Selling, general and administrative expense
    
    $
    321,096
    
    
    $
    2,104,825
    
    
    
    A
    
    
    $
    2,425,921Interest expense
    
    $
    (355,354
    )
    
    $
    301,326
    
    
    
    D
    
    
    $
    (54,028
    )Loss on issuance of convertible notes
    
    
    
    
    
    $
    (15,209,311
    )
    
    
    D
    
    
    $
    (15,209,311
    )Loss on fair market value of compound embedded derivative
    
    
    
    
    
    $
    (12,600,000
    )
    
    
    D
    
    
    $
    (12,600,000
    )Loss on fair market value of warrant liability
    
    
    
    
    
    $
    (9,958,593
    )
    
    
    D
    
    
    $
    (9,958,593
    )Net loss
    
    $
    (676,793
    )
    
    $
    (39,571,403
    )
    
    
    F
    
    
    $
    (40,248,196
    )Net loss per share  Continuing operations
    
    $
    (0.01
    )
    
    $
    (0.50
    )
    
    
    F
    
    
    $
    (0.51
    )Statement of OperationsFor the 6 months ended March 31, 2007Selling, general and administrative expense
    
    $
    772,859
    
    
    $
    4,162,461
    
    
    
    A
    
    
    $
    4,935,320Interest expense
    
    $
    (355,354
    )
    
    $
    301,326
    
    
    
    D
    
    
    $
    (54,028
    )Loss on issuance of convertible notes
    
    
    
    
    
    $
    (15,209,311
    )
    
    
    D
    
    
    $
    (15,209,311
    )Loss on fair market value of compound embedded derivative
    
    
    
    
    
    $
    (12,600,000
    )
    
    
    D
    
    
    $
    (12,600,000
    )Loss on fair market value of warrant liability
    
    
    
    
    
    $
    (9,958,593
    )
    
    
    D
    
    
    $
    (9,958,593
    )Net loss
    
    $
    (1,178,927
    )
    
    $
    (41,674,039
    )
    
    
    F
    
    
    $
    (42,852,966
    )Net loss per share  Continuing operations
    
    $
    (0.02
    )
    
    $
    (0.53
    )
    
    
    F
    
    
    $
    (0.55
    )Statement of OperationsFrom inception (July 7, 2004) through March 31, 2007Selling, general and administrative expense
    
    $
    9,233,786
    
    
    $
    23,583,807
    
    
    
    A
    
    
    $
    32,817,593Interest expense
    
    $
    (355,354
    )
    
    $
    301,326
    
    
    
    D
    
    
    $
    (54,028
    )Loss on issuance of convertible notes
    
    
    
    
    
    $
    (15,209,311
    )
    
    
    D
    
    
    
    (15,209,311
    )Loss on fair market value of compound embedded derivative
    
    
    
    
    
    $
    (12,600,000
    )
    
    
    D
    
    
    $
    (12,600,000
    )Loss on fair market value of warrant liability
    
    
    
    
    
    $
    (9,958,593
    )
    
    
    D
    
    
    $
    (9,958,593
    )Net loss
    
    $
    (9,740,890
    )
    
    $
    (61,050,385
    )
    
    
    F
    
    
    $
    (70,791,275
    )
 27




---



##### Table of Contents









1.
    
    The fair value of the options granted under the option agreements to the President/CEO and a
director was estimated using the Black-Scholes stock price valuation model with the following
assumptions:


§
    
    Volatility of 82.57%§
    
    Risk- free interest rate of 4.65%§
    
    Expected lives   4 years§
    
    No dividend yield§
    
    Market value per share of stock on measurement date of $0.70.


The Black Scholes model valued the options at $26.4 million which is being amortized over the
service period of 2 years: $14.4 million in fiscal year 2006, $8.5 million in fiscal year 2007 and
$3.6 million in fiscal year 2008. Based on this revised calculation, we increased stock
compensation by $14.4 million in fiscal year 2006, $4.2 million for the six months ended March 31,
2007 and $2.1 million in the quarter ended March 31, 2007.


2.
    
    The fair value of the shares transferred to employees was $10.7million, using the market
price on July 6, 2007, the date of transfer, which we recorded as compensation expense in
fiscal year 2006.


3.
    
    In the 2006 fiscal year the Company also recorded an additional compensation expense of $2.1
million, related to withholding tax obligations arising from the exercise of stock options by
the President and a US employee.




28



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##### Table of Contents



Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and Equity and related FASB
Staff Positions (FSPs)
     29




---



##### Table of Contents




    
    Increased stock compensation expense by $21.46million
    
    Reclassified warrants issued to the placement agent in conjunction with convertible note to
liability and reduced additional paid in capital by $2.01 million.
    
    Reclassified the conversion feature related to March 31, 2007 convertible note to liability
and eliminated the beneficial conversion feature. This entry reduced additional paid in
capital by $17.3 million.
    
    Reclassified $54,000 of interest expense on a related party loan from the additional paid
in capital account to accrued liabilities account.
      Amendment No.1
   Amendment No.2
  30




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##### Table of Contents




    
    The conversion option embedded in the notes was determined to be an embedded derivative,
primarily as a result of cash settlement provisions triggered by certain change of control
type events, along with the previously identified redemption privilege derivative. Together
these derivatives represent a compound embedded derivative to be accounted for at fair value
at inception and at each subsequent reporting period. As a result of this determination this
compound embedded derivative was valued at $17 million and recorded as a separate liability in
the balance sheet which created an offsetting debt discount. The original derivative liability
totaling $1.2 million recorded in the Amendment No. 1 was reversed in this Amendment No.2 and
the value of the new compound embedded derivative was recorded.
    
    Since the conversion option was determined to be an embedded derivative, the Companys
prior accounting for the conversion option under EITF 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,
and EITF 00-27,  Application of Issue No. 98-5 to Certain Convertible Instruments ,
as a beneficial conversion feature was determined to be incorrect. As a result, the
related beneficial conversion feature recorded to equity with the offset to debt discount of
$17.3 million was reversed and the related amortization of this discount totaling $282,000 was
also reversed in this Amendment No 2.
    
    The warrants issued to the note holders as well as the placement agent were determined to
be liability instruments, primarily due to the existence of cash redemption provisions
contained in the warrants in the event of certain change of control-type events. The value of
the warrants issued to the note holders totaling $15.9 million has been recorded in this
amendment as a liability and related discount to the convertible notes at issuance with
changes in fair value in subsequent periods recorded as loss on fair market value of warrant
liability in the statement of operations. The warrants issued to the placement agent totaling
$1.2 million have been recorded in this Amendment No. 2 as a warrant liability and deferred
financing cost with changes in fair value in subsequent periods being recorded as loss on
fair market value of warrant liability in the statement of operations. The deferred financing
costs are being amortized to interest expense on a method that approximates the effective
interest rate method.
    
    The fair value changes of the compound embedded derivative and warrants totaling $22.6
million have been recorded as loss on fair market value of compound embedded derivative and
loss on fair market value of warrant liability in this Amendment No. 2.
    
    We recorded a loss on issuance of convertible notes of $15.2 million relating to the
excess of the fair value of the warrants issued to the note holders and compound embedded
derivative liabilities over loan principal balance.Additionally, in responding to the second SEC comment letter, we reviewed certain historical
transactions that occurred prior to September 30, 2006 and made the following adjustments in
Amendment No. 3 to our Annual Report on Form 10-KSB. These revisions have been carried forward in
the balance sheet as of March 31, 2007.
    
    We recorded an additional compensation expense of $14.4 million related to the options
granted on March 1, 2006 to our President and to a director. The original Black Scholes model
used $0.002 as the fair value of the common stock, based on the most recent sale of our common
stock prior to the issuance date. However, shortly after the grant dates of these options,
our common stock traded in a public market at a significantly higher value. Management
revised the assumptions used in the Black Scholes model, most notably increasing the share
price from $0.002 to $0.70 per share based upon a valuation performed by our management. This
resulted in a significantly higher compensation expense.
    
    We recorded an additional compensation expense of $2.9 million related to the transfer of
5.75 million shares of our common stock by our President to various officers and employees of
Infotech Shanghai. The share price of $1.36 used in the original calculation was based on an
 31




---



##### Table of Contents



incorrect transaction date. The share price used in the revised calculation was $1.86 which
resulted in a significantly higher compensation expense.
    
    We recorded a withholding tax expense and liability of $2.1 million related to the exercise
of stock option grants by the President and a US employee who reside in the United States.
    
    We reclassified imputed interest on a related party loan of $54,000 from additional paid in
capital to accrued expense.
   Original Form 10-QSB
    
    
    Adjustments
    
    
    Amendment No. 2Statement of OperationsFor the quarter ended March 31, 2006Selling, general and administrative expense
    
    $
    0
    
    
    $
    10,210,448
    
    
    $
    10,210,448Net loss
    
    $
    (14,428
    )
    
    $
    (10,210,448
    )
    
    $
    (10,224,876
    )Net loss per share  Continuing operations
    
    $
    (0.00
    )
    
    $
    (0.09
    )
    
    $
    (0.09
    )Statement of OperationsFor the 6 months ended March 31, 2006Selling, general and administrative expense
    
    $
    0
    
    
    $
    10,210,448
    
    
    $
    10,210,448Net loss
    
    $
    (21,041
    )
    
    $
    (10,210,448
    )
    
    $
    (10,231,489
    )Net loss per share  Continuing operations
    
    $
    (0.00
    )
    
    $
    (0.08
    )
    
    $
    (0.08
    )
 
 Item 2. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
  GENERAL
  32




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##### Table of Contents



RESTATEMENT
  33




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##### Table of Contents



Original Form 10- QSB
    
    Adjustments
    
    Note
    
    Amendment No. 2Balance Sheet  March 31, 2007Current portion of deferred financing costs
    
    $
    605,937
    
    
    $
    (601,149
    )
    
    
    D
    
    
    $
    4,788Deferred financing costs
    
    $
    2,771,864
    
    
    $
    (236,518
    )
    
    
    D
    
    
    $
    2,535,346Accounts payable and accrued liabilities
    
    $
    379,715
    
    
    $
    2,118,833
    
    
    
    B
    
    
    $
    2,498,548Accounts payable and accrued liabilities, related parties
    
    $
    11,760
    
    
    $
    53,562
    
    
    
    C
    
    
    $
    65,322Derivative liabilities
    
    
    
    
    
    $
    29,200,000
    
    
    
    D
    
    
    $
    29,200,000Warrant liabilities
    
    
    
    
    
    $
    27,058,024
    
    
    
    D
    
    
    $
    27,058,024Additional paid in capital
    
    $
    32,011,003
    
    
    $
    2,064,857
    
    
    
    E
    
    
    $
    34,075,860Deficit accumulated during development stage
    
    
    (9,740,890
    )
    
    
    (61,050,385
    )
    
    
    F
    
    
    $
    (70,791,275
    )Statement of OperationsFor the quarter ended March 31, 2007Selling, general and administrative expense
    
    $
    321,096
    
    
    $
    2,104,825
    
    
    
    A
    
    
    $
    2,425,921Interest expense
    
    $
    (355,354
    )
    
    $
    301,326
    
    
    
    D
    
    
    $
    (54,028
    )Loss on issuance of convertible notes
    
    
    
    
    
    $
    (15,209,311
    )
    
    
    D
    
    
    $
    (15,209,311
    )Loss on fair market value of compound embedded derivative
    
    
    
    
    
    $
    (12,600,000
    )
    
    
    D
    
    
    $
    (12,600,000
    )Loss on fair market value of warrant liability
    
    
    
    
    
    $
    (9,958,593
    )
    
    
    D
    
    
    $
    (9,958,593
    )Net loss
    
    $
    (676,793
    )
    
    $
    (39,571,403
    )
    
    
    F
    
    
    $
    (40,248,196
    )Net loss per share  Continuing operations
    
    $
    (0.01
    )
    
    $
    (0.50
    )
    
    
    F
    
    
    $
    (0.51
    )Statement of OperationsFor the 6 months ended March 31, 2007Selling, general and administrative expense
    
    $
    772,859
    
    
    $
    4,162,461
    
    
    
    A
    
    
    $
    4,935,320Interest expense
    
    $
    (355,354
    )
    
    $
    301,326
    
    
    
    D
    
    
    $
    (54,028
    )Loss on issuance of convertible notes
    
    
    
    
    
    $
    (15,209,311
    )
    
    
    D
    
    
    $
    (15,209,311
    )Loss on fair market value of compound embedded derivative
    
    
    
    
    
    $
    (12,600,000
    )
    
    
    D
    
    
    $
    (12,600,000
    )Loss on fair market value of warrant liability
    
    
    
    
    
    $
    (9,958,593
    )
    
    
    D
    
    
    $
    (9,958,593
    )Net loss
    
    $
    (1,178,927
    )
    
    $
    (41,674,039
    )
    
    
    F
    
    
    $
    (42,852,966
    )Net loss per share  Continuing operations
    
    $
    (0.02
    )
    
    $
    (0.53
    )
    
    
    F
    
    
    $
    (0.55
    )Statement of OperationsFrom inception (July 7, 2004) through March 31, 2007Selling, general and administrative expense
    
    $
    9,233,786
    
    
    $
    23,583,807
    
    
    
    A
    
    
    $
    32,817,593Interest expense
    
    $
    (355,354
    )
    
    $
    301,326
    
    
    
    D
    
    
    $
    (54,028
    )Loss on issuance of convertible notes
    
    
    
    
    
    $
    (15,209,311
    )
    
    
    D
    
    
    $
    (15,209,311
    )Loss on fair market value of compound embedded derivative
    
    
    
    
    
    $
    (12,600,000
    )
    
    
    D
    
    
    $
    (12,600,000
    )Loss on fair market value of warrant liability
    
    
    
    
    
    $
    (9,958,593
    )
    
    
    D
    
    
    $
    (9,958,593
    )Net loss
    
    $
    (9,740,890
    )
    
    $
    (61,050,385
    )
    
    
    F
    
    
    $
    (70,791,275
    )
 34




---



##### Table of Contents



2.
    
    The fair value of the options granted under the option agreements to the President/CEO and a
director was estimated using the Black-Scholes stock price valuation model with the following
assumptions:
 §
    
    Volatility of 82.57%§
    
    Risk- free interest rate of 4.65%§
    
    Expected lives   4 years§
    
    No dividend yield§
    
    Market value per share of stock on measurement date of $0.70.
 The Black Scholes model valued the options at $26.4 million which is being amortized over the
service period of 2 years: $14.4 million in fiscal year 2006, $8.5 million in fiscal year 2007 and
$3.6 million in fiscal year 2008. Based on this revised calculation, we increased stock
compensation by $14.4 million in fiscal year 2006, $4.2 million for the six months ended March 31,
2007 and $2.1 million in the quarter ended March 31, 2007.
 4.
    
    The fair value of the shares transferred to employees was $10.7million, using the market
price on July 6, 2007, the date of transfer, which we recorded as compensation expense in
fiscal year 2006.5.
    
    In the 2006 fiscal year the Company also recorded an additional compensation expense of $2.1
million, related to withholding tax obligations arising from the exercise of stock options by
the President and a US employee.
    35




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##### Table of Contents



Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and Equity and related FASB
Staff Positions (FSPs)
      36




---



##### Table of Contents




    
    Increased stock compensation expense by $21.46million
    
    Reclassified warrants issued to the placement agent in conjunction with convertible note to
liability and reduced additional paid in capital by $2.01 million.
    
    Reclassified the conversion feature related to March 31, 2007 convertible note to liability
and eliminated the beneficial conversion feature. This entry reduced additional paid in
capital by $17.3 million.
    
    Reclassified $54,000 of interest expense on a related party loan from the additional paid
in capital account to accrued liabilities account.
      Amendment No.1
   Amendment No.2
  37




---



##### Table of Contents




    
    The conversion option embedded in the notes was determined to be an embedded derivative,
primarily as a result of cash settlement provisions triggered by certain change of control
type events, along with the previously identified redemption privilege derivative. Together
these derivatives represent a compound embedded derivative to be accounted for at fair value
at inception and at each subsequent reporting period. As a result of this determination this
compound embedded derivative was valued at $17 million and recorded as a separate liability in
the balance sheet which created an offsetting debt discount. The original derivative liability
totaling $1.2 million recorded in the Amendment No. 1 was reversed in this Amendment No.2 and
the value of the new compound embedded derivative was recorded.
    
    Since the conversion option was determined to be an embedded derivative, the Companys
prior accounting for the conversion option under EITF 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,
and EITF 00-27,  Application of Issue No. 98-5 to Certain Convertible Instruments ,
as a beneficial conversion feature was determined to be incorrect. As a result, the
related beneficial conversion feature recorded to equity with the offset to debt discount of
$17.3 million was reversed and the related amortization of this discount totaling $282,000 was
also reversed in this Amendment No 2.
    
    The warrants issued to the note holders as well as the placement agent were determined to
be liability instruments, primarily due to the existence of cash redemption provisions
contained in the warrants in the event of certain change of control-type events. The value of
the warrants issued to the note holders totaling $15.9 million has been recorded in this
amendment as a liability and related discount to the convertible notes at issuance with
changes in fair value in subsequent periods recorded as loss on fair market value of warrant
liability in the statement of operations. The warrants issued to the placement agent totaling
$1.2 million have been recorded in this Amendment No. 2 as a warrant liability and deferred
financing cost with changes in fair value in subsequent periods being recorded as loss on
fair market value of warrant liability in the statement of operations. The deferred financing
costs are being amortized to interest expense on a method that approximates the effective
interest rate method.
    
    The fair value changes of the compound embedded derivative and warrants totaling $22.6
million have been recorded as loss on fair market value of compound embedded derivative and
loss on fair market value of warrant liability in this Amendment No. 2.
    
    We recorded a loss on issuance of convertible notes of $15.2 million relating to the
excess of the fair value of the warrants issued to the note holders and compound embedded
derivative liabilities over loan principal balance.Additionally, in responding to the second SEC comment letter, we reviewed certain historical
transactions that occurred prior to September 30, 2006 and made the following adjustments in
Amendment No. 3 to our Annual Report on Form 10-KSB. These revisions have been carried forward in
the balance sheet as of March 31, 2007.
    
    We recorded an additional compensation expense of $14.4 million related to the options
granted on March 1, 2006 to our President and to a director. The original Black Scholes model
used $0.002 as the fair value of the common stock, based on the most recent sale of our common
stock prior to the issuance date. However, shortly after the grant dates of these options,
our common stock traded in a public market at a significantly higher value. Management
revised the assumptions used in the Black Scholes model, most notably increasing the share
price from $0.002 to $0.70 per share based upon a valuation performed by our management. This
resulted in a significantly higher compensation expense.
    
    We recorded an additional compensation expense of $2.9 million related to the transfer of
5.75 million shares of our common stock by our President to various officers and employees of
Infotech Shanghai. The share price of $1.36 used in the original calculation was based on an
incorrect transaction date. The share price used in the revised calculation was $1.86 which
resulted in a significantly higher compensation expense.
 38




---



##### Table of Contents




    
    We recorded a withholding tax expense and liability of $2.1 million related to the exercise
of stock option grants by the President and a US employee who reside in the United States.
    
    We reclassified imputed interest on a related party loan of $54,000 from additional paid in
capital to accrued expense.
   Original Form 10- QSB
    
    Adjustments
    
    Amendment No. 2Statement of OperationsFor the quarter ended March 31, 2006Selling, general and administrative expense
    
    $
    0
    
    
    $
    10,210,448
    
    
    $
    10,210,448Net loss
    
    $
    (14,428
    )
    
    $
    (10,210,448
    )
    
    $
    (10,224,876
    )Net loss per share  Continuing operations
    
    $
    (0.00
    )
    
    $
    (0.09
    )
    
    $
    (0.09
    )Statement of OperationsFor the 6 months ended March 31, 2006Selling, general and administrative expense
    
    $
    0
    
    
    $
    10,210,448
    
    
    $
    10,210,448Net loss
    
    $
    (21,041
    )
    
    $
    (10,210,448
    )
    
    $
    (10,231,489
    )Net loss per share  Continuing operations
    
    $
    (0.00
    )
    
    $
    (0.08
    )
    
    $
    (0.08
    )
 RESULTS OF OPERATIONS
  Limited Operating History
  39




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##### Table of Contents



Three and six month periods ended March 31, 2007
  Three month
    
    
    Six monthended March
    
    
    ended March31, 2007
    
    
    31, 2007(Restated)
    
    
    (Restated)RevenuesSales
    
    $
    3,208
    
    
    $
    3,208Cost of goods sold
    
    
    (5,958
    )
    
    
    (5,958
    )Gross loss
    
    
    (2,750
    )
    
    
    (2,750
    )ExpensesSelling, general and administrative
    
    
    2,425,921
    
    
    
    4,935,320Research and development
    
    
    3,986
    
    
    
    105,784Total operating expense
    
    
    2,429,907
    
    
    
    5,041,104Interest income
    
    
    6,393
    
    
    
    12,820Interest expense
    
    
    (54,028
    )
    
    
    (54,028
    )Loss on issuance of convertible notes
    
    
    (15,209,311
    )
    
    
    (15,209,311
    )Loss on fair market value of compound
embedded derivative
    
    
    (12,600,000
    )
    
    
    (12,600,000
    )Loss on fair market value of warrant liability
    
    
    (9,958,593
    )
    
    
    (9,958,593
    )Net loss
    
    $
    (40,248,196
    )
    
    $
    (42,852,966
    )
  Revenues
  40




---



##### Table of Contents



Expenses and general and administrative expenses
   Discontinued Operations
  Net Loss
  Liquidity and Capital Resources
   41




---



##### Table of Contents



Recent Financings
 Common stock issued for cash
  Convertible notes
  
    
    $5,000,000 in principal amount of Series A Convertible Notes and warrants to purchase
7,246,377 shares (exercise price of $1.21 per share) of its common stock;
    
    $3,300,000 in principal amount of Series B Convertible Notes and warrants to purchase
5,789,474 shares (exercise price of $0.90 per share) of its common stock , and;
    
    $9,000,000 in principal amount of Series B Convertible Notes and warrants to purchase
15,789,474 shares (exercise price of $0.90 per share) of its common stock.
   42




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##### Table of Contents



Critical Accounting Policies
   Principles of consolidation and basis of accounting
  Variable Interest Entities
    43




---



##### Table of Contents



Currency and foreign exchange
  Foreign Currency Translation,
  Stock-based Compensation
 Share-Based Payment
 Share-Based Payment, Accounting for Stock Issued to Employees,
 44




---



##### Table of Contents



Determining Fair Value
       Revenue Recognition
  Inventory
  45




---



##### Table of Contents



Derivative Financial Instruments
       Plan of Operation
     46




---



##### Table of Contents



Projected Expenditures Over The Next 12 Months
  (a)
    
    Personnel costs in Shanghai, China and the United States:
    
    $
    2,150,000(b)
    
    Production development / factory leasing costs:
    
    
    371,000(c)
    
    Administration, sales and marketing office:
    
    
    1,150,000(d)
    
    General and administrative expenses:
    
    
    1,050,000(e)
    
    PV production and manufacturing equipment:
    
    
    11,860,000(f)
    
    Silicon material purchase
    
    
    45,600,000(g)
    
    Professional fees and expenses, regulatory expenses:
    
    
    105,000(h)
    
    Shareholder communications:
    
    
    208,000(i)
    
    Travel, Miscellaneous, Unallocated
    
    
    65,000(j)
    
    Other capital acquisition
    
    
    696,000(k)
    
    Research and development
    
    
    1,345,000Total:
    
    
    
    $
    64,600,000
    Off-Balance Sheet Arrangements
  
 47




---



##### Table of Contents



ITEM 3. CONTROLS AND PROCEDURES
  
    
    The incorrect recording and disclosure of warrant and derivative liabilities related to the
convertible note contracts entered in March 2007.
    
    The incorrect recording and disclosure of stock options issued for employee services.
    
    The incorrect accounting for plant construction in process and debt and related party
transactions. These errors were identified by our independent accountant, Malone & Bailey,
PC, in connection with our interim review of the Companys financial statements for the
quarter ended December 31, 2006.
   
 PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
    48




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##### Table of Contents



ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
  3.1
    
    Articles of Incorporation, Incorporated by reference to our SB2
Registration Statement Amendment 7 filed on May 5, 2005, SEC File
Number 333-120926.3.2
    
    By-laws, Incorporated by reference to our SB2 Registration Statement
Amendment 7 filed on May 5, 2005, SEC File Number 333-120926.3.4
    
    Article of Merger filed with the Secretary of State of Nevada,
incorporated by reference from Exhibit 3.1 to the Form 8-K filed
April 10, 2006.10.2
    
    Form of Series A Convertible Note dated as of March 7, 2007
incorporated by reference from Exhibit 10.2 to our Form 8-K/A filed
on March 8, 2007.10.3
    
    Form of Series B Convertible Note dated as of March 7, 2007
incorporated by reference from Exhibit 10.3 to our Form 8-K/A filed
on March 8, 2007.10.4
    
    Form of Series A Warrant dated as of March 7, 2007 incorporated by
reference from Exhibit 10.4 to
 49




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##### Table of Contents



our Form 8- K/A filed on March 8,2007.10.5
    
    Form of Series B Warrant dated as of March 7, 2007 incorporated by
reference from Exhibit 10.5 to our Form 8- K/A filed on March 8,
2007.10.6
    
    Form of Registration Rights Agreement dated as of March 7, 2007
incorporated by reference from Exhibit 10.6 to our Form 8-K/A filed
on March 8, 2007.10.7
    
    Form of Lock-up agreement with officers and directors of the Company
dated as of March 7, 2007 incorporated by reference from Exhibit 10.7
to our Form 8-K/A filed on March 8, 2007.31.1
    
    Section 302 Certification  Chief Executive Officer31.2
    
    Section 302 Certification  Chief Financial Officer32.1
    
    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.
 50




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##### Table of Contents



SIGNATURES
  SOLAR ENERTECH CORP.Date: September 20, 2007By:
    
    /s/ Leo Shi YoungLeo Shi YoungDirector, President/CEODate: September 20, 2007By:
    
    /s/ Ming Wai Anthea ChungMing Wai Anthea ChungChief Financial Officer
 51