UNITED STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





Form 10-K





x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934For
      the fiscal year ended December 31, 2008o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934For
      the transition period from __________ to
  __________





Commission
File Number: 001-13549





SOLAR
THIN FILMS, INC.


(Exact
name of registrant as specified in its charter)





Delaware
            95-4356228(State
      or other jurisdiction of
            (I.R.S.
      Employerincorporation
      or organization)
            Identification
      No.)





25
Highland Blvd, Dix Hills, New York 11746


(Address
of principal executive offices, including zip code)





Registrant’s
telephone number, including area code:


(516)
417-8454





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


None





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


Common
Stock, par value $0.01 per share.









Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.   ̈





Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Exchange Act.   ̈





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.  Yes  x
     No   ̈





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





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




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




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





The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant was approximately $27,999,222 as of June 30,
2008.





As of
April 13, 2009, 58,136,113 shares of the registrant’s common stock, par value
$.01 per share, were issued and outstanding.





Documents
Incorporated by Reference: None.










SOLAR
THIN FILMS, INC.





2008
FORM 10-K ANNUAL REPORT





TABLE
OF CONTENTS





PagePART IItem 1.
            
            Business.
            
            4Item 1A.
            
            Risk
      Factors.
            
            12Item 1B.
            
            Unresolved
      Staff Comments.
            
            22Item 2.
            
            Properties.
            
            22Item 3.
            
            Legal
      Proceedings.
            
            22Item 4.
            
            Submission
      of Matters to a Vote of Security Holders.
            
            23PART
      IIItem 5.
            
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities.
            
            23Item 6.
            
            Selected
      Financial Data.
            
            26Item 7.
            
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.
            
            26Item
      7A.
            
            Quantitative
      and Qualitative Disclosures About Market Risk.
            
            39Item 8.
            
            Financial
      Statements and Supplementary Data.
            
            40Item 9.
            
            Changes
      and Disagreements With Accountants on Accounting and Financial
      Disclosure.
            
            41Item 9A(T.)
            
            Controls
      and Procedures.
            
            41Item 9B.
            
            Other
      Information.
            
            41PART
      IIIItem 10.
            
            Directors,
      Executive Officers and Corporate Governance.
            
            42Item 11.
            
            Executive
      Compensation.
            
            43Item
      12.
            
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.
            
            53Item
      13.
            
            Certain
      Relationships and Related Transactions, and Director
      Independence.
            
            54Item
      14.
            
            Principal
      Accounting Fees and Services.
            
            55Item
      15.
            
            Exhibits,
      Financial Statement Schedules.
            
            55Signatures
            
            59





-2-




PART I





Cautionary
Statement Concerning Forward-Looking Statements





Our representatives and we may from
time to time make written or oral statements that are "forward-looking,"
including statements contained in this Annual Report on Form 10-K and other
filings with the Securities and Exchange Commission, reports to our stockholders
and news releases. All statements that express expectations, estimates,
forecasts or projections are forward-looking statements within the meaning of
the Act. In addition, other written or oral statements which constitute
forward-looking statements may be made by us or on our behalf. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates,"
"projects," "forecasts," "may," "should," variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and involve risks,
uncertainties and assumptions which are difficult to predict. These risks may relate to,
without limitation:





·
            our
      independent registered public accounting firm has expressed doubt about
      our ability to continue as a going concern, which may hinder our ability
      to obtain future financing;




·
            we
      have a significant working capital shortage; are currently in default in
      payment of approximately $1.75 million of indebtedness which became due in
      March 2009 or earlier, and may face litigation or even bankruptcy if we
      are unable to met our obligations;




·
            we
      need to raise additional capital which may not be available on acceptable
      terms or at all;




·
            we
      have a history of substantial losses, may incur addition losses in 2009
      and beyond, and may never achieve or maintain profitability;




·
            our
      revenues and operating results are likely to fluctuate significantly;


·
            we
      have only generated limited revenues and may never achieve
      profitability;


·
            our
      equipment business is small and projected revenues may not
      materialize;


·
            our
      equipment business is dependent on a small amount of customers and any
      loss of these customers will have a negative impact on our operations;


·
            evaluating
      our business and future prospects may be difficult due to the rapidly
      changing market landscape;


·
            our
      future success substantially depends on our ability to significantly
      increase our manufacturing capacity through the development of additional
      manufacturing facilities;




·
            our
      “turnkey” manufacturing facility may not gain market acceptance, which
      would prevent us from achieving increased sales and market share;




·
            technological
      changes in the solar power industry could render our turnkey manufacturing
      facilities uncompetitive or obsolete, which could reduce our market share
      and cause our sales to decline;




·
            we
      face risks associated with the marketing, development and sale of our
      turnkey facilities internationally, and if we are unable to effectively
      manage these risks, it could impair our ability to expand our business
      abroad;




·
            we
      may not be able to successfully develop and commercialize our turnkey PV
      manufacturing facilities which would result in continued losses and may
      require us to curtail or cease;




·
            our
      fixed-price contracts could subject us to losses in the event that we have
      cost overruns;




·
            we
      are selling 49% of the equity of our Kraft subsidiary in order to acquire
      Buda Solar Ltd;




·
            we
      need to raise significant additional financing to complete the acquisition
      of Algatec Solar Ag;




·
            substantially
      all of Algatec's existing and projected 2009 revenues from the manufacture
      and sale of metallurgical crystalline solar modules are derived from its
      OEM contract with Q-Cells, which contract will expire at the end of
      2009;




·
            our
      inability to perform under significant contracts would have a material
      adverse effect on our consolidated business and
  prospects;




·
            prices
      of metallurgical crystalline cells and other components may increase
      causing Algatec's profit margins to
decrease;




-3-




·
            even
      if we finance and complete the Algatec acquisition, there is no assurance
      that Algatec will be able to build equip and operate its new manufacturing
      facilities on schedule or within the amount budgeted for such
      purpose;




·
            we
      have a few proprietary rights, the lack of which may make it easier for
      our competitors to compete against us;




·
            we
      depend on the services of key executives and technical and other
      personnel, the loss of whom could materially harm our business or reduce
      our operational effectiveness;


·
            we
      do not maintain theft or casualty insurance and only maintain modest
      liability and property insurance coverage and therefore we could incur
      losses as a result of an uninsured loss;and


·
            governmental
      regulation may have a negative impact on our business.





Therefore,
actual outcomes and results may differ materially from what is expressed or
forecasted in or suggested by such forward-looking statements. We undertake no
obligation to publicly revise these forward-looking statements to reflect events
or circumstances that arise after the date hereof. Readers should carefully
review the factors described herein and in other documents we file from time to
time with the Securities and Exchange Commission, including our Quarterly
Reports on Form 10-Q, Annual Reports on Form 10-K, and any Current Reports on
Form 8-K filed by us.





Item 1. Business.





Introduction





Solar
Thin Films, Inc. (the “Company”) is a business focused on the solar energy
industry.  We engage in the manufacture, sale and distribution of
equipment that is used to produce thin film amorphous silicon (or “a-Si”)
photovoltaic solar panels or modules and provide turn-key a-Si module
manufacturing facilities.  The Company through its wholly owned
subsidiary, Kraft Elektronikai Zrt (“Kraft”), is presently engaged in the
design, development and construction on behalf of its customers of both
photovoltaic manufacturing equipment and both alone and sometimes through
strategic partners of “turnkey” manufacturing plants that produce photovoltaic
thin film modules.  The Company expects the primary use of such
photovoltaic thin film modules will be the construction of solar power plants by
corporations and governments.





On April
3, 2009, the Company and Kraft entered into a restated share exchange agreement
with Buda Solar Technologies Co. Ltd. (“Buda Solar”) and its
shareholders.  Under the terms of such agreement, subject to the
satisfaction of certain closing conditions, Kraft will acquire 100% of the share
capital of Buda Solar and will issue to the stockholders of Buda Solar 49% of
the share capital of Kraft.  As a result, the Company will own 51% of
Kraft and our 51% owned Kraft subsidiary will, in turn, own 100% of the share
capital of Buda Solar.  Buda Solar is engaged in the providing
technical and installation services for the production and installation of thin
film a-Si solar module manufacturing equipment.  Consummation of the
Buda Solar transaction is scheduled to occur in June 2009.





Effective as of October 30, 2008, the
Company entered into a stock exchange agreement with Algatec Solar AG and its
shareholders.  Algatec produces, sells and distributes metallurgical
and other types of crystalline silicon solar panels or modules.  For a
description of the terms of this agreement, see “Description of our Business
–Algatec-Potentialmanufacture of crystalline silicon
solar modules” in
this Form 10-K.





The Company, in the future, may further
vertically integrate itself within this industry through activities in, but not
limited to, investing in and/or operating the module manufacturing plants,
selling thin film photovoltaic modules, and installing and/or managing solar
power plants. The Company also intends, directly and through joint ventures or
strategic alliances with other companies or governmental agencies, to sell
equipment for and participate financially in solar power facilities using thin
film a-Si solar modules or metallurgical and other crystalline solar modules as
the power source to provide electricity to municipalities, businesses and
consumers.





Consummation
of both the Buda Solar and Algatec acquisitions as well as all other expansion
plans of the Company are subject to its ability to solve its significant working
capital shortages; make payment or other arrangements for the resolution of
approximately $2.9 million of indebtedness (approximately $1.75 million of which
is in default) and other accrued accounts payable, all of which are
overdue.  In the event that the Company is unable to resolve these
matters within the next 90 days, it may be unable to continue in business and/or
may be required to seek protection from its creditors under the Federal
Bankruptcy Act.





Kraft and
Buda Solar are each Hungarian corporations and their headquarters are located in
Budapest, Hungary.  Algatec is a German corporation and its
headquarters are located in Proesen, Germany.  Solar Thin Films is a
Delaware corporation and its headquarters are located at 25 Highland Boulevard,
Dix Hills, New York 11746. Solar Thin Films website is located at www.solarthinfilms.com.




-4-




Solar
Thin Films History




The
Company was initially organized as a New York corporation on June 22, 1988 under
the name Alrom Corp. ("Alrom"), and completed an initial public offering of
securities in August 1990. Alrom effected a statutory merger in December 1991,
pursuant to which Alrom was reincorporated in the State of Delaware under the
name American United Global, Inc. Prior to the acquisition of Kraft, the Company
intended to focus its business strategy on acquisitions of operating businesses
in various sectors. On June 14, 2006, in connection with its business strategy,
the Company closed on the acquisition of 95.5% of the outstanding securities of
Kraft. In additional, the Company acquired the remaining 4.5% minority interest
in August 2007 and, as a result, now conducts its operations via Kraft, the
wholly-owned subsidiary.





Kraft
History




Kraft was
founded in 1993, shortly after the breakup of the communist economy in Hungary.
Its founding members were associated with the Hungarian Central Research
Institute for Physics. In 1996, Kraft was contracted to develop thin-film
photovoltaic deposition equipment for production of amorphous silicon based
thin-film modules, as well as complete turnkey facilities. Photovoltaics (PV) is
the physical phenomenon, which allows certain semiconductor materials to
directly convert sunlight into electricity.




In the subsequent years, Kraft has
manufactured equipment for such facilities in New Jersey, Germany, Hungary,
China, Taiwan and Greece. In producing equipment for these facilities, Kraft
developed substantial equipment manufacturing expertise. More recently as a
supplier to RESI for the CG Solar project in Weihai, China Kraft developed
additional process expertise required to allow it to become a leading
manufacturer of “turnkey” plants, including the delivery of both equipment and
services, that produce photovoltaics modules utilizing thin-film technology.
Kraft is now using this expertise to deliver its first "turnkey" plant in Spain
commencing in December 2008 and continuing through 2009.




Description
of Our Business





Amorphous
Silicon Solar Module Manufacturing Equipment





Kraft is
engaged in the design, development, manufacture and installation of thin-film
amorphous silicon (“a-Si”) photovoltaic manufacturing equipment used in plants
that produce photovoltaic thin-film a-Si solar panels or modules. The primary
customers of photovoltaic thin-film manufacturing equipment are businesses, as
well as governments and government agencies throughout the world engaged in the
production of photovoltaic thin-film modules or solar panels and in the
development and construction of solar power plants.  The photovoltaic
manufacturing equipment deposits a-Si as the active layer in the production of
photovoltaic thin-film modules or “solar panels” and is one of the least
expensive technologies currently available for the production of commercial
solar panels.  We believe that customers using its technology and
equipment can achieve a direct cost of power produced from a-Si solar modules of
less than $1.00 per Watt of capacity.




In
October 2008, the Company and Kraft entered into an agreement (which was amended
and restated in April 2009) to acquire Buda Solar Technologies Co. Ltd., a
corporation formed in 2007 and engaged in the development of a-Si technology and
integrated systems using photovoltaic manufacturing equipment.  The
Buda Solar employees and operations are currently being conducted at Kraft’s
facility in Budapest, Hungary and at the Buda Solar facility located within the
Institute of Physics Management in Budapest.  If the Buda Solar
acquisition is completed, Kraft intends to further consolidate the Buda Solar
operations either at one of the existing locations or a new location, but will
maintain space within the Institute to retain access to critical research and
development equipment and to maintain a relationship with the
Institute.





Historically,
Kraft has provided equipment that is incorporated into a single manufacturing
line capable of annually manufacturing a-Si solar modules that produce
approximately 5MW of solar power annually.  Since signing a
Cooperation Agreement with BudaSolar in October of 2008 Kraft has been able with
Buda’s assistance to improve the throughput of a single line to 6MW as well as
make other qualitative improvements in its offering. Management further believes
that the core group of physicists, chemists and engineers currently employed by
Buda Solar will provide Kraft with the additional systems integration
capabilities necessary to continuously improve its product offering, scale its
production capacity and meet customer demand and operating
requirements.  Kraft believes that its consolidation with Buda Solar
will accelerate its transition from an equipment vendor to an integrated
supplier providing its customers with higher margin “turnkey” production
facilities incorporating multiple solar module equipment lines.  As a
result of its working relationship with Buda Solar, Kraft has recently been able
to announce the availability of new semi-automated “turnkey” lines of solar
module equipment with the capacity of annually manufacturing a-Si solar modules
that generate from 18MW to 36 MW of solar power.




-5-




Under the
terms of a separate agreement with Buda Solar, Kraft has contracted to purchase
from Buda Solar certain technical services on a consulting basis for a fee of
$250,000 per month.  A total of $750,000 has been paid as of March 31,
2009.





Pricing
Factors; Backlog and Order Pipeline





Based on currently available market
information, a-Si solar module manufacturing equipment is currently available at
costs averaging $2.00 for each peak Watt of “production
capacity.”  Production capacity is the cumulative rated capacity of
a-Si solar modules that can be produced annually using such
equipment.  Accordingly, a “6 MW (1,000,000 Watts) equipment facility”
consists of a single line of manufacturing equipment that is capable of
producing on an annual basis a-Si solar modules with a cumulated rated capacity
of 6MW (6,000,000 Watts) of solar power.  The Company believes that
the current market price for a-Si solar modules has fallen from between $2.50
and $3.00 per Watt of rated capacity, or approximately $15.0 to $18.0 million of
a-Si solar module sales output from a 6 MW facility to $2.00 or less per Watt of
rated capacity, or roughly $12 million for a 6 MW facility, and $36.0 million
and $72.0 million of a-Si solar module sales output from its semi-automated 18
MW and  36 MW “turn-key”
facilities,  respectively.  The current cost of manufacture
of a-Si solar modules using the Company’s equipment is estimated at
approximately $1.50 per Watt or less from our 6MW equipment line, and
approximately $1.00 per Watt or less from our 36MW semi-automated “turn-key”
facility, costs competitive with any process on the market today. We believe
that this will provide a-Si solar module manufacturers with an important
competitive advantage given that the anticipated price per Watt for a-Si and
other modules is expected to continue to fall below $2.00 per Watt over the next
two to three years.





In April 2008, Kraft entered into a
purchase agreement with Grupo Solar S.A. of Bejar, Spain to furnish the customer
with a turn-key photovoltaic manufacturing equipment production facility in
Spain for a contract price payable to Kraft of €7.9 million ($12.3 million at
the time of signing of the purchase agreement). Kraft received a contract
deposit of approximately $600,000 in June 2008 an another $1,300,000 in November
2008 as a customer advance, and began delivery of the system in December of
2008.  We anticipate that substantially all of the revenues from the
Groupo Solar order will be recognized in 2009.  Groupo Solar has also
indicated an interest in expanding the facility to 12MW in 2009 which could
result in an additional €7.0 million (or $9.25 million at current exchange
rates) in equipment orders. Kraft also provided approximately $3.0 million of
equipment and services to EPV Solar in 2008, though it anticipates a reduction
in equipment business in 2010 as the Company transitions to a supplier of
“turnkey” systems.





In addition, both Kraft and Buda Solar
have submitted detailed proposals and contracts for additional orders, both
single line and multi-line, totaling in the tens of millions of dollars, with
companies based in Europe, China and Southeast Asia.   There can
be no assurance that any of such additional orders will be obtained on
commercially attractive terms, if at all.





The
Market





We
believe the photovoltaic (or PV) industry is currently growing from infancy to
adolescence. The Company believes this growth is aided by the concerns of global
warming, governmental incentives, political and institutional involvement, fuel
prices and the economics of the PV industry. STF believes the strongest force in
causing the move from fossil fuels to PV will be the economics of PV. Since the
cost of the PV module represents more that 60% of the cost of installed PV
systems, learning to manufacture the lowest cost PV modules will help secure the
greatest competitive edge and advantage in the market place.





We
believe that there is currently a world-wide shortage of photovoltaic solar
modules and demand for solar power currently far exceeds the supply of
silicon-based modules.  Thin film a-Si modules are primarily installed
on solar “farms” to serve utilities and power projects to provide electricity to
a large number of users, whereas metallurgical crystalline modules are more
suited to individual commercial and residential uses.  Approximately
20% of the world’s supply of solar modules are of the thin film a-Si type and
approximately 80% are crystalline modules.  We believe that, upon
completion of its expansion plans, the Company and Kraft will be significant
suppliers of both crystalline silicon solar modules and thin-film amorphous
silicon solar modules.




The
market presently consists substantially of modules produced using crystalline
silicon. Most of the thin-films that have been produced, until now, use
amorphous silicon on a glass substrate. The costs of the thin-film based modules
are less than half of those for crystalline silicon. Based on the economic
pressures caused by this major cost difference, STF believes that the ratio of
crystalline to thin-film in the product mix will substantially shift in the next
decade, driving rapid increases in the market for “thin film” PV products. The
Company further believes that it can continue to drive costs down through
further process improvements to existing technology (amorphous silicon) and
through the introduction of newer technologies, possibly including
CIGS.




-6-




Our
Growth Strategy





The
Company’s strategy is to market complete turnkey manufacturing equipment to
manufacture thin-film based PV modules where possible, while offering individual
pieces of equipment to companies possessing their own internal process
knowledge. The Company’s main focus will be the delivery of “turnkey” amorphous
silicon production lines, and in the future “turn-key” production lines based on
newer materials. Customers include companies with manufacturing expertise and
local knowledge, but often without the technology base required to build and
manage their own production lines.




Alone,
and sometimes together with strategic partners, we offer a “turnkey” amorphous
silicon manufacturing facility that is sold installed and with certain
guarantees regarding throughput, module efficiency, and therefor by implication,
manufacturing cost. Such “turnkey” facilities consists of all the hardware and
machinery manufactured, assembled, and installed by the Company together with
all the software, know-how and training associated with the manufacturing
process.





On a
case-by-case basis and subject to financing we will also consider investing in
our clients “turn-key” production lines as an equity partner and may secure
distribution and/or purchase rights for modules for resale or for use in power
projects.





The
Company will also continue to sell individual pieces of equipment including,
without limitation, deposition lines, sputtering equipment, laminators, IV
testers and transport equipment, to customers with their own technology
expertise or as add-ons for existing “turn-key” customers.





We are seeking to transition our
equipment business from an equipment supplier to a higher margin “turnkey”
system supplier, in which we can provide significantly more value added to our
customers base. In addition to continuing to provide entry level 6MW systems
that provide customers with a low risk cost effective way of entering the
photovoltaic business, we believe that the Buda Solar acquisition will enable us
to be capable of providing semi-automated 18MW and 36MW facilities, which
enables its existing and potential customer base to scale more rapidly while
further reducing the cost of production.





In addition to Kraft’s acquisition of
Buda Solar, the Company intends to enter the business of producing, selling and
distributing metallurgical and other types of crystalline silicon solar panels
or modules through its acquisition of Algatec. We believe that the contemplated
acquisition of Algatec will enable the Company and its subsidiaries to provide
both a-Si equipment and turn-key manufacturing facilities to a-Si solar module
producers, as well as becoming a vendor of choice for the assembly of
metallurgic crystalline silicon solar modules and in some cases a direct
supplier of metallurgical crystalline solar modules.  In addition,
Solar Thin Films may seek to enter into joint ventures with third parties,
including utilities, to establish fully integrated power systems or power
projects using either of its low cost technologies.  The Company or
its subsidiaries may also seek arrangements with certain of its module
manufacturing customers to purchase low cost a-Si modules (the output of the
equipment provided by Kraft and Buda Solar) for use in power projects in Europe,
North America and Asia.  Together with its planned acquisition of
Algatec this will provide the Company and its subsidiaries with access to both
metallurgical crystalline silicon and amorphous silicon modules at attractive
costs in order to pursue plans to enter into strategic arrangements to provide
electricity from solar power in fully integrated power systems or power
projects.





Joint
Venture





In 2008,
Solar Thin Films entered into a joint venture agreement with Blue Star Glass
Company (a company organized under the laws of the People’s Republic of China)
and China Singyes Curtain Wall Company (a Hong Kong corporation) to form CG
Solar Company Ltd.   The joint venture company was formed for the
purpose of establishing a photovoltaic manufacturing equipment facility to
produce thin film a-Si solar modules in Weihai, Shandong Province,
China.  The joint venture company currently operates a 2.5 MW a-Si
module manufacturing facility constructed with equipment delivered by the
Company, with plans to further expand the operation. The current site has
buildings with capacity for over 100 MW of production. Under the terms of such
joint venture, Solar Thin Power, Inc., a majority owned subsidiary of Solar Thin
Films currently owns 15% of the equity of CG Solar Company Limited and has
agreed to acquire an additional 5% interest from its prior technology partner
RESI.





Competition
- Thin Films





Crystalline
silicon PV technologies currently represent roughly 80% of the PV market. Demand
for crystalline (and poly-crystalline) silicon has grown very rapidly over the
past decade, but photovoltaic module costs have remained relatively unchanged
due to cost realities of the crystalline production process. As such, while
prices have fallen recently due to increased supply from Asia and reduced demand
due to the credit crisis the differential in costs is expected to provide a
significant opportunity for profit to “thin film” module and equipment
producers, placing the Company in an attractive position.




-7-




However,
there are an increasing number of competitors for the Company in this market,
and through well funded research and development activities, these competitors
have developed their own pilot lines for thin-films PV module manufacturing and
are introducing both modules and equipment into the marketplace. Competitors
will consist of 1) companies who build their own PV plants utilizing internal
technology and know how - and who may represent customer opportunities for
specific pieces of equipment, and 2) companies who manufacture and deliver
production equipment to third parties. Many players in this latter market
specialize in the sale of individual pieces of equipment rather than “turn-key”
production lines, while others compete directly for “turn-key”
business.





As an equipment and “turnkey” systems
supplier Kraft and Buda Solar compete with a broad range of suppliers into the
photovoltaic or “PV” industry. Within the amorphous silicon space two of its
largest competitors include Applied Materials and Oerlikon, both of which offer
larger scale systems.  Kraft (with BudaSolar) offers several
advantages for prospective customers including a lower price point for its entry
or single line systems, and a highly cost effective manufacturing design based
on its batch process - sometimes called the “box carrier” system - that yields
high materials utilization and high finished product yield, and therefor
commensurately lower cost. Additionally its process has the further advantage
that its systems do not require costly clean rooms, which further raise the cost
of equipment and production, allowing  Kraft to price its offering
below that of its major competitors. Kraft has historically offered scalable
systems starting with a 6MW line available for approximately $2.00 per Watt,
providing a much lower cost of entry into the business.





While maintaining the low cost design
of the current system, we believe that, with their newer 18 and 36 semi
automated systems, Kraft (together with BudaSolar) will be able to offer larger
systems capable of meeting customer plans for rapid expansion, and capable of
producing a-Si modules for less than $1.00 per Watt.  Indirect
competitors, competing within this low cost space, include a-Si module
manufacturers like EPV Solar and Cadmium manufacturer First Solar.




Customers





The
current customers of Kraft and Buda Solar are principally located in Europe and
Asia.  Currently our Kraft subsidiary has one key customer, which
counted for over 96% of the total revenue in 2008.





Government
Regulation





The
Company’s operations are subject to local, state and federal laws and
regulations governing environmental quality and pollution control. To date, the
Company’s compliance with these regulations had no material effect on its
operations, capital, earnings, or competitive position, and the cost of such
compliance has not been material. STF is unable to assess or predict at this
time the effects that additional regulations or legislation could have on the
activities.





Seasonality





We do not
anticipate that our business will be substantially affected by
seasonality.





Employees




As of
December 31, 2008, the Company employed 57 full-time and 2 part-time employees,
respectively, none of whom is a member of a union or work council. None of our
employees are covered by the by collective bargaining agreements. We believe
that our relations with our employees are good.




Sales and Project
Management




Two
members of management and two sales engineers are currently focused on the
company’s sales activity including finding and contacting potential customers
and managing contracts and bids - for both “turn-key” and equipment sales. In
addition the company currently has two project managers, responsible for
managing contracts and projects from inception through completion. The sales and
project management groups work together with the engineering and equipment
manufacturing groups to assure timely production and deliveries.




-8-




Engineering





The
Companies engineering department consists of three dedicated mechanical
engineers and seven dedicated electrical engineers as well as a number of vacuum
and field services engineers. The engineering department works closely with the
manufacturing unit to guarantee quality and timely delivery, under the guidance
of its project management staff.





Production (Equipment
manufacturing)





The
largest group in the Company is the production (equipment manufacturing)
department, consisting of 33 employees. These people perform the actual assembly
of equipment, including activities related to the mechanical, electrical and
vacuum system parts of the finished product. The manufacturing activities are
actively supported by input from the engineering group.





Algatec
- Potential manufacture of crystalline silicon solar modules





Algatec is a business that is focused
on the development of solar modules.  Specifically, its is engaged in
the manufacture, sale and distribution of metallurgical crystalline silicon
solar modules at its manufacturing facility located in Prosen, Germany,
approximately 80 miles from Dresden, Germany.  For the year ended
December 31, 2008, its audited net income was approximately $1.7 million on
total revenues of approximately $18.5 million.





Algatec has a significant contractual
backlog of orders for 2009.  The current total for 2009 is 85
Megawatts (MW), representing approximately $66.45 million in
revenues.  Module quantities are stated in megawatts; 85 MW is
approximately 392,000 modules.  Algatec’s principal customer,
representing 80 MW of our 2009 backlog, is Q-Cells International GmbH
(“Q-Cells”).  In addition to being the world’s largest producer of
solar cells, Q-Cells has plans to be a significant generator of electricity, and
uses the Algatec modules in power projects worldwide.  Algatec has
been an original equipment manufacturer (“OEM”) to Q-Cells since
2006.   Subject to its obtaining the financing required to expand
its manufacturing and production capacity, Algatec anticipates that Q-Cells will
renew the existing OEM agreement through December 31, 2010 and agree to purchase
approximately 120 MW of metallurgical crystalline silicon solar modules in
2010.  Algatec also believes that prior to the end of 2009, Q-Cells
will confirm its  2011 purchase commitments for such solar modules
under the OEM agreement.  In 2009, substantially all of Algatec’s
revenues will be derived under its OEM contract with
Q-Cells.  Commencing in 2010, it will seek to obtain orders through
direct sales to other power integrators.





Under the terms of its OEM agreement
with Q-Cells, Algatec receives metallurgical crystalline cells from
Q-Cells.  Using these cells, Algatec manufactures and assembles solar
modules that provide at least 15% “efficiency.”  The term efficiency
refers to the ability of the module to convert solar energy into
electricity.  Under its OEM agreement, Algatec has no monetary outlay
for the cells.





Capacity constraints have previously
limited Algatec’s ability to meaningfully diversify beyond the Q-Cells OEM
business.   Algatec’s current manufacturing capacity is 15 MW per
year.  In order to fulfill its contractual order backlog, Algatec
intends seek financing of up to $50.0 million to expand its current annual
production capabilities to 175 MW.  Algatec recently acquired
approximately five acres of land adjacent to our current 15,000 square foot
facility, and intends to construct a 125,000 square foot plant addition at an
estimated cost of $10.9 million and install five lines of crystalline module
production equipment.  Algatec has contracted to purchase from The
Komax Group, S.A. and other suppliers the necessary equipment to automatically
string and laminate crystalline cells into solar modules.  The
estimated total cost of such stringing equipment, laminating equipment to bond
cells to solar modules, and ancillary items is approximately $39.2
million





Based upon inquiries from a number of
potential customers, Algatec believes that there is significant demand for
metallurgical crystalline modules, both in Europe and in many other areas in
Asia and North America.  When it has in the past produced modules for
customers other than Q-Cells, Algatec purchases the metallurgical crystalline
cells from Q-Cells, manufacture the modules, and ships them to the respective
client.





In February 2009, Algatec received a
proposal from Nord Landesbank for a $24.65 million financing to enable Algatec
to purchase for $29.0 million sixteen Xcell 3400 stringing systems from Komax’s
United States subsidiary.   Such financing is subject to
obtaining a loan guaranty from the Export-Import Bank of the United States (the
“Ex-Im Bank”) and Algatec or the Company posting a $4.35 million letter of
credit, or 15% of the contracted amount for the equipment.  Although
Algatec has applied for the Ex-Im Bank guaranty and believes that it will
qualify for such loan guaranty, as at the date of this Form 10-K, such guaranty
commitment has not been issued, nor has Algatec or the Company provided the
requisite letter of credit.




-9-




In addition to the Nord Landesbank
proposed financing, Algatec has received a proposal for a $15.1 million (€11.6
million) five year bank financing from Credit Suisse Bank to enable it to
purchase laminating equipment which loan is guaranteed by the Ex-Im Bank, and
the balance by the laminator supplier, and a proposal from a German bank for a
20 year construction loan in the amount of $9.1 million (€7.0 million) to enable
it to construct its plant addition.





There can be no assurance that any or
all of the above proposed financings will be obtained by
Algatec.  Consummation of such financings, or one or more alternative
financings of up to $50.0 million, is a condition to the Company’s ability to
complete the acquisition of Algatec.  See below.





Under current German law, companies
in the five new German Länder and Berlin may apply
for cash investment premiums/rebates under the so-called Investitionszulagengesetz
2007 (2007 Investment Premium Act) and for subsidies on the basis of the
joint task scheme for the improvement of regional economic structure in
connection with the regional aid scheme of the respective Land.  In general,
these legal acts are in accordance with European Union law and have been
approved by the European Commission.





The 2007 Investment Premium Act
provides for a tax-free cash investment premium for initial investment projects.
Assuming that the statutory requirements are fulfilled, companies may apply for
an investment premium to the extent of 25% for movable assets (such as machinery
and equipment) and to the extent of 12.5% for immovable assets (such as
buildings and improvements).  On the basis of the 2007 Investment
Premium Act and our anticipated expenditures for both movable and immovable
assets, Algatec intends to apply for an investment premium of approximately
€7.95 million ($11.1 million), or approximately 22.2% of total anticipated
expenditures of approximately $50.1 million.





Further, Algatec has already applied
for additional subsidies of approximately €5.737 million ($8.0 million) on the
basis of the regional aid rules of the German Land Brandenburg in
connection with the joint task scheme for the improvement of regional economic
structure for subsidies.





Neither the investment premiums under
the 2007 Investment Premium Act, nor the subsidies under the regional aid
scheme, have been approved by either applicable administrative
authority.  However Algatec believes that investment premiums under
the 2007 Investment Premium Act will be granted in the summer of the year
following completion of the expenditures (anticipated in 2010) and that further
subsidies under the regional aid scheme may be granted in 2011.





The proceeds, if any, that are
received by Algatec under the 2007 Investment Premium Act, or the subsidies
under the regional aid scheme will be used to secure repayment of the above
contemplated financings and/or any financing provided to Algatec or the Company
to secure payment of the $4.35 million contract deposit on the Komax
equipment.





Terms
of the Algatec Acquisition and Related Party Financing





On October 20, 2008, Robert M. Rubin,
Chairman, Chief Executive Officer and Chief Financial Officer of Solar Thin
Films, formed Algatec Equity Partners, L.P., a Delaware limited partnership (the
“Partnership”), for the purpose of acquiring up to 49% of the share capital of
Algatec.  Effective as October 30, 2008, Algatec and members of
Algatec senior management consisting of Messrs. Rainer Ruschke, Ullrich Jank,
Dr. Stefan Malik and Andre Freud (collectively, the “Management Stockholders”),
and Anderkonto R. Richter, Esq.,as trustee for Mr. Ruschke
and another Algatec stockholder (the “Trustee”), entered into a share purchase
agreement (the “Algatec Share Purchase Agreement”).  Under the terms
of the Algatec Share Purchase Agreement, on November 3, 2008 (the “First
Closing”) the Partnership invested an aggregate of $3,513,000, of which
approximately €2,476,000 was represented by a contribution to the equity of
Algatec to enable it to acquire all of the assets and equity of Trend Capital,
the predecessor to Algatec.  The Partnership also purchased for €1.00
per share a total of 13,750 Algatec shares, representing 27.5% of the
outstanding share capital of Algatec.





The general partner of the Partnership
is Algatec Management LLP, a Delaware limited liability company owned by The
Rubin Family Irrevocable Stock Trust and other persons.  Mr. Rubin and
Barry Pomerantz, a business associate of Mr. Rubin, are the managers of the
general partner.  Under the terms of the limited partnership
agreement, the general partner agreed to invest a total of $165,000 in the
Partnership in consideration for 5.0% of the assets, profits and losses of the
Partnership.  The limited partners, who invested an aggregate of
$3,200,000 at the First Closing and additional persons the Partnership will seek
to admit as limited partners by the Second Closing, will own 95.0% of the
Partnership assets, profits and losses. As part of the First Closing, The Rubin
Family Irrevocable Stock Trust invested an additional $1,500,000, as a limited
partner, on the same terms as other limited partners of the
Partnership.




-10-




In addition to its equity investment,
the Partnership has agreed under the terms of a loan agreement entered into at
the same time as the Algatec Share Purchase Agreement, to lend to Algatec on or
about November 30, 2008 (the “Second Closing”), an additional $2,600,000 or
approximately €2,000,000.  The proceeds of the loan was to be used to
assist Algatec in paying the balance of the purchase price for all of the assets
and equity of the Trend Capital limited partnership.  Upon funding of
the loan, the Partnership would purchase for €9,250 an additional 9,250 shares,
representing 21.5% of the outstanding share capital of Algatec, thereby
increasing its ownership to an aggregate of 49% of the outstanding share capital
of Algatec.  The loan, together with interest at the rate of 6% per
annum, is repayable on the earlier of December 31, 2012 or the completion of one
or more financings providing Algatec with up to $50.0 million of proceeds for
expansion (the “Algatec Financing”).  Upon the Partnership funding the
entire €2,000,000 loan at the Second Closing, the Management Group would own the
remaining 51% of the share capital of Algatec.  If the Partnership
funds less than the full €2,000,000 loan, the additional 21.5% equity to be
issued to the Partnership at the Second Closing was to have been appropriately
pro-rated.  On December 29, 2009, the Partnership consummated the
Second Closing with Algatec and funded a loan of €2,000,000 ($2.6 million) as a
result of which the Partnership’s total equity ownership in Algatec was fixed at
49% of the total number of outstanding Algatec shares.





Effective as of October 30, 2008, the
Trustee, the Management Group and the Partnership (collectively, the “Algatec
Stockholders”) and Algatec entered into a stock exchange agreement. Under the
terms of the stock exchange agreement the Algatec stockholders agreed,
subject to certain conditions, to exchange 100% of the share capital of Algatec
for shares of our newly authorized Series B-5 convertible preferred
stock.  The Series B-5 preferred stock is convertible at any time into
that number of shares of our common stock as shall represent 60% of our
“Fully-Diluted Common Stock” (as defined).  The term “Fully-Diluted
Common Stock” means the aggregate number of shares of Company common stock
issued and outstanding as at the date of closing of the share exchange, aftergiving pro-forma effect to the sale or issuance of any shares of common
stock (a) that were issued at any time following the October 30, 2008 date of
execution of the stock exchange agreement and prior to consummation of the
Algatec acquisition, (b) that are issuable upon conversion of any Company
convertible securities or upon the exercise of any warrants that were issued at
any time between October 31, 2008 and consummation of the Algatec acquisition,
and (c) that are issuable upon full conversion of the Series B-5 preferred
stock.  However, the Algatec stockholders shall be subject to
pro-rata dilution resulting from the issuance of (i) approximately 19.6 million
shares of Company common stock issuable upon conversion of convertible notes or
the exercise of options and warrants that were outstanding as at October 30,
2008, (ii) any shares of Company common stock issued in connection with
providing financing for Algatec (as described below), or (iii) any shares of
Company common stock issued or issuable after completion of the Algatec
acquisition.  Consummation of the Algatec acquisition is subject to
certain conditions, including Algatec obtaining up to $50.0 million of the
Algatec Financing to enable it to construct the addition to its existing
manufacturing facility and purchase the necessary equipment to expand its
business and meet contractual obligations to Q-Cells and other customers, as
described above.





On April 10, 2009, the parties agreed
to extend the anticipated closing date of the transactions contemplated by the
Stock Exchange Agreement to July 15, 2009.





There can be no assurance that the
necessary Algatec Financing will be obtained or that the proposed Algatec
acquisition will be consummated.





Under the terms of the Stock Exchange
Agreement, each of Messrs. Ruschke, Malik, Jank and Freud will enter into five
year employment agreements with Algatec pursuant to which Mr. Ruschke will
receive an annual salary of €180,000 (approximately USD $246,600) and each of
Messrs. Malik, Jank and Freud will receive annual salaries of €100,000
(approximately USD $137,000), subject to 5% annual cost-of-living
increases.  In addition, such executives shall be entitled to receive
annual bonuses equal to 10% of the annual net income before interest and taxes
of Algatec (“EBIT”) for each of the five years, subject to an annual “cap” on
such bonuses that will not exceed 100% of their annual salaries if annual EBIT
is €10.0 million or less in any of the five fiscal years, and 200% of their
annual salaries if such annual EBIT is more than €10.0 million in any of the
five fiscal years.  Each of Messrs. Ruschke, Malik, Jank and Freud
have also agreed, for a period equal to the greater of five years or the term of
their individual employment with Algatec, not to compete with the “business” of
the Company (defined as (i) the manufacture and sale of photovoltaic module
equipment of all types, (ii) the installation of turn-key module manufacturing
facilities of all types; (iii) the manufacture and sale of photovoltaic cells or
modules of all types; and (iv) the installation and operation of power projects,
including the supplying of solar power electricity to private industry,
consumers or local or foreign governments and municipalities).





If the Algatec acquisition is
consummated, the board of directors of our Company will be expanded to seven
persons, of which three members of the board of directors shall be represented
by the Management Stockholders.  Messrs. Ruschke, Malik and Jank have
agreed to serve on our board of directors.





Solar
Thin Power





In 2007, the Company formed Solar Thin
Power, Inc. under the laws of the State of Delaware.  Solar Thin Power
was to engage in power projects.  It currently owns a 15% interest in
CG Solar Company Limited, the Company’s joint venture in China (and has agreed
to purchase another 5%), and is in preliminary discussions with other
prospective joint venture partners with respect to marketing and financing of
various power projects.




-11-




In 2007 and 2008, Solar Thin Power
received an aggregate of $3,498,396 of financing from ten unaffiliated investors
who purchased common stock of Solar Thin Power at $0.50 per
share.  Approximately $1,500,000 of the proceeds of such financing
used by Solar Thin Power to acquire a 20% minority interest in a thin film a-Si
solar module manufacturing facility in China and the balance of such proceeds
were loaned to Solar Thin Films for working capital.  Under the terms
of the transaction, if Solar Thin Power was not a publicly traded corporation by
June 2009, the investors in Solar Power have the right to require Solar Thin
Films to repurchase half of their portion of their minority equity in Solar
Power for $1,767,500.





As at December 31, 2008, an aggregate
of 67,570,000 shares of Solar Thin Power were issued and outstanding, of which
Solar Thin Film owned 44,000,000 or 65.12% the outstanding shares of Solar Thin
Power common stock.  In April 2009, Solar Thin Films agreed to
transfer 2,000,000 of its Solar Thin Power shares to Strategic Growth
International Inc. in lieu of cash compensation payable under a one year
investor relations agreement expiring March 31, 2010.  In addition,
Solar Thin Power agreed to issue three year warrants to purchase an additional
2,000,000 shares of Solar Thin Power to Strategic Growth International at an
exercise price of $0.20 per share.





As a result of the foregoing
transactions, as at the date of this Form 10-K, Solar Thin Films owns an
aggregate of 33,900,000 shares of Solar Thin Power common stock, and
stockholders of Solar Thin Power, other than Solar Thin Films, currently own an
aggregate of 25,570,000 shares of the 59,470,000 outstanding shares of Solar
Thin Power common stock, and Strategic Growth International holds warrants to
purchase an additional 2,000,000 shares of Solar Thin Power.  Peter C.
Lewis, Group Vice President and General Manager of the Thin Film Group and
former Chief Executive Officer and President of Solar Thin Films owns 3,000,000
shares of Solar Thin Power and The Rubin Family Stock Trust owns 3,000,000
shares of Solar Thin Power.





Item 1A. Risk Factors.





You should carefully consider the
risks described below in conjunction with our  forward looking statement related
risks as set forth in the beginning of this report, as well as the other information in
this report, when evaluating our business and future prospects. Should any of the
following risks actually occur, our business, financial condition and results of
operations could be seriously harmed. In that event, the market price of our
common stock could decline and investors could lose all or a portion of the value of
their investment in our common stock.





Risks Related to Our Financial Condition





Our
independent registered public accounting firm has expressed doubt about our
ability to continue as a going concern, which may hinder our ability to obtain
future financing.





Our
consolidated financial statements as of December 31, 2008 have been prepared
under the assumption that we will continue as a going concern for the year
ending December 31, 2009. Our independent registered public accounting firm
issued a report that was included in this annual report which included an
explanatory paragraph expressing substantial doubt in our ability to continue as
a going concern without additional capital becoming available. Our ability to
continue as a going concern ultimately is dependent on our ability to obtain
additional equity or debt financing, attain further operating efficiencies and,
ultimately, to achieve profitable operations. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.





We
have a significant working capital shortage; are currently in default in payment
of approximately $1.75 million of indebtedness which became due in March 2009,
and may face litigation or even bankruptcy if we are unable to met our
obligations.





As at December 31, 2008, the Company’s
consolidated current liabilities exceeded its consolidated current assets by
$7,261,614.   The Company is currently in default in the payment
of notes aggregating $1.75 million which became due in March 2009 or earlier,
and outstanding accounts payable of approximately $4.0 million are also past
due.  Unless the Company is able to obtain additional capital or other
financing within the next 60 to 90 days, or sooner, its creditors may sue to
collect on their notes and accounts, which action may accelerate the due date of
other Company indebtedness aggregating approximately $1.2 million that is not
currently in default.  In such event, the Company may be required to
seek protection from its creditors under the Federal Bankruptcy
Act.  Although the Company is actively pursuing such financing, there
is no assurance that it will be obtained on commercially reasonable terms, if at
all.  Even if such financing is obtainable, it may be expected that
the terms thereof will significantly dilute the equity interests of existing
stockholders of the Company.




-12-
 
  Our existing and potential
subsidiaries need to raise significant additional capital which may not be
available on acceptable terms or at all.


In addition to the indebtedness and
other obligations of Solar Thin Films, our Kraft subsidiary requires additional
capital to meet its expansion plans and may require approximately $1.1 million
to consummate the proposed Buda Solar acquisition.  In addition, in
order to consummate the proposed Algatec acquisition, the Company must assist
Algatec in obtaining up to $50.0 million of expansion
financing.  Although the Company and Algatec are considering various
debt financing proposals, there is no assurance that such additional financing
will be obtained on commercially reasonable terms, if at all.





If adequate funding is not available on
acceptable terms, Kraft may be unable to develop or enhance its products or take
advantage of its acquisition opportunities, either of which could have a
material adverse effect on the Company's business, results of operations and
financial condition and may reduce our ability to continue to conduct business
operations. Any additional equity or equity-type financing (including the
issuance of convertible securities or warrants) will likely involve substantial
dilution to our then existing shareholders





We
have a history of losses, expect to incur substantial further losses and may not
achieve or maintain profitability in the future, which may decrease the market
value of our stock.




The Company has reported a net loss of
$6,974,675 from operations for the year ended December 31, 2008 and a net loss
of $3,824,645 from operations for the year ended December 31, 2007.




The Company has suffered operating
losses and negative cash flows from operations since inception and, at December
31, 2008, the Company had an accumulated deficit of $32,549,564. We cannot
assure you that we can achieve or sustain profitability on a quarterly or annual
basis in the future. If revenues grow more slowly than we anticipate, or if
operating expenses exceed our expectations or cannot be adjusted accordingly, we
will continue to incur losses. We will continue to incur losses until we are
able to establish significant sales. Our possible success is dependent upon the
successful development and marketing of our products, as to which there is no
assurance. Any future success that we might enjoy will depend upon many factors,
including factors out of our control or which cannot be predicted at this time.
These factors may include changes in or increased levels of competition,
including the entry of additional competitors and increased success by existing
competitors, changes in general economic conditions, increases in operating
costs, including costs of supplies, personnel, marketing and promotions, reduced
margins caused by competitive pressures and other factors. These conditions may
have a materially adverse effect upon us or may force us to reduce or curtail
operations. In addition, we will require additional funds to sustain and expand
our sales and marketing activities, particularly if a well-financed competitor
emerges. There can be no assurance that financing will be available in amounts
or on terms acceptable to us, if at all. The inability to obtain sufficient
funds from operations or external sources would require us to curtail or cease
operations.





Our
revenues and operating results are likely to fluctuate
significantly.





As a result of our limited operating
history and the rapidly changing nature of the markets in which the Company
competes, our quarterly and annual revenues and operating results are likely to
fluctuate from period to period. These fluctuations may be caused by a number of
factors, many of which are beyond our control. These factors include the
following, as well as others discussed elsewhere in this section:





·
            how
      and when we introduce new products and services and enhance our existing
      products and services;


·
            our
      ability to attract and retain new customers and satisfy our customers'
      demands;


·
            the
      timing and success of our brand-building and marketing
      campaigns;


·
            our
      ability to establish and maintain strategic
  relationships;


·
            our
      ability to attract, train and retain key
  personnel;


·
            the
      emergence and success of new and existing
  competition;


·
            varying
      operating costs and capital expenditures related to the expansion of our
      business operations and infrastructure, domestically and internationally,
      including the hiring of new
employees;


·
            changes
      in the mix of products and services that we sell to our
      customers;


·
            costs
      and effects related to the acquisition of businesses or technology and
      related integration; and


·
            costs
      of litigation and intellectual property
  protection.





In
addition, because the market for our products and services is relatively new and
rapidly changing, it is difficult to predict future financial
results.




-13-




For these
reasons, you should not rely on period-to-period comparisons of our financial
results, if any, as indications of future results. Our future operating results
could fall below the expectations of public market analysts or investors and
significantly reduce the market price of our common stock. Fluctuations in our
operating results will likely increase the volatility of our stock
price.





Risks
Related to our Current Business Operations





Kraft
has generated limited revenues and it may never achieve
profitability.





To date, the Company, through its Kraft
subsidiary, has generated limited revenues of $3,436,779 and $5,779,578 for the
years ended December 31, 2008 and December 31, 2007, respectively, and the
Company incurred losses from operations of $6,974,675 and $3,824,645,
respectively. Kraft’s future existence is dependent upon management’s ability to
develop profitable operations and resolve its liquidity problems. We cannot
assure you that the Company can achieve or sustain profitability in the future.
Kraft’s operations are subject to the risks and competition inherent in the
establishment of a business enterprise. There can be no assurance that future
operations will be profitable. Revenues and profits, if any, will depend upon
various factors, including whether our PV manufacturing facilities development
will achieve market acceptance. The Company may not achieve its business
objectives and the failure to achieve such goals would have an adverse impact on
Kraft. These matters raise substantial doubt about the Company’s ability to
continue as a going concern.





Our
equipment business is small and projected revenues may not
materialize.





Since its inception, our thin film
amorphous silicon equipment business located in Hungary has only delivered
$11,643,311 of equipment to customers and has never sold more than $5,000,000 of
equipment in any one year.  Our ability to achieve or even approach
our sales and profit projections are subject to a number of factors, some of
which are beyond our control.. Such factors include, without
limitation:





·
            entering
      into definitive agreements with financially credible customers that
      provide for adequate profit
margins;




·
            our
      obtaining meaningful down payments to provide sufficient cash flow to
      enable Kraft to purchase necessary components and pay labor
      costs;




·
            significantly
      increasing our personnel and
infrastructure;




·
            our
      having or obtaining sufficient manufacturing
  capacity;




·
            our
      ability to meet contracted for delivery schedules;
  and




·
            our
      ability to obtain and post completion bonds or other guarantees, if
      required by certain customers.




Kraft
is dependent on a only a few customers and any loss of these customers will have
a negative impact on our operations.




For
the year ended December 31, 2008, Kraft derived over 96% of its total revenues
from one key customer. A loss of this relationship, for any reason could cause
the Company to experience difficulties in obtaining revenue and implementing its
business strategy. There can be no assurance that the Company could establish
other relationships of adequate revenue in a timely manner or at all. In the
event that STF is not able to significantly increase the number of customers or
vendors that purchase its products its financial condition and results of
operations will be materially and adversely affected.





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





There is limited historical information
available about our company upon which you can base your evaluation of our
business and prospects. Although Kraft was formed in 1993 for the development of
vacuum based technologies it has only recently developed four turnkey PV module
manufacturing facilities pursuant to which it has only recognized limited
revenues.




The market we are addressing is rapidly
evolving and is experiencing technological advances and new market entrants. Our
future success will require us to scale our manufacturing capacity significantly
beyond the capacity of our Budapest, Hungary manufacturing facility, and our
business model and technology are unproven at significant scale. Moreover,
Kraft’s strategic partnerships with Buda Solar and Algatec, are only in the
early stages of development and have not been officially agreed to and
formalized. Kraft has limited experience upon which to predict whether it will
be successful. As a result, you should consider its business and prospects in
light of the risks, expenses and challenges that we will face as an early-stage
company seeking to develop and manufacture new products in a growing and rapidly
evolving market.




-14-




Our
future success substantially depends on our ability to significantly increase
our manufacturing capacity through the development of additional manufacturing
facilities. We may be unable to achieve our capacity expansion goals as a result
of a number of risks, which would limit our growth potential, impair our
operating results and financial condition and cause our stock price to
decline.





Our future success depends on our
ability to increase our manufacturing capacity through the development of
additional manufacturing facilities. If we are unable to do so, we may not be
able to achieve the production volumes and per unit costs that will allow us to
meet customer demand, maintain our competitive position and achieve
profitability. Our ability to develop additional manufacturing facilities is
subject to significant risk and uncertainty, including:





·
            we
      may need to continue to raise significant additional capital through the
      issuance of equity or convertible or debt securities in order to finance
      the costs of development of any additional facility, which we may be
      unable to do on reasonable terms or at all, and which could be dilutive to
      our existing stockholders;


·
            the
      build-out of any additional facilities will be subject to the risks
      inherent in the development of a new manufacturing facility, including
      risks of delays and cost overruns as a result of a number of factors, many
      of which may be out of our control, such as delays in government approvals
      or problems with supplier
relationships;


·
            our
      manufacturing processes, particularly those for the development of the
      equipment used in the turnkey PV manufacturing facilities, are unproven at
      large scale and may prove difficult to implement in any new facility;
      and


·
            if
      a new facility is established internationally, we may encounter legal
      restrictions and liability, encounter commercial restrictions and incur
      taxes and other expenses to do so and otherwise be subject to the risks
      inherent in conducting business in a foreign jurisdiction as described
      elsewhere in this section.





If we are unable to develop and
successfully operate additional manufacturing facilities, or if we encounter any
of the risks described above, we may be unable to scale our business to the
extent necessary to achieve profitability, which would cause our stock price to
decline. Moreover, there can be no assurance that if we do expand our
manufacturing capacity that we will be able to generate customer demand for our
turnkey PV manufacturing facilities at these production levels or that we will
increase our revenues or achieve profitability.





Our
“turnkey” manufacturing facility may not gain market acceptance, which would
prevent us from achieving increased sales and market share.





The
development of a successful market for turnkey manufacturing facility may be
adversely affected by a number of factors, many of which are beyond our control,
including, without limitation:





·
            our
      ability to market our services together with our
  equipment;


·
            our
      failure to produce a turnkey facility that competes favorably against
      companies electing to develop these facilities
  internally;


·
            our
      failure to produce a turnkey facility that produces PV modules that
      compete favorably against conventional energy sources and alternative
      distributed generation technologies, such as wind and biomass, on the
      basis of cost, quality and performance;
and


·
            our
      failure to develop and maintain successful relationships with strategic
      partners, including, Buda Solar and
Algatec.





If our “turnkey” facilities or the PV
solar modules produced by our facilities fail to gain market acceptance, we
would be unable to increase our sales and market share and to achieve and
sustain profitability.





Technological
changes in the solar power industry could render our turnkey manufacturing
facilities uncompetitive or obsolete, which could reduce our market share and
cause our sales to decline.





Our failure to further refine our
technology and develop and introduce the next generation of our turnkey facility
could cause our products to become uncompetitive or obsolete, which could reduce
our market share and cause our sales to decline. The solar power industry is
rapidly evolving and competitive. We will need to invest significant financial
resources in research and development to keep pace with technological advances
in the solar power industry and to effectively compete in the future. We believe
that a variety of competing solar power technologies are under development by
other companies that could result in lower manufacturing costs or higher product
performance than those expected to be produced utilizing our turnkey facilities.
Our development efforts may be rendered obsolete by the technological advances
of others and other technologies may prove more advantageous for the
commercialization of solar power products.




-15-




We
face risks associated with the marketing, development and sale of our turnkey
facilities internationally, and if we are unable to effectively manage these
risks, it could impair our ability to expand our business abroad.





To date, Kraft has delivered equipment
for facilities in New Jersey, Germany, Portugal, China, Taiwan and Greece and is
now delivering a “turnkey” system in Spain. Going forward we expect to seek to
develop turnkey facilities on an international basis. It will require
significant management attention and financial resources to successfully develop
our international sales channels either internally (with BudaSolar) or through
outside agents. In addition, the marketing, development and sale of our turnkey
facilities internationally could expose us to a number of markets with which we
have limited experience. If we are unable to effectively manage these risks, it
could impair our ability to grow our business abroad. These risks
include:





·
            difficult
      and expensive compliance with the commercial and legal requirements of
      international markets, with which we have only limited
      experience;


·
            inability
      to obtain, maintain or enforce intellectual property
    rights;


·
            encountering
      trade barriers such as export requirements, tariffs, taxes and other
      restrictions and expenses, which could affect the competitive pricing of
      our turnkey facilities;


·
            fluctuations
      in currency exchange rates relative to the United States dollar and the
      Hungarian florint;


·
            difficulty
      in recruiting and retaining individuals skilled in international business
      operations; and


·
            difficulty
      of enforcing revenue collection
internationally.





We expect
that a portion of our international sales will be denominated in United States
dollars. As a result, increases in the value of the United States dollar
relative to foreign currencies would cause our products to become less
competitive in international markets and could result in limited, if any, sales
and profitability.




Furthermore,
in the development of our facilities in foreign markets, we may encounter legal
restrictions, commercial restrictions and incur taxes and other expenses to
establish our manufacturing facilities in certain countries. In addition, we may
potentially forfeit, voluntarily or involuntarily, foreign assets due to
economic or political instability in the countries where our local manufacturing
facilities are located.





We
may not be able to successfully develop and commercialize our turnkey PV
manufacturing facilities which would result in continued losses and may require
us to curtail or cease.





While we have made progress in the
development of our PV manufacturing facilities, we have generated limited
revenues and we are unable to project when we will achieve profitability, if at
all. As is the case with any new technology, we expect the development process
to continue. We cannot assure that our engineering resources will be able to
modify the product fast enough to meet market requirements. We can also not
assure that our product will gain market acceptance and that we will be able to
successfully commercialize the technologies. The failure to successfully develop
and commercialize the technologies passed its current stage would result in
continued losses and may require us to curtail or cease operations.





Our
fixed-price contracts could subject us to losses in the event that we have cost
overruns.





Substantially
all of our agreements with customers are based upon fixed-price
contracts.  In a fixed-price contract, the price is not subject to
adjustment based on cost incurred to perform the required work under the
contract. Therefore, we fully absorb cost overruns on fixed-price contracts,
thereby reducing our profit margin.  Further risks associated with
fixed-price contracts include the difficulty of estimating costs that are
related to performance in accordance with contract specifications and the
possibility of obsolescence in connection with long-term
procurements.  We may not be able to accurately estimate the costs of
the components and materials that we use to manufacture our products, because
their prices have been, and we expect them to continue to be, subject to
volatility. Also, any failure to anticipate technical problems, estimate costs
accurately or control costs during performance of a contract can reduce our
profitability. Under fixed-price contracts, we may not be able to pass price and
cost increases on to our customers, which could have an adverse effect on our
financial results.





We
have a few proprietary rights, the lack of which may make it easier for our
competitors to compete against us.




We
attempt to protect our limited proprietary property through copyright,
trademark, trade secret, nondisclosure and confidentiality measures. Such
protections, however, may not preclude competitors from developing similar
technologies. Any inability to adequately protect our proprietary technology
could harm our ability to compete.




-16-




Our
future success and ability to compete depends in part upon our proprietary
technology and our trademarks, which we attempt to protect with a combination of
patent, copyright, trademark and trade secret laws, as well as with our
confidentiality procedures and contractual provisions. These legal protections
afford only limited protection and are time-consuming and expensive to obtain
and/or maintain. Further, despite our efforts, we may be unable to prevent third
parties from infringing upon or misappropriating our intellectual
property.





We
depend on the services of key executives and technical and other personnel, the
loss of whom could materially harm our business or reduce our operational
effectiveness.





Some of our senior executives are
important to our success because they have been instrumental in setting our
strategic direction, operating our business, identifying, recruiting and
training key personnel, identifying opportunities and arranging necessary
financing. We are highly dependent on our management, in particular, Peter
Lewis, the Group Vice President and General Manager of the Thin Film Group, and
Robert Rubin, the Chief Executive Officer and Chief Financial Officer, and
consultants who are all critical to the development of our financing
arrangements, technologies and business. Losing the services of any of these
individuals, including, without limitation, Peter Lewis or Robert Rubin, could
adversely affect our business until a suitable replacement could be found. If we
were to lose any one of these individuals, we may experience difficulties in
competing effectively, developing our technology and implementing our business
strategies or financing arrangements. We believe that they could not quickly be
replaced with executives of equal experience and capabilities. We do not
maintain key person life insurance policies on any of our executives. The
employment agreement entered with Mr. Lewis and our company (as amended on April
7, 2009) is for a term of three years through June 2010. The agreements entered
between our company and Rubin expire in June 2009.





There is a continuing demand for
qualified technical personnel, and we believe that our future growth and success
will depend upon our ability to attract, train and retain such
personnel.  Competition for personnel in our industry is intense, and
there is a limited number of persons with knowledge of, and experience in, this
industry. Although we currently experience relatively low rates of turnover for
our technical personnel, the rate of turnover may increase in the future. During surge
production periods, we rely on a substantial number of temporary employees. An
inability to attract or maintain a sufficient number of technical or temporary
personnel could have a material adverse effect on our contract performance or on
our ability to capitalize on market opportunities.





We
do not maintain theft or casualty insurance and only maintain modest liability
and property insurance coverage and therefore we could incur losses as a result
of an uninsured loss.





We do not
maintain theft or casualty insurance and we have modest liability and property
insurance coverage. We cannot assure that we will not incur uninsured
liabilities and losses as a result of the conduct of our business. Any such
uninsured or insured loss or liability could have a material adverse affect on
our results of operations.





Risks
Related to our Proposed Business Operations





Substantially
all of Algatec's existing and projected 2009 revenues are derived from its OEM
contract with Q-Cells, which contract will expire at the end of 2009; there can
be no assurance that Q-Cells will renew such contract beyond such date or on
financially acceptable terms.  A loss of the OEM contract with Q-Cells
or a reduction of sales or profit margins under such OEM contract would have a
material adverse effect on Algatec’s business.





Algatec derived approximately 60% of
its 2008 revenues from its OEM contract with Q-Cells and anticipates that a
significant portion of its projected 2009 revenues will be derived under such
contract that currently expires on December 31, 2009.  Although we
have received agreement in principle with Q-Cells to extend such agreement
through 2010 and anticipate signed such extension in January 2009, even if
extended, the Q-Cells contract will then expire on December 31,
2010.  Although Algatec believes that Q-Cells will negotiate a
contract extension beyond 2010 with revised pricing and other terms prior to
such anticipated December 31, 2010 expiration date, there can be no assurance
Q-cells will renew such contract beyond 2010 or, even if renewed, that such
renewed contract will be on financially attractive terms.  Even if
renewed for 2011 and beyond, a reduction in the annual sales revenues or profit
margins under such OEM contract would have a material adverse effect on our
business, results of operations and cash flow.  A termination of such
OEM contract in the near term would have a material adverse effect to our
business, results of operations, cash flow and ability to make principal
installment payments under the notes.




-17-




Algatec's inability
to perform under its Q-Cells OEM contract would have a material adverse effect
on our consolidated business and prospects.





A failure to meet perform or otherwise
meet delivery schedules to Q-Cells or other customers in accordance with
contractual requirements, would have a material adverse effect on our reputation
and future sales and business prospects.  Each of such contracts
obligates Algatec to meet certain delivery schedules, and furnish equipment
that performs within agreed upon product specifications.  A default or
other failure to perform obligations under such contracts, could result in
Algatec incurring substantial financial losses and subject them to liabilities
to their customers.





Prices
of metallurgical crystalline cells and other components may increase causing our
profit margins to decrease





Upon completion of its fixed asset
additions, Algatec intends to increasingly focus a portion of its business
activities on Profit Center 2 - the sale of metallurgical crystalline
solar modules to third parties other thanQ-Cells.The
price currently being charged by Q-Cells to Algatec for metallurgical crystalline
cells that are not covered by the OEM agreement (i.e.,to be included in solar
modules sold resale to third parties) may significantly
increase.  This which would erode anticipated profit margins andAlgatec’s projected
earnings.  Because it doesnot control the production of cells
or other components, Algatec may also be subject to delays caused by
interruption in production of materials based on conditions not within its
control. Such conditions include job actions or strikes by employees of Q-Cells
or other suppliers, transportation interruptions, and natural disasters or other
catastrophic events. There can be no assurance that Algatec will be able to
obtain alternative sources of metallurgical crystalline
cells or other componentsat
favorable prices, or at all, if it experiences supply shortages.





Algatec’s
strategy depends on continued outsourcing by Q-Cells and producers of solar
modules and power plants.





Algatec's strategy to increase
sales depends in part on the continued outsourcing by Q-Cells of metallurgical
crystalline solar modules for installation in power
projects.  Although Algatec believes that, as a world-wide supplier of
metallurgical crystalline and other solar cells to module producers, Q-Cells
would not elect to compete with its customers, there can be no assurance that it
will not change its business strategy and enter the module manufacturing
business in direct competition with Algatec and others.  In such
event, Q-Cells would likely terminate its agreement with Algatec and may refuse
to continue to sell Algatec metallurgical crystalline cells, or significantly
raise the price of such solar module component.  In addition, other
large producers of thin-film a-Si modules or operators of turn-key solar power
facilities, may elect to stop outsourcing the purchase of equipment to
manufacture such modules.  The occurrence of either of such events,
would have a material adverse effect on our results of operations and financial
condition.





There
is no assurance that Algatec will be able to build equip and operate its new
manufacturing facilities on schedule or within the amount budgeted for such
purpose.





Even if Algatec is able to obtain the
necessary financing, the construction of its manufacturing facility and receipt
and installation of necessary production equipment could be materially delayed
by factors beyond the control of Algatec, including labor disputes, material
shortages and weather conditions.  There can also be no assurance
that, once installed, the production equipment will work properly or
efficiently; failing which Algatec’s production schedule could be materially
delayed.  In addition, Algatec could face significant cost overruns in
its construction and equipment installation efforts which could have a material
adverse effect on its liquidity and production scheduling.





There
is no assurance that Algatec will receive the investment premium under the 2007
Investment Premium Act or the subsidies under the regional aid scheme we applied
for and/or that we will not have to pay back the respective
subsidies.





Algatec will have a legal right to
obtain investment premiums under the 2007 Investment Premium Act provided that
the statutory requirements of the 2007 Investment Premium Act are
fulfilled.   On this basis, Algatec will have a legal right to
obtain a 25% investment premium with regard to the movable assets (investments
with regard to the purchase of machinery and equipment) and a 12.5% investment
premium for the immovable assets (investments with regard to the construction of
the 125,000 square foot plant addition).





Once the investments have been made and
the movable and immovable assets have been constructed, purchased and installed,
we believe that it is highly probable that the statutory requirements will have
been fulfilled and that the German authority therefore will grant the investment
premium calculated for the movable assets on the one hand and for the immovable
assets on the other hand.  However, there is no assurance that the
German administrative authority will not conclude that the statutory
requirements have not been fulfilled, or seek to reclaim the investment premiums
at a later stage.  For instance, the German administrative authority
is obliged to repeal its decision and to reclaim the investment premium if the
applicable company does not comply with the statutory requirements during the
commitment period of three years after completion of the investment
project.




-18-




Further, Algatec will not have a strict
legal right to obtain the administrative approval of a regional subsidy even if
the requirements of the respective regional aid scheme are
fulfilled.  Thus, it cannot be assured that the authority of the Land
Brandenburggrant will grant the subsidy.  Even if the Land
Brandenburggrant will grant the subsidy, it cannot be assured that, after
exercising its discretion, the Land Brandenburggrant will not reclaim the
subsidy at a later stage. The Land Brandenburggrant will be obliged to
repeal its decision and to reclaim the subsidy if the requirements of the
regional aid schemes are not fulfilled after the completion of the investment
project.





In addition and even if the German
administrative authorities approve the aforementioned state aid measures it is
possible that the European Commission could, acting on its own initiative or
following a complaint, come to the conclusion that the respective measure(s)
is/are not compatible with the Common Market of the EU, it could oblige Germany
to reclaim the relevant subsidies.  In such a case, Algatec might even
be obliged to pay for interest and/or damages.





Algatec
depends on the services of key executives and technical and other personnel, the
loss of whom could materially harm our business or reduce its operational
effectiveness.





Some of the Algatec senior executives,
especially Rainer Ruschke and Ullrich Jank, are important to its success because
they have been instrumental in developing with Komax its module stringing
equipment and other technical capabilities, operating its business, identifying,
and recruiting and training key personnel, identifying opportunities. Losing the
services of any of these individuals could adversely affect Algatec's business
until a suitable replacement could be found. We believe that they could not
quickly be replaced with executives of equal experience and
capabilities.  There is a continuing demand for qualified technical
personnel, and we believe that our future growth and success will depend upon
our ability to attract, train and retain such personnel.  Competition
for personnel in our industry is intense, and there is a limited number of
persons with knowledge of, and experience in, the crystalline module production
business. Although Algatec currently experience relatively low rates of turnover
for technical personnel, the rate of turnover may increase in the future. During surge
production periods,Algatecrelieson a substantial number
of temporary employees. An inability to attract or maintain a sufficient number
of technical or temporary personnel could have a material adverse effect onitscontract
performance or onitsability to capitalize on
market opportunities





Other
Business Risks





Fixed-price
contracts could subject us to losses in the event that we have cost
overruns.





Substantially all of agreements with
customers of Algatec and Kraft are based upon fixed-price
contracts.  In a fixed-price contract, the price is not subject to
adjustment based on cost incurred to perform the required work under the
contract. Therefore, we and Kraft fully absorb cost overruns on fixed-price
contracts, thereby reducing our profit margin.  Further risks
associated with fixed-price contracts include the difficulty of estimating costs
that are related to performance in accordance with contract specifications and
the possibility of obsolescence in connection with long-term
procurements.  We may not be able to accurately estimate the costs of
the components and materials that we use to manufacture our products, because
their prices have been, and we expect them to continue to be, subject to
volatility. Also, any failure to anticipate technical problems, estimate costs
accurately or control costs during performance of a contract can reduce our
profitability. Under fixed-price contracts, we may not be able to pass price and
cost increases on to our customers, which could have an adverse effect on our
financial results.





We
have no excess production facilities. Therefore, the loss of one of our
facilities would adversely affect our production capability.





Our manufacturing operations occur at
one facility located in Prosen, Germany.  We have no other production
facilities at the present time.  We may lose production capability if
a natural or other disaster were to occur that affected one of our facilities or
if we were unable to renew an expired lease for any such facility. The loss of
any of our facilities would adversely affect our production capacity and could
have a material adverse effect on our results of operations or financial
condition.





Governmental
regulation may have a negative impact on our business.





Our operations and properties are
subject to regulation by various government entities and agencies. As a producer
of food products, our operations are subject to production, packaging, quality,
labeling and distribution standards. Our manufacturing, processing and
distribution facilities are also subject to various workplace regulations. We
believe that our current compliance programs adequately address such concerns
and that we are in substantial compliance with applicable laws and regulations.
However, compliance with, or any violation of, current and future laws or
regulations could require material expenditures or otherwise adversely affect
our business and financial results.




-19-




Product
recalls could have a material adverse effect on our business.





Manufacturers of solar modules are
sometimes subject to the recall of their products for a variety of reasons,
including for product defects or failure to adequately perform to contract
specifications. If any of our products are recalled due to a product defect or
for any other reason, we could be required to incur the expense of the recall or
the expense of any resulting legal proceeding. Additionally, if one of the
significant products of Algatec or Kraft were subject to recall, the image of
that brand and our company could be harmed, which could have a material adverse
effect on our business and the consolidated operations of Solar Thin
Films.





Product
liability claims could have a material adverse effect on our business and that
of Kraft.





We and Kraft face an inherent risk of
exposure to product liability claims if any of the products we sell cause injury
or illness. We have obtained liability insurance for product liability claims.
We cannot assure you, however, that this insurance will continue to be available
at a reasonable cost, or that any insurance that we obtain will be adequate to
cover product liability claims against us. We generally obtain contractual
indemnification from parties supplying our products, but this form of
indemnification is limited, as a practical matter, to the creditworthiness and
financial resources of the indemnifying party.  If we do not have
adequate insurance or contractual indemnification available, losses associated
with product liability claims could have a material adverse effect on our
business, operating results and financial condition.





Environmental
laws and regulations may subject us to significant costs and
liabilities.





We are subject to various U.S. federal,
state, local and foreign laws and regulations relating to the protection of the
environment, including those governing and imposing liabilities for the
discharge of pollutants into the air and water, the management and on-site and
off-site disposal of hazardous substances and wastes, the maintenance of a safe
workplace and the investigation and cleanup of contamination at currently or
formerly owned, operated or leased sites, as well as third-party owned sites
that may have been impacted by our operations. In addition, some of our
operations require environmental permits and controls to prevent and limit
pollution of the environment. We could incur substantial costs, including
cleanup costs, civil or criminal fines, penalties or sanctions and third-party
claims for property damage or personal injury, as a result of violations of or
liabilities under environmental laws and regulations or non-compliance with the
environmental permits required at our facilities. Some environmental laws impose
strict, and under certain circumstances joint and several, liability on the
current, as well as former, owners and operators of contaminated sites for costs
of investigation and remediation of contamination on and emanating from these
sites, and also impose liability for damages to natural resources. See
discussion of the ongoing environmental issue at the site of our packaging plant
in ‘‘Business—Environmental Matters’’ below at page 57.





These laws, regulations and permits
also could require the installation of costly pollution control equipment or
operational changes to limit pollution emissions or decrease the likelihood of
accidental releases of hazardous substances. In addition, new laws and
regulations, stricter enforcement of existing laws and regulations, the
discovery of previously unknown contamination at our or other sites or the
imposition of new cleanup requirements could require us to incur future costs
that would have a negative effect on our results of operations or cash
flow.





Risks
Related to Solar Thin Films Common Stock




Our
current stockholders are expected to incur significant immediate substantial
dilution.





As of April 13, 2009, we had 58,136,113
shares of common stock issued and outstanding.  In addition, at such
date there are an additional 20,028,959 shares issuable under outstanding
options and warrants.  Assuming all shares of our common stock that
are issuable under outstanding options, warrants are issued, a total of
approximately 112,000,000 shares would be issued and outstanding and our current
stockholders’ equity in such common stock will be reduced to 51.6%, or a
dilution of 48.4%.  In addition, inasmuch as the per  share
price for the Company’s common stock has dropped significantly from a high of
$1.14 in the quarter ended June 30, 2008 to $0.18 per share as at March 31,
2009, any additional common stock, convertible securities or warrants we may
issue to raise much needed capital will further significantly dilute the equity
ownership of our current stockholders.





-20-




The
proposed acquisition of Algatec will result in a further immediate and
substantial dilution of the equity of our current stockholders.





Under the terms of our proposed share
exchange agreement, the current stockholders of Algatec (which includes The
Rubin Family Stock Trust formed by our Chairman, CEO and CFO, Robert M. Rubin)
will receive, in exchange for 100% of the share capital of Algatec, 60% of the
“Fully-Diluted Common Stock” of the Company.  Based on such definition
(excluding adjustments that may result from shares or share equivalents that we
may issue to provide financing for our company unrelated to the Algatec
acquisition), the Algatec shareholders would receive (based on our current
capitalization) approximately 150,000,000 additional shares of our common stock)
or 60% of the approximately 250,000,000 million shares to be outstanding after
such acquisition.  This transaction will therefore further reduce the
equity of the 58,136,113 shares owned by our current common stockholders to
approximately 23% of the outstanding shares, before dilution resulting the
exercise of outstanding warrants and options.





Our
historic stock price has been volatile and the future market price for our
common stock may continue to be volatile. Further, the limited market for our
shares will make our price more volatile. This may make it difficult for you to
sell our common stock for a positive return on your investment.




Our common stock is currently quoted on
the OTC Bulletin Board under the symbol “SLTN". There is a limited trading
market for our common stock. Accordingly, there can be no assurance as to the
liquidity of any markets that may develop for our common stock, the ability of
holders of our common stock to sell our common stock, or the prices at which
holders may be able to sell our common stock.





The public market for our common stock
has historically been very volatile. Any future market price for our shares may
continue to be very volatile. This price volatility may make it more difficult
for you to sell shares when you want at prices you find attractive. We do not
know of any one particular factor that has caused volatility in our stock price.
However, the stock market in general has experienced extreme price and volume
fluctuations that often are unrelated or disproportionate to the operating
performance of companies. Broad market factors and the investing public's
negative perception of our business may reduce our stock price, regardless of
our operating performance. Market fluctuations and volatility, as well as
general economic, market and political conditions, could reduce our market
price. As a result, this may make it difficult or impossible for you to sell our
common stock for a positive return on your investment.





A sale of a substantial number of
shares of our common stock may cause the price of its common stock to
decline.




If our stockholders sell substantial
amounts of the Company’s common stock in the public market, including shares
issued upon the exercise of outstanding options or warrants, the market price of
its common stock could fall. These sales also may make it more difficult for the
Company to sell equity or equity-related securities in the future at a time and
price that the Company deems reasonable or appropriate. Stockholders who have
been issued shares may be able to sell their shares pursuant to Rule 144 under
the Securities Act of 1933, beginning six months after the stockholders acquired
their shares.





We
have not paid dividends in the past and do not expect to pay dividends in the
future. Any returns on investment may be limited to the value of our common
stock.





We have never paid cash dividends on
our common stock and do not anticipate paying cash dividends in the foreseeable
future. The payment of dividends on our common stock will depend on earnings,
financial condition and other business and economic factors affecting it at such
time as the board of directors may consider relevant. If we do not pay
dividends, our common stock may be less valuable because a return on your
investment will only occur if its stock price appreciates.




Our common stock is deemed to be
“penny stock” with a limited trading market.





Our common stock is currently listed
for trading on the OTC Bulletin Board which is generally considered to be a less
efficient market than markets such as NASDAQ or other national exchanges, and
which may cause difficulty in conducting trades and difficulty in obtaining
future financing. Further, our securities are subject to the "penny stock rules"
adopted pursuant to Section 15 (g) of the Securities Exchange Act of 1934, as
amended, or Exchange Act. The penny stock rules apply to non-NASDAQ companies
whose common stock trades at less than $5.00 per share or which have tangible
net worth of less than $5,000,000 ($2,000,000 if we have been operating for
three or more years). Such rules require, among other things, that brokers who
trade "penny stock" to persons other than "established customers" complete
certain documentation, make suitability inquiries of investors and provide
investors with certain information concerning trading in the security, including
a risk disclosure document and quote information under certain circumstances.
Many brokers have decided not to trade "penny stock" because of the requirements
of the penny stock rules and, as a result, the number of broker-dealers willing
to act as market makers in such securities is limited. In the event that we
remain subject to the "penny stock rules" for any significant period, there may
develop an adverse impact on the market, if any, for our securities. Because our
securities are subject to the "penny stock rules," investors will find it more
difficult to dispose of our securities. Further, for companies whose securities
are traded in the OTC Bulletin Board, it is more difficult: (i) to obtain
accurate quotations, (ii) to obtain coverage for significant news events because
major wire services, such as the Dow Jones News Service, generally do not
publish press releases about such companies, and (iii) to obtain needed
capital.




-21-




Foreign
Currency and Exchange Risks and Rate Revaluation.





We will be subject to significant
foreign exchange risk. There are currently no meaningful ways to hedge currency
risk in Hungary. Therefore, the Company’s ability to limit its exposure to
currency fluctuations is significantly restricted. The Company’s ability to
obtain dividends or other distributions is subject to, among other things,
restrictions on dividends under applicable local laws and foreign currency
exchange regulations of the jurisdictions in which its subsidiaries operate. The
laws under which the Company’s operating subsidiaries are organized provide
generally that dividends may be declared by the partners or shareholders out of
yearly profits subject to the maintenance of registered capital and required
reserves and after the recovery of accumulated losses.





Item
1B. Unresolved Staff Comments.





Not applicable.





Item
2. Properties.





The
following table lists the office space that the Company leases from unaffiliated
persons:





Lessee
            
            Address
      of Property
            
            Primary
      Use
            
            Sq.
      feet
            
            Rent
              Amount/
              Month
            
            Lease
      TermsKraft
            
            1112
      Budapest,
              Kőérberki
      út 36.
              Hungary
            
            General
      operation
              Equipment
      manufacturing plant
              stockholder
      relations, general executive
            
            
            23,200
            
            USD
      20,800
            
            3
      years from January 1, 2008
              non-cancelableKraft
            
            9900
      Körmend
              Hegyalja
      u 42.
              Hungary
            
            Equipment
      manufacturing plant
            
            
            10,760
            
            USD
      1,600
            
            unlimited
      with 6 months cancellation period




In
November 2005, Kraft entered into a three year fixed term lease agreement for
its corporate offices and facilities in Budapest, Hungary at a rate ranging from
$4,543 to $14,200 per month as the lease has provisions for additional space for
the period calendar year of 2006 and beyond. The lease agreement provides for
moderate increases in rent after December 31, 2006 in accordance with the
inflationary index published by the Central Statistical Office. Rental expenses
charged to operations for the year ended December 31, 2008 and 2007 are $266,359
and $217,885, respectively.  In late 2007, the Company signed a
modified rental agreement for the Budapest facilities and expanded its spaces as
well as extended the contract for an additional three years period of time,
which resulted in a slight increase in rent from 2007 to 2008.




The
Company also has a mailing address within the United States located at 25
Highland Blvd., Dix Hills, New York 11746.





We believe that our facilities are
adequate to meet our current needs. Our offices are in good condition and are
sufficient to conduct our operations. We do not intend to renovate, improve, or
develop properties. We are not subject to competitive conditions for property
and currently have no property to insure. We have no policy with respect to
investments in real estate or interests in real estate and no policy with
respect to investments in real estate mortgages. Further, we have no policy with
respect to investments in securities of or interests in persons primarily
engaged in real estate activities.





Item 3. Legal
Proceedings.





New York
Medical, Inc. and Redwood Investment Associates, L.P. vs. American United
Global, Inc., et al. (Supreme Court, New York State, New York County). In this
suit, filed on December 12, 2003, plaintiffs seek a declaration that a series of
transactions by which we allegedly acquired Lifetime Healthcare Services, Inc.
("Lifetime") and Lifetime acquired an interest in NY Medical from Redwood
(collectively "Transactions") were properly rescinded or, alternatively, that
because the Transactions were induced by fraudulent conduct of our company and
others, that the Transactions should be judicially rescinded. In addition to the
requests for equitable relief, plaintiffs also seek monitory damages in excess
of $5 million and exemplary damages in the amount of $15 million.





-22-


Currently, the suit has not proceeded
past the filing and service of the complaint. We have obtained an open-ended
extension of time in which to answer and/or move with regard to the complaint.
We are attempting to resolve the matter amicably. However, in the event
litigation proceeds, it will be aggressively defended.  Management
believes that the plaintiff’s suit is without merit, and further believes the
ultimate outcome of this matter will not have a material adverse effect on the
Company’s consolidated financial position, results of operations or
liquidity.




A suit
was filed on February 8, 2008 in the New York State Supreme Court by an investor
seeking damages in an amount not to exceed $50,000, plus interest and costs,
allegedly resulting from the Company’s delay in registering certain securities.
The matter was settled in June 2008.




From time
to time, we are a party to litigation or other legal proceedings that we
consider to be a part of the ordinary course of our business. We are not
involved currently in legal proceedings that could reasonably be expected to
have a material adverse effect on our business, prospects, financial condition
or results of operations. We may become involved in material legal proceedings
in the future.





Item 4. Submission of Matters to a Vote of
Security Holders.





We have
not submitted any matters to a vote of security holders in the fourth quarter of
2008 or thereafter.





PART II





Item 5. Market for Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.





Our common stock is quoted on the
Over-the-Counter Bulletin Board under the symbol "SLTN.OB" Effective as of July
3, 2006, the Company changed its name from American United Global, Inc. to Solar
Thin Films, Inc. As a result, our quotation symbol changed from “AUGB.PK” to
“SLTF.PK”. In February 2007, the Company’s symbol was changed to SLTN.OB. The
following table shows the reported high and low closing bid quotations per share
for our common stock based on information provided by the Over-the-Counter
Bulletin Board. Particularly since our common stock is traded infrequently, such
over-the-counter market quotations reflect inter-dealer prices, without markup,
markdown or commissions and may not necessarily represent actual transactions or
a liquid trading market








Year
      Ended December 31, 2008
            
            High
            
            
            LowFirst
      Quarter ended March 31, 2008
            
            $
            1.65
            
            
            $
            0.72Second
      Quarter ended June 30, 2008
            
            $
            1.14
            
            
            $
            0.76Third
      Quarter ended September 30, 2008
            
            $
            0.90
            
            
            $
            0.58Fourth
      Quarter ended December 31, 2008
            
            $
            0.65
            
            
            $
            0.17Year
      Ended December 31, 2007
            
            High
            
            
            LowFirst
      Quarter ended March 31, 2007
            
            $
            2.24
            
            
            $
            0.82Second
      Quarter ended June 30, 2007
            
            $
            0.93
            
            
            $
            0.47Third
      Quarter ended September 30, 2007
            
            $
            1.09
            
            
            $
            0.57Fourth
      Quarter ended December 31, 2007
            
            $
            1.57
            
            
            $
            0.94Year Ended December 31,
      2006
            
            High
            
            
            LowFirst
      Quarter ended March 31, 2006
            
            $
            3.20
            
            
            $
            1.36Second
      Quarter ended June 30, 2006
            
            $
            3.52
            
            
            $
            1.36Third
      Quarter ended September 30, 2006
            
            $
            3.12
            
            
            $
            1.92Fourth
      Quarter ended December 31, 2006
            
            $
            2.27
            
            
            $
            1.52





The
shares quoted are subject to the provisions of Section 15(g) and Rule 15g-9 of
the Securities Exchange Act of 1934, as amended (the Exchange Act"), commonly
referred to as the "penny stock" rule. Section 15(g) sets forth certain
requirements for transactions in penny stocks and Rule 15g-9(d)(1) incorporates
the definition of penny stock as that used in Rule 3a51-1 of the Exchange
Act.




-23-


The
Commission generally defines penny stock to be any equity security that has a
market price less than $5.0 per share, subject to certain exceptions. Rule
3a51-1 provides that any equity security is considered to be a penny stock
unless that security is: registered and traded on a national securities exchange
meeting specified criteria set by the Commission; authorized for quotation on
The NASDAQ Stock Market; issued by a registered investment company; excluded
from the definition on the basis of price (at least $5.00 per share) or the
registrant's net tangible assets; or exempted from the definition by the
Commission. Trading in the shares is subject to additional sales practice
requirements on broker-dealers who sell penny stocks to persons other than
established customers and accredited investors, generally persons with assets in
excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together
with their spouse.




For
transactions covered by these rules, broker-dealers must make a special
suitability determination for the purchase of such securities and must have
received the purchaser's written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the rules require the delivery, prior to the first transaction, of a
risk disclosure document relating to the penny stock market. A broker-dealer
also must disclose the commissions payable to both the broker-dealer and the
registered representative, and current quotations for the securities. Finally,
the monthly statements must be sent disclosing recent price information for the
penny stocks held in the account and information on the limited market in penny
stocks. Consequently, these rules may restrict the ability of broker dealers to
trade and/or maintain a market in the company’s common stock and may affect the
ability of shareholders to sell their shares.





Number
of Shareholders





As of December 31, 2008, there were
57,810,601 shares of our common stock issued and outstanding and 180 holders of
record of our common stock. The transfer agent of our common stock is Corporate
Stock Transfer, LLC,
3200 Cherry Creek Dr. South, Suite 430, Denver, CO 80209.





Dividends





Except
for dividend payment declared by Kraft in 2001 and 2002, we have never paid cash
dividends or distributions to our equity owners. We do not expect to pay cash
dividends on our common stock, but instead, intend to utilize available cash to
support the development and expansion of our business. Any future determination
relating to our dividend policy will be made at the discretion of our Board of
Directors and will depend on a number of factors, including but not limited to,
future operating results, capital requirements, financial condition and the
terms of any credit facility or other financing arrangements we may obtain or
enter into, future prospects and in other factors our Board of Directors may
deem relevant at the time such payment is considered. There is no assurance that
we will be able or will desire to pay dividends in the near future or, if
dividends are paid, in what amount.





Shares
eligible for future sale could depress the price of our common stock, thus
lowering the value of a buyer’s investment. Sales of substantial amounts of
common stock, or the perception that such sales could occur, could adversely
affect prevailing market prices for shares of our common stock.





Our
revenues and operating results may fluctuate significantly from quarter to
quarter, which can lead to significant volatility in the price and volume of our
stock. In addition, stock markets have experienced extreme price and volume
volatility in recent years. This volatility has had a substantial effect on the
market prices of securities of many smaller public companies for reasons
unrelated or disproportionate to the operating performance of the specific
companies. These broad market fluctuations may adversely affect the market price
of our common stock.





-24-


Equity Compensation Plan Information





The
following table presents information as of December 31, 2008 with respect to
compensation plans under which equity securities were authorized for
issuance.




Plan category
              
              Number of securities
                to be issued upon
                exercise of
                outstanding options,
                warrants and rights
                (a)
              
              Weighted average
                exercise price of
                outstanding options,
                warrants and rights
                (b)
              
              Number of securities
                    remaining available for
                    future issuance under
                    equity compensation plans
                    (excluding securities
                    reflected in column
                    (a))
                    (c)Equity
      compensation plans approved by security holders2001
      Stock Plan
              
              -0-
              
              $
              -0-
              
              -0-2007
      Stock Plan
              
              -0-
              
              $
              -0-
              
              5,000,000Equity
      compensation plans not approved by security holders
              
              -0-
              
              $
              -0-
              
              -0-Total
              
              -0-
              
              $
              -0-
              
              5,000,000


The equity compensation plans are
discussed in Note 15 of the 2008 Consolidated Financial Statements.





Other
than as set forth above, we do not have any stock option, bonus, profit sharing,
pension or similar plan.





Purchases
of Equity Securities by the Issuer and Affiliated Purchasers





There were no purchases or repurchases
of our equity securities by the Company or any affiliated
purchasers.





Unregistered
Sales of Equity Securities and Use of Proceeds





During the fourth quarter of 2008, we
issued (or contracting to issue) equity securities without registration under
the Securities Act of 1933, as amended, as follows:





On September 29, 2008, the Company and
Kraft entered into a stock exchange agreement (the “Exchange Agreement”) with
Buda Solar Technologies Co. Ltd. (“Buda Solar”), New Palace Investments Ltd., a
Cyprus corporation (“NPI”), Istvan Krafcsik (“Krafcsik”) and Attila Horvath
(“Horvath”, and collectively with NPI and Krafcsik, the “Buda Solar
Stockholders”). Under the terms of the Exchange Agreement, Kraft agreed to
acquire from the Buda Solar Stockholders 100% of the outstanding registered
share equity capital of Buda Solar in exchange for 40% of the outstanding
capital stock or share capital of Kraft on a fully diluted basis.





On April 3, 2009, the Company, Kraft,
BudaSolar and the BudaSolar Stockholders entered into an amended and restated
stock exchange agreement (the “Amended Exchange Agreement”) dated as of April 2,
2009 under which Kraft agreed to acquire from the BudaSolar Stockholders 100% of
the outstanding registered share equity capital of BudaSolar in exchange for the
Company transferring to the BudaSolar Stockholders 49% of the outstanding
capital stock or share capital (the “Kraft Shares”) of Kraft (the “Share
Exchange”).  As a result, the Company will own 51% of Kraft and its
51% owned Kraft subsidiary will, in turn, own 100% of the share capital of
BudaSolar.  In addition, the Amended Exchange Agreement deleted the
put option of the BudaSolar Stockholders, and the call option of the Company and
Kraft, each resulting in the Company and Kraft acquiring from the BudaSolar
Stockholders 100% of Kraft Shares owned by the BudaSolar Stockholders or their
affiliates after the closing of the Share Exchange.





On October 27, 2008, the Company issued
5 year options to purchase an aggregate of 500,000 shares of common stock at an
exercise price equal to $0.42 per share to Mr. Gary Maitland and Dr. Boris
Goldstein as compensation for services to be performed by them in their
capacities as directors of the Company. Such options vest in accordance with the
following schedule: (i) options to purchase 83,333 shares of common stock vest
on October 27, 2009; (ii) options to purchase 83,333 shares of common stock vest
on October 27, 2010; and (iii) options to purchase 83,334 shares of common stock
vest on October 27, 2011.





Effective as of October 30, 2008, the
trustee, the management group and the Partnership (collectively, the “Algatec
Stockholders”) and Algatec entered into a stock exchange agreement with the
Company (the “Stock Exchange Agreement”) under which the Algatec Stockholders
(including the Partnership) agreed to exchange 100% of the share capital of
Algatec for 50,000 shares of Company’s Series B-5 preferred stock which is
convertible at any time at the option of the holder(s) into that number of
shares of common stock of the Company (“Company Common Stock”) as shall
represent 60% of the “Fully-Diluted Common Stock” of Company. The term
“Fully-Diluted Common Stock” means the aggregate number of shares of Company
Common Stock issued and outstanding as at the date of closing of the share
exchange, after giving effect to (i) the issuance by the Company between the
date of the First Closing and the closing of the share exchange of any Company
Common Stock or shares issuable upon the conversion or exercise of any
securities convertible into or exercisable for shares of Company Common Stock.
However, Fully-Diluted Common Stock does not include, and the Algatec
Stockholders will be subject to pro-rata dilution in connection with, (i) any
shares of Company Common Stock issued or issuable upon exercise of the
12,000,000 currently outstanding warrants expiring on June 30, 2010 that are
exercisable at exercise prices ranging from $2.20 to $3.30 per share, or (ii)
any shares of Company Common Stock issued or issuable upon the conversion or
exercise of any securities convertible into or exercisable for shares of Company
Common Stock in connection with the Algatec Financing.





-25-


All of the above offerings and sales
were deemed to be exempt under rule 506 of Regulation D and Section 4(2) of the
Securities Act of 1933, as amended. No advertising or general solicitation was
employed in offering the securities. The offerings and sales were made to a
limited number of persons, all of whom were accredited investors, business
associates of Solar Thin Films, Inc. or executive officers of Solar Thin Films,
Inc., and transfer was restricted by Solar Thin Films, Inc. in accordance with
the requirements of the Securities Act of 1933. In addition to representations
by the above-referenced persons, we have made independent determinations that
all of the above-referenced persons were accredited or sophisticated investors,
and that they were capable of analyzing the merits and risks of their
investment, and that they understood the speculative nature of their investment.
Furthermore, all of the above-referenced persons were provided with access to
our Securities and Exchange Commission filings.





Item 6. Selected Financial
Data.





Not applicable.





Item 7. Management’s Discussion and Analysis
of Financial Condition or Results of Operations.





WE URGE YOU TO READ THE FOLLOWING
DISCUSSION IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE
NOTES THERETO BEGINNING ON PAGE F-1. THIS DISCUSSION MAY CONTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS,
PERFORMANCE OR ACHIEVEMENTS COULD DIFFER MATERIALLY FROM THOSE EXPRESSED OR
IMPLIED BY THE FORWARD-LOOKING STATEMENTS AS A   RESULT OF A NUMBER OF FACTORS,
INCLUDING BUT NOT LIMITED TO THE RISKS AND UNCERTAINTIES DISCUSSED UNDER THE
HEADING “RISK FACTORS” IN THIS FORM 10-K AND IN OUR OTHER
FILINGS WITH THE SEC. IN ADDITION,  SEE “CAUTIONARY  
STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS ” SET FORTH IN THIS
REPORT.





Overview





Solar
Thin Films, Inc. (the “Company”) is a business focused on the solar energy
industry.  We engage in the manufacture, sale and distribution of
equipment that is used to produce thin film amorphous silicon (or “a-Si”)
photovoltaic solar panels or modules and provide turn-key a-Si module
manufacturing facilities.  The Company through its wholly owned
subsidiary, Kraft Elektronikai Zrt (“Kraft”), is presently engaged in the
design, development and construction on behalf of its customers of both
photovoltaic manufacturing equipment and both alone and sometimes through
strategic partners of “turnkey” manufacturing plants that produce photovoltaic
thin film modules.  The Company expects the primary use of such
photovoltaic thin film modules will be the construction of solar power plants by
corporations and governments.





On April
3, 2009, the Company and Kraft entered into a restated share exchange agreement
with Buda Solar Technologies Co. Ltd. (“Buda Solar”) and its
shareholders.  Under the terms of such agreement, subject to the
satisfaction of certain closing conditions, Kraft will acquire 100% of the share
capital of Buda Solar and will issue to the stockholders of Buda Solar 49% of
the share capital of Kraft.  As a result, the Company will own 51% of
Kraft and our 51% owned Kraft subsidiary will, in turn, own 100% of the share
capital of Buda Solar.  Buda Solar is engaged in the providing
technical and installation services for the production and installation of thin
film a-Si solar module manufacturing equipment.  Consummation of the
Buda Solar transaction is scheduled to occur in June 2009.





Effective as of October 30, 2008, the
Company entered into a stock exchange agreement with Algatec Solar AG and its
shareholders.  Algatec produces, sells and distributes metallurgical
and other types of crystalline silicon solar panels or modules.  For a
description of the terms of this agreement, see “Description of our Business
–Algatec-Potentialmanufacture of crystalline silicon
solar modules” in
this Form 10-K.





The Company, in the future, may further
vertically integrate itself within this industry through activities in, but not
limited to, investing in and/or operating the module manufacturing plants,
selling thin film photovoltaic modules, and installing and/or managing solar
power plants. The Company also intends, directly and through joint ventures or
strategic alliances with other companies or governmental agencies, to sell
equipment for and participate financially in solar power facilities using thin
film a-Si solar modules or metallurgical and other crystalline solar modules as
the power source to provide electricity to municipalities, businesses and
consumers.





-26-


Consummation
of both the Buda Solar and Algatec acquisitions as well as all other expansion
plans of the Company are subject to its ability to solve its significant working
capital shortages; make payment or other arrangements for the resolution of
approximately $2.9 million of indebtedness (approximately $1.75 million of which
is in default) and other accrued accounts payable, all of which are
overdue.  In the event that the Company is unable to resolve these
matters within the next 90 days, it may be unable to continue in business and/or
may be required to seek protection from its creditors under the Federal
Bankruptcy Act.





Kraft and Buda Solar are each Hungarian
corporations and their headquarters are located in Budapest,
Hungary.  Algatec is a German corporation and its headquarters are
located in Proesen, Germany.  Solar Thin Films is a Delaware
corporation and its headquarters are located at 25 Highland Boulevard, Dix
Hills, New York 11746. Solar Thin Films website is located at www.solarthinfilms.com.





Company
History





Solar
Thin Films History





The Company was initially organized as
a New York corporation on June 22, 1988 under the name Alrom Corp. ("Alrom"),
and completed an initial public offering of securities in August 1990. Alrom
effected a statutory merger in December 1991, pursuant to which Alrom was
reincorporated in the State of Delaware under the name American United Global,
Inc. Prior to the acquisition of Kraft, the Company intended to focus its
business strategy on acquisitions of operating businesses in various sectors. On
June 14, 2006, in connection with its business strategy, the Company closed on
the acquisition of 95.5% of the outstanding securities of Kraft. In additional,
the Company acquired the remaining 4.5% minority interest in August 2007 and, as
a result, now conducts its operations via Kraft, the wholly-owned
subsidiary.





Kraft
History




Kraft was
founded in 1993, shortly after the breakup of the communist economy in Hungary.
Its founding members were associated with the Hungarian Central Research
Institute for Physics. In 1996, Kraft was contracted to develop thin-film
photovoltaic deposition equipment for production of amorphous silicon based
thin-film modules, as well as complete turnkey facilities. Photovoltaics (PV) is
the physical phenomenon, which allows certain semiconductor materials to
directly convert sunlight into electricity.




In the subsequent years, Kraft has
manufactured equipment for such facilities in New Jersey, Germany, Hungary,
China, Taiwan and Greece. In producing equipment for these facilities, Kraft
developed substantial equipment manufacturing expertise. More recently as a
supplier to RESI for the CG Solar project in Weihai, China Kraft developed
additional process expertise required to allow it to become a leading
manufacturer of “turnkey” plants, including the delivery of both equipment and
services, that produce photovoltaics modules utilizing thin-film technology.
Kraft is now using this expertise to deliver its first "turnkey" plant in Spain
commencing in December 2008 and continuing through 2009.





Stock
Exchange Agreement with Buda Solar Technologies Co. Ltd.





On April 3, 2009, the Company and Kraft
entered into a restated share exchange agreement with Buda Solar Technologies
Co. Ltd. (“Buda Solar”) and its shareholders.  Under the terms of such
agreement, subject to the satisfaction of certain closing conditions, Kraft will
acquire 100% of the share capital of Buda Solar and will issue to the
stockholders of Buda Solar 49% of the share capital of Kraft.  As a
result, the Company will own 51% of Kraft and our 51% owned Kraft subsidiary
will, in turn, own 100% of the share capital of Buda Solar.  Buda
Solar is engaged in the providing technical and installation services for the
production and installation of thin film a-Si solar module manufacturing
equipment.  Consummation of the Buda Solar transaction is scheduled to
occur in June 2009.





Under the terms of a separate agreement
with Buda Solar, Kraft has contracted to purchase from Buda Solar certain
technical services on a consulting basis for a fee of $250,000 per
month.  A total of $750,000 has been paid as of March 31,
2009.





-27-


Agreements
with Algatec Solar AG





On October 20, 2008, Robert M. Rubin,
Chairman, Chief Executive Officer and Chief Financial Officer of Solar Thin
Films, formed Algatec Equity Partners, L.P., a Delaware limited partnership (the
“Partnership”), for the purpose of acquiring up to 49% of the share capital of
Algatec.  Effective as October 30, 2008, Algatec and members of
Algatec senior management consisting of Messrs. Rainer Ruschke, Ullrich Jank,
Dr. Stefan Malik and Andre Freud (collectively, the “Management Stockholders”),
and Anderkonto R. Richter, Esq.,as trustee for Mr. Ruschke
and another Algatec stockholder (the “Trustee”), entered into a share purchase
agreement (the “Algatec Share Purchase Agreement”).  Under the terms
of the Algatec Share Purchase Agreement, on November 3, 2008 (the “First
Closing”) the Partnership invested an aggregate of $3,513,000, of which
approximately €2,476,000 was represented by a contribution to the equity of
Algatec to enable it to acquire all of the assets and equity of Trend Capital,
the predecessor to Algatec.  The Partnership also purchased for €1.00
per share a total of 13,750 Algatec shares, representing 27.5% of the
outstanding share capital of Algatec.





The general partner of the Partnership
is Algatec Management LLP, a Delaware limited liability company owned by The
Rubin Family Irrevocable Stock Trust and other persons.  Mr. Rubin and
Barry Pomerantz, a business associate of Mr. Rubin, are the managers of the
general partner.  Under the terms of the limited partnership
agreement, the general partner agreed to invest a total of $165,000 in the
Partnership in consideration for 5.0% of the assets, profits and losses of the
Partnership.  The limited partners, who invested an aggregate of
$3,200,000 at the First Closing and additional persons the Partnership will seek
to admit as limited partners by the Second Closing, will own 95.0% of the
Partnership assets, profits and losses. As part of the First Closing, The Rubin
Family Irrevocable Stock Trust invested an additional $1,500,000, as a limited
partner, on the same terms as other limited partners of the
Partnership.





In addition to its equity investment,
the Partnership has agreed under the terms of a loan agreement entered into at
the same time as the Algatec Share Purchase Agreement, to lend to Algatec on or
about November 30, 2008 (the “Second Closing”), an additional $2,600,000 or
approximately €2,000,000.  The proceeds of the loan was to be used to
assist Algatec in paying the balance of the purchase price for all of the assets
and equity of the Trend Capital limited partnership.  Upon funding of
the loan, the Partnership would purchase for €9,250 an additional 9,250 shares,
representing 21.5% of the outstanding share capital of Algatec, thereby
increasing its ownership to an aggregate of 49% of the outstanding share capital
of Algatec.  The loan, together with interest at the rate of 6% per
annum, is repayable on the earlier of December 31, 2012 or the completion of a
financing providing Algatec with up to $50.0 million of proceeds for expansion
(the “Algatec Financing”).  Upon the Partnership funding the entire
€2,000,000 loan at the Second Closing, the Management Group would own the
remaining 51% of the share capital of Algatec.  If the Partnership
funds less than the full €2,000,000 loan, the additional 21.5% equity to be
issued to the Partnership at the Second Closing was to have been appropriately
pro-rated.  On December 29, 2009, the Partnership consummated the
Second Closing with Algatec and funded a loan of €2,000,000 ($2.6 million) as a
result of which the Partnership’s total equity ownership in Algatec was fixed at
49% of the total number of outstanding Algatec shares.





Effective as of October 30, 2008, the
Trustee, the Management Group and the Partnership (collectively, the “Algatec
Stockholders”) and Algatec entered into a stock exchange agreement. Under the
terms of the stock exchange agreement the Algatec stockholders agreed,
subject to certain conditions, to exchange 100% of the share capital of Algatec
for shares of our newly authorized Series B-5 convertible preferred
stock.  The Series B-5 preferred stock is convertible at any time into
that number of shares of our common stock as shall represent 60% of our
“Fully-Diluted Common Stock” (as defined).  The term “Fully-Diluted
Common Stock” means the aggregate number of shares of Company common stock
issued and outstanding as at the date of closing of the share exchange, aftergiving
pro-forma effect to the sale or issuance of any shares of common stock (a) that
were issued at any time following the October 30, 2008 date of execution of the
stock exchange agreement and prior to consummation of the Algatec acquisition,
(b) that are issuable upon conversion of any Company convertible securities or
upon the exercise of any warrants that were issued at any time between October
31, 2008 and consummation of the Algatec acquisition, and (c) that are issuable
upon full conversion of the Series B-5 preferred stock.  However, the
Algatec stockholders shall be subject to pro-rata dilution resulting from
the issuance of (i) approximately 19.6 million shares of Company common stock
issuable upon conversion of convertible notes or the exercise of options and
warrants that were outstanding as at October 30, 2008, (ii) any shares of
Company common stock issued in connection with providing financing for Algatec
(as described below), or (iii) any shares of Company common stock issued or
issuable after completion of the Algatec acquisition.  Consummation of
the Algatec acquisition is subject to certain conditions, including Algatec
obtaining up to $50.0 million of the Algatec Financing to enable it to construct
the addition to its existing manufacturing facility and purchase the necessary
equipment to expand its business and meet contractual obligations to Q-Cells and
other customers, as described above.





On April 10, 2009, the parties agreed
to extend the anticipated closing date of the transactions contemplated by the
Stock Exchange Agreement to July 15, 2009.





There can be no assurance that the
necessary Algatec Financing will be obtained or that the proposed Algatec
acquisition will be consummated.





-28-


Under the terms of the Stock Exchange
Agreement, each of Messrs. Ruschke, Malik, Jank and Freud will enter into five
year employment agreements with Algatec pursuant to which Mr. Ruschke will
receive an annual salary of €180,000 (approximately USD $246,600) and each of
Messrs. Malik, Jank and Freud will receive annual salaries of €100,000
(approximately USD $137,000), subject to 5% annual cost-of-living
increases.  In addition, such executives shall be entitled to receive
annual bonuses equal to 10% of the annual net income before interest and taxes
of Algatec (“EBIT”) for each of the five years, subject to an annual “cap” on
such bonuses that will not exceed 100% of their annual salaries if annual EBIT
is €10.0 million or less in any of the five fiscal years, and 200% of their
annual salaries if such annual EBIT is more than €10.0 million in any of the
five fiscal years.  Each of Messrs. Ruschke, Malik, Jank and Freud
have also agreed, for a period equal to the greater of five years or the term of
their individual employment with Algatec, not to compete with the “business” of
the Company (defined as (i) the manufacture and sale of photovoltaic module
equipment of all types, (ii) the installation of turn-key module manufacturing
facilities of all types; (iii) the manufacture and sale of photovoltaic cells or
modules of all types; and (iv) the installation and operation of power projects,
including the supplying of solar power electricity to private industry,
consumers or local or foreign governments and municipalities).





If the Algatec acquisition is
consummated, the board of directors of our Company will be expanded to seven
persons, of which three members of the board of directors shall be represented
by the Management Stockholders.  Messrs. Ruschke, Malik and Jank have
agreed to serve on our board of directors.





Solar
Thin Power





In 2007, the Company formed Solar Thin
Power, Inc. under the laws of the State of Delaware.  Solar Thin Power
was to engage in power projects.  It currently owns a 15% interest in
CG Solar Company Limited, the Company’s joint venture in China (and has agreed
to purchase another 5%), and is in preliminary discussions with other
prospective joint venture partners with respect to marketing and financing of
various power projects.





In 2007 and 2008, Solar Thin Power
received an aggregate of $3,498,396 of financing from ten unaffiliated investors
who purchased common stock of Solar Thin Power at $0.50 per
share.  Approximately $1,500,000 of the proceeds of such financing
used by Solar Thin Power to acquire a 20% minority interest in a thin film a-Si
solar module manufacturing facility in China and the balance of such proceeds
were loaned to Solar Thin Films for working capital.  Under the terms
of the transaction, if Solar Thin Power was not a publicly traded corporation by
June 2009, the investors in Solar Power have the right to require Solar Thin
Films to repurchase half of their portion of their minority equity in Solar
Power for $1,767,500.





As at December 31, 2008, an aggregate
of 67,570,000 shares of Solar Thin Power were issued and outstanding, of which
Solar Thin Film owned 44,000,000 or 65.12% the outstanding shares of Solar Thin
Power common stock.  In April 2009, Solar Thin Films agreed to
transfer 2,000,000 of its Solar Thin Power shares to Strategic Growth
International Inc. in lieu of cash compensation payable under a one year
investor relations agreement expiring March 31, 2010.  In addition,
Solar Thin Power agreed to issue three year warrants to purchase an additional
2,000,000 shares of Solar Thin Power to Strategic Growth International at an
exercise price of $0.20 per share.





As a result of the foregoing
transactions, as at the date of this Form 10-K, Solar Thin Films owns an
aggregate of 33,900,000 shares of Solar Thin Power common stock, and
stockholders of Solar Thin Power, other than Solar Thin Films, currently own an
aggregate of 25,570,000 shares of the 59,470,,000 outstanding shares of Solar
Thin Power common stock, and Strategic Growth International holds warrants to
purchase an additional 2,000,000 shares of Solar Thin Power.  Peter C.
Lewis, Group Vice President and General Manager of the Thin Film Group and
former Chief Executive Officer and President of Solar Thin Films owns 3,000,000
shares of Solar Thin Power and The Rubin Family Stock Trust owns 3,000,000
shares of Solar Thin Power.





Critical
Accounting Policies





The Company's discussion and analysis
of its financial condition and results of operations are based upon its
consolidated financial statements that have been prepared in accordance with
generally accepted accounting principles in the United States of America ("US
GAAP"). This preparation requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses,
and the disclosure of contingent assets and liabilities. US GAAP provides the
framework from which to make these estimates, assumption and disclosures. The
Company chooses accounting policies within US GAAP that management believes are
appropriate to accurately and fairly report the Company's operating results and
financial position in a consistent manner. Management regularly assesses these
policies in light of current and forecasted economic conditions. While there are
a number of significant accounting policies affecting our consolidated financial
statements, we believe the following critical accounting policies involve the
most complex, difficult and subjective estimates and judgments:





·
            Revenue
      Recognition;


·
            Cost of
    Sales;




-29-




·
            General, Selling and
      Administrative Expenses;


·
            Allowance for doubtful
      accounts;


·
            Research and
      development;


·
            Warrant
      liability;


·
            Product warranty
      reserve;


·
            Use of Estimates;
      and


·
            Acquisition -
      Kraft.





Revenue
Recognition





For revenue from product/contract sales
(Equipment Sale) which include equipment and sometimes installation, the Company
recognizes revenue in accordance with Staff Accounting Bulletin No. 104, Revenue
Recognition (“SAB 104"), which superseded Staff Accounting Bulletin No. 101,
“Revenue Recognition in Financial Statements” (“SAB 101"). SAB 104 requires that
four basic criteria must be met before revenue can be recognized: (1) Persuasive
evidence of an arrangement exists; (2) delivery has occurred; (3) the selling
price is fixed and determinable; and (4) collectibility is reasonably
assured.





Determination of criteria (3) and (4)
are based on management’s judgments regarding the fixed nature of the selling
prices of the products delivered and the collectibility of those amounts.
Provisions for discounts and rebates to customers, estimated returns and
allowances, and other adjustments are provided for in the same period the
related sales are recorded. The Company defers any revenue for which the product
has not been delivered or is subject to refund until such time that the Company
and the customer jointly determine that the product has been delivered or no
refund will be required. Deferred revenues as of December 31, 2008 and 2007
amounted to $33,452 and $0, respectively. SAB 104 incorporates Emerging Issues
Task Force 00-21 (“EITF 00-21"), Multiple-Deliverable Revenue Arrangements. EITF
00-21 addresses accounting for arrangements that may involve the delivery or
performance of multiple products, services and/or rights to use assets. There
were no impact from the implementation of EITF 00-21 on the Company’s financial
position and results of operations as there were no such arrangements during the
year ended December 31, 2008 and 2007.





The Company recognizes revenue when
persuasive evidence of an arrangement exists, the price to the customer is
fixed, collectibility is reasonable assured and title and risk of ownership is
passed to the customer, which is usually upon shipment. However, certain
customers traditionally have requested to take title and risk of ownership prior
to shipment. Revenue for these transactions is recognized only
when:





1.
            Title
      and risk of ownership have passed to the
  customer;


2.
              The
      Company has obtained a written fixed purchase
  commitment;
 3.
                The
      customer has requested the transaction be on a bill and hold
      basis;
 4.
                  The
      customer has provided a delivery
schedule;
 5.
                    All
      performance obligations related to the sale have been
      completed;
 6.
                        The
      product has been processed to the customer’s specifications, accepted by
      the customer and made ready for shipment;
and
 7.
                            The
      product is segregated and is not available to fill other
      orders.


The remittance terms for these “bill
and hold” transactions are consistent with all other sale by the Company. There
were no bill and hold transactions at December 31, 2008 and 2007.





For
Complete Factory sales, which include sale of equipment, installation and
commissioning, the Company recognizes revenues from the product portion (pieces
of equipment) on shipment and services portion (installation and commissioning)
upon completion, and passage of performance tests.  The commissioning
includes a range of consulting services necessary to successfully complete a
performance test, such as training of management, engineering and production
personnel, debugging and resolving problems, initial oversight or support for
vendor relations and purchasing, documentation and transfer of process knowledge
and potential co-management of the production line during performance
testing.





-30-




Cost
of Sales





Cost of sales includes cost of raw
materials, labor, subcontractor work, inbound freight charges, purchasing and
receiving costs, inspection costs, internal transfer costs and absorbed indirect
manufacturing cost, as well as installation related travel costs and warranty
costs.





General,
Selling and Administrative Expenses





General,
selling and administrative expenses primarily include indirect labor costs,
rental fees, accounting, legal and consulting fees. The Company classifies all
of its depreciation and amortization expenses as operating expenses under a
separate line item, depreciation and amortization.





Allowance
For Doubtful Accounts





We are required to estimate the
collectibility of our trade receivables. A considerable amount of judgment is
required in assessing the realization of these receivables including the current
creditworthiness of each customer and related aging of the past due balances. In
order to assess the collectibility of these receivables, we perform ongoing
credit evaluations of our customers' financial condition. Through these
evaluations we may become aware of a situation where a customer may not be able
to meet its financial obligations due to deterioration of its financial
viability, credit ratings or bankruptcy. The reserve requirements are based on
the best facts available to us and are reevaluated and adjusted as additional
information is received. Our reserves are also based on amounts determined by
using percentages applied to certain aged receivable categories. These
percentages are determined by a variety of factors including, but are not
limited to, current economic trends, historical payment and bad debt write-off
experience. We are not able to predict changes in the financial condition of our
customers and if circumstances related to our customers deteriorate, our
estimates of the recoverability of our receivables could be materially affected
and we may be required to record additional allowances. Alternatively, if we
provided more allowances than are ultimately required, we may reverse a portion
of such provisions in future periods based on our actual collection
experience.





Research
and development





Solar Thin Film’s accounts for research
and development costs in accordance with the Financial Accounting Standards
Board’s Statement of Financial Accounting Standards No. 2 (“SFAS 2”),
“Accounting for Research and Development Costs.” Under SFAS 2, all research and
development cost must be charged to expense as incurred. Accordingly, internal
research and development cost are expensed as incurred. Third-party research and
developments costs are expensed when the contracted work has been performed or
as milestone results have been achieved. Company-sponsored research and
development costs related to both present and future products are expensed in
the period incurred.





Warrant
Liability





In
connection with the placement of certain debt instruments during the twelve
month ended December 31, 2006, the Company issued freestanding warrants.
Although the terms of the warrants do not provide for net-cash settlement, in
certain circumstances, physical or net-share settlement is deemed to not be
within our control and, accordingly, the Company are required to account for
these freestanding warrants as a derivative financial instrument liability,
rather than as shareholders’ equity.





The
warrant liability is initially measured and recorded at its fair value, and is
then re-valued at each reporting date, with changes in the fair value reported
as non-cash charges or credits to earnings. For warrant-based derivative
financial instruments, the Black-Scholes option pricing model is used to value
the warrant liability.





The
classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is re-assessed at the end of
each reporting period. Derivative instrument liabilities are classified in the
balance sheet as current or non-current based on whether or not net-cash
settlement of the derivative instrument could be required within 12 months of
the balance sheet date.





We do not
use derivative instruments to hedge exposures to cash flow, market, or foreign
currency risks.




-31-




Use
of Estimates





The preparation of these financial
statements requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues, expenses, and the disclosure
of contingent assets and liabilities, if any, at the date of the financial
statements. The Company analyzes its estimates, including those related to
future contingencies and litigation. The Company bases its estimates on
assumptions that are believed to be reasonable under the circumstances. Actual
results may differ from these estimates under different assumptions or
conditions.





Acquisition
- Kraft





Commencing in March 2006 through June
2006, the Company entered into Securities Purchase Agreements with shareholders
of Kraft that together owned 95.5% of the equity interest in Kraft to acquire
their interests. On June 14, 2006, the Company closed on the acquisition of
95.5% of the outstanding securities of Kraft and, as a result, Kraft became a
majority-owned subsidiary of the Company. In consideration for the shares of
Kraft, the Company issued the sellers an aggregate of 95,500 shares of Series
B-4 Preferred Stock of the Company (the “Preferred Shares”). Each Preferred
Share is automatically converted into 350 shares of common stock or an aggregate
of 33,425,000 shares of common stock upon us increasing our authorized shares of
common stock and, prior to such conversion, the Preferred Shares had the same
voting rights of the shares of common stock and voted together with the shares
of common stock on all matters.




As a result of the Securities Purchase
Agreement, there was a change in control of STF, the public entity. In
accordance with SFAS No. 141, Kraft was the acquiring entity. While the
transaction is accounted for using the purchase method of accounting, in
substance the Agreement is a recapitalization of Kraft's capital structure. For
accounting purposes, the Company accounted for the transaction as a reverse
acquisition and Kraft is the surviving entity. The total purchase price and
carrying value of net assets acquired was $6,681,891. Additionally, on August 3,
2007, the Company acquired the remaining 4.5% minority interest of Kraft in
exchange for 1,575,000 shares of common stock value at $1,181,250, and as a
result, Kraft is now a wholly-owned subsidiary of the Company. The Company did
not recognize goodwill or any intangible assets in connection with the
transaction. Prior to the Agreement, the Company was an inactive corporation
with no significant assets and liabilities.





Commitments
and Contingencies





The Company’s subsidiaries have entered
into non-cancelable operational agreements for office premises.





In connection with the acquisition of
Kraft, the Company entered into consulting agreements with Robert Rubin and
Zoltan Kiss pursuant to which each consultant would receive an annual salary of
$160,000 per annum, reimbursement for up to $5,000 in expenses associated with
company activities and major medical benefits in consideration for services
performed on behalf of the company. Each of these agreements was for a term of
three years and has been supplanted by subsequent events. Mr. Rubin’s salary was
increased to $225,000 per annum when he assumed the duties of Chief Financial
Officer. In December 2007, Mr. Kiss resigned as director of the Company and
subsequently agreed to waive his rights to such payments pursuant to a pending
settlement agreement with the Company as described elsewhere in this annual
report.




On June 20, 2007, Peter Lewis and the
Company entered into an Employment Agreement pursuant to which Mr. Lewis has
agreed to serve as the Chief Executive Officer of the Company. The Employment
Agreement contains the following terms:





·
            base
      salary of $225,000 per year;


·
            the
      issuance of 187,617 shares of common stock per
  year;


·
            a
      bonus paid pursuant to the Executive Officer Incentive Plan as determined
      by the Board of Directors;




-32-




·
            a
      ten year option to purchase 3,000,000 shares of common stock at an
      exercise price of $0.533 per share on a cashless basis vesting on a
      pro-rata basis over a period of two
years;


·
            participation
      in all employee benefit plans and programs;
and


·
            reimbursement
      of reasonable expenses.





On April
7, 2009, the Company entered into an amendment to the employment agreement of
Peter Lewis under which Mr. Lewis agreed to resign as the President, Chief
Executive Officer and as a member of the board of directors of the Company,
effective as of March 31, 2009. There was no disagreement or dispute between Mr.
Lewis and the Company which led to his resignation.  Effective as of
April 1, 2009, Mr. Lewis was appointed as Group Vice President and General
Manager of the Thin Film Group of the Company through June 1,
2010.  The Thin Film Group shall consist of the manufacture and sale
of PV Equipment.  In this capacity, Mr. Lewis will be primarily
responsible for generating orders and sales of PV Equipment and he will provide
general oversight of the manufacturing operations of the Kraft and BudaSolar
subsidiaries of the Company, and together with Messrs. Krafcsik and Horvath,
will be responsible for generating profits for the Thin Film Equipment
Group.





For the
period commencing April 1, 2009 and ending September 30, 2009, Mr. Lewis’ base
salary shall be fixed at the rate of $225,000, payable in monthly installments
of $18,750 each.  For the period commencing October 1, 2009, Mr.
Lewis’ salary shall be reduced to the rate of $180,000 per annum, payable in
monthly installments of $15,000 each.  On the earlier of June 30, 2009
or completion of an equity financing for the Company in excess of $3.0 million,
the Company will pay to Mr. Lewis in one payment all accrued and unpaid salary
that is owed under the original employment agreement for all periods through and
including the date of payment of such accrued and unpaid salary.  In
addition, Mr. Lewis shall be entitled to receive a sales commission on all PV
Equipment that is sold or on which firm orders are received by the Company
during the term of employment in an amount equal to: (i) a percentage to be
determined by mutual agreement on or before April 30, 2009, of the “net sales
price” (defined as gross selling price, less returns, discounts and allowances)
of such PV Equipment, as and when paid in cash by the customer to the Company
less
(ii) the amount of all other finders fees, commissions and other payments made
or payable by the Company to any other person, firm or corporation who
participates in or assists Mr. Lewis in the sale of such PV Equipment; or such
other bonus arrangement as may be made with Kraft management.





All
3,000,000 shares of common stock of ST Power owned by Mr. Lewis shall
immediately and irrevocably vest.  Moreover, with respect to the stock
options entitling Mr. Lewis to purchase up to 3,600,000 shares of Company common
stock (the “Option Shares”), the parties agreed as follows
(i)  options for 3,000,000 Options Shares shall be deemed to have
fully vested as of March 31, 2009 and the remaining 600,000 Option Shares that
have not vested will be forfeited as of March 31, 2009; (ii) the exercise price
of all stock options were reduced from $0.533 per share to $0.18 per share,
representing 100% of the closing price of Company common stock as at March 27,
2009, the effective date of the amendment to the employment agreement; (iii) all
stock options for vested Option Shares may be exercised on a “cashless exercise”
basis; and (iv) Mr. Lewis agreed to waive any rights to receive the 187,617
shares of Company common stock previously granted to him annually under the
original employment agreement.





In November 2005, the Company entered
into a three year fixed term lease agreement for our corporate offices and
facilities in Budapest, Hungary at a rate ranging from $4,543 to $15,433 per
month as the lease has provisions for additional space for the period calendar
year of 2006 and beyond. The lease agreement provides for moderate increases in
rent after the first year in accordance with the inflationary index published by
the Central Statistical Office. In November 2007, the Company signed the
modification of lease agreement resulted a charge of $20,800 per months from
January 1, 2008 for three years period of time. The minimum future cash flow for
the leases at December 31, 2008 is as follows:





Amount:Years
      ended:December
      31, 2009
              
              $
              249,600December
      31, 2010
              
              $
              249,600Total
              
              $
              499,200




-33-




The following table summarizes the cash
commitments described above:





Debt
      obligations (1)
            
            
            Interest
      on Debt obligations
            
            
            Operational
              Leases
            
            
            Employment
              Agreements
      (2)
            
            
            Total2009
            
            $
            2,923,000
            
            
            $
            -
            
            
            $
            249,600
            
            
            $
            337,000
            
            
            $
            3,509,6002010
            
            
            -
            
            
            
            -
            
            
            
            249,600
            
            
            
            112,500
            
            
            
            362,1002010
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -2011
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -After
      2012
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            $
            2,923,000
            
            
            $
            -
            
            
            $
            499,200
            
            
            $
            449,500
            
            
            $
            3,871,700





(1)
            Based
      on the assumption of demand cash payments by note
  holders.





(2)
            Base
      salary of the Company’s CEO and
CFO.





In 1996,
the Company issued an unsecured 8% $1.5 million note to an  unrelated
party that was due and payable April 30, 1999.  The note was governed by
the laws of the State of New York.  The New York statute of limitations for
seeking to collect on a note is six years from the maturity date.  The
creditor has never sought to collect the note since its maturity date and in or
about 2001 orally advised a representative of the Company that it had "written
off the debt."  Although the Company has previously and currently listed
the note as a liability on its balance sheet, it does not believe that it has
any further liability under this note.





Results
of Operations





Year
ended December 31, 2008 as compared to the year ended December 31,
2007




Revenues





The following table summarizes our
revenues for the years ended December 31, 2008 and 2007:





Year ended December
      31,
            
            2008
            
            
            2007Total
      Revenues
            
            $
            3,436,779
            
            
            $
            5,779,578




For the
year ended December 31, 2008, revenues decreased by 40.5% or $2,342,799 as
compared to the similar period in 2007.  The 40.5% decrease in revenue
over 2007 is primarily due to completion of a large related party equipment sale
in 2007 totaling $2,751,836 in
2007.  While the Company continued to provide assistance to the
customer during 2008 and hopes to secure orders in the future the Company did
not derive any additional revenue from the contract during this period. The
Company also generated revenues from sales to RESI and EPV Solar in 2007. In
2007 100% of revenue was derived from Equipment Sales.
  During 2008 the Company primarily
delivered equipment to EPV Solar, first commencing in 2007, for facilities in
Germany and New Jersey with a combined capacity of 50MW. While the total
production capacity of facilities for which the Company produced equipment in
2008 increased over 2007, the Company only produced a sub-set of the total
equipment set and this was a significant factor in the overall decline in
revenue. Equipment Sales totaled $3,289,517 or over 95% of revenue.
 
 During
2007 and 2008 the Company also began to shift its marketing focus from Equipment
Sales to Factory Sales (delivered on a “turnkey” basis - which by definition
include a full set of equipment plus installation and training services). The
Company signed its first deal in June of 2008, for which it completed its first
minor equipment delivery in December of 2008 valued at $147,262. The Company
began shipping the balance of the equipment in March of 2009 and expects to
deliver substantially all of the equipment for this 7.9 million euro order
during fiscal year 2009. In fact during 2009 the Company expects that majority
of its revenue will come from Factory sales rather than Equipment sales, and
does not expect to derive any substantial revenue from related parties.
Commencing in 2008 the Company has decided to further break out its revenue into
Equipment Sales and Factory Sales and to continue to do so in the future in both
annual and quarterly filings.




While the Company is pursuing
additional business opportunities- both Factory
Sales and Equipment Sales, given the limited amount of historical
business volume we cannot provide assurance regarding future sales. As the Company shifts
primarily from Equipment Sales secured by
purchase orders to Factory Sales secured by
contracts, management expects that it may become easier to forecast future
volume based upon long-term contracts and then established trends. In either case, the Company produces individual
pieces of equipment (standard not generally
custom)based on individual customer orders.  Comparison of
different financial reporting periods will show significant fluctuations,
primarily due to the value of outstanding and completed contracts or orders
during the period. Therefore, historical figures
(whether ona comparative year over yearpercentage analysis in a linear fashion or
otherwise) may not have much meaning with respect to future changes in
revenue and should not be used to make
predictions about future revenue
performance. For example, revenue could
increase 400% year over year if the Company booked and invoiced one or more complete factory
orders or it could decrease 100% or more if the
Company failed to successfully deliver on a Factory Saleorder or only
managed to book and invoiceorders for
production of selected equipment, i.e. an
Equipment Sale.  Therefore, management is not in the position
to predict future revenue flow or make conclusions based on actualhistorical figures.  For example,
recent increases and decreases in revenue
are not dramatic as compared to our existing 7.9 million eurocontract with Grupo Unisolar, which is
expected to be completed during 2009 and which
commenced shipping in December 2008. However, we can not provide absolute
assurance that signed contracts, Grupo Unisolar or
other, will be completed as expected or predicted. One complete factory
may exceed $12 million in value but with unexpected financial or technical
problems, production may slow down the completion of the
contract.  In conclusion, revenue
prediction by management is difficult as of the date of this
report.





-34-




Cost
of revenue





The following table summarizes our cost
of revenue for the year ended December 31, 2008 and 2007:





Year ended December
      31,
            
            2008
            
            
            2007Total
      cost of revenue
            
            $
            2,356,255
            
            
            $
            4,779,962





For the year ended December 31, 2008
selling, general and administrative expenses were $7,745,174 as compared to
$4,243,401 in 2007. The increase in selling, general and administrative expenses
of $3,501,773 is attributable to the additional staff/consultants (legal,
audit), an increase in  stock based compensation issued in 2008 of
$1,085,251 as compared with $356,618 in 2007, reserves for doubtful accounts
increases of $1,605,797 over 2007 and accrual for estimated merger costs of
$500,000.





Research
and development





The following table summarizes our
research and development expenses for the years ended December 31, 2008 and
2007:





Year
      ended December 31
            
            2008
            
            
            2007Research
      and development expenses
            
            $
            120,000
            
            
            $
            360,000





Our research and development for year
ended December 31, 2008 were $120,000 compared to $360,000 for the year ended
December 31, 2007. In late 2005, the Company suspended its research and
development activity, while it signed a new contract with RESI in middle of
December 2006 for a new agreement representing a monthly charge of $30,000
through the first four months of 2008.





Depreciation
and amortization





The following table summarizes our
depreciation and amortization for the years ended December 31, 2008 and
2007:





Year
      ended December 31,
            
            2008
            
            
            2007Depreciation
      and amortization
            
            $
            190,025
            
            
            $
            220,860




Depreciation and amortization has
decreased by $30,835 in the year ended December 31, 2008 compared to the same
period in 2007. The decrease mainly due to the aging of the equipment purchased
in previous years.





-35-




Interest
expense, net





The following table summarizes our
interest expense, net for the years ended December 31, 2008 and
2007:





Year
      ended December 31,
            
            2008
            
            
            2007Interest
      expense, net
            
            $
            1,178,465
            
            
            $
            4,527,940





Interest expense, net has decreased by
$3,349,475 in the year ended December 31, 2008 compared to the same period in
2007. The decrease is mainly due to the issuance of 4,029,000 shares of common
stock in exchange for convertible notes payable in 2007 resulting in the write
down of the related debt discount.  The decrease is primarily due to
(i) an accelerated recognition of the associated debt discount relating to our
convertible debt due to conversions resulting an additional $2,255,393 in
interest expense.





Liquidity
and Capital Resources





During the year ended December 31, 2008
Solar Thin Power, Inc., a majority owned subsidiary of the Company, acquired a
15% interest in CG Solar, formerly WeiHai Blue Star Terra Photovoltaic Co., Ltd,
a Sino-Foreign Joint Venture Company organized under the laws of the People’s
Republic of China. The investment of $1,500,000 is carried at cost under the
cost method of accounting for investment.





As of December 31, 2008, our cash, cash
equivalents and marketable securities were $619,257, a decrease of $3,538,219
from December 31, 2007. As described below, the decrease in cash, cash
equivalents and marketable securities was principally from (i) $2,590,106
operating activities, (ii) $1,500,000 investment in 15% ownership of CG Solar
and $44,181 of acquisition of property and equipment, net with (iii) proceeds
from sale of majority owned common stock of $150,000 and borrowing on a short
term basis of $500,000.





As of December 31, 2008, we had working
capital deficit of $7,261,614. We generated a deficit in cash flow from
operations of $2,590,106 for the year ended December 31, 2008. This deficit is
primary attributable to our net loss of $8,474,010, net with depreciation and
amortization, amortization of debt discount, deferred compensation and deferred
financing costs of $1,402,980 as well as $1,255,236 fair value of vested
options, common stock and warrants issued, minority interests of $(67,904),
$1,605,797 of allowance for doubtful account, $260,746 loss on settlement of
deposit, and the changes in the balances of assets and liabilities. Assets
increased $1,904,581, net with an increase in liabilities of
$3,331,630.





Cash flow used by investing activities
for the year ended December 31, 2008 was $1,544,181, due to the acquisition of
15% interest in CG Solar of $1,500,000, the purchase of property and equipment
of $44,181.





We met our cash requirements during the
period through borrowing $500,000 on a short term basis. The note is non
interest bearing and is due on March 4, 2009. In addition, as a consolidated
group, we received net proceeds from the sale of common stock of our subsidiary,
Solar Thin Power, Inc of $150,000.





Exploitation
of potential revenue sources will be financed primarily through the sale of
securities and convertible debt, issuance of notes payable and other debt or a
combination thereof, depending upon the transaction size, market conditions and
other factors.




While we
have raised capital to meet our working capital and financing needs in the past,
additional financing is required within the next 3 months in order to meet
our current and projected cash flow deficits from operations and development. We
have sufficient funds to conduct our operations for approximately nine
months.  There can be no assurance that financing will be available in
amounts or on terms acceptable to us, if at all.





By
adjusting our operations and development to the level of capitalization, we
believe we have sufficient capital resources to meet projected cash flow
deficits. However, if during that period or thereafter, we are not successful in
generating sufficient liquidity from operations or in raising sufficient capital
resources, on terms acceptable to us, this could have a material adverse effect
on our business, results of operations liquidity and financial
condition.





As at
December 31, 2008, the Company’s consolidated current liabilities exceeded its
consolidated current assets by $7,261,614.   The Company is
currently in default in the payment of notes aggregating $1.75 million which
became due in March 2009 or earlier, and outstanding accounts payable of
approximately $2.4 million are also past due.  Unless the Company is
able to obtain additional capital or other financing within the next 60 to 90
days, or sooner, its creditors may sue to collect on their notes and accounts,
which action may accelerate the due date of other Company indebtedness
aggregating approximately $0.50 million that is not currently in
default.  In such event, the Company may be required to seek
protection from its creditors under the Federal Bankruptcy
Act.  Although the Company is actively pursuing such financing, there
is no assurance that it will be obtained on commercially reasonable terms, if at
all.  Even if such financing is obtainable, it may be expected that
the terms thereof will significantly dilute the equity interests of existing
stockholders of the Company.








-36-




Trends,
Risks and Uncertainties





We have sought to identify what we
believe to be the most significant risks to our business, but we cannot predict
whether, or to what extent, any of such risks may be realized nor can we
guarantee that we have identified all possible risks that might arise. Investors
should carefully consider all of such risk factors before making an investment
decision with respect to our common stock.





Inflation
and Foreign Currency





We maintain our books in local
currency: US Dollars for the parent holding Company and Solar Thin Film Power,
Inc. in the United States of America and Hungarian Forint for Kraft in
Hungary.





We operate primarily outside of the
United States through its wholly owned subsidiary. As a result, fluctuations in
currency exchange rates may significantly affect our sales, profitability and
financial position when the foreign currencies, primarily the Hungarian Forint,
of its international operations are translated into U.S. dollars for financial
reporting. In additional, we are also subject to currency fluctuation risk with
respect to certain foreign currency denominated receivables and payables.
Although the we cannot predict the extent to which currency fluctuations may or
will affect our business and financial position, there is a risk that such
fluctuations will have an adverse impact on the sales, profits and financial
position. Because differing portions of our revenues and costs are denominated
in foreign currency, movements could impact our margins by, for example,
decreasing our foreign revenues when the dollar strengthens and not
correspondingly decreasing our expenses. The Company does not currently hedge
its currency exposure. In the future, we may engage in hedging transactions to
mitigate foreign exchange risk.





The translation of the Company’s
subsidiaries forint denominated balance sheets into U.S. dollars, as of December
31, 2008, has not been affected by the U.S. dollar against the Hungarian forint
due to recent strengthening of the U.S. dollar. The currency has changed from
172.61 as of December 31, 2007 to 187.91 as of December 31, 2008, an approximate
8.9% depreciation in value. The average Hungarian forint/U.S. dollar exchange
rates used for the translation of the subsidiaries forint denominated statements
of operations into U.S. dollars, for the year ended December 31, 2008 and 2007
were 171.8 and 183.64, respectively.





Recently
Issued Accounting Standards





In December 2007, the FASB issued
SFAS No. 141(R), "Business Combinations"
("SFAS No. 141(R)"), which establishes principles and requirements for how
an acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in an
acquiree, including the recognition and measurement of goodwill acquired in a
business combination. SFAS No. 141R is effective as of the beginning of the
first fiscal year beginning on or after December 15, 2008. Earlier adoption
is prohibited. The adoption of SFAS No. 141R in 2009 did not have a material
effect on its consolidated financial position, results of operations or cash
flows.





In December 2007, the FASB issued
SFAS No. 160, "Noncontrolling Interest in
Consolidated Financial Statements, an amendment of ARB No. 51”
(“SFAS No. 160”), which will change the accounting and reporting for
minority interests, which will be recharacterized as noncontrolling interests
and classified as a component of equity within the consolidated balance sheets.
SFAS No. 160 is effective as of the beginning of the first fiscal year beginning
on or after December 15, 2008. Earlier adoption is prohibited. The adoption
of SFAS No. 160 in 2009 did not have a material effect on its consolidated
financial position, results of operations or cash flows.





In December 2007, the FASB ratified the
consensus in Emerging Issues Task Force (EITF) Issue No. 07-1, “Accounting
for Collaborative Arrangements” (EITF 07-1). EITF 07-1 defines
collaborative arrangements and requires collaborators to present the result of
activities for which they act as the principal on a gross basis and report any
payments received from (made to) the other collaborators based on other
applicable authoritative accounting literature, and in the absence of other
applicable authoritative literature, on a reasonable, rational and consistent
accounting policy is to be elected. EITF 07-1 also provides for disclosures
regarding the nature and purpose of the arrangement, the entity’s rights and
obligations, the accounting policy for the arrangement and the income statement
classification and amounts arising from the agreement. EITF 07-1 will be
effective for fiscal years beginning after December 15, 2008, which will be
the Company’s fiscal year 2009, and will be applied as a change in accounting
principle retrospectively for all collaborative arrangements existing as of the
effective date. The adoption of EITF 07-1 in 2009 did not have a material effect
on its consolidated financial position, results of operations or cash
flows.




-37-




In June 2008, the FASB ratified
the consensus on Emerging Issues Task Force (EITF) Issue 07-5, “Determining
whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own
Stock.” This issue addresses whether an instrument (or an embedded feature) is
indexed to an entity’s own stock, which is the first part of the scope exception
in paragraph 11(a) of SFAS No. 133, for purposes of determining whether the
instrument should be classified as an equity instrument or accounted for as a
derivative instrument. The provisions of EITF Issue No. 07-5 are effective
for financial statements issued for fiscal years beginning after
December 15, 2008 and will be applied retrospectively through a cumulative
effect adjustment to retained earnings for outstanding instruments as of that
date. The adoption of EITF 07-05 did not have a material effect on its
consolidated financial position, results of operations or cash
flows.





In March 2008, the FASB” issued SFAS
No. 161, “Disclosures about
Derivative Instruments and Hedging Activities - an amendment to FASB Statement
No. 133” (“SFAS No. 161”).  SFAS No. 161 is
intended to improve financial standards for derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entity's financial position, financial
performance, and cash flows.  Entities are required to provide
enhanced disclosures about: (a) how and why an entity uses derivative
instruments; (b) how derivative instruments and related hedged items are
accounted for under SFAS No. 133 and its related interpretations; and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance and cash flows.  It is effective for
financial statements issued for fiscal years beginning after November 15, 2008,
with early adoption encouraged.  The adoption of SFAS No. 161 did not
have a material effect on its consolidated financial position, results of
operations or cash flows.





In April 2008, the FASB issued FSP No.
FAS 142-3,“Determination of
the Useful Life of Intangible Assets”. This FSP amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS
No. 142,“Goodwill and
Other Intangible Assets”.  The Company is required to adopt FSP
142-3 on January 1, 2009, earlier adoption is prohibited.  The
guidance in FSP 142-3 for determining the useful life of a recognized intangible
asset shall be applied prospectively to intangible assets acquired after
adoption, and the disclosure requirements shall be applied prospectively to all
intangible assets recognized as of, and subsequent to, adoption. The
adoption of FSP No. FAS 142-3 did not have a material effect on its consolidated
financial position, results of operations or cash flows.





In May 2008, the FASB issued SFAS
No. 162, "The Hierarchy
of Generally Accepted Accounting Principles" ("SFAS No.
162").  SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (the
GAAP hierarchy).  SFAS No. 162 will become effective 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 does not expect the adoption of SFAS No. 162 to have a material
effect on its consolidated financial position, results of operations or cash
flows.





In May 2008, the FASB issued FSP
Accounting Principles Board ("APB") 14-1 "Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement) " ("FSP APB 14-1").  FSP APB 14-1
requires the issuer of certain convertible debt instruments that may be settled
in cash (or other assets) on conversion to separately account for the liability
(debt) and equity (conversion option) components of the instrument in a manner
that reflects the issuer's non-convertible debt borrowing rate.  FSP
APB 14-1 is effective for fiscal years beginning after December 15,
2008 on a retroactive basis.  The Company is currently evaluating the
potential impact, if any, of the adoption of FSP APB 14-1 on its
consolidated financial position, results of operations or cash
flows.





In May 2008, the FASB issued FASB
Statement No. 163, “Accounting for Financial Guarantee Insurance Contracts”,
which clarifies how FASB Statement No. 60, “Accounting and Reporting by
Insurance Enterprises”, applies to financial guarantee insurance contracts
issued by insurance enterprises.    The standard is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
including interim periods in that year. The Company does not expect the adoption
of SFAS 163 to have a material effect on its consolidated financial
statements.





In June 2008, the FASB issued
FSP Emerging Issues Task Force (EITF) No. 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities.” Under the FSP, unvested share-based payment awards that
contain rights to receive non-forfeitable dividends (whether paid or unpaid) are
participating securities, and should be included in the two-class method of
computing EPS. The FSP is effective for fiscal years beginning after
December 15, 2008, and interim periods within those years. The Company does
not expect the adoption of FSP EITF No. 03-6-1 to have a material effect on
its consolidated financial position, results of operations or cash
flows.





-38-


In October 2008, the FASB issued FSP
SFAS No. 157-3, “Determining the Fair Value of a Financial Asset When
the Market for That Asset Is Not Active.” This position clarifies the
application of SFAS No. 157 in a market that is not active and
provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial asset is not
active. It also reaffirms the notion of fair value as an exit price as of the
measurement date. This position was effective upon issuance, including prior
periods for which financial statements have not been issued. The adoption had no
impact on the Company’s consolidated financial statements.





In December 2008, the FASB issued FSP
132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets, which
is effective for fiscal years ending after December 15, 2009. FSP 132(R)-1
requires disclosures about fair value measurements of plan assets that would be
similar to the disclosures about fair value measurements required by SFAS 157.
The Company is assessing the potential effect of the adoption of FSP 132(R)-1 on
its consolidated financial statements.





In December 2008, the FASB issued FSP
SFAS 140-4 and FIN 46(R)-8, Disclosures about Transfers of Financial
Assets and Interests in Variable Interest Entities. The FSP requires extensive
additional disclosure by public entities with continuing involvement in
transfers of financial assets to special-purpose entities and with variable
interest entities (VIEs), including sponsors that have a variable interest in a
VIE. This FSP became effective for the first reporting period ending after
December 15, 2008 and did not have any material impact on the Company's
consolidated financial statements.





In
January 2009, the FASB issued Financial Statement of Position (“FSP”) Issue
No. EITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue
No. 99-20” (“FSP EITF No. 99-20-1”). FSP EITF No. 99-20-1 amends
the impairment guidance in EITF Issue No. 99-20, “Recognition of Interest
Income and Impairment on Purchased Beneficial Interests and Beneficial Interests
that Continue to be Held by a Transferor in Securitized Financial Assets” to
achieve more consistent determination of whether an other-than-temporary
impairment has occurred. The Company adopted FSP EITF No. 99-20-1 and it
did not have a material impact on the consolidated financial
statements.




Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not, or are not believed by
management to, have a material impact on the Company’s present or future
consolidated financial statements.




Off-Balance
Sheet Arrangements





We do not
have any off balance sheet arrangements that are reasonably likely to have a
current or future effect on our financial condition, revenues, results of
operations, liquidity or capital expenditures.





Item
7A. Quantitative and Qualitative Disclosures About Market Risk.





Not applicable.





-39-




Item 8. Financial Statements and
Supplementary Data.




SOLAR
THIN FILMS, INC.




Index
to Financial Statements




Page No.Report
      of Independent Registered Public Accounting Firm
            
            F-1Consolidated
      Balance Sheets at December 31, 2008 and 2007
            
            F-2Consolidated Statements of Operations
      and Comprehensive Loss for the years ended December 31, 2008 and
      2007
            
            F-3Consolidated Statements
      of Stockholders' Deficit for the years ended December 31, 2008
      and 2007
            
            F-4
      to F-5Consolidated Statements
      of Cash Flows for the years ended December 31, 2008 and
      2007
            
            F-6Notes
      to Consolidated Financial Statements
            
            F-7
      to F-33









REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
  To the Board of Directors and Shareholders
 Solar
Thin Films, Inc.
 Dix
Hills, New York
 
 We have audited the consolidated
balance sheets of Solar Thin Films, Inc. and Subsidiaries (the “Company”) as of
December 31, 2008 and 2007, and the related statements of operations
and comprehensive income (loss), stockholders' deficit and cash flows
for each of the two years in the period ended December 31, 2008. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
 
 We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting.
Our audits included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
 
 In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Solar Thin Films, Inc. and
Subsidiaries as of December 31, 2008 and 2007, and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 2008 in conformity with accounting principles generally
accepted in the United States of America.
 
 The accompanying
consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations that raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
  /s/
      RBSM LLPRBSM
      LLPCertified
      Public
Accountants
  New York,
New York
 April 15,
2009




F-1




SOLAR
      THIN FILMS, INC.CONSOLIDATED
      BALANCE SHEETSDECEMBER
      31, 2008 AND 2007




2008
                  
                  
                  2007ASSETSCurrent
      assets:Cash
      and cash equivalents
                  
                  $
                  619,257
                  
                  
                  $
                  4,157,476Accounts
      receivable, net of allowance for doubtful accounts of $696,067 and $-0-,
      respectively
                  
                  
                  194,341
                  
                  
                  
                  459,574Accounts
      receivable, related party, net of allowance for doubtful accounts of
      $831,863 and $-0-, respectively (Note  1)
                  
                  
                  500,000
                  
                  
                  
                  1,456,863Inventory
      (Note  3)
                  
                  
                  207,041
                  
                  
                  
                  191,715Advances
      to suppliers
                  
                  
                  931,370
                  
                  
                  
                  84,928Note
      receivable, net of allowance for doubtful accounts of $250,000 (Note
      4)
                  
                  
                  -
                  
                  
                  
                  -Deposits
      and other current assets (Note 5)
                  
                  
                  378,331
                  
                  
                  
                  84,960Total
      current assets
                  
                  
                  2,830,340
                  
                  
                  
                  6,435,516Property,
      plant and equipment, net of accumulated depreciation of $439,998 and
      $341,896, respectively (Note 6)
                  
                  
                  413,241
                  
                  
                  
                  595,030Other
      assets:Deferred
      financing costs, net of accumulated amortization of $581,000 and $506,796,
      respectively
                  
                  
                  26,500
                  
                  
                  
                  100,704Investments
      into CG Solar, at cost (Note 1)
                  
                  
                  1,500,000
                  
                  
                  
                  -Deposits
                  
                  
                  38,072
                  
                  
                  
                  -Other
      assets
                  
                  
                  3,893
                  
                  
                  
                  7,682Total
      other assets
                  
                  
                  1,568,465
                  
                  
                  
                  108,386Total
      assets
                  
                  $
                  4,812,046
                  
                  
                  $
                  7,138,932LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      liabilities:Accounts
      payable and accrued liabilities (Note 7)
                  
                  $
                  4,028,115
                  
                  
                  $
                  3,072,799Notes
      payable, current portion (Note 10)
                  
                  
                  2,560,997
                  
                  
                  
                  -Advances
      received from customers
                  
                  
                  1,969,390
                  
                  
                  
                  -Deferred
      revenue
                  
                  
                  33,452
                  
                  
                  
                  -Note
      payable-other (Note 8)
                  
                  
                  1,500,000
                  
                  
                  
                  1,500,000Total
      current liabilities
                  
                  
                  10,091,954
                  
                  
                  
                  4,572,799Convertible
      notes payable, net of unamortized discount (Note 10)
                  
                  
                  -
                  
                  
                  
                  1,773,746Dividends
      payable (Note 9)
                  
                  
                  143,778
                  
                  
                  
                  156,522Total
      long term debt
                  
                  
                  143,778
                  
                  
                  
                  1,930,268Commitments
      and contingencies (Note 17)Minority
      interests (Note 13 )
                  
                  
                  1,146,588
                  
                  
                  
                  999,496Stockholders”
      DeficitPreferred
      stock, par value $0.01 per share; 2,700,000 shares
    authorized:Series
      A Preferred stock, par value $0.01 per share; 1,200,000 shares designated;
      -0- issued and outstanding at December 31, 2008 and 2007
                  
                  
                  -
                  
                  
                  
                  -Series
      B Preferred stock, par value $0.01 per share; 1,500,000 shares
      designated:Series
      B-1 Preferred stock, par value $0.01 per share, 1,000,000 shares
      designated, 228,652 shares issued and outstanding at December 31, 2008 and
      2007
                  
                  
                  2,286
                  
                  
                  
                  2,286Series
      B-3 Preferred stock, par value $0.01 per share, 232,500 shares designated,
      47,518 shares issued and outstanding at December 31, 2008 and
      2007
                  
                  
                  475
                  
                  
                  
                  475Series
      B-4 Preferred stock, par value $0.01 per share, 100,000 shares designated,
      -0- shares issued and outstanding at December 31, 2008 and
      2007
                  
                  
                  -
                  
                  
                  
                  -Common
      stock, par value $0.01 per share, 150,000,000 shares authorized,
      57,810,601 and 57,012,601 shares issued and outstanding as of December 31,
      2008 and 2007, respectively (Note11)
                  
                  
                  578,106
                  
                  
                  
                  570,126Additional
      paid in capital
                  
                  
                  24,838,003
                  
                  
                  
                  22,857,742Treasury
      stock
                  
                  
                  (80,000
                  )
                  
                  
                  (80,000
                  )Deferred
      compensation
                  
                  
                  (26,250
                  )
                  
                  
                  (79,750
                  )Accumulated
      deficit
                  
                  
                  (32,549,564
                  )
                  
                  
                  (24,075,554
                  )Accumulated
      other comprehensive income (loss)
                  
                  
                  666,670
                  
                  
                  
                  441,044Total
      stockholders' deficit
                  
                  
                  (6,570,274
                  )
                  
                  
                  (363,631
                  )Total
      Liabilities and Stockholders' Deficit
                  
                  $
                  4,812,046
                  
                  
                  $
                  7,138,932The
      accompanying notes are an integral part of these consolidated financial
      statements





F-2






SOLAR
      THIN FILMS, INC.CONSOLIDATED
      STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSSYEARS
      ENDED DECEMBER 31, 2008 AND 2007




2008
                                                                
                                                                
                                                                2007REVENUE:Equipment
      sales
                                                                
                                                                $
                                                                3,289,517
                                                                
                                                                
                                                                $
                                                                5,779,578Factory
      Sales
                                                                
                                                                
                                                                147,262
                                                                
                                                                
                                                                
                                                                -Total
      revenue
                                                                
                                                                
                                                                3,436,779
                                                                
                                                                
                                                                
                                                                5,779,578Cost
      of sales (exclusive of depreciation and amortization shown separately
      below)
                                                                
                                                                
                                                                2,356,255
                                                                
                                                                
                                                                
                                                                4,779,962Net
                                                                
                                                                
                                                                1,080,524
                                                                
                                                                
                                                                
                                                                999,616OPERATING
      EXPENSES:General,
      selling and administrative expenses
                                                                
                                                                
                                                                7,745,174
                                                                
                                                                
                                                                
                                                                4,243,401Research
      and development
                                                                
                                                                
                                                                120,000
                                                                
                                                                
                                                                
                                                                360,000Depreciation
      and amortization expense
                                                                
                                                                
                                                                190,025
                                                                
                                                                
                                                                
                                                                220,860Total
      operating expenses
                                                                
                                                                
                                                                8,055,199
                                                                
                                                                
                                                                
                                                                4,824,261NET
      LOSS FROM OPERATIONS
                                                                
                                                                
                                                                (6,974,675
                                                                )
                                                                
                                                                
                                                                (3,824,645
                                                                )Other
      income/(expense):Loss
      on settlement of real estate deposits
                                                                
                                                                
                                                                (260,746
                                                                )
                                                                
                                                                
                                                                -Foreign
      currency translation gain (loss)
                                                                
                                                                
                                                                (56,061
                                                                )
                                                                
                                                                
                                                                (105,503
                                                                )Interest
      expense, net
                                                                
                                                                
                                                                (1,178,465
                                                                )
                                                                
                                                                
                                                                (4,527,940
                                                                )Debt
      acquisition costs
                                                                
                                                                
                                                                (74,204
                                                                )
                                                                
                                                                
                                                                (395,837
                                                                )Other
      income
                                                                
                                                                
                                                                2,237
                                                                
                                                                
                                                                
                                                                89,041Net
      loss before provision for income taxes and minority
    interest
                                                                
                                                                
                                                                (8,541,914
                                                                )
                                                                
                                                                
                                                                (8,764,884
                                                                )Provision
      for income taxes
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -Net
      Loss before minority interest
                                                                
                                                                
                                                                (8,541,914
                                                                )
                                                                
                                                                
                                                                (8,764,884
                                                                )Minority
      interest (Note 13)
                                                                
                                                                
                                                                67,904
                                                                
                                                                
                                                                
                                                                17,089NET
      LOSS
                                                                
                                                                $
                                                                (8,474,010
                                                                )
                                                                
                                                                $
                                                                (8,747,795
                                                                )Foreign
      currency translation gain
                                                                
                                                                
                                                                225,626
                                                                
                                                                
                                                                
                                                                171,382Comprehensive
      Loss
                                                                
                                                                $
                                                                (8,248,384
                                                                )
                                                                
                                                                $
                                                                (8,576,413
                                                                )Net
      Loss  per common share (basic and diluted)
                                                                
                                                                $
                                                                (0.14
                                                                )
                                                                
                                                                $
                                                                (0.21
                                                                )Weighted
      average shares outstanding (basic and diluted)
                                                                
                                                                
                                                                57,664,948
                                                                
                                                                
                                                                
                                                                42,452,053The
      accompanying notes are an integral part of these consolidated financial
      statements





F-3




SOLAR THIN FILMS, INC.CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ DEFICITYEARS
      ENDED DECEMBER 31, 2008 AND 2007




Preferred
      Series B-1
            
            
            Preferred
      Series B-3
            
            
            Preferred
      Series B-4
            
            
            Common
      sharesShares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            AmountBalance
      at December 31, 2006
            
            
            228,652
            
            
            $
            2,286
            
            
            
            47,518
            
            
            $
            475
            
            
            
            95,500
            
            
            $
            955
            
            
            
            16,269,597
            
            
            $
            162,696Fractional
      shares issued upon 1.6 to 1 reverse split on February 9,
    2007
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,504
            
            
            
            15Settlement
      of minority interest
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Effect
      of adoption of EITF 00-19-2 change in accounting principle (Note
      1)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Issuance
      of 33,425,000 shares of common stock for conversion of 95,500 Preferred
      B-4 shares
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (95,500
            )
            
            
            (955
            )
            
            
            33,425,000
            
            
            
            334,250Issuance
      of 1,312,500 shares of common stock in exchange for convertible notes
      payable
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,312,500
            
            
            
            13,125Common
      stock issued in June 2007 for services rendered at $0.48 per
      share
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            400,000
            
            
            
            4,000Fair
      value of warrants issued in conjunction with settlement of convertible
      debt
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Fair
      value of vested portion of 3,000,000 options issued to an
      officer
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Issuance
      of 1,575,000 shares of common stock to acquire minority interest in
      subsidiary at $0.75 per share
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,575,000
            
            
            
            15,750Issuance
      of 4,029,000 shares of common stock in exchange for convertible notes
      payable
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            4,029,000
            
            
            
            40,290Foreign
      currency translation gain
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Balance,
      December 31, 2007
            
            
            228,652
            
            
            
            2,286
            
            
            
            47,518
            
            
            
            475
            
            
            
            -
            
            
            
            -
            
            
            
            57,012,601
            
            
            
            570,126Issuance
      of 595,000 shares of common stock in exchange for convertible notes
      payable
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            595,000
            
            
            
            5,950Fair
      value of vested portion of employee options issued
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Sale
      of majority owned subsidiary common stock by subsidiary
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Issuance
      of 199,000 shares of common stock in exchange for convertible notes
      payable
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            199,000
            
            
            
            1,990Common
      stock to be issued in connection with services rendered
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Issuance
      of 4,000 shares of common stock in exchange for convertible notes
      payable
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            4,000
            
            
            
            40Amortization
      of deferred compensation
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Foreign
      currency translation gain
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -228,652
            
            
            $
            2,286
            
            
            
            47,518
            
            
            $
            475
            
            
            $
            -
            
            
            $
            -
            
            
            
            57,810,601
            
            
            $
            578,106




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





F-4




SOLAR
      THIN FILMS, INC.CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' DEFICITYEARS
      ENDED DECEMBER 31, 2008 AND 2007




Additional
            
            
            
            
            
            
            
            
            Other
            
            
            
            
            
            TotalPaid
      in
            
            
            Deferred
            
            
            Treasury
            
            
            Comprehensive
            
            
            Accumulated
            
            
            Stockholders'Capital
            
            
            Compensation
            
            
            Stock
            
            
            Income
    (loss)
            
            
            Deficit
            
            
            DeficitBalance
      at December 31, 2006
            
            $
            3,627,872
            
            
            $
            -
            
            
            $
            (80,000
            )
            
            $
            269,662
            
            
            $
            (4,790,109
            )
            
            $
            (806,163
            )Fractional
      shares issued upon 1.6 to 1 reverse split on February 9,
    2007
            
            
            (15
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Effect
      of adoption of EITF 00-19-2 change in accounting principle (Note
      1)
            
            
            10,821,900
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (9,356,400
            )
            
            
            1,465,500Issuance
      of 33,425,000 shares of common stock for conversion of 95,500 Preferred
      B-4 shares
            
            
            (333,295
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Issuance
      of 1,312,500 shares of common stock in exchange for convertible notes
      payable
            
            
            511,875
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            525,000Common
      stock issued in June 2007 for services rendered at $0.48 per
      share
            
            
            188,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            192,000Fair
      value of warrants issued in conjunction with settlement of convertible
      debt
            
            
            61,767
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            61,767Fair
      value of vested portion of 3,000,000 options issued to an
      officer
            
            
            356,618
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            356,618Issuance
      of 1,575,000 shares of common stock to acquire minority interest in
      subsidiary at $0.75 per share
            
            
            1,165,500
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,181,250
            )
            
            
            -Issuance
      of 4,029,000 shares of common stock in exchange for convertible notes
      payable
            
            
            3,988,710
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            4,029,000Issuance
      of majority owned subsidiary common stock in exchange for services to be
      rendered
            
            
            87,000
            
            
            
            (87,000
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Issuance
      of majority owned subsidiary common stock in exchange for services
      rendered
            
            
            50,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            50,000Sale
      of majority owned subsidiary common stock by subsidiary
            
            
            2,331,810
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,331,810Amortization
      of deferred compensation
            
            
            -
            
            
            
            7,250
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            7,250Foreign
      currency translation gain
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            171,382
            
            
            
            -
            
            
            
            171,382Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (8,747,795
            )
            
            
            (8,747,795
            )Balance,
      December 31, 2007
            
            
            22,857,742
            
            
            
            (79,750
            )
            
            
            (80,000
            )
            
            
            441,044
            
            
            
            (24,075,554
            )
            
            
            (363,631
            )Issuance
      of 595,000 shares of common stock in exchange for convertible notes
      payable
            
            
            589,050
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            595,000Fair
      value of vested portion of employee options
            
            
            1,085,016
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,085,016Sale
      of majority owned subsidiary common stock by subsidiary
            
            
            105,225
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            105,225Issuance
      of 199,000 shares of common stock in exchange for convertible notes
      payable
            
            
            197,010
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            199,000Issuance
      of 4,000 shares of common stock in exchange for convertible notes
      payable
            
            
            3,960
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            4,000Amortization
      of deferred compensation
            
            
            -
            
            
            
            53,500
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            53,500Foreign
      currency translation gain
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            225,626
            
            
            
            -
            
            
            
            225,626Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (8,474,010
            )
            
            
            (8,474,010
            )$
            24,838,003
            
            
            $
            (26,250
            )
            
            $
            (80,000
            )
            
            $
            666,670
            
            
            $
            (32,549,564
            )
            
            $
            (6,570,274
            )




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





F-5




SOLAR
      THIN FILMS, INC.CONSOLIDATED
      STATEMENTS OF CASH FLOWSYEARS
      ENDED DECEMBER 31, 2008 AND 2007




2008
                  
                  
                  2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                  
                  $
                  (8,474,010
                  )
                  
                  $
                  (8,747,795
                  )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization expense
                  
                  
                  190,025
                  
                  
                  
                  220,860Allowance
      for doubt accounts
                  
                  
                  1,605,797
                  
                  
                  
                  -Minority
      interest
                  
                  
                  (67,904
                  )
                  
                  
                  (17,089
                  )Amortization
      of deferred financing costs
                  
                  
                  74,204
                  
                  
                  
                  395,837Amortization
      of debt discounts
                  
                  
                  1,085,251
                  
                  
                  
                  4,431,697Amortization
      of deferred compensation costs
                  
                  
                  53,500
                  
                  
                  
                  7,250Fair
      value of vested options issued to officer and director
                  
                  
                  1,085,016
                  
                  
                  
                  356,618Fair
      value of warrants issued in conjunction with settlement of
      debenture
                  
                  
                  -
                  
                  
                  
                  61,767Common
      stock of majority owned subsidiary issued for services
      rendered
                  
                  
                  170,220
                  
                  
                  
                  -Loss
      on settlement of deposits
                  
                  
                  260,746
                  
                  
                  
                  -Common
      stock issued in exchange for services rendered
                  
                  
                  -
                  
                  
                  
                  242,000Loss
      on disposal of fixed assets
                  
                  
                  -
                  
                  
                  
                  11,184Change
      in operating assets and liabilities:Accounts
      receivable
                  
                  
                  (512,164
                  )
                  
                  
                  (124,557
                  )Accounts
      receivable, related party
                  
                  
                  113,628
                  
                  
                  
                  (576,733
                  )Inventory
                  
                  
                  (33,836
                  )
                  
                  
                  1,319,524Prepaid
      expenses
                  
                  
                  -
                  
                  
                  
                  655,717Advances
      and other current assets
                  
                  
                  (1,106,030
                  )
                  
                  
                  (129,922
                  )Other
      assets
                  
                  
                  (366,179
                  )
                  
                  
                  2,342Accounts
      payable and accrued liabilities
                  
                  
                  1,144,115
                  
                  
                  
                  526,257Advances
      received from customers
                  
                  
                  2,154,063
                  
                  
                  
                  (309,512
                  )Other
      current liabilities
                  
                  
                  33,452
                  
                  
                  
                  -Net
      cash used in operating activities
                  
                  
                  (2,590,106
                  )
                  
                  
                  (1,674,555
                  )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of investments
                  
                  
                  (1,500,000
                  )
                  
                  
                  -Acquisition
      of property, plant and equipment
                  
                  
                  (44,181
                  )
                  
                  
                  (197,757
                  )Net
      cash used in investing activities
                  
                  
                  (1,544,181
                  )
                  
                  
                  (197,757
                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from sale of common stock by majority owned subsidiary
                  
                  
                  150,000
                  
                  
                  
                  3,348,395Proceeds
      from notes payable and capital leases
                  
                  
                  500,000
                  
                  
                  
                  -Cash
      provided (used in) notes payable, related party
                  
                  
                  -
                  
                  
                  
                  (157,472
                  )Net
      cash provided by financing activities
                  
                  
                  650,000
                  
                  
                  
                  3,190,923Effect
      of currency rate change on cash
                  
                  
                  (53,932
                  )
                  
                  
                  171,382Net
      (decrease) increase in cash and cash equivalents
                  
                  
                  (3,538,219
                  )
                  
                  
                  1,489,993Cash
      and cash equivalents at beginning of period
                  
                  
                  4,157,476
                  
                  
                  
                  2,667,483Cash
      and cash equivalents at end of period
                  
                  $
                  619,257
                  
                  
                  $
                  4,157,476SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Cash
      paid during the period for interest
                  
                  $
                  3,572
                  
                  
                  $
                  4,933Cash
      paid during the period for taxes
                  
                  
                  -
                  
                  
                  
                  -NON
      CASH INVESTING AND FINANCING ACTIVITIES:Common
      stock issued for services rendered
                  
                  $
                  -
                  
                  
                  $
                  242,000Options
      issued for services rendered
                  
                  $
                  1,085,016
                  
                  
                  $
                  356,618




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





F-6




SOLAR
THIN FILMS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


DECEMBER
31, 2008 and 2007




NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





A summary
of the significant accounting policies applied in the presentation of the
accompanying consolidated financial statements are as follows:





Business and Basis of
Presentation





The
Company is incorporated under the laws of the State of Delaware, and is in the
business of designing, manufacturing and marketing Solar Panel equipment on a
world wide basis.





The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries, Superior Ventures Corp. and Kraft Elektronikai
Zrt. (“Kraft”) and majority owned subsidiary, Solar Thin Power, Inc. All
significant intercompany balances and transactions have been eliminated in
consolidation.





Merger and Corporate
Restructure





On June
14, 2006, the Company entered into a Securities Purchase Agreement (“Agreement”
or “Merger”) with Kraft, a company formed under the laws of the country of
Hungary. As a result of the Merger, there was a change in control of the public
entity. In accordance with SFAS No. 141, Kraft was the acquiring entity. While
the transaction is accounted for using the purchase method of accounting, in
substance the Agreement is a recapitalization of Kraft's capital
structure.





For
accounting purposes, the Company accounted for the transaction as a reverse
acquisition and Kraft is the surviving entity. The total purchase price and
carrying value of net assets acquired was $(6,681,891). The Company did not
recognize goodwill or any intangible assets in connection with the transaction.
Prior to the Agreement, the Company was an inactive corporation with no
significant assets and liabilities.





Effective
with the Agreement, 95.5% of previously outstanding shares of its common stock
owned by the Kraft’s shareholders were exchanged for an aggregate of 95,500
shares of the Company’s newly issued Series B-4 Preferred Stock (the “Series B-4
Preferred”). The Series B-4 Preferred are each automatically convertible into
350 shares of common stock or an aggregate of 33,425,000 shares of the Company’s
common stock. The conversion is subject to the Company increasing its authorized
shares of common stock. Under the Agreement, prior to such conversion, each
Series B-4 Preferred share will have the voting rights equal to 350 shares of
common stock and vote together with the shares of common stock on all matters.
As described in Note 15, all issued and outstanding Series B-4 Preferred stock
was converted to common stock during the year ended December 31,
2007.





The value
of the stock that was issued was the historical cost of the Company's net
tangible assets, which did not differ materially from their fair
value.





The
accompanying financial statements present the historical financial condition,
results of operations and cash flows of Kraft prior to the merger with American
United Global.




F-7




SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 and 2007





NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





The total
consideration paid was $(6,681,891) and the significant components of the
transaction are as follows:





American
      United Global, Inc.
              Summary
      Statement of Financial Position
              At
      June 14, 2006Current
      Assets:Cash
            
            $
            5,258,503Other
      assets:Deferred
      loan costs, net of accumulated amortization of $-0-
            
            
            607,500Notes
      receivable-Kraft RT
            
            
            1,500,000Current
      Liabilities:Note
      payable - unsecured
            
            
            (1,500,000
            )Accrued
      interest and other
            
            
            (1,435,200
            )Long
      Term liabilities:$525,000
      Convertible debenture; less unamortized debt discount of
      $266,935
            
            
            (258,065
            )$1,250,000
      Convertible debenture; less unamortized debt discount of
      $1,140,988
            
            
            (109,012
            )$6,000,000
      Convertible debenture; less unamortized debt discount of
      $6,000,000
            
            
            -0-Warrant
      liability
            
            
            (10,821,900
            )Preferred
      stock: series B-1
            
            
            (2,287
            )Preferred
      stock: series B-3
            
            
            (475
            )Preferred
      stock: series B-4
            
            
            (955
            )Treasury
      stock, at cost
            
            
            80,000Net
      liabilities assumed
            
            $
            (6,681,891
            )





The net
liabilities assumed is accounted for as a recapitalization of the Company’s
capital structure and  accordingly the Company has charged the
$6,681,891 to accumulated deficit during the year ended December 31,
2006.





Subsequent
to the date of the merger, the Company changed its name from American United
Global Inc. to Solar Thin Films, Inc.





In July
2007, the Company issued 1,575,000 shares of its common stock to acquire the
remaining 4.5% of the outstanding common shares of Kraft. Accordingly, the
Company has charged the fair value, based on the underlying common stock issued,
of $1,181,250 to accumulated deficit in the year ended December 31,
2007.





Change in Accounting
Principle for Registration Payment Arrangements.





In
December 2006, the Financial Accounting Standards Board (“FASB”) issued
FASB Staff Position on No. EITF 00-19-2,Accounting for Registration Payment
Arrangements (“FSP EITF 00-19-2”). FSP EITF 00-19-2 provides that the
contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement should be separately
recognized and measured in accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 5,Accounting for Contingencies , which provides that loss contingencies
should be recognized as liabilities if they are probable and reasonably
estimable. Subsequent to the adoption of FSP EITF 00-19-2, any changes in the
carrying amount of the contingent liability will result in a gain or loss that
will be recognized in the consolidated statement of operations in the period the
changes occur. The guidance in FSP EITF 00-19-2 is effective immediately for
registration payment arrangements and the financial instruments subject to those
arrangements that are entered into or modified subsequent to the date of
issuance of FSP EITF 00-19-2. For registration payment arrangements and
financial instruments subject to those arrangements that were entered into prior
to the issuance of FSP EITF 00-19-2, this guidance is effective for the
consolidated financial statements issued for the year beginning January 1,
2007, and interim periods within that year.





F-8





SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 and 2007





NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





On
January 1, 2007, the Company adopted the provisions of FSP EITF 00-19-2 to
account for the registration payment arrangement associated with our June 2006
financing (see Note 7). On February 13, 2007 the Company became effective with
their SB-2 and as such management determined that it was not probable that we
would have any additional payment obligations under the June 2006 Registration
Payment Arrangement; therefore, additional accrual for contingent obligation is
not required under the provisions of FSP EITF 00-19-2. Accordingly, the warrant
liability account was eliminated and the comparative consolidated financial
statements have been adjusted to apply the new method. The following financial
statement line items for the year ended December 31, 2007 by the change in
accounting principle are as follow:





Consolidated
Statements of Operations





As
      Computed
            
            As
      Reportedunder
            
            under
      FSP
            
            Effect
      ofEITF
      00-19
            
            EITF
      00-19-2
            
            ChangeYear
      ended December 31, 2007Loss
      from operations
            
            
            $
            (3,824,645
            )
            
            $
            (3,824,645
            )
            
            $
            —Other
      income (loss)
            
            
            
            (4,940,239
            )
            
            
            (4,940,239
            )
            
            
            —Loss
      on fair value of warrants
            
            
            
            (3,972,600
            )
            
            
            —
            
            
            
            3,972,600Net
      loss
            
            
            
            (12,720,395
            )
            
            
            (8,747,795
            )
            
            
            3,972,600Net
      loss per share
            
            
            $
            (0.30
            )
            
            $
            (0.21
            )
            
            $
            0.09





Consolidated
Balance Sheet





As
      Computed
            
            As
      Reportedunder
            
            under
      FSP
            
            Effect
      ofEITF
      00-19
            
            EITF
      00-19-2
            
            ChangeDecember
      31, 2007Warrant
      liability
            
            
            $
            5,438,100
            
            
            $
            —
            
            
            $
            (5,438,100
            )Total
      liabilities
            
            
            
            11,941,167
            
            
            
            6,503,067
            
            
            
            (5,438,100
            )Additional
      paid-in capital
            
            
            
            12,035,842
            
            
            
            22,857,742
            
            
            
            10,821,900Deficit
            
            
            
            (14,719,154
            )
            
            
            (24,075,554
            )
            
            
            (9,356,400
            )Total
      stockholders’ deficit
            
            
            
            (5,801,731
            )
            
            
            (363,631
            )
            
            
            5,438,100





Consolidated
Statements of Cash Flows





As
      Computed
            
            As
      Reportedunder
            
            under
      FSP
            
            Effect
      ofEITF
      00-19
            
            EITF
      00-19-2
            
            ChangeSix   Year
      ended December 31, 2007Net
      loss
            
            
            $
            (12,720,395
            )
            
            $
            (8,747,795
            )
            
            $
            3,972,600Loss
      on value of warrant liability
            
            
            
            3,972,600
            
            
            
            —
            
            
            
            (3,972,600
            )





Accounts
Receivable





The
Company assesses the realization of its receivables by performing ongoing credit
evaluations of its customers' financial condition. Through these evaluations,
the Company may become aware of a situation where a customer may not be able to
meet its financial obligations due to deterioration of its financial viability,
credit ratings or bankruptcy. The Company’s reserve requirements are based on
the best facts available to the Company and are reevaluated and adjusted as
additional information is received. The Company’s reserves are also based on
amounts determined by using percentages applied to certain aged receivable
categories. These percentages are determined by a variety of factors including,
but not limited to, current economic trends, historical payment and bad debt
write-off experience. Allowance for doubtful accounts for accounts and notes
receivable was $1,777,930 and $0 for the years ended December 31, 2008 and 2007,
respectively. During the year ended December 31, 2008, the Company determined
accounts receivable, related party of $831,863 (Note 12), trade receivables of
$696,067 and a note receivable of 250,000 (Note 4) were impaired and accordingly
recorded an allowance for doubtful accounts.





F-9





SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 and 2007





NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Revenue
Recognition





For
revenue from product/contract sales (Equipment Sale) which include equipment and
sometimes installation, the Company recognizes revenue in accordance with Staff
Accounting Bulletin No. 104, Revenue Recognition (“SAB 104"), which superseded
Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements”
(“SAB 101"). SAB 104 requires that four basic criteria must be met before
revenue can be recognized: (1) Persuasive evidence of an arrangement exists; (2)
delivery has occurred; (3) the selling price is fixed and determinable; and (4)
collectibility is reasonably assured.





Determination
of criteria (3) and (4) are based on management’s judgments regarding the fixed
nature of the selling prices of the products delivered and the collectibility of
those amounts. Provisions for discounts and rebates to customers, estimated
returns and allowances, and other adjustments are provided for in the same
period the related sales are recorded. The Company defers any revenue for which
the product has not been delivered or is subject to refund until such time that
the Company and the customer jointly determine that the product has been
delivered or no refund will be required. Deferred revenues as of December 31,
2008 and 2007 amounted to $33,452 and $0, respectively. SAB 104 incorporates
Emerging Issues Task Force 00-21 (“EITF 00-21"), Multiple-Deliverable Revenue
Arrangements. EITF 00-21 addresses accounting for arrangements that may involve
the delivery or performance of multiple products, services and/or rights to use
assets. There were no impact from the implementation of EITF 00-21 on the
Company’s financial position and results of operations as there were no such
arrangements during the year ended December 31, 2008 and 2007.





The
Company recognizes revenue when persuasive evidence of an arrangement exists,
the price to the customer is fixed, collectibility is reasonable assured and
title and risk of ownership is passed to the customer, which is usually upon
shipment. However, certain customers traditionally have requested to take title
and risk of ownership prior to shipment. Revenue for these transactions is
recognized only when:





1.
            Title
      and risk of ownership have passed to the customer;2.
            The
      Company has obtained a written fixed purchase commitment;3.
            The
      customer has requested the transaction be on a bill and hold
    basis;4.
            The
      customer has provided a delivery schedule;5.
            All
      performance obligations related to the sale have been
  completed;6.
            The
      product has been processed to the customer’s specifications, accepted by
      the customer and made ready for shipment; and7.
            The
      product is segregated and is not available to fill other
  orders.





The
remittance terms for these “bill and hold” transactions are consistent with all
other sale by the Company. There were no bill and hold transactions at December
31, 2008 and 2007.





For
Complete Factory sales to be completed and shipped during first part
of year 2009, which include sale of equipment, installation, and
commissioning, the Company recognizes revenues from the product portion (pieces
of equipment) on shipment and services portion (installation and commissioning)
upon completion and passage of performance tests.  The commissioning
includes a range of consulting services necessary to successfully complete a
performance test, such as training of management, engineering and production
personnel, debugging and resolving problems, initial oversight or support for
vendor relations and purchasing, documentation and transfer of process knowledge
and potential co-management of the production line during performance
testing.





F-10




SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 and 2007





NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Cost of
sales





Cost of
sales includes cost of raw materials, labor, subcontractor work, inbound freight
charges, purchasing and receiving costs, inspection costs, internal transfer
costs and absorbed indirect manufacturing cost, as well as installation related
travel costs and warranty costs.





General, selling and
administrative expenses





General,
selling and administrative expenses primarily include indirect labor costs,
rental fees, accounting, legal and consulting fees. The Company classifies all
of its depreciation and amortization expenses as operating expenses under a
separate line item, depreciation and amortization.





Investments





As part
of the Company’s business strategy to take a minority interest in its customer
base and to secure module supply for planned power projects to improve the
chances of securing contracts, during the year ended December 31, 2008, the
Company acquired a 15% interest in CG Solar, formerly WeiHai Blue Star Terra
Photovoltaic Co., Ltd, a Sino-Foreign Joint Venture Company organized under the
laws of the People’s Republic of China.  The investment of $1,500,000
represented 15% of total committed capital of $10,000,000 and is carried at cost
under the cost method of accounting for investment.  Blue Star Glass
and China Singyes own the remaining 85% of CG Solar.





The
Company supplied equipment to RESI that was utilized in the construction of CG
Solar's first a-Si production line. The investment  was accomplished
by purchasing a 10% interest from Terrasolar for $1 million (representing 10% of
the committed capital) in March 2008 and a 5% interest from RESI for $500,000
(representing 5% of the committed capital) in January 2008. The balance of the
committed capital was invested by CG Solar's parent, Blue Star Glass, and by a
strategic partner, China Singyes. Management believed that the investment
represented a reasonable equity investment on its own account, expected to have
preferential access to module output for power projects, and expected to
increase the chances of securing contracts to expand the facility in
2009.





The
Company did not evaluate for impairment and the fair value of the cost-method
investment is not estimated since there were no identified events or changes in
circumstances that may have a significant adverse effect on the fair value and
the Company determined, in accordance with SFAS No. 107 that it is not
practicable to estimate the fair value of the investment.





Segment
information





Statement
of Financial Accounting Standards No. 131, “Disclosures about Segments of an
Enterprise and Related Information” (“SFAS No.131”) establishes standards for
reporting information regarding operating segments in annual financial
statements and requires selected information for those segments to be presented
in interim financial reports issued to stockholders. SFAS No.131 also
establishes standards for related disclosures about products and services and
geographic areas. Operating segments are identified as components of an
enterprise about which separate discrete financial information is available for
evaluation by the chief operating decision maker, or decision-making group, in
making decisions how to allocate resources and assess performance. The Company
applies the management approach to the identification of our reportable
operating segment as provided in accordance with SFAS No. 131. The information
disclosed herein materially represents all of the financial information related
to the Company’s principal operating segment (see Note 19).





Product Warranty
costs





The
Company provides for estimated costs to fulfill customer warranty obligations
upon recognition of the related revenue in accordance with the FASB
Interpretation No. 45, “Guarantors Accounting and Disclosure Requirements for
Guarantees” as a charge in the current period cost of goods sold. The range for
the warranty coverage for the Company’s products is up to 18 to 24 months. The
Company estimates the anticipated future costs of repairs under such warranties
based on historical experience and any known specific product information. These
estimates are reevaluated periodically by management and based on current
information, are adjusted accordingly. The Company’s determination of the
warranty obligation is based on estimates and as such, actual product failure
rates may differ significantly from previous expectations.





The
Company accrued a provision for product warranty of approximately $180,000
during 2007; of which approximately $85,000 was utilized during the year ended
December 31, 2007. An additional $73,000 warranty liability was accrued during
the year ended December 31, 2008 after the utilization of $108,070 in 2008,
while approximately $59,930 remaining as of December 31, 2008.




F-11





SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 and 2007





NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Research and
Development





The
Company accounts for research and development costs in accordance with the
Financial Accounting Standards Board’s Statement of Financial Accounting
Standards No. 2 (“SFAS 2"), “Accounting for Research and Development Costs.”
Under SFAS 2, all research and development cost must be charged to expense as
incurred. Accordingly, internal research and developments cost is expensed as
incurred.





Third-party
research and developments costs are expensed when the contracted work has been
performed or as milestone results have been achieved. Company-sponsored research
and development costs related to products are expensed in the period incurred.
The Company incurred expenditures of $120,000 and $360,000 on research and
product development for the years ended December 31, 2008 and 2007,
respectively.





Reclassification





Certain
reclassifications have been made to conform to prior periods’ data to the
current presentation. These reclassifications had no effect on reported income
or losses.





Fair
Values





On
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value
Measurements” (SFAS No. 157) as amended by FASB Statement of Position (FSP)
FAS 157-1 and FSP FAS 157-2. SFAS No. 157 defines fair value, establishes a
framework for measuring fair value, and enhances fair value measurement
disclosure. FSP FAS 157-2 delays, until the first quarter of fiscal year 2009,
the effective date for SFAS No. 157 for all non-financial assets and
non-financial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually). The
adoption of SFAS No. 157 did not have a material impact on the Company’s
financial position or operations. Refer to Note 18 for further discussion
regarding fair value.




Property, plant and
equipment




Property,
plant and equipment are stated at cost less accumulated depreciation and
impairment losses. Depreciation is computed using the straight-line method over
the estimated useful lives of the respective assets.




The
estimated useful lives of property, plant and equipment are as
follows:





Land
            
            -Buildings
            
            50
      yearsLeasehold
      improvements
            
            3 to 7 yearsFurniture
      and fixtures
            
            3 to 7 yearsMachinery,
      plant and equipment
            
            3 to 7 years




We
evaluate the carrying value of items of property, plant and equipment to be held
and used whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable. The carrying value of an item of property, plant
and equipment is considered impaired when the projected undiscounted future cash
flows related to the asset are less than its carrying value. We measure
impairment based on the amount by which the carrying value of the respective
asset exceeds its fair value. Fair value is determined primarily using the
projected future cash flows discounted at a rate commensurate with the risk
involved.





F-12




SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 and 2007





NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Stock Based
Compensation





Effective
for the year beginning January 1, 2007 the Company has adopted SFAS 123 (R)
“Share-Based Payment” which supersedes APB Opinion No. 25, “Accounting for Stock
Issued to Employees” and eliminates the intrinsic value method that was provided
in SFAS 123 for accounting of stock-based compensation to employees. The Company
made no employee stock-based compensation grants before December 31, 2005 and
therefore has no unrecognized stock compensation related liabilities or expense
unvested or vested prior to 2006. Stock-based compensation expense recognized
under SFAS 123(R) for the year ended December 31, 2008 and 2007 was $1,085,016
and $356,618, respectively (Note 15).





Use of
Estimates





The
preparation of the financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.





Comprehensive Income
(Loss)





The
Company adopted SFAS No. 130; “Reporting Comprehensive Income”. SFAS No. 130
establishes standards for the reporting and displaying of comprehensive income
and its components. Comprehensive income is defined as the change in equity of a
business during a period from transactions and other events and circumstances
from non-owners sources. It includes all changes in equity during a period
except those resulting from investments by owners and distributions to owners.
SFAS No. 130 requires other comprehensive income (loss) to include foreign
currency translation adjustments and unrealized gains and losses on available
for sale securities.





Foreign Currency
Translation





The
Company translates the foreign currency financial statements into US Dollars
using the year end or average exchange rates in accordance with the requirements
of SFAS No. 52, “Foreign Currency Translation”. Assets and liabilities of
these subsidiaries were translated at exchange rates as of the balance sheet
date. Revenues and expenses are translated at average rates in effect for the
periods presented. The cumulative translation adjustment is included in the
accumulated other comprehensive gain (loss) within shareholders’ equity
(deficit). Foreign currency transaction gains and losses arising from exchange
rate fluctuations on transactions denominated in a currency other than the
functional currency are included in the consolidated results of
operations.





Net income (loss) per
share





The
Company accounts for net (loss) income per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (“EPS”), which
requires presentation of basic and diluted EPS on the face of the statement of
operations for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS.





Basic net
(loss) income per share is computed by dividing net (loss) income by the
weighted average number of shares of common stock outstanding during each
period.  It excludes the dilutive effects of potentially issuable
common shares such as those related to our convertible notes, warrants and stock
options.  Diluted net (loss) income per share is calculated by
including potentially dilutive share issuances in the
denominator.  However, diluted net (loss) income per share for the
year ended December 31, 2008 and 2007 does not reflect the effects of 1,534,026
shares potentially issuable upon conversion of our convertible preferred shares,
2,423,000 and 3,221,000 shares potentially issuable upon the conversion of
convertible debt as of December 31, 2008 and 2007, respectively and -0- and
1,833,334 shares potentially issuable upon the exercise of the Company's stock
options and warrants (calculated using the treasury stock method) as of December
31, 2008 and 2007, respectively. These potentially issuable shares would have an
anti-dilutive effect on our net (loss) income per share.





F-13





SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 and 2007





NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)




Liquidity





The
Company has incurred a net loss of $8,474,010 and negative cash flows from
operating activities of $2,590,106 for the year ended December 31, 2008. In
addition, the Company has negative working capital of $7,261,614 at December 31,
2008.




Recent accounting
pronouncements




In
December 2007, the FASB issued SFAS No. 141(R), "Business Combinations"
("SFAS No. 141(R)"), which establishes principles and requirements for how
an acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in an
acquiree, including the recognition and measurement of goodwill acquired in a
business combination. SFAS No. 141R is effective as of the beginning of the
first fiscal year beginning on or after December 15, 2008. Earlier adoption
is prohibited. The Company does not expect the adoption of SFAS No. 141R in 2009
will have a material effect on its consolidated financial position, results of
operations or cash flows.





In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interest in
Consolidated Financial Statements, an amendment of ARB No. 51”
(“SFAS No. 160”), which will change the accounting and reporting for
minority interests, which will be recharacterized as noncontrolling interests
and classified as a component of equity within the consolidated balance sheets.
SFAS No. 160 is effective as of the beginning of the first fiscal year beginning
on or after December 15, 2008. Earlier adoption is prohibited. The Company
does not expect the adoption of SFAS No. 160 in 2009 to have a material effect
on its consolidated financial position, results of operations or cash
flows.





In
December 2007, the FASB ratified the consensus in Emerging Issues Task Force
(EITF) Issue No. 07-1, “Accounting for Collaborative Arrangements”
(EITF 07-1). EITF 07-1 defines collaborative arrangements and requires
collaborators to present the result of activities for which they act as the
principal on a gross basis and report any payments received from (made to) the
other collaborators based on other applicable authoritative accounting
literature, and in the absence of other applicable authoritative literature, on
a reasonable, rational and consistent accounting policy is to be elected.
EITF 07-1 also provides for disclosures regarding the nature and purpose of
the arrangement, the entity’s rights and obligations, the accounting policy for
the arrangement and the income statement classification and amounts arising from
the agreement.





EITF 07-1
will be effective for fiscal years beginning after December 15, 2008, which
will be the Company’s fiscal year 2009, and will be applied as a change in
accounting principle retrospectively for all collaborative arrangements existing
as of the effective date.


The
Company does not expect the adoption of EITF 07-1in 2009 to have a material
effect on its consolidated financial position, results of operations or cash
flows.





In
June 2008, the FASB ratified the consensus on Emerging Issues Task Force
(EITF) Issue 07-5, “Determining whether an Instrument (or Embedded Feature)
is indexed to an Entity’s Own Stock.” This issue addresses whether an instrument
(or an embedded feature) is indexed to an entity’s own stock, which is the first
part of the scope exception in paragraph 11(a) of SFAS No. 133, for
purposes of determining whether the instrument should be classified as an equity
instrument or accounted for as a derivative instrument. The provisions of EITF
Issue No. 07-5 are effective for financial statements issued for fiscal
years beginning after December 15, 2008 and will be applied retrospectively
through a cumulative effect adjustment to retained earnings for outstanding
instruments as of that date. The Company does not expect the adoption of EITF
07-05 to have a material effect on its consolidated financial position, results
of operations or cash flows.





In March
2008, the FASB” issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities - an amendment to FASB Statement No.
133” (“SFAS No. 161”).  SFAS No. 161 is
intended to improve financial standards for derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entity's financial position, financial
performance, and cash flows.  Entities are required to provide
enhanced disclosures about: (a) how and why an entity uses derivative
instruments; (b) how derivative instruments and related hedged items are
accounted for under SFAS No. 133 and its related interpretations; and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance and cash flows.  It is effective for
financial statements issued for fiscal years beginning after November 15, 2008,
with early adoption encouraged.  The Company does not expect the
adoption of SFAS No. 161 to have a material effect on its consolidated financial
position, results of operations or cash flows.





F-14





SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 and 2007





NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Recent accounting
pronouncements (continued)





In April
2008, the FASB issued FSP No. FAS 142-3,“Determination of the Useful Life of
Intangible Assets”. This FSP amends the factors that should be considered
in developing renewal or extension assumptions used to determine the useful life
of a recognized intangible asset under SFAS No. 142,“Goodwill and Other Intangible
Assets”.  The Company is required to adopt FSP 142-3 on January
1, 2009, earlier adoption is prohibited.  The guidance in FSP 142-3
for determining the useful life of a recognized intangible asset shall be
applied prospectively to intangible assets acquired after adoption, and the
disclosure requirements shall be applied prospectively to all intangible assets
recognized as of, and subsequent to, adoption. The Company does not expect
the adoption of FSP No. FAS 142-3 to have a material effect on its consolidated
financial position, results of operations or cash flows.





In May
2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" ("SFAS No. 162").  SFAS No.
162 identifies the sources of accounting principles and the framework for
selecting the principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles (the GAAP hierarchy).  SFAS No.
162 will become effective 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 does not
expect the adoption of SFAS No. 162 to have a material effect on its
consolidated financial position, results of operations or cash
flows.





In May
2008, the FASB issued FSP Accounting Principles Board ("APB") 14-1 "Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement) " ("FSP APB 14-1").  FSP APB 14-1
requires the issuer of certain convertible debt instruments that may be settled
in cash (or other assets) on conversion to separately account for the liability
(debt) and equity (conversion option) components of the instrument in a manner
that reflects the issuer's non-convertible debt borrowing rate.  FSP
APB 14-1 is effective for fiscal years beginning after December 15,
2008 on a retroactive basis.  The Company is currently evaluating the
potential impact, if any, of the adoption of FSP APB 14-1 on its
consolidated financial position, results of operations or cash
flows.





In May
2008, the FASB issued FASB Statement No. 163, “Accounting for Financial
Guarantee Insurance Contracts”, which clarifies how FASB Statement No. 60,
“Accounting and Reporting by Insurance Enterprises”, applies to financial
guarantee insurance contracts issued by insurance enterprises. 
  The standard is effective for financial statements issued for fiscal
years beginning after December 15, 2008, including interim periods in that year.
The Company does not expect the adoption of SFAS 163 to have a material effect
on its consolidated financial statements.





In
June 2008, the FASB issued FSP Emerging Issues Task Force
(EITF) No. 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities.” Under the FSP, unvested share-based payment awards that
contain rights to receive non-forfeitable dividends (whether paid or unpaid) are
participating securities, and should be included in the two-class method of
computing EPS. The FSP is effective for fiscal years beginning after
December 15, 2008, and interim periods within those years. The Company does
not expect the adoption of FSP EITF No. 03-6-1 to have a material effect on
its consolidated financial position, results of operations or cash
flows.





In
October 2008, the FASB issued FSP SFAS No. 157-3, “Determining the
Fair Value of a Financial Asset When the Market for That Asset Is Not Active.”
This position clarifies the application of SFAS No. 157 in a market
that is not active and provides an example to illustrate key considerations in
determining the fair value of a financial asset when the market for that
financial asset is not active. It also reaffirms the notion of fair value as an
exit price as of the measurement date. This position was effective upon
issuance, including prior periods for which financial statements have not been
issued. The adoption had no impact on the Company’s consolidated financial
statements.





In
December 2008, the FASB issued FSP 132(R)-1, Employers’ Disclosures about
Postretirement Benefit Plan Assets, which is effective for fiscal years ending
after December 15, 2009. FSP 132(R)-1 requires disclosures about fair value
measurements of plan assets that would be similar to the disclosures about fair
value measurements required by SFAS 157. The Company is assessing the potential
effect of the adoption of FSP 132(R)-1 on its consolidated financial
statements.





In
December 2008, the FASB issued FSP SFAS 140-4 and FIN 46(R)-8,
Disclosures about Transfers of Financial Assets and Interests in Variable
Interest Entities. The FSP requires extensive additional disclosure by public
entities with continuing involvement in transfers of financial assets to
special-purpose entities and with variable interest entities (VIEs), including
sponsors that have a variable interest in a VIE. This FSP became effective for
the first reporting period ending after December 15, 2008 and did not have
any material impact on the Company's consolidated financial
statements.




F-15





SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 and 2007





NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





In
January 2009, the FASB issued Financial Statement of Position (“FSP”) Issue
No. EITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue
No. 99-20” (“FSP EITF No. 99-20-1”). FSP EITF No. 99-20-1 amends
the impairment guidance in EITF Issue No. 99-20, “Recognition of Interest
Income and Impairment on Purchased Beneficial Interests and Beneficial Interests
that Continue to be Held by a Transferor in Securitized Financial Assets” to
achieve more consistent determination of whether an other-than-temporary
impairment has occurred. The Company adopted FSP EITF No. 99-20-1 and it
did not have a material impact on the consolidated financial
statements.





Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not, or are not believed by
management to, have a material impact on the Company’s present or future
consolidated financial statements.





NOTE
2 - GOING CONCERN MATTERS




The
accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As shown in the accompanying
consolidated financial statements, the Company incurred a net loss of $8,474,010
and $8,747,795 for the years ended December 31, 2008 and 2007, respectively.
Additionally, the Company has negative working capital of $7,261,614 and an
accumulated deficit of $32,549,564 as of December 31, 2008. These factors among
others may indicate that the Company will be unable to continue as a going
concern for a reasonable period of time.





The
Company’s continued existence is dependent upon management’s ability to develop
profitable operations and resolve its liquidity problems. The accompanying
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.




The
Company is actively pursuing additional equity financing through discussions
with investment bankers and private investors. There can be no assurance that
the Company will be successful in its effort to secure additional equity
financing.





NOTE
3 - INVENTORIES





Inventories
are stated at the lower of cost or market determined by the first-in, first-out
(FIFO) method. Components of inventories as of December 31, 2008 and 2007
consist of the following.





2008
            
            
            2007Work
      in Progress
            
            
            103,919
            
            
            
            103,416Raw
      Materials
            
            
            103,122
            
            
            
            88,299$
            207,041
            
            
            $
            191,715





NOTE 4 - NOTE RECEIVABLE





Note
receivable consists of the following:





2008
              
              
              2007Note
      receivable, 7% per annum, secured and due June 10, 2009
              
              $
              250,000
              
              
              $
              —Less:
      allowance for doubtful accounts
              
              
              (250,000
              )
              
              
              -Net
              
              $
              -
              
              
              $
              -





The
Company’s note receivable along with accrued interest is due on June 10, 2009
and can be prepaid at any time without penalty or premium. The note is secured
by the Company’s common stock held by certain shareholders. At December 31,
2008, management determined the collectibility may be impaired and accordingly
recorded an allowance for doubtful accounts with a current period charge to
operations.





F-16




SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 and 2007





NOTE
5 – DEPOSITS AND OTHER CURRENT ASSETS





Deposits
and other current assets are comprised of the following:





2008
              
              
              2007Real
      estate deposits, net of liquidated damages (see below)
              
              $
              194,254
              
              
              $
              -Tax
      receivable
              
              
              176,601
              
              
              
              84,960Other
              
              
              7,476
              
              
              
              -Total
              
              $
              378,331
              
              
              $
              84,960





On August
20, 2008, the Company entered into a contract (the “Contract”) to purchase
certain property, plant and equipment, including all buildings and improvements,
all fixtures and equipment attached to the property and certain equipment for a
purchase price of $4,550,000.  In conjunction with the purchase, the
Company made a wire transfer of a $30,000 non-refundable initial down payment
upon signing of the agreement to an escrow account.  In addition, the
Company made a $425,000 second down payment, which was subject to an
environmental testing result.  The initial closing was scheduled on
September 26, 2008.  The closing date has been adjourned in order to
complete the Phase I environmental assessment and to address any issues
identified.  Subsequently the Company has identified an environmental
condition, which it believes may lead to contamination





The
Company determined not to purchase the property. The Company received refund in
the amount of $194,254 and accounted for the liquidated damages of $260,746 as
loss on settlement of real estate deposits in the Company’s other expenses for
the year ended December 31, 2008.





NOTE
6 - PROPERTY, PLANT AND EQUIPMENT





The
Company's property and equipment at December 31, 2008 and 2007 consist of the
following:




2008
            
            
            2007Land
      and buildings
            
            $
            223,132
            
            
            $
            239,019Furniture
      and fixture
            
            
            78,644
            
            
            
            92,434Machinery,
      plant and equipment
            
            
            551,463
            
            
            
            605,473Total
            
            
            853,239
            
            
            
            936,926Accumulated
      depreciation
            
            
            439,998
            
            
            
            341,896Property
      and equipment
            
            $
            413,241
            
            
            $
            595,030





Property
and equipment are recorded on the basis of cost. For financial statement
purposes, property, plant and equipment are depreciated using the straight-line
method over their estimated useful lives.





Depreciation
and amortization expense was $190,025 and $220,860 for the years ended December
31, 2008 and 2007, respectively.




NOTE
7 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES





Accounts
payable and accrued liabilities at December 31, 2008 and 2007 were as
follows:




2008
              
              
              2007Accounts
      payable
              
              $
              149,324
              
              
              $
              166,814Other
      accrued expenses, including a penalty in the amount of  $720,000
      in connection with liquidating charges as of December 31, 2008 and 2007
      (Note 10)
              
              
              2,068,591
              
              
              
              1,245,785Accrued
      interest, see Note 8 below
              
              
              1,810,200
              
              
              
              1,660,220$
              4,028,115
              
              
              $
              3,072,799




As
described on Note 20 below, the Company, entered into a stock exchange
agreement.  As such, the Company recorded estimated legal and other
related costs of $500,000 as a current period expense included in other accrued
expenses above.





F-17




SOLAR THIN FILMS,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 and 2007





NOTE
8 - NOTES PAYABLE OTHER




A summary
of notes payable other at December 31, 2008 and 2007 consists of the
following:




2008
            
            
            2007Demand
      note payable: interest payable at 10.0 % per annum; in default and
      unsecured
            
            $
            1,500,000
            
            
            $
            1,500,000$
            1,500,000
            
            
            $
            1,500,000




In 1996,
the Company issued an unsecured 8% $1.5 million note to an unrelated party in
connection with the Company's acquisition of a software company. The note was
due and payable on April 30, 1999. The note was governed by the laws of the
State of New York. The New York statute of limitations for seeking to collect on
a note is six years from the maturity date. The creditor has never sought to
collect the note since its maturity date and in or about 2001 orally advised a
representative of the Company that it had "written off the debt." Although the
Company has previously and currently listed the note as a liability on its
balance sheet, it does not believe that it has any further liability under this
note.





NOTE
9- DIVIDENDS PAYABLE





In 2000
and 2001, the Company’s wholly owned subsidiary declared a dividend to its
shareholders. However based on the Company’s limited financial resources it has
been unable to pay it. The shareholders have conceded the deferment of this
dividend until the company financially can afford paying it. At December 31,
2008 and 2007 the outstanding balance was $143,778 and $156,522, respectively.
The underlying liability is in the local currency. Changes in the recorded
amounts are related to the changes in the currency exchange rates





NOTE
10- PRIVATE PLACEMENT OF CONVERTIBLE NOTES AND NOTE PAYABLE





A summary
of convertible notes payable at December 31, 2008 and 2007 are as
follows:





2008
            
            
            2007Convertible
      notes payable (“March 2006”) non-interest bearing; secured and due March
      2009
            
            
            1,250,000
            
            
            
            1,250,000Debt
      Discount, net of accumulated amortization of $1,165,525 and $793,363,
      respectively
            
            
            (84,475
            )
            
            
            (456,637
            )Net
            
            
            1,165,525
            
            
            
            793,363Convertible
      notes payable (“June 2006”), non- interest bearing; secured and due June
      2009; Noteholder has the option to convert unpaid note principal to the
      Company’s common stock at a rate of $1.00 per share
            
            
            1,173,000
            
            
            
            1,971,000Debt
      Discount, net of accumulated amortization of $895,472 and $980,383,
      respectively
            
            
            (277,528
            )
            
            
            (990,617
            )Net
            
            
            895,472
            
            
            
            980,383Note
      payable, non interest bearing, due March 4, 2009
            
            
            500,000
            
            
            
            -Total
            
            
            2,560,997
            
            
            
            1,773,746Less
      Current Maturities
            
            
            (2,560,997
            )
            
            
            ( -
            )Net
            
            $
            -
            
            
            $
            1,773,746








March 2006
Financing





In
connection with the merger and corporate restructure on June 14, 2006 (see Note
1), the Company assumed a financing arrangement dated March 16, 2006,
subsequently amended on May 18, 2006, with several investors (the "March
Investors") for the sale of (i) $1,250,000 in notes (the "Notes"), (ii) 625,000
shares of common stock of the Company (the "Shares") (Note 11) and (iii) common
stock purchase warrants to purchase 625,000 shares of common stock at $1.00
price per share for a period of five years (the "Warrants"). The warrants and
warrant agreement provide for certain anti-dilution rights through December 31,
2007 in the event of a reverse split.





F-18




SOLAR THIN FILMS,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 and 2007





NOTE
10- PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)





March 2006 Financing
(continued)





The
March 2006 Notes are interest free and mature on the earlier of (i) March 16,
2009 or (ii) the Company closing on a financing in the aggregate amount of
$12,000,000. The Company granted the March 2006 Investors piggyback registration
rights with respect to the March 2006 Shares and the shares of common stock
underlying the warrants. Further, Robert M. Rubin, CEO and a Director of the
Company, has personally guaranteed payment of the March 2006 Notes.





The March
2006 Investors have contractually agreed to restrict their ability to convert
the March 2006 Notes and exercise the March 2006 Warrants and receive shares of
our common stock such that the number of shares of the Company common stock held
by them and their affiliates after such conversion does not exceed 4.99% of the
Company’s then issued and outstanding shares of common stock.





The sale
of the Notes was completed on March 16, 2006. As of the date hereof, the Company
is obligated on $1,250,000 in face amount of Notes issued to the March
investors.





In
accordance with Emerging
Issues Task Force Issue 98-5, “Accounting For Convertible Securities With a
Beneficial Conversion Feature or Contingently Adjustable Conversion Ratios”
(EITF 98-5), the Company allocated, on a relative fair value basis, the
net proceeds amongst the common stock, warrants and the convertible notes issued
to the investors. The accounting predecessor recognized and measured $519,491 of
the proceeds, which equals to the intrinsic value of the imbedded beneficial
conversion feature, to additional paid in capital and a discount against the
March 2006 Notes.





In
accordance with Emerging
Issues Task Force Issue 00-27, “Application of Issue No. 98-5 to Certain
Convertible Instruments” (“EITF - 0027”), the Company recognized the
relative value attributable to the warrants in the amount of $231,797 to
additional paid in capital and a discount against the March 2006 Notes. The
Company valued the warrants in accordance with EITF 00-27 using the
Black-Scholes pricing model and the following assumptions: (1) dividend yield of
0%; 2) expected volatility of 93.03%, (3) risk-free interest rate of 5.08% to
5.10%, and (4) expected life of 5 years. The Company also recognized the
relative value attributable to the common stock issued in the amount of $498,712
to additional paid in capital and a discount against the March 2006 Notes. Total
debt discount to the March 2006 Notes amounted $1,250,000. The note discount is
being amortized over the maturity period of the Notes, being thirty-four (34)
months.




The
Company amortized the Convertible Notes’ debt discount and recorded non-cash
interest expense of $372,163 and $442,103, respectively, during the years ended
December 31, 2008 and 2007, respectively.





June 2006
Financing




In
connection with the merger and corporate restructure on June 14, 2006 (see Note
1), the Company entered into a financing arrangement with several investors (the
“June 2006 Investors”) pursuant to which it sold various securities in
consideration of an aggregate purchase price of $6,000,000 consisting of the
following securities:





·
            $
      6,000,000 in senior secured convertible notes (“June 2006
      Notes”);





·
            3,000,000
      (Note 8) shares of the Company’s common
stock;





·
            Series
      A Common Stock Purchase Warrants to purchase 3,000,000 shares of common
      stock at $2.00 per share for a period of three years (“Series A
      Warrants”);





·
            Series
      B Common Stock Purchase Warrants to purchase 3,000,000 shares of common
      stock at $2.20 per share for a period of four years (“Series B
      Warrants”);





·
            Series
      C Common Stock Purchase Warrants to purchase 3,000,000 shares of common
      stock at $3.00 per share for a period of three years (“Series C
      Warrants”); and




·
            Series
      D Common Stock Purchase Warrants to purchase 3,000,000 shares of common
      stock at $3.30 per share for a period of four years (“Series D
      Warrants”).





F-19




SOLAR THIN FILMS,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 and 2007





NOTE
10- PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)





June 2006 Financing
(continued)





The
warrants and warrant agreement provide for certain anti-dilution rights through
December 31, 2007 in the event of a reverse stock split.





The
Series B Warrants and the Series D Warrants are exercisable only following the
exercise of the Series A Warrants and the Series C Warrants, respectively, on a
share by share basis.




The June
2006 Notes are interest free and mature in June 2009 and are convertible into
the Company’s common stock, at the June 2006 Investors’ option, at a conversion
price equal to $1.00 per share (Note 11). The Company granted the June 2006
Investors a first priority security interest in all of its assets subject only
to the secured convertible notes in the amount of $525,000 previously issued in
September 2005. In addition, the Company pledged one hundred percent (100%) of
the shares held its majority owned subsidiary , Kraft Rt, as collateral to the
June 2006 Investors.





The
Company granted the June 2006 Investors registration rights with respect to the
June 2006 Shares, and the shares of common stock underlying the June 2006 Notes,
Series A Warrants, Series B Warrants, the Series C Warrants and Series D
Warrants. The Company is required to file a registration statement within 30
days from closing and have such registration statement declared effective within
90 days from closing if the registration statement is not reviewed or, in the
event that the registration statement is reviewed, within 120 days from closing.
If the Company fails to have the registration statement filed or declared
effective by the required dates, it will be obligated to pay a liquidated
damages equal to 2% of the aggregate financing to each investor upon any such
registration failure and for each thirty days that such registration failure
continues in cash.





The June
2006 Investors have contractually agreed to restrict their ability to convert
the June 2006 Notes, Series A Warrants, Series B Warrants, Series C Warrants and
Series D Warrants and receive shares of the Company’s common stock such that the
number of shares of the Company’s common stock held by them and their affiliates
after such conversion does not exceed 4.99% of the Company’s then issued and
outstanding shares of common stock.





In
accordance with Emerging
Issues Task Force Issue 98-5, “Accounting For Convertible Securities With a
Beneficial Conversion Feature or Contingently Adjustable Conversion Ratios”
(EITF 98-5), the Company allocated, on a relative fair value basis, the
net proceeds amongst the common stock and Convertible Notes issued to the
investors. As of December 31, 2006, the Company recognized $2,777,778 of the
proceeds, which is equal to the intrinsic value of the imbedded beneficial
conversion feature, to additional paid-in capital and a discount against the
Convertible Note. The debt discount attributed to the beneficial conversion
feature is amortized over the Convertible Notes’ maturity period, being three
(3) years, as interest expense. In accordance with Emerging Issues Task Force Issue
00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments”(“EITF - 0027”), the Company also recognized the relative value
attributable to the common stock issued in the amount of $3,222,222 to
additional paid in capital and a discount against the June 2006 Notes. Total
debt discount to the June 2006 Notes amounted $6,000,000. The note discount is
amortized over the maturity period of the notes, being (3) years.





In the
year ended December 31, 2007, certain June 2006 investors converted $4,029,000
of convertible notes to 4,029,000 shares of the Company’s common
stock.





In the
year ended December 31, 2008, certain June 2006 investors converted $798,000 of
convertible notes to 798,000 shares of the Company’s common stock.





The
Company amortized and wrote off the Convertible Notes’ debt discount and
recorded a non-cash interest expense of $1,153,980 and $3,913,493 for the years
ended December 31, 2008 and 2007, respectively.




F-20




SOLAR THIN FILMS,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 and 2007





NOTE
10- PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)





June 2006 Financing
(continued)





In
conjunction with raising capital through the issuance of $6,000,000 Notes, the
Company has issued warrants that have registration rights for the underlying
shares.  As the contract must be settled by the delivery of registered
shares and the delivery of the registered shares is not controlled by the
Company, pursuant to EITF 00-19, “Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”, the
warrants were recorded as a derivative liability and valued at fair market value
until the Company meets the criteria under EITF 00-19 for permanent equity. The
net value of the warrants at the date of issuance was recorded as a warrant
liability on the balance sheet in the amount of $10,821,900 and charged to
operations as interest expense.  Upon the registration statement being
declared effective, the fair value of the warrant on that date will be
reclassified to equity. The Company initially valued the warrants using the
Black-Scholes pricing model with the following assumptions: (1) dividend yield
of 0%; (2) expected volatility of 93.03%, (3) risk-free interest rate of 5.08%
to 5.10%, and (4) expected life of 5 years.





In
connection with the merger and corporate restructure on June 14, 2006 (see Note
1), the Company assumed as liability the fair value of $10,821,900 representing
the warrants issued and outstanding as described above. At December 31, 2006,
the Company revalued the warrants using the Black-Scholes option pricing model
with the following assumptions: (1) dividend yield of 0%; (2) expected
volatility of 51.21%, (3) risk-free interest rate of 4.62 to 4.82% to 5.10%, and
(4) expected life of 2.45 to 3.44 years. And 5) a deemed fair value of common
stock of $0.99. The decrease of $9,356,400 in the fair value of the warrants at
December 31, 2006 has been recorded as a gain on revaluation of warrant
liability for the year ended December 31, 2006.  Warrant liability at
December 31, 2006 amounted to $1,465,500. On February 13, 2007, upon the
registration statement being declared effective, the assumed liability of
$10,821,900 was adjusted to additional paid in capital.





During
the year ended December 31, 2008, the Company issued a $500,000 non interest
bearing note, which was due on March 4, 2009 and is currently in
default.




NOTE
11- CAPITAL STOCK





Preferred
Stock





The
Company has authorized 2,700,000 total shares of preferred stock.





The Board
of Directors designated 1,200,000 shares as Series A 12.5% cumulative preferred
stock (“Series A Preferred Stock”), with a par value of $0.01 per share. The
preferred stock is entitled to preference upon liquidation of $0.63 per share
for any unconverted shares. As of December 31, 2008 and 2007, there were no
shares of Series A Preferred Stock issued and outstanding.





The Board
of Directors has designated a total of 1,500,000 shares of Series B Preferred
Stock:





·
            The
      Board of Directors has designated 1,000,000 shares of its preferred stock
      as Series B-1 Preferred Stock (“B-1 Preferred”). Each share of Series B-1
      Preferred Stock is entitled to preference upon liquidation of $2.19 per
      share for any unconverted shares. Each shares of the Series B-1 Preferred
      shall be entitled to one (1) vote on all matters submitted to the
      stockholders for a vote together with the holders of the Common Stock as a
      single class. Seventeen (17) Series B-1 Preferred shares may be converted
      to one (1) share of the Company’s common stock. As of December 31, 2008
      and 2007 there were 228,652 shares of Series B-1 Preferred issued and
      outstanding.





·
            The
      Board of Directors has designated 232,500 shares of its preferred stock as
      Series B-3 Preferred Stock (“B-3 Preferred”). Each share of the Series B-3
      Preferred shall be entitled to thirty two (32) votes on all matters
      submitted to the stockholders for a vote together with the holders of the
      Common Stock as a single class. Each Series B-3 Preferred share may be
      converted to thirty two (32) shares of the Company’s common stock. As
      of December 31, 2008 and 2007, there were 47,518 shares of Series B-3
      Preferred issued and outstanding.





·
            In
      June 2006 the Board of Directors designated 100,000 shares of its
      preferred stock as Series B-4 Preferred Stock (“B-4
      Preferred”).  Upon the filing of an amendment which increased
      the number of authorized common shares such that there was an adequate
      amount of authorized common stock per issuance upon conversion of the
      Series B-4 Preferred, the Series B-4 Preferred shares automatically
      converted to shares of the Company's common stock at a rate of three
      hundred fifty (350) common shares for each share of Series B-4
      Preferred. During the year ended December 31, 2007, 95,500 shares of
      Series B-4 Preferred were converted into 33,425,000 shares of the
      Company’s common stock. As of December 31, 2008 and 2007, there were no
      shares of Series B-4 Preferred issued and
  outstanding.




F-21




SOLAR THIN FILMS,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 and 2007




NOTE
11- CAPITAL STOCK (continued)





Common
Stock





On
February 9, 2007, the Company effected a one-for-one sixth (1 to 1.6) reverse
stock split of it authorized and outstanding shares of common stock, $0.01 par
value (see Note 15). All references in the financial statements and the notes to
financial statements, number of shares, and share amounts have been
retroactively restated to reflect the reverse split. The Company has restated
from 26,031,355 to 16,269,597 shares of common stock issued and outstanding as
of December 31, 2006 to reflect the reverse split.





On
February 9, 2007, the Company is authorized to issue 150,000,000 shares of
common stock with a par value of $0.01 per share (see Note 15). As of December
31, 2008 and 2007, there were 57,810,601 and 57,012,601 shares of common stock
issued and outstanding, respectively.





In
February 2007, the Company amended its Certificate of Incorporation increasing
its authorized shares of common stock to issue 150,000,000 shares of common
stock with a par value of $0.01 per share.





In March
2007, the Company issued 8,925,000 shares of its Common stock in exchange for
25,500 shares of Series B-4 Preferred stock.





In April
2007, the Company issued 18,200,000 shares of its Common stock in exchange for
52,000 shares of Series B-4 Preferred stock.





In June
2007, the Company issued 6,300,000 shares of its Common stock in exchange for
18,000 shares of Series B-4 Preferred stock.





In June
2007, the Company issued 400,000 shares of its Common stock for services valued
at $192,000. The value of common stock issued for services was based upon the
value of the services rendered, which did not differ materially from the fair
value of the Company's common stock during the period the services were
rendered.





In June
2007, the Company issued 1,312,500 shares of its Common stock in exchange for
convertible debentures of $525,000.





In July
2007, the Company issued 1,575,000 shares of its Common stock in exchange for
the outstanding minority interest in Kraft.





In August
2007, the Company issued 100,000 shares of its Common stock in exchange for
convertible debentures of $100,000.





In
September 2007, the Company issued 16,000 shares of its Common stock in exchange
for convertible debentures of $16,000.





In
October 2007, the Company issued 2,467,600 shares of its Common stock in
exchange for convertible debentures of $2,467,600.





In November 2007, the Company issued
1,096,400 shares of its Common stock in exchange for convertible debentures of
$1,096,400.





In
December 2007, the Company issued 349,000 shares of its Common stock in exchange
for convertible debentures of $349,000.





In January 2008, the Company issued
400,000 shares of its Common stock in exchange for convertible debentures of
$400,000.





In March
2008, the Company issued 195,000 shares of its Common stock in exchange for
convertible debentures of $195,000.





In April
2008, the Company issued 1,000 shares of its Common stock in exchange for
convertible debentures of $1,000.





In June
2008, the Company issued 175,000 shares of its Common stock in exchange for
convertible debentures of $175,000.





In
September 2008, the Company issued 23,000 shares of its Common stock in exchange
for convertible debentures of $23,000.




In
October 2008, the Company issued 4,000 shares of its Common Stock in exchange
for convertible debentures of $4,000.




F-22




SOLAR THIN FILMS,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 and 2007





NOTE
12- RELATED PARTY NOTES PAYABLE AND TRANSACTIONS




All of the sales during 2007 and a significant majority
of sales during 2008 have been Equipment Sales rather than Factory Sales. In
some cases the equipment was supplied directly to an end user, as in the case of
EPV Solar; in other cases the equipment was supplied to a general contractor who
subsequently delivered a complete factory, as in the case of equipment supplied
in collaboration with RESI and Terrasolar on behalf of CG Solar (previously Blue
Star Terra Corporation). In fact during late 2007 the main strategic partner for
the Company on such sales had been Renewable Energy Solutions, Inc.
(“RESI”). Prior to RESI assuming the role of
general contractor on the CG Solar project the primary partner was Terra
Solar Global, Inc. (“Terra Solar”).
 
 Terra
Solar, Inc. (“TSI”) owns approximately 49% of the outstanding securities of
Terra Solar. Zoltan Kiss, a shareholder and former director of the Company,
iswas also a shareholder of TSI. Zoltan Kiss, a
shareholder and former director of the Company, is also the Chairman and
majority owner of RESI. (Note:Mr. Kiss resigned as Chairman and a Director of the
Company effective December 20,2007).
 
 During 2007 the Company supplied equipment for
the Blue Star Terra Corporation factoryin China in collaboration with both Terrasolar and RESI.
The Blue Star contract was originally held by Terra Solar and in April 2007 RESI assumed rights and obligations under the contract from
Terra Solar. Revenues under the contract were $2,751,836 for the year ended
December 31, 2007, which were invoiced to
Terra Solar and later assumed by RESI.
 
 An additional $369,108 was invoiced to RESI for a
separate project. No revenue wasgenerated infrom either party during 2008.
 
 The
Company currently has related party trade receivables of $1,197,548 from RESI as of December 31,2008, from the Blue Star Contract.and another $134,315 from another project. Note: RESI
assumed the trade payable from Terrasolar upon assumption of the Blue Star
contract in April 2007 and made several payments during 2007. While the
Company’s liability is contractually limited to the delivery of equipment and
not to turnkey manufacturing performance, there is a practical risk of non-payment until the
facility has successfully passed an acceptance test - a RESI liability, and until payment is made in full by
Blue Star. In fact the Company has decided to reserve the entire remaining
amount of the receivable of $1,331,863 less $500,000.
 
 The Company has since decided to focus its sales effort
on Factory Sales.
 
 The
Company signed a cooperative Research and Development Contract, and a Marketing
and Manufacturing Facility Turn On Function Contract with RESI on December 20,
2006 and January 30, 2007, respectively. Zoltan Kiss, the Company’s former
Chairman of the Board, is Chairman and majority shareholder of RESI. Payments
made to RESI under the Research and Development Contract were $120,000 and
$360,000 for the years ended December 31, 2008 and 2007, respectively. No
payments have been made to RESI under the Marketing and Manufacturing Facility
Turn On Function Contract for the year
ended December 31, 2008.
 
 During 2008 the Company also entered into a Settlement
Agreement with Zoltan Kiss, replacing both the Research and Development Contract
and the Marketing Contract.





A summary
of the related party sales and cost of sales are as follows:





Years
ended December 31, 2008 and 2007:





2008
            
            
            2007REVENUES:Third
      party revenue
            
            $
            3,436,779
            
            
            $
            2,658,634Related
      party revenue
            
            
            -
            
            
            
            3,120,944TOTAL
      REVENUES
            
            $
            3,436,779
            
            
            $
            5,779,578COST
      OF SALES:Third
      party cost of sales
            
            $
            2,356,255
            
            
            $
            4,680,633Related
      party cost of sales
            
            
            -
            
            
            
            99,329TOTAL
      COST OF SALES
            
            $
            2,356,255
            
            
            $
            4,779,962





Related
party revenues generated from RESI were $0 and $369,108 for the years ended
December 31, 2008 and 2007, respectively.  Related party revenues
generated from Terra Solar were $0 and $2,751,836 for the years ended December
31, 2008 and 2007, respectively.
 
 Related
party cost of sales incurred from RESI were $0 and $99,329 for the years ended
December 31, 2008 and 2007, respectively.
 
 The
Company has a dividend payment obligation due to the former shareholders valued
at $143,778 and $156,522 as of December 31, 2008 and 2007,
respectively.


F-23





SOLAR THIN FILMS,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 and 2007




NOTE
13 - MINORITY INTEREST AND PUT LIABILITY





Formation of
Subsidiary





On
October 18, 2007, the Company organized a wholly owned subsidiary, Solar Thin
Power, Inc. under the laws of the state of Nevada. On October 24, 2007, Solar
Thin Power, Inc. issued 50,000,000 shares of its common stock in exchange for
services rendered to the Company and 14,500,000 common shares for services to be
performed.  On December 19, 2007 and January 23, 2008, Solar Thin
Power, Inc. completed the sale of 7,070,000 shares of its common stock at a net
sales price of $0.4948 per share.  In conjunction with the sale of the
common stock of Solar Thin Power, Inc., the Company issued 3,685,000 warrants to
purchase shares in the Company’s common stock at $3.30 per share for five
years.





For the
period from October 18, 2007 (date of incorporation) to December 31, 2008, Solar
Thin Power, Inc. had total revenue of $0 , losses of $240,881 and $57,250 for
periods ended December 31, 2008 and 2007, respectively and a total accumulated
deficit  of $298,131 at December 31, 2008.  As of December
31, 2008, the Company owned a 65.12% interest in Solar Thin Power, Inc. as
compared to 70.15% at December 31, 2007. Due to this majority interest, our
consolidated financial statements include the balance sheet, results of
operations and cash flows of Solar Thin Power, Inc. net of intercompany charges.
We therefore eliminated 34.88% of financial results that pertain to the minority
interest; the eliminated amount was reported as a separate line on our
consolidated statements of operations and balance sheets.





The
following table summarizes the changes in Minority Interest from inception to
December 31, 2008:





Minority
      interest at inception of Solar Thin Power
              
              $
              1,016,585Period
      loss applicable to minority interest for 2007
              
              
              (17,089
              )Balance
      as of December 31, 2007
              
              
              999,496Period
      loss applicable to minority interest for 2008
              
              
              (67,904
              )Dilution
      of ownership interest from 70.15% ownership to 65.12% through issuance of
      Solar Power common stock by Company for services rendered
              
              
              214,996Balance
      as of December 31, 2008
              
              $
              1,146,588





Put
Liability





Additionally,
in conjunction with the sale of the common stock of Solar Thin Power, Inc. at
December 19, 2007; the Company agreed to complete a Registration Statement with
the Securities Exchange Commission and use its best efforts to have the
Registration Statement declared effective within eighteen months (“Effective Date”) of
closing.  In the event that Solar Thin Power, Inc. is not a public
reporting company by the Effective Date, the Company has agreed to re-acquire,
at the option of the shareholders, half of the common stock issued at the
aggregate purchase price (“Put
Option”).  The Company follows the SFAS No. 5, “Accounting for
Contingencies” in accounting for this put liability as of December 31, 2008,
which provides that loss contingencies should be recognized as liabilities if
they are probable and reasonably estimable.  At December 31, 2008, the
Company determined that the put obligation is not probable that the event will
occur.





NOTE
14- ECONOMIC DEPENDENCY





During
the year ended December 31, 2008 approximately $3,289,517 or 96% of total
revenues were derived from one customer; for the year ended December 31, 2007
approximately $5,779,578 or 100% were derived from three customers.




F-24





SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 and 2007





NOTE
15 – STOCK OPTIONS AND WARRANTS





Warrants




The
following table summarizes the changes in warrants outstanding and related
prices for the shares of the Company’s common stock at December 31,
2008:




Exercise
      Price
                      
                      
                      Number
                        Outstanding
                      
                      
                      Warrants
      Outstanding Weighted Average Remaining Contractual Life
      (years)
                      
                      
                      Weighted
      Average Exercise price
                      
                      
                      Number
                        Exercisable
                      
                      
                      Warrants
      Exercisable Weighted Average Exercise Price$
                      1.00
                      
                      
                      
                      333,334
                      
                      
                      
                      1.47
                      
                      
                      $
                      1.00
                      
                      
                      
                      333,334
                      
                      
                      $
                      1.001.20
                      
                      
                      
                      625,000
                      
                      
                      
                      0.21
                      
                      
                      
                      1.20
                      
                      
                      
                      625,000
                      
                      
                      
                      1.202.00
                      
                      
                      
                      3,000,000
                      
                      
                      
                      0.46
                      
                      
                      
                      2.00
                      
                      
                      
                      3,000,000
                      
                      
                      
                      2.002.20
                      
                      
                      
                      3,000,000
                      
                      
                      
                      1.46
                      
                      
                      
                      2.20
                      
                      
                      
                      —
                      
                      
                      
                      2.203.00
                      
                      
                      
                      3,000,000
                      
                      
                      
                      0.46
                      
                      
                      
                      3.00
                      
                      
                      
                      3,000,000
                      
                      
                      
                      3.003.30
                      
                      
                      
                      6,685,000
                      
                      
                      
                      2.81
                      
                      
                      
                      3.30
                      
                      
                      
                      3,685,000
                      
                      
                      
                      3.30Total
                      
                      
                      
                      16,643,334
                      
                      
                      
                      1.59
                      
                      
                      $
                      2.69
                      
                      
                      
                      10,643,334
                      
                      
                      $
                      2.07




Transactions
involving the Company’s warrant issuance are summarized as follows:




Number
      of
              Shares
            
            Weighted
      Average
              Price
      Per ShareOutstanding
      at December 31, 2006
            
            12,625,000
            
            $
            2.56Granted
            
            3,718,334
            
            
            3.10Exercised
            
            —
            
            
            —Canceled
      or expired
            
            —
            
            
            —Outstanding
      at December 31, 2007
            
            16,343,334
            
            
            2.68Granted
            
            300,000
            
            
            3.30Exercised
            
            —
            
            
            —Canceled
      or expired
            
            —
            
            
            —Outstanding
      at December 31, 2008
            
            16,643,334
            
            $
            2.69




The
Company granted 333,334 warrants in connection with the conversion of debentures
during the year ended December 31, 2007. The warrants are exercisable until
three years after the date of issuance at a purchase price of $1.00 per share.
The warrants were valued using the “Black-Scholes” option pricing method with
the following assumptions: dividend yield: $-0-; volatility: 82.53%; risk free
rate: 4.98%. The fair value of the warrants of $61,767 was charged to the
Company’s operating results during the year ended December 31,
2007.





In
conjunction with the sale of the Company’s majority owned subsidiary, Solar Thin
Power, Inc., the Company issued 300.000 and 3,385,000
warrants during the year ended December 31, 2008 and 2007, respectively to
purchase the Company’s common stock at $3.30 per share exercisable until five
years from the date of issuance. (see Note 13 above)




F-25




SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 and 2007





NOTE
15 – STOCK OPTIONS AND WARRANTS




Employee
options
 
 The
following table summarizes the changes in options outstanding and the related
prices for the shares of the Company's common stock issued to employees and
directors of the Company at December 31, 2008:


Options
      Outstanding
                        
                        
                        
                        Options
      ExercisableExercise
      Prices
                        
                        Number
                          Outstanding
                        
                        Weighted
      Average
                          Remaining
                          Contractual
      Life (Years)
                        
                        Weighted
      Average
                          Exercise
      Price
                        
                        Number
                          Exercisable
                        
                        Weighted
      Average
                          Exercise
      Price$0.42
                        
                        
                        500,000
                        
                        4.82
                        
                        $
                        0.42
                        
                        27,778
                        
                        $
                        0.42$0.533
                        
                        
                        3,000,000
                        
                        8.47
                        
                        $
                        0.533
                        
                        2,383,561
                        
                        $
                        0.533$0.75
                        
                        
                        630,000
                        
                        9.22
                        
                        $
                        0.75
                        
                        280,000
                        
                        $
                        0.75$0.80
                        
                        
                        600,000
                        
                        9.29
                        
                        $
                        0.80
                        
                        —
                        
                        $
                        0.80$2.07
                        
                        
                        15,625
                        
                        0.95
                        
                        $
                        2.07
                        
                        15,625
                        
                        $
                        2.07Total
                        
                        
                        4,745,625
                        
                        8.26
                        
                        $
                        0.59
                        
                        2,706,964
                        
                        $
                        0.56





Transactions
involving stock options issued to employees are summarized as
follows:




Weighted
      AverageNumber
      of
            
            
            PriceShares
            
            
            Per
      ShareOutstanding
      at December 31, 2006:
            
            
            1,890,625
            
            
            $
            2.18Granted
            
            
            3,000,000
            
            
            $
            0.533Exercised
            
            
            —
            
            
            
            —Canceled
      or expired
            
            
            (1,875,000
            )
            
            
            (2.18
            )Outstanding
      at December 31, 2007:
            
            
            3,015,625
            
            
            $
            0.55Granted
            
            
            1,770,000
            
            
            $
            0.66Exercised
            
            
            —
            
            
            
            —Canceled
      or expired
            
            
            (40,000
            )
            
            
            —Outstanding
      at December 31, 2008:
            
            
            4,745,625
            
            
            $
            0.59





During
the year ended December 31, 2007, the Company granted 3,000,000 stock options to
an officer and employee with an exercise price of $0.533 per share expiring ten
years from issuance and vesting on a pro rata basis over two years. The fair
value of the vested portion (determined as described below) of $609,916 and
$356,618 was charged to operating results for the years ended December 31, 2008
and 2007, respectively.





The
weighted-average fair value of stock options granted to an officer and employee
during the year ended December 31, 2007 and the weighted-average significant
assumptions used to determine those fair values, using a Black-Scholes option
pricing model are as follows:





Significant
      assumptions (weighted-average):Risk-free
      interest rate at grant date
            
            
            5.14
            %Expected
      stock price volatility
            
            
            82.53
            %Expected
      dividend payout
            
            
            —Expected
      option life-years (a)
            
            
            10





(a) The
expected option life is based on contractual expiration dates.





During
the year ended December 31, 2008, the Company granted an aggregate of 1,730,000
stock options (net of cancellations, see stock option table per above) to
officers and employees with an exercise prices from $0.42 to $0.80 per share
expiring five to ten years from issuance with cliff vesting or graded vesting
over eighteen to thirty six months. Compensation cost is recognized over the
requisite service period in a manner consistent with the option vesting
provisions.  Compensation expense in the amount of $475,100 was
charged to operating results in connection with these options grants for the
year ended December 31, 2008.




F-26




SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 and 2007





NOTE
15 – STOCK OPTIONS AND WARRANTS





Employee options
(continued)





The
weighted-average fair value of stock options granted to officers and employees
during the year ended December 31, 2008 and the weighted-average significant
assumptions used to determine those fair values, using a Black-Scholes option
pricing model are as follows:




Significant
      assumptions (weighted-average):Risk-free
      interest rate at grant date
            
            
            2.67%
      to 3.75
            %Expected
      stock price volatility
            
            
            92.20%
      to 94.93
            %Expected
      dividend payout
            
            
            —Expected
      option life-years (a)
            
            
            5
      to 10





(a) The
expected option life is based on contractual expiration dates.





NOTE
16 – INCOME TAXES





The
Company has adopted SFAS No. 109 “Accounting for Income Taxes” which requires
the recognition of deferred tax liabilities and assets for the expected future
tax consequences of events that have been included in the financial statement or
tax returns. Under this method, deferred tax liabilities and assets are
determined based on the difference between financial statements and tax bases of
assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse. Temporary differences between taxable
income reported for financial reporting purposes and income tax purposes are
insignificant.





In June
2006, the FASB issued FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109”
("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, treatment of interest and penalties, and
disclosure of such positions. Effective January 1, 2007, the Company
adopted the provisions of FIN 48, as required. As a result of implementing FIN
48, there has been no adjustment to the Company’s financial statements and the
adoption of FIN 48 did not have a material effect on the Company’s consolidated
financial statements for the years ended December 31, 2008 and
2007.





At
December 31, 2008, the Company has available for federal income tax purposes a
net operating loss carryforward of approximately $32,500,000,  which
starts to expire in the year 2023 through the year 2028, that may be used to
offset future taxable income. The Company has provided a valuation reserve
against the full amount of the net operating loss benefit, since in the opinion
of management based upon the earnings history of the Company; it is more likely
than not that the benefits will not be realized. Due to significant changes in
the Company's ownership, the future use of its existing net operating losses may
be limited. Components of deferred tax assets as of December 31, 2008 are as
follows:





Deferred
      tax assets – non current:Net
      operating loss carryforward
            
            $
            11,375,000Valuation
      allowance
            
            
            (11,375,000
            )Net
      deferred tax asset
            
            $
            —





For the
years ended December 31, 2008 and 2007, the Company incurred losses once
significant tax adjusting items are considered.





An income
tax provision for the years ended December 31, 2008 and 2007 consists of the
following:





2008
            
            
            2007Provision
      for income taxes
            
            $
            -0-
            
            
            $
            -0-





The
Company paid local filing fees which are not deemed to be income taxes and have
been included in SG&A expenses for the years ended December 31, 2008 and
2007.




F-27




SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 and 2007





NOTE
17 - COMMITMENTS AND CONTINGENCIES





Lease
agreement





In
November 2005, the Company entered into a three year fixed term lease agreement
for our corporate offices and facilities in Budapest, Hungary at a rate ranging
from $4,543 to $15,433 per month as the lease has provisions for additional
space for the period calendar year of 2006 and beyond. The lease agreement
provides for moderate increases in rent after the first year in accordance with
the inflationary index published by the Central Statistical Office. In November
2007, the terms of the lease agreement were modified effectively increasing the
monthly rent to $20,800 per month starting on January 1, 2008 for the next three
years through December 31, 2010. The minimum future cash flow for the leases at
December 31, 2008 is as follows:





Amount:Years
      ended:December
      31, 2009
            
            $
            249,600December
      31, 2010
            
            $
            249,600Total
            
            $
            499,200





Litigation





New York Medical, Inc. and Redwood
Investment Associates, L.P. vs. American United Global, Inc., et al. (Supreme
Court, New York State, New York County). In this suit, filed on December
12, 2003, plaintiffs seek a declaration that a series of transactions by which
the Company allegedly acquired Lifetime Healthcare Services, Inc. ("Lifetime")
and Lifetime acquired an interest in NY Medical from Redwood (collectively
"Transactions") were properly rescinded or, alternatively, that because the
Transactions were induced by fraudulent conduct of our company and others, that
the Transactions should be judicially rescinded. In addition to the requests for
equitable relief, plaintiffs also seek monitory damages in excess of $5 million
and exemplary damages in the amount of $15 million.





Currently,
the suit has not proceeded past the filing and service of the complaint. The
Company has obtained an open-ended extension of time in which to answer and/or
move with regard to the complaint. The Company is attempting to resolve the
matter amicably. However, in the event litigation proceeds, it will be
aggressively defended. Management believes the ultimate outcome of this matter
will not have a material adverse effect on the Company’s consolidated financial
position, results of operations or liquidity.




From time
to time, the Company is a party to litigation or other legal proceedings that
the Company considers to be a part of the ordinary course of its business. The
Company is not involved currently in legal proceedings that could reasonably be
expected to have a material adverse effect on its business, prospects,
consolidated financial condition or results of operations. The Company may
become involved in material legal proceedings in the future.




Contingent
Obligation





The
Company remains contingently liable for certain capital lease obligations
assumed by EGLOBE, Inc. ("EGLOBE") as part of the Connectsoft Communications
Corp. asset sale which was consummated in June 1999. The lessor filed for
bankruptcy in 2000 and the leases were acquired by another leasing organization
which subsequently also filed for bankruptcy in 2001. In addition, EGLOBE filed
for bankruptcy in 2001. The Company has been unable to obtain any further
information about the parties but believes that in the normal course of the
proceedings that another company most likely acquired the assets and related
leases and that a mutually acceptable financial arrangement was reached to
accomplish such a transfer.





To date,
the Company has not been contacted and has not been notified of any delinquency
in payments due under these leases. The original leases were entered into during
early to mid 1997 each of which was for a five-year term. Extensions of an
additional 20 months were negotiated with the original lessor in 1998 and 1999
moving the ending date to approximately mid 2004. The balance due under the
leases in June 1999 upon transfer and sale to EGLOBE was approximately
$2,800,000 including accrued interest and the monthly payments were
approximately $55,000. The balance that is currently due under the leases is
unknown and there would most likely have been negotiated reductions of amounts
due during the bankruptcy proceedings.





F-28




SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 and 2007





NOTE
17 - COMMITMENTS AND CONTINGENCIES (continued)





Product Warranty
Obligation





The
Company provides for estimated costs to fulfill customer warranty obligations
upon recognition of the related revenue in accordance with the FASB
Interpretation No. 45, “Guarantors Accounting and Disclosure Requirements for
Guarantees.” The range for the warranty coverage for the Company’s products is
up to 18 to 24 months. The Company estimates the anticipated future costs of
repairs under such warranties based on historical experience and any known
specific product information. These estimates are reevaluated periodically by
management and based on current information, are adjusted accordingly. The
Company’s determination of the warranty obligation is based on estimates and as
such, actual product failure rates may differ significantly from previous
expectations. Accrued provision for product warranty was approximately $59,930
and $95,000 as of December 31, 2008 and December 31, 2007,
respectively.





Employment and Consulting
Agreements





The
Company has consulting agreements with its key officers. In addition to
compensation and benefit provisions, the agreements include non-disclosure and
confidentiality provisions for the protection of the Company's proprietary
information.




In
connection with the merger with Kraft, the Company entered into consulting
agreements with Zoltan Kiss and Bob Rubin pursuant to which each will receive
annual compensation of $160,000 per annum and major medical benefits in
consideration for services performed on behalf of the Company. Each of these
agreements had a term of three years. The agreement with Mr. Kiss was terminated
as part of the agreement with Mr. Kiss as further described below. Mr. Rubin’s
agreement was modified upon his appointment as the Company’s Chief Financial
Officer in August 2007.




The
Company has consulting agreements with outside contractors to provide marketing
and financial advisory services. The Agreements are generally for a term of 12
months from the inception and renewable automatically from year to year unless
either the company or consultant terminates such engagement by written
notice.





Agreement with Mr. Kiss and
other Stockholders.





On August
12, 2008, the Company entered into a stock purchase agreement (the “Purchase Agreement”)
with Zoltan Kiss (“Z.
Kiss”), Gregory Joseph Kiss (“G. Kiss”), Maria
Gabriella Kiss (“M.
Kiss”), and Steven H. Gifis (“Gifis”). Under the
terms of the Purchase Agreement, the Company has agreed to arrange for the sale,
and each of Z. Kiss, G. Kiss and M. Kiss (the “Selling
Stockholders”) have agreed to sell, an aggregate of 18.0 million shares
of common stock of the Company owned by the Selling Stockholders. The purchase
price for the 18.0 million shares is $0.4139 per share, or a total of $7,450,200
for all of the shares. At August 12, 2008, the closing price of the Company’s
common stock, as traded on the OTC Bulletin Board, was $0.80 per
share.





Z. Kiss,
a former director and executive officer of the Company, is selling 10.0 million
of the 18.0 million shares, representing his entire share holdings in the
Company. In addition, Mr. Kiss has agreed to apply up to $831,863 of the
proceeds from the sale of his 10.0 million shares to pay a portion of the
$1,331,863 of indebtedness owed by his affiliate Renewable Energy Solutions Inc.
(“RESI”), to
the Company. G. Kiss and M. Kiss, the children of Z. Kiss, are each selling 4.0
million shares in the transaction, and, after the sale, such persons will retain
50,000 and 1,000,000 shares of the Company’s common stock, respectively. Mr.
Gifis is acting as agent for each of the Selling Stockholders (the “Sellers’
Agent”).





The
Company intends to finance the purchase price for the 18.0 million shares being
sold by the Selling Stockholders by arranging for a sale of the shares, either
through a registered public offering for the account of the Selling
Stockholders, or a private purchase.





The
closing of the transactions under the Purchase Agreement was to occur and will
take place on or about November 30, 2008, subject to extension to January 31,
2009, by mutual agreement of the Company and Mr. Gifis; provided, that if such
Sellers’ Agent shall receive reasonable assurances from the investment banking
firm underwriting securities on behalf of the Company and the Selling
Stockholders that the financing to pay the purchase price for the shares being
sold, will, in their judgment, be consummated, the Sellers’ Agent shallextend the closing date
to January 31, 2009.





F-29





SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 and 2007





NOTE
18 – FAIR VALUE MEASUREMENT





The
      Company adopted the provisions of SFAS No. 157, “Fair Value Measurements”
      on January 1, 2008. SFAS No. 157 defines fair value as the price that
      would be received from selling an asset or paid to transfer a liability in
      an orderly transaction between market participants at the measurement
      date. When determining the fair value measurements for assets and
      liabilities required or permitted to be recorded at fair value, the
      Company considers the principal or most advantageous market in which it
      would transact and considers assumptions that market participants would
      use when pricing the asset or liability, such as inherent risk, transfer
      restrictions, and risk of nonperformance. SFAS No. 157 establishes a
      fair value hierarchy that requires an entity to maximize the use of
      observable inputs and minimize the use of unobservable inputs when
      measuring fair value. SFAS No. 157 establishes three levels of inputs
      that may be used to measure fair
value:





Level
      1 - Quoted prices in active markets for identical assets or
      liabilities.





Level
      2 - Observable inputs other than Level 1 prices such as quoted prices for
      similar assets or liabilities; quoted prices in markets with insufficient
      volume or infrequent transactions (less active markets); or model-derived
      valuations in which all significant inputs are observable or can be
      derived principally from or corroborated by observable market data for
      substantially the full term of the assets or
  liabilities.





Level
      3 - Unobservable inputs to the valuation methodology that are significant
      to the measurement of fair value of assets or
  liabilities.





To
      the extent that valuation is based on models or inputs that are less
      observable or unobservable in the market, the determination of fair value
      requires more judgment. In certain cases, the inputs used to measure fair
      value may fall into different levels of the fair value hierarchy. In such
      cases, for disclosure purposes, the level in the fair value hierarchy
      within which the fair value measurement is disclosed and is determined
      based on the lowest level input that is significant to the fair value
      measurement.





Upon
adoption of SFAS No. 157, there was no cumulative effect adjustment to
beginning retained earnings and no impact on the consolidated financial
statements.





The
carrying value of the Company’s cash and cash equivalents, accounts receivable,
accounts payable, short-term borrowings (Including convertible notes payable),
and other current assets and liabilities approximate fair value because of their
short-term maturity.





Items
      recorded or measured at fair value on a recurring basis in the
      accompanying consolidated financial statements consisted of the following
      items as of December 31, 2008:





The
      following table sets forth the Company’s short and long-term investments
      as of December 31, 2008 which are measured at fair value on a recurring
      basis by level within the fair value hierarchy.  As required by
      SFAS No. 157, these are classified based on the lowest level of input that
      is significant to the fair value
measurement:






Quoted
                              Prices
      in
                              Active
                              Markets
      for
                              Identical
                              Instruments
                              Level
      1
                            
                            
                            Significant
                              Other
                              Observable
                              Inputs
                              Level
      2
                            
                            
                            Significant
                              Unobservable
                              Inputs
                              Level
      3
                            
                            
                            Assets
      at
                              fair
      ValueAssets:Cash
                            
                            $
                            619,257
                            
                            $
                            -
                            
                            $
                            -
                            
                            $
                            619,257Long-term
      investments
                            
                            $
                            -
                            
                            $
                            -
                            
                            $
                            1,500,000
                            
                            $
                            1,500,000


At
December 31, 2008, the carrying amounts of the notes payable approximate fair
value because the entire note had been classified to current
maturity.





F-30




SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 and 2007





NOTE
19 – SEGMENT INFORMATION





The
Company's operations fall into one single product segment, photovoltaic thin
film modules: producing and/or installing and commissioning factory equipment
that produces photovoltaic thin film modules. The Company manages its
operations, and accordingly determines its operating segments, on a geographic
basis. Consequently, the Company has one operating geographic location, Hungary.
The performance of geographic operating segments is monitored based on net
income or loss (after income taxes, interest, and foreign exchange
gains/losses). The accounting policies of the segments are the same as those
described in the summary of accounting policies in Note 1. There are no
intersegment sales revenues. The following tables summarize financial
information by geographic segment for the years ended December 31, 2008 and
2007:





Geographic
information for 2007:




Hungary
              
              
              (Corporate)
              
              
              TotalTotal
      Revenues
              
              $
              5,779,578
              
              
              $
              -
              
              
              $
              5,779,578Depreciation
              
              
              220,860
              
              
              
              -
              
              
              
              220,860Interest
      Income
              
              
              434
              
              
              
              58,691
              
              
              
              59,125Interest
      expense
              
              
              (4,934
              )
              
              
              (4,582,131
              )
              
              
              (4,587,065
              )Net
      interest expense
              
              
              (4,500
              )
              
              
              (4,523,440
              )
              
              
              (4,527,940
              )Debt
      acquisition cost
              
              
              -
              
              
              
              (395,837
              )
              
              
              (395,837
              )Research
      and development
              
              
              -
              
              
              
              (360,000
              )
              
              
              (360,000
              )Net
      loss
              
              
              (735,848
              )
              
              
              (8,011,947
              )
              
              
              (8,747,795
              )Fixed
      assets, net
              
              
              595,030
              
              
              
              -
              
              
              
              595,030Fixed
      asset additions
              
              
              197,757
              
              
              
              -
              
              
              
              197,757Other
      assets
              
              
              7,682
              
              
              
              -
              
              
              
              7,682


Geographic
information for 2008:




Hungary
              
              
              (Corporate)
              
              
              TotalTotal
      Revenues
              
              $
              3,436,779
              
              
              $
              -
              
              
              $
              3,436,779Depreciation
              
              
              190,025
              
              
              
              -
              
              
              
              190,025Interest
      Income
              
              
              5,164
              
              
              
              46,929
              
              
              
              52,093Interest
      expense
              
              
              (3,572
              )
              
              
              (1,226,986
              )
              
              
              (1,230,558
              )Net
      interest expense
              
              
              1,592
              
              
              
              (1,180,057
              )
              
              
              (1,178,465
              )Debt
      acquisition cost
              
              
              -
              
              
              
              (74,204
              )
              
              
              (74,204
              )Research
      and development
              
              
              -
              
              
              
              (120,000
              )
              
              
              (120,000
              )Net
      loss
              
              
              (2,582,591
              )
              
              
              (5,891,419
              )
              
              
              (8,474,010
              )Fixed
      assets, net
              
              
              413,241
              
              
              
              -
              
              
              
              413,241Fixed
      asset additions
              
              
              44,181
              
              
              
              -
              
              
              
              44,181Other
      assets
              
              
              3,893
              
              
              
              -
              
              
              
              3,893




Geographic
information of revenues by customers’ locations/countries for 2008 and
2007:




Customer
      Countries:
              
              2008
              
              2007United
      States of America
              
              $3,289,517
              
              $5,779,578Hungary
              
              $147,262
              
              -Total
              
              3,436,779
              
              $5,779,578




F-31




SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 and 2007





NOTE
20 – SUBSEQUENT EVENTS





Share exchange
agreement





On April
3, 2009, the Company and Kraft Electronikai Zrt, a Hungarian corporation and
wholly owned subsidiary of the Company (“Kraft”), entered into
a stock exchange agreement (the “Exchange Agreement”)
with BudaSolar Technologies Co. Ltd. (“BudaSolar”), New
Palace Investments Ltd., a Cyprus corporation (“NPI”), Istvan
Krafcsik (“Krafcsik”) and Attila
Horvath (“Horvath”, and
collectively with NPI and Krafcsik, the “BudaSolar
Stockholders”).





On April
3, 2009, the Company, Kraft, BudaSolar and the BudaSolar Stockholders entered
into an amended and restated stock exchange agreement (the “Amended Exchange
Agreement”) dated as of April 2, 2009 under which Kraft agreed to acquire
from the BudaSolar Stockholders 100% of the outstanding registered share equity
capital of BudaSolar in exchange for the Company transferring to the BudaSolar
Stockholders 49% of the outstanding capital stock or share capital (the “Kraft Shares”) of
Kraft (the “Share
Exchange”).  As a result, the Company will own 51% of Kraft and
its 51% owned Kraft subsidiary will, in turn, own 100% of the share capital of
BudaSolar.  In addition, the Amended Exchange Agreement deleted the
put option of the BudaSolar Stockholders, and the call option of the Company and
Kraft, each resulting in the Company and Kraft acquiring from the BudaSolar
Stockholders 100% of Kraft Shares owned by the BudaSolar Stockholders or their
affiliates after the closing of the Share Exchange. The Company accrued an
estimated $500,000 in connection with the Amended Exchange
Agreement.





Kraft
agreed to assume the obligation of the repayment of certain loans made by
BudaSolar Stockholders to BudaSolar prior to the date of the Amended Exchange
Agreement, to be evidenced by a five-year subordinated promissory note of Kraft
bearing interest at an annual rate equal to LIBOR for twelve month United States
dollars interbank deposits as fixed by BBA plus a margin of 3% (the “Loan”).  Such
Loan will be repaid by Kraft as follows: (i) on October 1, 2009, Kraft shall
repay $250,000 provided that there’s a minimum amount of $1,600,000 available on
the accounts of Kraft. In case such amount is not available on the accounts on
October 1, 2009, repayment of this tranche is due whenever the amount is made
available on the accounts; (ii) on January 1, 2010, $250,000 is repayable from
the available excess cash; and (iii) the outstanding amount of the Loan is
repayable on January 1, 2011. The parties further agreed that the condition of
the repayment of the Loan (or any tranche of the Loan) shall be the availability
of excess cash.





Under the
Amended Exchange Agreement, the Company agreed to increase the capital of Kraft
(the "Share Capital
Increase") by investing USD $750,000 equivalent in Hungarian Forints in
Kraft calculated at the then current exchange rate.





The
Amended Exchange Agreement contains customary representations, warranties and
covenants of the Company, Kraft, BudaSolar and the BudaSolar Stockholders for
similar transactions.  All covenants survive until fulfilled in
accordance with their respective terms.  The Amended Exchange
Agreement contains a mutual indemnification provision for breach of or
inaccuracy in any representation or warranty and any breach or failure to fully
perform any covenant by any party to the agreement.  In addition, the
BudaSolar Stockholders agreed that, for a period of five years from the Closing
Date (as defined below), they will neither compete with the business, nor
solicit the employees of, Kraft, the Company, BudaSolar, or any of their
respective direct or indirect subsidiaries.





The
consummation of the Share Exchange and other transactions set forth in the
Amended Exchange Agreement is subject to certain closing conditions, including
(i) the parties’ satisfaction with their respective due diligence
investigations; (ii) the execution and delivery of five year employment
agreements for each of Istvan Krafcsik and Attila Horvath as Chief Executive
Officer and Chief Operating Officer of Kraft and its BudaSolar subsidiary,
respectively; (iii) the execution and delivery of a shareholders agreement
between the Company, Kraft and the BudaSolar Stockholders; (iv) the execution
and delivery of a corporate services agreement and inter-company services
agreement between Kraft and BudaSolar; and (v) BudaSolar’s delivery to the
Company and Kraft of unaudited financial statements of BudaSolar from the period
of inception through December 31, 2008.





The
closing of the Share Exchange and the transactions contemplated pursuant to the
Amended Exchange Agreement was revised to occur as soon as practicable, but in
any event by April 30, 2009 (the “Closing
Date”).  However, there can be no assurances that the Share
Exchange will be consummated.





In the
event that the Exchange Agreement terminates or the closing does not occur by
the Closing Date, then BudaSolar shall thereafter continue to render certain
technical services to Kraft under a cooperation agreement entered into on
September 29, 2008 (the “Cooperation  Agreement”).  Pursuant
to the terms of the Cooperation Agreement, the Company or Kraft has caused to be
paid to BudaSolar the aggregate sum of $750,000.  Such payment shall
be deemed to be a loan by Kraft to BudaSolar and shall be repaid prior to
closing of the Share Exchange.





F-32




SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 and 2007





NOTE
20 – SUBSEQUENT EVENTS (continued)





On April
3, 2009, Solar Thin Power, Inc., a majority owned subsidiary of the Company
(“ST Power”),
Kraft and its wholly owned subsidiary BudaSolar Limited entered into an
Inter-Company Services Agreement dated as of April 2, 2009 (the “Services Agreement”)
in respect of power projects undertaken by ST Power and the use of Kraft and
BudaSolar Limited as a preferred supplier of amorphous silicon photovoltaic
module manufacturing equipment (the “PV
Equipment”).  ST Power will have the right to integrate turnkey
PV Equipment into its power project offering and will receive most favored
nations pricing from Kraft and BudaSolar Limited on purchases of PV Equipment
for integration in such power projects. Alternatively, ST Power may refer the PV
Equipment customer to Kraft in exchange for a 5% commission.  In
addition, ST Power may elect, in its sole discretion, to structure one or more
power projects with Kraft as the general contractor, or with ST Power as the
general contractor and Kraft as the sub-contractor, for the manufacturing
facility portion of the integrated offering.





Employment
agreements





On April
3, 2009, Kraft entered into five year employment agreements with each of Istvan
Krafcsik and Attila Horvath as Chief Executive Officer and Chief Operating
Officer of Kraft and its BudaSolar subsidiary, respectively. Kraft and its
shareholders also entered into a shareholders’ agreement which, among other
things, (i) restricts a shareholder’s ability to sell, assign or otherwise
transfer any of his or its shares of Kraft; (ii) provides for a right of first
refusal and tag-along rights with respect to any permitted sale or other
disposition of a shareholder’s shares of Kraft; and (iii) sets forth certain
agreed upon procedures related to corporate governance, major decisions,
competing business ventures and affiliated sales.





On April
3, 2009, the Company, Kraft and the BudaSolar Stockholders entered into a side
letter bonus agreement to the Amended Exchange Agreement dated as of April 2,
2009 (the “Bonus
Agreement”) under which the parties agreed to formulate a bonus agreement
for key executives and employees within 30 days after the closing of the Share
Exchange under specific guidelines set forth therein.





On April
7, 2009, the Company entered into an amendment to the employment agreement of
Peter Lewis under which Mr. Lewis agreed to resign as the President, Chief
Executive Officer and as a member of the board of directors of the Company,
effective as of March 31, 2009.  Effective as of April 1, 2009, Mr.
Lewis was appointed as Group Vice President and General Manager of the Thin Film
Group of the Company through June 1, 2010.  The Thin Film Group shall
consist of the manufacture and sale of PV Equipment.  In this
capacity, Mr. Lewis will be primarily responsible for generating orders and
sales of PV Equipment and he will provide general oversight of the manufacturing
operations of the Kraft and BudaSolar subsidiaries of the Company, and together
with Messrs. Krafcsik and Horvath, will be responsible for generating profits
for the Thin Film Equipment Group.





Effective
April 1, 2009, Mr. Robert M. Rubin, the Company’s Chief Financial Officer and
Chairman, was appointed as the Chief Executive Officer of the Company to fill
the vacancy created by Mr. Lewis’ resignation.





F-33




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





None.





Item 9A. Controls and
Procedures.





(a)
Evaluation
of Disclosure Controls and Procedures. Under the supervision and with the
participation of our Chief Executive Officer and Chief Financial Officer, we
conducted an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures, as defined in Rule 13a-15(3) under the
Exchange Act as of December 31, 2008 (the “Evaluation Date”).  Based
on this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded as of the Evaluation Date that our disclosure controls and procedures
were effective such that the information relating to our company required to be
disclosed in our reports (i) is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms and (ii) is accumulated
and communicated to our management, including our principal executive officer
and principal financial officer, as appropriate, to allow timely decisions
regarding required disclosure.





Our management, including our Chief
Executive Officer and Chief Financial Officer, does not expect that our
disclosure controls and procedures or our internal controls will prevent all
error and all fraud.  A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met.  Further, the design of a
control system must reflect the fact that there are resource constraints and the
benefits of controls must be considered relative to their costs.  Due
to the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within our company have been detected.




(b) Changes in
internal controls. During the year ended December 31, 2008, there were no
changes in our internal control over financial reporting identified in
connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule
15d-15 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.





Management’s Report on Internal
Control Over Financial Reporting





Our management is responsible for
establishing and maintaining adequate internal control over financial reporting
for our company in accordance with as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act. Our internal control over financial reporting is
designed to provide reasonable assurance regarding the (i) effectiveness and
efficiency of operations, (ii) reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles, and (iii) compliance with applicable
laws and regulations. Our internal controls framework is based on the criteria
set forth in the Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).





Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.





Management’s assessment of the
effectiveness of our internal control over financial reporting is as of the year
ended December 31, 2008. We believe that internal control over financial
reporting is effective.  We have not identified any material
weaknesses considering the nature and extent of our current operations or any
risks or errors in financial reporting under current operations.





This annual report does not include an
attestation report of the Company’s registered accounting firm regarding
internal control over financial reporting. Management’s report was not subject
to attestation by the Company’s registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission




Item 9B. Other
Information.





We do not have any information required
to be disclosed in a report on Form 8-K during the fourth quarter of 2008 that
was not reported.





-41-





PART III





Item 10. Directors, Executive Officers
and Corporate
Governance.





Executive
Officers and Directors





Our
current directors and executive officers are as follows:




Name
            
            Age
            
            PositionRobert
      M. Rubin
            
            69
            
            Chief
      Executive Officer, Chief Financial Officer and Chairman of the Board of
      DirectorsDr.
      Boris Goldstein
            
            45
            
            DirectorGary
      Maitland, Esq.
            
            55
            
            Director




Robert M.
Rubin.   Mr. Rubin has served as a director of Solar Thin
Films since May 1991, and was its Chief Executive Officer from May 1991 to
January 1, 1994. Mr. Rubin has served as Solar Thin Films’ Chief Financial
Officer since August 2007. Mr. Rubin was again appointed as our Chief Executive
Officer on April 1, 2009.  Between October 1990 and January 1, 1994,
Mr. Rubin served as the Chairman of the Board and Chief Executive Officer of
Solar Thin Films and its subsidiaries; from January 1, 1994 to January 19, 1996,
he served only as Chairman of the Board.  From January 19, 1996 until
June 2006, Mr. Rubin served as Chairman of the Board, President and Chief
Executive Officer. Mr. Rubin resigned as Chairman in June 2006 and as an
executive officer in October 2006.  Mr. Rubin was the founder,
President, Chief Executive Officer and a Director of Superior Care, Inc. ("SCI")
from its inception in 1976 until May 1986, when Mr. Rubin resigned as an
executive officer. Mr. Rubin continued as a director of SCI until the latter
part of 1987. In 1993, SCI was sold to Olsten Corporation (NYSE).




Boris Goldstein.  Boris
Goldstein became a member of the board of directors of Solar Thin Films in
October 2008.  From 2005 to the present, Dr. Goldstein has served as
the Chief Executive Officer of Trans Global Ventures Group and Managing Director
of Pacific Venture Fund. From 1991 to 1997, Dr. Goldstein served on the board of
directors and advisory boards of E-Trade Eurasia, IVS, Pacific Petroleum
Technologies, E*Forex; CBSF Capital Management, CBSF International Fund, CBSF,
Sakaru, Daldaris, FRB, RBK and others.  In 1989, Dr. Goldstein founded
Software House HT, a startup technology company which he developed into a
worldwide corporation with over 40 offices in 17 countries. Dr. Goldstein has
substantial experience in building high-tech companies in Silicon Valley. Dr.
Goldstein received a degree in Applied Mathematics and Ph. D. in Real Time
Systems from Latvian Technical University in 1985 and 1993,
respectively.





Gary Maitland.Gary
Maitland, Esq. became a member of the board of directors of Solar Thin Films in
October 2008.  From 1987 to the present, Mr. Maitland has served as
Managing Partner of Kreisberg & Maitland, LLP, a law firm based in New York
City. He currently serves on the faculty of the Benjamin N. Cardozo School of
Law’s Intensive Trial Advocacy Program. From 1978 to 1981, Mr. Maitland served
as an Assistant District Attorney in Kings County, New York (Brooklyn). Mr.
Maitland earned a Bachelor of Arts degree from Vassar College in 1975. In
addition, he earned a Juris Doctor degree from the Boston University School of
Law in 1978. Mr. Maitland is a licensed attorney admitted to practice in the
State of New York and admitted to practice before the United States Supreme
Court, the Second Circuit Court of Appeals, and the Federal District Courts for
the Eastern and Southern Districts of New York.





Key
Employees





Peter Lewis.  Mr.
Lewis served as Chief Executive Officer, President and a member of the Board of
Directors of Solar Thin Films from June 2007 to March 31, 2009.  He
was appointed as Group Vice President and General Manager of the Thin Film Group
of our company on April 1, 2009. Mr. Lewis briefly provided consulting services
to RESI, a private company that formerly conducted business with Solar Thin
Films (from March 2007 until May 2007).  From 2005 through 2006, Mr.
Lewis served as an Executive Vice President of KmX Corporation, a Toronto based
company he helped co-found that provides advanced membrane solutions for the
chemical recycling and ethanol markets.  Prior to joining KmX
Corporation, from 2002 through 2004, Mr. Lewis served as the Chief Operating
Officer of CA Technology (now Agilence), a New Jersey based company providing
software and hardware solutions to the digital video and security marketplace.
Mr. Lewis holds a B.A. in Economics from Columbia and an M.B.A. from Harvard
Business School.





-42-


Role
of the Board of Directors





Pursuant to Delaware law, our business,
property and affairs are managed under the direction of the Company’s board of
directors. The board has responsibility for establishing broad corporate
policies and for the overall performance and direction of Solar Thin Films, Inc,
but is not involved in day-to-day operations. Members of the board keep informed
of the Company’s business by participating in board and committee meetings, by
reviewing analyses and reports sent to them regularly, and through discussions
with its executive officers.





Compensation
of the Board of Directors





Directors
who are also our employees do not receive additional compensation for serving on
the Board or its committees. Non-employee directors are not paid any annual cash
fee. In addition, directors are entitled to receive options under our stock
option plans. All directors are reimbursed for their reasonable expenses
incurred in attending Board meetings. We intend to procure directors and
officers liability insurance.





Board
Meeting and Actions by Written Consent





In 2008, the board met 3 times and took
action by unanimous written consent 2 times.





Board
Committees





We have not established an audit
committee, compensation committee, nominating committee or other committee of
our board of directors.




Advisory Board




We do not
currently have an advisory board.




Director Independence




We
believe that of Dr. Boris Goldstein and Gary Maitland, Esq. are considered
independent directors as defined by any national securities exchange registered
pursuant to Section 6(a) of the Securities Exchange Act of
1934.





Family Relationships




There are
no family relationships among our executive officers and directors.




Involvement in Certain Legal
Proceedings.





None of
our officers or directors have, during the last five years: (i) been
convicted in or is currently subject to a pending a criminal proceeding;
(ii) been a party to a civil proceeding of a judicial or administrative
body of competent jurisdiction and as a result of such proceeding was or is
subject to a judgment, decree or final order enjoining future violations of, or
prohibiting or mandating activities subject to any federal or state securities
or banking laws including, without limitation, in any way limiting involvement
in any business activity, or finding any violation with respect to such law, nor
(iii) has any bankruptcy petition been filed by or against the business of
which such person was an executive officer or a general partner, whether at the
time of the bankruptcy of for the two years prior thereto.




Compliance with Section 16(a) of
the Exchange Act





Section 16(a)
of the Securities Exchange Act of 1934, as amended, requires our directors,
executive officers, and shareholders holding more than 10% of our outstanding
common stock, to file with the Securities and Exchange Commission initial
reports of ownership and reports of changes in beneficial ownership of our
common stock. Executive officers, directors and greater-than-10% shareholders
are required by SEC regulations to furnish us with copies of all
Section 16(a) reports they file. Gary Maitland, Esq. filed a Form 3 and
Form 4 late. Other than the foregoing, to our knowledge, based solely on review
of the copies of such reports furnished to us for the year ended December 31,
2008, the Section 16(a) reports required to be filed by our executive
officers, directors and greater-than-10% shareholders were filed on a timely
basis.





-43-


Code of Ethics





The Company adopted a Code of Ethics
and Business Conduct for Officers, Directors and Employees that applies to all
of the officers, directors and employees of the Company. A copy of our code of
ethics may be found as Exhibit 14.3 to the Annual Report filed on Form 10-K with
the Securities and Exchange Commission on July 16, 2004.





Item 11. Executive
Compensation.





The following table sets forth all
compensation for the last fiscal year awarded to, or earned by, our Chief
Executive Officer and all other executive officers serving as such at the end of
fiscal year ended December 31, 2008 and 2007 whose salary and bonus exceeded
$100,000 for the year ended December 31, 2008 and 2007, or who, as of December
31, 2008 and 2007, was being paid a salary at a rate of at least $100,000 per
year.




Summary
Compensation Table






Name &PrincipalPosition
              
              Year
              
              Salary ($)
              
              Bonus
                ($)
              
              Stock
                Awards($)
              
              Option
                Awards ($)
              
              Non-Equity
                Incentive Plan
                Compensation
                ($)
              
              Change
      in
                Pension Value
                and
      Non-
                Qualified
                Deferred
                Compensation
                Earnings
      ($)
              
              All
      Other
                Compensation
                ($)
              
              Total ($)Peter
      Lewis (1)
              
              
              2008
              
              $
              225,000
              
              
              
              
              $
              50,765
              (2)
              $
              857,935
              (3)
              
              
              
              
              
              
              
              
              
              $
              1,133,700Group
      Vice President and General Manager and Former Chief Executive Officer and
      Director
              
              
              2007
              
              $
              131,250
              
              
              —
              
              $
              186,805
              (2)
              $
              356,618
              (3)
              
              —
              
              
              —
              
              
              —
              
              $
              546,201Zoltan
      Kiss*
              
              
              2008
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Director
      (5)
              
              
              2007
              
              $
              136,000
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              $
              136,000Robert
      Rubin
              
              
              2008
              
              $
              225,000
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              $
              225,000Chief
      Executive Officer, Chief Financial Officer and Director (7)
              
              
              2007
              
              $
              245,000
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              $
              245,000Csaba
      Toro**
              
              
              2008
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Chief
      Executive Officer (4)
              
              
              2007
              
              $
              103,068
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              $
              103,068






* Mr.
Kiss resigned as director of the Company in December 2007




** As of
June 20, 2007, Mr. Toro no longer serves as an executive officer of our
company.




(1) Mr.
Lewis was appointed as Chief Executive Officer of our company on June 20, 2007
and resigned as President, Chief Executive Officer and as a director on March
31, 2009. Mr. Lewis was appointed as Group Vice President and General Manager of
the Thin Film Group of our company on April 1, 2009.





-44-




(2) In
accordance with Mr. Lewis’s employment agreement, Mr. Lewis is entitled to
receive 187,617 shares of common stock per year. The shares are valued at the
stated value in the employment agreement of $0.533 per share, which was the
average closing bid price for the 20 trading days immediately prior to the date
of the employment agreement.





(3) In
2007, Mr. Lewis was granted a ten year option to purchase 3,000,000 shares of
common stock at an exercise price of $0.533 per share on a cashless basis
vesting on a pro-rata basis over a period of two years. The option was valued
using the Black-Scholes option pricing model assuming a ten year life, no
expected dividend payments a volatility of 82.53% and a risk free rate of 5.14%.
In addition, in 2008, Mr. Lewis was granted a ten year option to purchase
600,000 shares of common stock at an exercise price of $0.80 per share vesting
at a rate of 100,000 shares per month beginning June 1, 2009.  The
option was valued using the Black-Scholes option pricing model assuming a ten
year life, no expected dividend payments, a volatility of 94.93% and a risk free
rate of 3.75%.





(4) Mr.
Toro was appointed as Chief Executive Officer of our company on October 31,
2006. In accordance with Mr. Toro’s employment agreement, Mr. Toro was entitled
to receive 45,956 shares of common stock per year. The shares are valued at the
stated value in the employment agreement of $2.18 per share, which was the
market price as of the date of grant. Mr. Toro resigned as an executive officer
and director of the Company on June 20, 2007. All obligations under Mr. Toro’s
employment agreement, including the stock options granted were
terminated.





(5) In
June 2006, Mr. Kiss was appointed as a director and consultant. Mr. Kiss
resigned as a Director and Chairman of the Company effective December 20,
2007.





(6) Mr.
Toro was granted a ten year option to purchase 1,875,000 shares of common stock
at an exercise price of $2.18 per share, which may be exercised on a cashless
basis. Although the option has vested immediately, Mr. Toro is only permitted to
sell 52,084 shares per month on a cumulative basis. The option was valued using
the Black-Scholes option pricing model assuming a ten year life, no expected
dividend payments a volatility of 49.5% and a risk free rate of 4.6%. Mr. Toro
resigned as an executive officer and director of the Company on June 20, 2007.
All obligations under Mr. Toro’s employment agreement, including the stock
options granted were terminated.




(7) In
June 2006, Mr. Rubin was appointed as a director and consultant. Mr. Rubin was
appointed Chief Financial Officer of the Company in August 2007 and as Chief
Executive Officer of the Company on April 1, 2009. In addition to the
compensation noted above, Mr. Rubin’ wife, an employee of the Company receives a
salary of $1,250 per month for administrative services.





Outstanding
Equity Awards at Fiscal Year-End Table




The
following table sets forth information with respect to stock awards and grants
of options to purchase our common stock to the named executive officers during
the fiscal year ended December 31, 2008.




Option
      Awards
            
            Stock
      AwardsName
            
            Number
              of
              Securities
              Underlying
              Unexercised
              Options
              (#)
              Exercisable
            
            Number
              of
              Securities
              Underlying
              Unexercised
              Options
              (#)
              Unexercisable
            
            Equity
              Incentive
              Plan
              Awards:
              Number
              of
              Securities
      Underlying
              Unexercised
              Unearned
              Options (#)
            
            Option
              Exercise
              Price ($)
            
            Option
              Expiration
              Date
            
            Number
              of
      Shares
              or
      Units
              of
      Stock
              That Have
              Not
              Vested
              (#)
            
            Market
              Value of
              Shares or
              Units of
              Stock
              That Have
              Not
              Vested
              ($)
            
            Equity
              Incentive
              Plan
      Awards:
              Number
              of
              Unearned
              Shares,
              Units
      or
              Other
              Rights
              That Have
              Not
              Vested
              (#)
            
            Equity
              Incentive
              Plan
              Awards:
              Market or
      Payout
              Value
              of
              Unearned
              Shares,
              Units or
              Other
              Rights
              That Have
              Not
              Vested
              ($)Peter
      Lewis (1)
            
            
            3,000,000
            (2)
            
            —
            
            
            —
            
            $
            0.533
            
            06/20/2017
            
            616,439
            (4)
            $
            123,288
            (4)
            
            —
            
            
            —Peter
      Lewis (3)
            
            
            600,000
            (3)
            
            —
            
            
            —
            
            $
            0.80
            
            04/17/2018
            
            600,000
            
            $
            120,000
            (4)
            
            —
            
            
            —





-45-




(1) Mr.
Lewis was appointed as Chief Executive Officer of our company on June 20, 2007
and resigned as President, Chief Executive Officer and as a director on March
31, 2009. Mr. Lewis was appointed as Group Vice President and General Manager of
the Thin Film Group of our company on April 1, 2009.





(2) Mr.
Lewis received a ten year option to purchase 3,000,000 shares of common stock at
an exercise price of $0.533 per share on a cashless basis vesting on a pro-rata
basis over a period of two years.





(3) Mr.
Lewis was granted a ten year option to purchase 600,000 shares of common stock
at an exercise price of $0.80 per share vesting at a rate of 100,000 shares per
month beginning June 1, 2009.





(4) In
accordance with Mr. Lewis’s employment agreement, Mr. Lewis’ options are vesting
on a pro-rata basis over a period of two years. The 2,120,548 shares represents
the shares of common stock that have not vested to date. The value of such
shares is based on the closing price for our common stock of $0.20 as of
December 31, 2008 (the last trading day of 2008).





Except as set forth above, no other
named executive officer has received an equity award.





Director
Compensation





The
following table sets forth with respect to the named director, compensation
information inclusive of equity awards and payments made in the year end
December 31, 2008.





Fees
              Earned
              or Paid
              in Cash
              ($)
            
            Stock
      Awards
              ($)
            
            Option
              Awards
              ($)
            
            Non-Equity
      Incentive Plan Compensation
              ($)
            
            Change in Pension
      Value and Nonqualified Deferred Compensation Earnings
            
            All
      Other Compensation
              ($)
            
            Total
              ($)Robert
      Rubin
            
            
            —
            (1)
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Peter
      Lewis
            
            
            —
            (1)
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Dr.
      Boris Goldstein
            
            
            —
            (2)
            
            —
            
            $
            4,194
            
            
            —
            
            
            —
            
            
            —
            
            $
            4,194Gary
      Maitland, Esq.
            
            
            —
            (2)
            
            —
            
            $
            4,194
            
            
            —
            
            
            —
            
            
            —
            
            $
            4,194





(1) All
compensation earned by Messrs. Rubin and Lewis is fully reflected in the Summary
Compensation Table above.





(2) On
October 27, 2008, the Company issued 5 year options to purchase an aggregate of
500,000 shares of common stock at an exercise price equal to $0.42 per share to
Mr. Gary Maitland and Dr. Boris Goldstein as compensation for services to be
performed by them in their capacities as directors of the Company. Such options
vest in accordance with the following schedule: (i) options to purchase 83,333
shares of common stock vest on October 27, 2009; (ii) options to purchase 83,333
shares of common stock vest on October 27, 2010; and (iii) options to purchase
83,334 shares of common stock vest on October 27, 2011.





Stock
Option Plans





2001
Stock Option Plan





General





The 2001 Stock Option Plan (“Plan”,
“Incentive Plan”) was adopted by the Board of Directors. The Board of Directors
has initially reserved 4,687,500 shares of Common Stock for issuance under the
2001 Stock Option Plan. Under the Plan, options may be granted which are
intended to qualify as Incentive Stock Options ("ISOs") under Section 422 of the
Internal Revenue Code of 1986 (the "Code") or which are not ("Non-ISOs")
intended to qualify as Incentive Stock Options thereunder.





The 2001 Incentive Plan and the right
of participants to make purchases thereunder are intended to qualify as an
"employee stock purchase plan" under Section 423 of the Internal Revenue Code of
1986, as amended (the "Code"). The 2001 Incentive Plan is not a qualified
deferred compensation plan under Section 401(a) of the Internal Revenue Code and
is not subject to the provisions of the Employee Retirement Income Security Act
of 1974 ("ERISA").





-46-




Purpose





The
primary purpose of the 2001 Incentive Plan is to attract and retain the best
available personnel for the Company in order to promote the success of the
Company's business and to facilitate the ownership of the Company's stock by
employees.





Administration





The 2001
Incentive Plan is administered by the Board of Directors of the Company (the
"Board of Directors") or a committee appointed by the Board of Directors. If, at
any time, there are less than two members of the Committee, the Board of
Directors shall appoint one or more other members of the Board of Directors to
serve on the Committee. All Committee members shall serve, and may be removed by
the Board of Directors.





A
majority of the members of the Committee (but not less than two) shall
constitute a quorum, and any action taken by a majority of such members present
at any meeting at which a quorum is present, or acts approved in writing by all
such members shall be the acts of the Committee.





Subject
to the other provisions of the Plan, the Committee shall have full authority to
decide the date or dates on which options (the "Options") to acquire shares of
Common Stock will be granted under the Plan to determine whether the Options to
be granted shall be Incentive Options or Non qualified Options, or a combination
of both, to select the persons to whom the Options will be granted and to
determine the number of shares of Common Stock to be covered by each Option, the
price at which such shares may be purchased upon the exercise of such option
(the "Option Exercise Price"), and other terms and conditions of the Options. In
making those determinations, the Committee shall solicit the recommendations of
the President and Chairman of the Board of the Company and may take into account
the proposed optionee's present and potential contributions to the Company's
business and any other factors which the Committee may deem relevant. Subject to
the other provisions of the Plan, the Committee shall also have full authority
to interpret the Plan and any stock option agreements evidencing Options granted
hereunder, to issue rules for administering the Plan, to change, alter, amend or
rescind such rules, and to make all other determinations necessary or
appropriate for the administration of the Plan. All determinations,
interpretations and constructions made by the Committee pursuant to this Section
3 shall be final and conclusive. No member of the Board of Directors or the
Committee shall be liable for any action, determination or omission taken or
made in good faith with respect to this Plan or any Option granted
hereunder





Members of the Board of Directors who
are eligible employees are permitted to participate in the 2001 Incentive Plan,
provided that any such eligible member may not vote on any matter affecting the
administration of the 2001 Incentive Plan or the grant of any option pursuant to
it, or serve on a committee appointed to administer the 2001 Incentive Plan. In
the event that any member of the Board of Directors is at any time not a
"disinterested person", as defined in Rule 16b-3(c)(3)(i) promulgated pursuant
to the Securities Exchange Act of 1934, the Plan shall not be administered by
the Board of Directors, and may only by administered by a Committee, all the
members of which are disinterested persons, as so defined.





Eligibility





Under the 2001 Incentive Plan, options
may be granted to key employees, officers, directors or consultants of the
Company, as provided in the 2001 Incentive Plan.





Terms
of Options





The term of each Option granted under
the Plan shall be contained in a stock option agreement between the Optionee and
the Company and such terms shall be determined by the Committee consistent with
the provisions of the Plan, including the following:





(a) PURCHASE PRICE. The purchase price
of the Common Shares subject to each ISO shall not be less than the fair market
value (as set forth in the 2001 Incentive Plan), or in the case of the grant of
an ISO to a Principal Stockholder. The purchase price of the Common Shares
subject to each Non-ISO shall be determined at the time such Option is granted,
but in no case less than 85% of the fair market value of such Common Shares at
the time such Option is granted.





(b)
VESTING. The dates on which each Option (or portion thereof) shall be
exercisable and the conditions precedent to such exercise, if any, shall be
fixed by the Board of Directors, in its discretion, at the time such Option is
granted.





-47-




(c)
EXPIRATION. The expiration of each Option shall be fixed by the Committee, in
its discretion, at the time such Option is granted; however, unless otherwise
determined by the Committee at the time such Option is granted, an Option shall
be exercisable for ten(10) years after the date on which it was granted (the
"Grant Date"). Each Option shall be subject to earlier termination as expressly
provided in the 2001 Incentive Plan or as determined by the Board of Directors,
in its discretion, at the time such Option is granted.





(d)
TRANSFERABILITY. No Option shall be transferable, except by will or the laws of
descent and distribution, and any Option may be exercised during the lifetime of
the Optionee only by him. No Option granted under the Plan shall be subject to
execution, attachment or other process.





(e)
OPTION ADJUSTMENTS. The aggregate number and class of shares as to which Options
may be granted under the Plan, the number and class shares covered by each
outstanding Option and the exercise price per share thereof (but not the total
price), and all such Options, shall each be proportionately adjusted for any
increase decrease in the number of issued Common Shares resulting from split-up
spin-off or consolidation of shares or any like Capital adjustment or the
payment of any stock dividend.





Except as
otherwise provided in the 2001 Incentive Plan, any Option granted hereunder
shall terminate in the event of a merger, consolidation, acquisition of property
or stock, separation, reorganization or liquidation of the Company. However, the
Optionee shall have the right immediately prior to any such transaction to
exercise his Option in whole or in part notwithstanding any otherwise applicable
vesting requirements.





(f)
TERMINATION, MODIFICATION AND AMENDMENT. The 2001 Incentive Plan (but not
Options previously granted under the Plan) shall terminate ten (10) years from
the earlier of the date of its adoption by the Board of Directors or the date on
which the Plan is approved by the affirmative vote of the holders of a majority
of the outstanding shares of capital stock of the Company entitled to vote
thereon, and no Option shall be granted after termination of the Plan. Subject
to certain restrictions, the Plan may at any time be terminated and from time to
time be modified or amended by the affirmative vote of the holders of a majority
of the outstanding shares of the capital stock of the Company present, or
represented, and entitled to vote at a meeting duly held in accordance with the
applicable laws of the State of Delaware.





2007 Stock Option Plan





General





The 2007 Stock Option Plan (“Plan”,
“Incentive Plan”) was adopted by the Board of Directors in October 2007. The
Board of Directors has initially reserved 5,000,000 shares of Common Stock for
issuance under the 2007 Stock Option Plan. Under the Plan, options may be
granted which are intended to qualify as Incentive Stock Options ("ISOs") under
Section 422 of the Internal Revenue Code of 1986 (the "Code") or which are not
("Non-ISOs") intended to qualify as Incentive Stock Options
thereunder.





The 2007 Incentive Plan and the right
of participants to make purchases thereunder are intended to qualify as an
"employee stock purchase plan" under Section 423 of the Internal Revenue Code of
1986, as amended (the "Code"). The 2007 Incentive Plan is not a qualified
deferred compensation plan under Section 401(a) of the Internal Revenue Code and
is not subject to the provisions of the Employee Retirement Income Security Act
of 1974 ("ERISA").





Purpose





The primary purpose of the 2007
Incentive Plan is to attract and retain the best available personnel for the
Company in order to promote the success of the Company's business and to
facilitate the ownership of the Company's stock by employees.





Administration





The 2007 Incentive Plan is administered
by the Board of Directors or a committee (the "Committee") consisting of not
less than two members of the Board of Directors of the Company (the "Board of
Directors"), who are selected by the Board of Directors. If, at any time, there
are less than two members of the Committee, the Board of Directors shall appoint
one or more other members of the Board of Directors to serve on the Committee.
All Committee members shall serve, and may be removed by the Board of
Directors.




-48-




A
majority of the members of the Committee (but not less than two) shall
constitute a quorum, and any action taken by a majority of such members present
at any meeting at which a quorum is present, or acts approved in writing by all
such members shall be the acts of the Committee.





Subject
to the other provisions of the Plan, the Committee shall have full authority to
decide the date or dates on which options (the "Options") to acquire shares of
Common Stock will be granted under the Plan to determine whether the Options to
be granted shall be Incentive Options or Non qualified Options, or a combination
of both, to select the persons to whom the Options will be granted and to
determine the number of shares of Common Stock to be covered by each Option, the
price at which such shares may be purchased upon the exercise of such option
(the "Option Exercise Price"), and other terms and conditions of the Options. In
making those determinations, the Committee shall solicit the recommendations of
the President and Chairman of the Board of the Company and may take into account
the proposed optionee's present and potential contributions to the Company's
business and any other factors which the Committee may deem relevant. Subject to
the other provisions of the Plan, the Committee shall also have full authority
to interpret the Plan and any stock option agreements evidencing Options granted
hereunder, to issue rules for administering the Plan, to change, alter, amend or
rescind such rules, and to make all other determinations necessary or
appropriate for the administration of the Plan. All determinations,
interpretations and constructions made by the Committee pursuant to this Section
3 shall be final and conclusive. No member of the Board of Directors or the
Committee shall be liable for any action, determination or omission taken or
made in good faith with respect to this Plan or any Option granted
hereunder





Members
of the Board of Directors who are eligible employees are permitted to
participate in the 2007 Incentive Plan, provided that any such eligible member
may not vote on any matter affecting the administration of the 2007 Incentive
Plan or the grant of any option pursuant to it, or serve on a committee
appointed to administer the 2007 Incentive Plan. In the event that any member of
the Board of Directors is at any time not a "disinterested person", as defined
in Rule 16b-3(c)(3)(i) promulgated pursuant to the Securities Exchange Act of
1934, the Plan shall not be administered by the Board of Directors, and may only
by administered by a Committee, all the members of which are disinterested
persons, as so defined.





Eligibility





Under the
2007 Incentive Plan, options may be granted to key employees, officers,
directors or consultants of the Company, as provided in the 2007 Incentive
Plan.





Terms
of Options





The term
of each Option granted under the Plan shall be contained in a stock option
agreement between the Optionee and the Company and such terms shall be
determined by the Committee consistent with the provisions of the Plan,
including the following:





(a)
PURCHASE PRICE. The purchase price of the Common Shares subject to each ISO
shall not be less than the fair market value (as set forth in the 2007 Incentive
Plan), or in the case of the grant of an ISO to a Principal Stockholder. The
purchase price of the Common Shares subject to each Non-ISO shall be determined
at the time such Option is granted, but in no case less than 85% of the fair
market value of such Common Shares at the time such Option is
granted.




(b)
VESTING. The dates on which each Option (or portion thereof) shall be
exercisable and the conditions precedent to such exercise, if any, shall be
fixed by the Board of Directors, in its discretion, at the time such Option is
granted.





(c)
EXPIRATION. The expiration of each Option shall be fixed by the Committee, in
its discretion, at the time such Option is granted; however, unless otherwise
determined by the Comittee at the time such Option is granted, an Option shall
be exercisable for ten (10) years after the date on which it was granted (the
"Grant Date"). Each Option shall be subject to earlier termination as expressly
provided in the 2007 Incentive Plan or as determined by the Board of Directors,
in its discretion, at the time such Option is granted.





(d)
TRANSFERABILITY. No Option shall be transferable, except by will or the laws of
descent and distribution, and any Option may be exercised during the lifetime of
the Optionee only by him. No Option granted under the Plan shall be subject to
execution, attachment or other process.





(e)
OPTION ADJUSTMENTS. The aggregate number and class of shares as to which Options
may be granted under the Plan, the number and class shares covered by each
outstanding Option and the exercise price per share thereof (but not the total
price), and all such Options, shall each be proportionately adjusted for any
increase decrease in the number of issued Common Shares resulting from split-up
spin-off or consolidation of shares or any like Capital adjustment or the
payment of any stock dividend.




-49-





Except as
otherwise provided in the 2007 Incentive Plan, any Option granted hereunder
shall terminate in the event of a merger, consolidation, acquisition of property
or stock, separation, reorganization or liquidation of the Company. However, the
Optionee shall have the right immediately prior to any such transaction to
exercise his Option in whole or in part notwithstanding any otherwise applicable
vesting requirements.





(f)
TERMINATION, MODIFICATION AND AMENDMENT. The 2007 Incentive Plan (but not
Options previously granted under the Plan) shall terminate ten (10) years from
the earlier of the date of its adoption by the Board of Directors or the date on
which the Plan is approved by the affirmative vote of the holders of a majority
of the outstanding shares of capital stock of the Company entitled to vote
thereon, and no Option shall be granted after termination of the Plan. Subject
to certain restrictions, the Plan may at any time be terminated and from time to
time be modified or amended by the affirmative vote of the holders of a majority
of the outstanding shares of the capital stock of the Company present, or
represented, and entitled to vote at a meeting duly held in accordance with the
applicable laws of the State of Delaware.





Employment
and Other Agreements





On June 20, 2007, Peter Lewis and the
Company entered into an Employment Agreement (the “Lewis Agreement”) pursuant to
which Mr. Lewis has agreed to serve as the Chief Executive Officer of the
Company. The Lewis Agreement contains the following terms:





·
            base
      salary of $225,000 per year;


·
            the
      issuance of 187,617 shares of common stock per
  year;


·
            a
      bonus paid pursuant to the Executive Officer Incentive Plan as determined
      by the Board of Directors;


·
            a
      ten year option to purchase 3,000,000 shares of common stock at an
      exercise price of $0.533 per share on a cashless basis vesting on a
      pro-rata basis over a period of two
years;


·
            participation
      in all employee benefit plans and programs;
and


·
            reimbursement
      of reasonable expenses.





The term of the employment agreement is
36 months that may be renewed for one year periods unless either party notifies
the other within 60 days prior to the end of the employment term of its intent
to terminate the agreement.





On April
7, 2009, the Company entered into an amendment to the employment agreement of
Peter Lewis under which Mr. Lewis agreed to resign as the President, Chief
Executive Officer and as a member of the board of directors of the Company,
effective as of March 31, 2009. There was no disagreement or dispute between Mr.
Lewis and the Company which led to his resignation.  Effective as of
April 1, 2009, Mr. Lewis was appointed as Group Vice President and General
Manager of the Thin Film Group of the Company through June 1,
2010.  The Thin Film Group shall consist of the manufacture and sale
of PV Equipment.  In this capacity, Mr. Lewis will be primarily
responsible for generating orders and sales of PV Equipment and he will provide
general oversight of the manufacturing operations of the Kraft and BudaSolar
subsidiaries of the Company, and together with Messrs. Krafcsik and Horvath,
will be responsible for generating profits for the Thin Film Equipment
Group.





For the
period commencing April 1, 2009 and ending September 30, 2009, Mr. Lewis’ base
salary shall be fixed at the rate of $225,000, payable in monthly installments
of $18,750 each.  For the period commencing October 1, 2009, Mr.
Lewis’ salary shall be reduced to the rate of $180,000 per annum, payable in
monthly installments of $15,000 each.  On the earlier of June 30, 2009
or completion of an equity financing for the Company in excess of $3.0 million,
the Company will pay to Mr. Lewis in one payment all accrued and unpaid salary
that is owed under the original employment agreement for all periods through and
including the date of payment of such accrued and unpaid salary.  In
addition, Mr. Lewis shall be entitled to receive a sales commission on all PV
Equipment that is sold or on which firm orders are received by the Company
during the term of employment in an amount equal to: (i) a percentage to be
determined by mutual agreement on or before April 30, 2009, of the “net sales
price” (defined as gross selling price, less returns, discounts and allowances)
of such PV Equipment, as and when paid in cash by the customer to the Company
less
(ii) the amount of all other finders fees, commissions and other payments made
or payable by the Company to any other person, firm or corporation who
participates in or assists Mr. Lewis in the sale of such PV Equipment; or such
other bonus arrangement as may be made with Kraft management.





-50-


All
3,000,000 shares of common stock of ST Power owned by Mr. Lewis shall
immediately and irrevocably vest.  Moreover, with respect to the stock
options entitling Mr. Lewis to purchase up to 3,600,000 shares of Company common
stock (the “Option Shares”), the parties agreed as follows
(i)  options for 3,000,000 Options Shares shall be deemed to have
fully vested as of March 31, 2009 and the remaining 600,000 Option Shares that
have not vested will be forfeited as of March 31, 2009; (ii) the exercise price
of all stock options were reduced from $0.533 per share to $0.18 per share,
representing 100% of the closing price of Company common stock as at March 27,
2009, the effective date of the amendment to the employment agreement; (iii) all
stock options for vested Option Shares may be exercised on a “cashless exercise”
basis; and (iv) Mr. Lewis agreed to waive any rights to receive the 187,617
shares of Company common stock previously granted to him annually under the
original employment agreement.





In connection with the acquisition of
Kraft, the Company entered into consulting agreements with Robert Rubin and
Zoltan Kiss pursuant to which each consultant would receive an annual salary of
$160,000 per annum, reimbursement for up to $5,000 in expenses associated with
company activities and major medical benefits in consideration for services
performed on behalf of the company. Each of these agreements was for a term of
three years and has been supplanted by subsequent events. Mr. Rubin’s salary was
increased to $225,000 per annum when he assumed the duties of Chief Financial
Officer. In December 2007, Mr. Kiss resigned as director of the Company and
subsequently agreed to waive his rights to such payments pursuant to a pending
settlement agreement with the Company as described below.





On August
12, 2008 the Company entered into a stock purchase agreement (the “Purchase
Agreement”) with Zoltan Kiss (“Z. Kiss”), Gregory Joseph Kiss (“G. Kiss”), Maria
Gabriella Kiss (“M. Kiss”), and Steven H. Gifis (“Gifis”).  Under the
terms of the Purchase Agreement, the Company agreed to arrange for the sale, and
each of Z. Kiss, G. Kiss and M. Kiss (the “Selling Stockholders”) have agreed to
sell, an aggregate of 18.0 million shares of common stock of the Company owned
by the Selling Stockholders.  The purchase price for the 18.0 million
shares is $0.4139 per share, or a total of $7,450,200 for all of the
shares.





In
addition to the Purchase Agreement, on August 12, 2008 each of Z. Kiss,
Renewable Energy Solutions, Inc. (“RESI”), the Company, the Company’s subsidiary
Kraft, and Amelio Solar Inc. (“Amelio”) entered into a settlement agreement (the
“Settlement Agreement”) under which the parties agreed to terminate all prior
agreements and exchange mutual general releases.  The consummation of
the Settlement Agreement is subject to consummation of the transactions under
the above Purchase Agreement.  Z. Kiss and RESI have agreed to
transfer to Amelio (an entity controlled by unaffiliated third parties)
substantially all of the technology and intellectual property owned by Z. Kiss
and RESI relating to solar panel technology, including thin film amorphous
silicon and copper indium gallium diselenide technology.





The
Company intends to finance the purchase price for the 18.0 million shares being
sold by the Selling Stockholders by arranging for a sale of the shares, either
through a registered public offering for the account of the Selling
Stockholders, or a private purchase.





The
closing of the transactions under the Purchase Agreement, the Settlement
Agreement and the Strategic Alliance and Cross License Agreement will all occur
simultaneously and were scheduled to take place on or about November 30, 2008,
subject to extension to January 31, 2009, by mutual agreement of the Company and
Gifis (the “Outside Closing Date”); provided, that if Gifis shall receive
reasonable assurances from the investment banking firm underwriting securities
on behalf of the Company and the Selling Stockholders that the financing to pay
the purchase price for the shares being sold, will, in their judgment, be
consummated, Gifis shall extend the closing date
to January 31, 2009.





On
December 22, 2008, the Company and Kraft entered into an Amendment to the Master
Settlement Agreement and Stock Purchase Agreement (the “Amendment”) with Amelio,
RESI and the Selling Stockholders under which, among other things, the Outside
Closing Date as defined in the Settlement Agreement was revised to May 31,
2009.  In addition, the definition of “RESI Debt” owed to the Company
as defined in the Settlement Agreement was revised to the net amount of
indebtedness, net of fees payable under the existing agreements to the closing
date, and not to exceed $831,863 owed by RESI to the Company or its affiliates
as of the closing date; provided, that if the
Transferred CG Solar Equity (as defined below) is not delivered to the Company
by December 31, 2008, the RESI Debt shall be an amount not to exceed
$1,331,863.  Moreover, “RESI Debt Settlement Payment and Deliverables”
as set forth in the Settlement Agreement was amended to state that the RESI Debt
shall be paid to the Company as follows:





·
            on
      or before December 31, 2008, Z. Kiss shall cause RESI to transfer to the
      Company an aggregate of shares of CG Solar, formerly known as Weihai Blue
      Star Terra Photovoltaic Company (“CG Solar”), representing 5% of the
      issued and outstanding capital shares of CG Solar, and having an agreed
      upon value of $500,000 (the “Transferred CG Solar
  Equity”);


·
            the
      $831,863 balance of the RESI Debt (the “RESI Debt Balance”) shall be paid
      on or following the closing date as
follows:


·
            to
      the extent not previously paid in full, out of the net proceeds received
      by him from the public or private sale of all or a portion of his
      10,000,000 subject shares under the Purchase Agreement, Z. Kiss shall pay
      to the Company a total of up to $434,315 of the RESI Debt Balance, such
      amount to be appropriately pro-rated based upon $0.0434315 to be paid for
      each such 10,000,000 subject shares sold;
and




-51-




·
            unless
      a portion of the RESI Debt Balance has been paid by Z. Kiss in accordance
      with the above, the entire RESI Debt Balance(or any unpaid portion
      thereof) will be paid to the Company by Amelio on the earlier to occur of
      (i) receipt of net proceeds of a financing by Amelio (the “Amelio
      Financing”) of not less than $10,000,000, or (ii) receipt of payment by
      RESI or Amelio from CG Solar, the customer from whom the a-Si equipment
      giving rise to the RESI Debt was shipped.  To the extent that
      the RESI Debt Balance is paid in whole or in part by Z. Kiss, then Amelio
      shall issue to Z. Kiss a promissory note due and payable to the earlier to
      occur of the consummation of the Amelio Financing or one year from the
      closing date.


·
            Amelio
      agreed to guaranty payment of the RESI Debt Balance to the
      Company.





The
Settlement Agreement was further amended to state that Robert M. Rubin and The
Rubin Irrevocable Stock Trust (the “Trust”) agree that all indebtedness owed to
Mr. Rubin and the Trust by Nanergy Solar, Inc. (“Nanergy”), an affiliate of Z.
Kiss, will be deemed fully paid and satisfied, and Mr. Rubin and the Trust agree
to relinquish all capital stock or stock certificates in Nanergy.  To
the extent that Mr. Rubin and/or the Trust received notes or stock certificates
of Nanergy, the same will be returned to Nanergy on or before December 31,
2008.





Under the
Amendment, the Purchase Agreement was revised to state that in the event that
any time prior to the Outside Closing Date, any of the Selling Stockholders
receive a bona fide written offer (the “Offer”) from any financially credible
individual or institutional purchaser(s) to purchase as a principal in a private
transaction, all or any portion of the subject shares, then the Selling
Stockholders shall give written notice to the Company (the
“Notice”).  The Company shall have the right, within 30 days from
receipt of the Notice, to purchase that number of subject shares proposed to be
purchases in the Offer at the same price per share and payment terms as set
forth in the Offer.





There can be no assurance that the
Company will be able to obtain the requisite financing to consummate the
transactions contemplated by the above agreements.




Limitation
on Liability and Indemnification of Directors and Officers





The
Company's directors and executive officers are indemnified as provided by the
Delaware General Corporation Law and the Company's Bylaws. Limitation on
Liability and Indemnification of Directors and Officers under Delaware General
Corporation Law a director or officer is generally not individually liable to
the corporation or its shareholders for any damages as a result of any act or
failure to act in his capacity as a director or officer, unless it is proven
that:




1. his
act or failure to act constituted a breach of his fiduciary duties as a director
or officer; and


2. his
breach of those duties involved intentional misconduct, fraud or a knowing
violation of law.




This
provision is intended to afford directors and officers protection against and to
limit their potential liability for monetary damages resulting from suits
alleging a breach of the duty of care by a director or officer. As a consequence
of this provision, stockholders of ours will be unable to recover monetary
damages against directors or officers for action taken by them that may
constitute negligence or gross negligence in performance of their duties unless
such conduct falls within one of the foregoing exceptions. The provision,
however, does not alter the applicable standards governing a director's or
officer's fiduciary duty and does not eliminate or limit our right or any
stockholder to obtain an injunction or any other type of non-monetary relief in
the event of a breach of fiduciary duty.




As
permitted by Delaware law, our By-Laws include a provision which provides for
indemnification of a director or officer by us against expenses, judgments,
fines and amounts paid in settlement of claims against the director or officer
arising from the fact that he was an officer or director, provided that the
director or officer acted in good faith and in a manner he or she believed to be
in or not opposed to our best interests. We have purchased insurance under a
policy that insures both our company and our officers and directors against
exposure and liability normally insured against under such policies, including
exposure on the indemnities described above.




Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore,
unenforceable.





Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers or persons controlling the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.





-52-




Item 12. SecurityOwnership of Certain Beneficial
Owners and Management and Related Stockholder
Matters.





The following table sets forth
information regarding the beneficial ownership of our common stock as of April
13, 2009 by:




·
            each
      person known by us to be the beneficial owner of more than 5% of our
      outstanding shares of common stock;




·
              each
      of our officers and directors; and
  ·
                all
      our officers and directors as a
group.


Based on information available to us,
all persons named in the table have sole voting and investment power with
respect to all shares of common stock beneficially owned by them, unless
otherwise indicated. Beneficial ownership is determined in accordance with Rule
13d-3 under the Securities Exchange Act of 1934, as amended. In computing the
number of shares beneficially owned by a person or a group and the percentage
ownership of that person or group, shares of our common stock subject to options
or warrants currently exercisable or exercisable within 60 days after the date
of this prospectus are deemed outstanding, but are not deemed outstanding for
the purpose of computing the percentage of ownership of any other person.
Applicable percentage ownership as of April 13, 2009 is based upon 58,136,113
shares of common stock outstanding.





Unless otherwise indicated, the address
of each individual named below is our address located at 25 Highland Blvd, Dix
Hills, New York 11746.





Name of Beneficial Owner
            
            Number of
              Shares
            
            Percentage of
              Shares
              Beneficially
              OwnedRobert
      Rubin (1)
            
            
            0
            
            
            ---Dr.
      Boris Goldstein (1)
            
            
            250,000
            (2)
            
            *Gary
      Maitland, Esq. (1)
            
            
            250,000
            (2)
            
            *Zoltan
      Kiss(3)
            
            
            4,000,525
            (4)
            
            6.9
            %Rubin
      Family Irrevocable Trust
            
            
            2,039,038
            (5)
            
            3.5
            %Peter
      Lewis
            
            
            3,000,000
            (6)
            
            5.2
            %All
      Directors and Executive Officers as a group (3 persons)
            
            
            500,000
            (2)
            
            *




*Less
than 1%





(1)
Officer and/or Director of the Company.





(2) On
October 27, 2008, the Company issued 5 year options to purchase an aggregate of
500,000 shares of common stock at an exercise price equal to $0.42 per share to
Mr. Gary Maitland and Dr. Boris Goldstein as compensation for services to be
performed by them in their capacities as directors of the Company. Such options
vest in accordance with the following schedule: (i) options to purchase 83,333
shares of common stock vest on October 27, 2009; (ii) options to purchase 83,333
shares of common stock vest on October 27, 2010; and (iii) options to purchase
83,334 shares of common stock vest on October 27, 2011.





(3) Mr.
Kiss resigned as a director effective December 2007.





(4)
Represents 3,650,525 shares of Common Stock held by Mr. Kiss and 350,000 shares
of Common Stock held by Mr. Kiss’ wife.





(5) The
Rubin Family Irrevocable Stock Trust (the "Trust") was created by Robert M.
Rubin, a director, for the benefit of his wife Margery Rubin and their children.
Mr. Rubin disclaims beneficial interest in all securities of our company held by
the Trust.  The foregoing table does not include an additional minimum
of 5,206,503 shares of Common Stock to be issued to the Trust under the Algatec
Share Exchange Agreement, in the Trust’s capacity as a limited partner of the
Partnership and one of the members of the general partner of Algatec Equity
Partners, L.P.





(6)
Includes options to purchase 3,000,000 shares of common stock at $0.18 per share
which have fully vested as of March 31, 2009 pursuant to the terms of that
certain amended employment agreement with the Company dated as of April 7,
2009.





-53-





Item 13. Certain Relationships and Related
Transactions, and Director Independence.




All of
thesales during 2007 and a significant majority
of sales during 2008 have been Equipment Sales rather than Factory Sales.
In some cases the equipment was supplied directly to an end user, as in the case
of EPV Solar; in other cases the equipment was supplied to a general contractor
who subsequently delivered a complete factory, as in the case of equipment
supplied in collaboration with RESI and Terrasolar on behalf of CG Solar
(previously Blue Star Terra Corporation). In fact during late 2007 the main
strategic partner for the Company on such sales had been Renewable Energy
Solutions, Inc. (“RESI”). Prior to RESI
assuming the role of general contractor on the CG Solar project the primary
partner was Terra Solar Global, Inc. (“Terra Solar”).
  Terra
Solar, Inc. (“TSI”) owns approximately 49% of the outstanding securities of
Terra Solar. Zoltan Kiss, a shareholder and former director of the Company,
iswas also a shareholder of TSI. Zoltan Kiss, a
shareholder and former director of the Company, is also the Chairman and
majority owner of RESI. (Note:Mr. Kiss resigned as Chairman and a Director of the
Company effective December 20,2007).
 
 During 2007 the Company supplied equipment for
the Blue Star Terra Corporation factoryin China collaboration with both Terrasolar and RESI. The
Blue Star contract was originally held by Terra Solar and in April 2007 RESI
assumed rights and obligations under the
contract from Terra Solar. Revenues under the contract were $2,751,836 for the
year ended December 31, 2007, which were invoiced
to Terra Solar and later assumed by RESI.
 
 An additional $369,108 was invoiced to RESI for a
separate project. No revenue wasgenerated from either party during
2008.
  The
Company currently has related party trade receivables of $1,197,548 from RESI as
of December 31,2008, from the Blue Star Contract.and another $134,315 from another project. Note: RESI
assumed the trade payable from Terrasolar upon assumption of the Blue Star
contract in April 2007 and made several payments during 2007. While the
Company’s liability is contractually limited to the delivery of equipment and
not to turnkey manufacturing performance, there is practical risk of non-payment until the facility
has successfully passed an acceptance test a RESI
liability, and until payment is made in full by Blue Star. In fact the Company
has decided to reserve the entire remaining amount of the receivable of
$1,331,863 less $500,000.
 
 The Company has since decided to focus its sales effort
on Factory Sales.


The
Company signed a cooperative Research and Development Contract, and a Marketing
and Manufacturing Facility Turn On Function Contract with RESI on December 20,
2006 and January 30, 2007, respectively. Zoltan Kiss, the Company’s former
Chairman of the Board, is Chairman and majority shareholder of RESI. Payments
made to RESI under the Research and Development Contract were $120,000 and $360,000 for the years ended December 31, 2008 and
2007, respectively. No payments have been made to RESI under the Marketing and
Manufacturing Facility Turn On Function Contract for the year ended December 31,
2008.





During 2008 the Company also entered into a Settlement
Agreement with Zoltan Kiss, replacing both the Research and Development Contract
and the Marketing Contract.
  Related party revenues generated from RESI were
$0 and $369,108 for the years ended
December 31, 2008 and 2007, respectively. Related
party revenues generated from Terra Solar were $0 and $2,751,836 for the years
ended December 31, 2008 and 2007, respectively.


Related party cost of sales incurred from RESI were $0
and $99,329 for the years ended December 31, 2008 and 2007,
respectively.


The
Company has a dividend payment obligation due to the former shareholders valued
at $143,778 and $156,522 as of December 31,
2008 and 2007, respectively.


We
believe that all these transactions were entered into on terms as favorable as
could have been obtained from unrelated third parties because, based upon its
experience in the industry, we believe we would have had to pay independent
third parties more for comparable assets or services.





Other
than the above transactions, we have not entered into any material transactions
with any director, executive officer, and nominee for director, beneficial owner
of five percent or more of our common stock, or family members of such persons.
Also, other than the above transactions, we have not had any transactions with
any promoter.




Conflicts of Interest




Certain
potential conflicts of interest are inherent in the relationships between our
officers and directors of and us.




Conflicts Relating to Officers and
Directors




To date,
we do not believe that there are any conflicts of interest involving our
officers or directors.




With
respect to transactions involving real or apparent conflicts of interest, we
have adopted policies and procedures which require that: (i) the fact of
the relationship or interest giving rise to the potential conflict be disclosed
or known to the directors who authorize or approve the transaction prior to such
authorization or approval, (ii) the transaction be approved by a majority
of our disinterested outside directors, and (iii) the transaction be fair
and reasonable to us at the time it is authorized or approved by our
directors.





-54-


Item 14. Principal Accountant Fees and
Services.





Appointment
of Auditors





Our Board of Directors selected RBSM
LLP our auditors for the year ended December 31, 2008.





Audit
Fees





RBSM LLP billed us $ ___________ and $
___________ in fees for audit services for the year ended December 31, 2008 and
2007, respectively.





Audit-Related
Fees





We did not pay any fees to RBSM LLP for
assurance and related services that are not reported under Audit Fees above
during our fiscal year ending December 31, 2008. For the
fiscal year ending December 31, 2007, we paid fees of $__________ to RBSM LLP
for assurance and related services that are not reported under Audit Fees
above.





Tax
and All Other Fees





We did not
pay any fees to RBSM LLP for tax compliance, tax advice, tax planning or
other work during our fiscal years ending December 31, 2008 and December 31,
2007.





Pre-Approval
Policies and Procedures





We have implemented pre-approval
policies and procedures related to the provision of audit and non-audit
services. Under these procedures, our audit committee pre-approves all services
to be provided by RBSM LLP and the estimated fees related to these
services.





With respect to the audit of our
financial statements as of December 31, 2008, and for the year then ended, none
of the hours expended by RBSM LLP’s engagement to audit those financial
statements were attributed to work by persons other than RBSM LLP, and its
full-time, permanent employees.




Item 15. Exhibits,
Financial Statement Schedules.





(a)
Financial Statements and Schedules





1. Financial
Statements





The following financial statements are
filed as part of this report under Item 8 of Part II “Financial Statements and
Supplementary Data:





A.           Consolidated
Balance Sheets as of December 31, 2008 and 2007.




B.           Consolidated
Statements of Operations and Comprehensive Losses for the years ended of
December 31, 2008 and 2007.




C.           Consolidated
Statements of Stockholders’ Deficit for the years ended of December 31, 2008 and
2007.




D.







2.Financial
Statement Schedules





Financial statement schedules not
included herein have been omitted because they are either not required, not
applicable, or the information is otherwise included herein.





(b)
Exhibits.





-55-




EXHIBIT INDEX




Exhibit
      No.
            
            Description3.1
            
            Certificate
      of Incorporation of the Company (incorporated by reference to the
      Registration Statement filed on Form S-1 with the Securities and Exchange
      Commission on January 4, 2002).3.2
            
            Bylaws
      of the Company (incorporated by reference to the Registration Statement
      filed on Form S-1 with the Securities and Exchange Commission on January
      4, 2002).10.1
            
            Securities
      Purchase Agreement dated June 14, 2006 by and among the Company and the
      June 2006 Investors (incorporated by reference to the Current Report on
      Form 8-K filed with the Securities and Exchange Commission on June 19,
      2006).10.2
            
            Registration
      Rights Agreement dated June 14, 2006 by and among the Company and the June
      2006 Investors (incorporated by reference to the Current Report on Form
      8-K filed with the Securities and Exchange Commission on June 19,
      2006).10.3
            
            Form
      of Senior Secured Convertible Note dated June 14, 2006 (incorporated by
      reference to the Current Report on Form 8-K filed with the Securities and
      Exchange Commission on June 19, 2006).10.4
            
            Form
      of Series A Common Stock Purchase Warrant dated June 14, 2006
      (incorporated by reference to the Current Report on Form 8-K filed with
      the Securities and Exchange Commission on June 19,
  2006).10.5
            
            Form
      of Series B Common Stock Purchase Warrant dated June 14, 2006
      (incorporated by reference to the Current Report on Form 8-K filed with
      the Securities and Exchange Commission on June 19,
  2006).10.6
            
            Form
      of Series C Common Stock Purchase Warrant dated June 14, 2006
      (incorporated by reference to the Current Report on Form 8-K filed with
      the Securities and Exchange Commission on June 19,
  2006).10.7
            
            Form
      of Series D Common Stock Purchase Warrant dated June 14, 2006
      (incorporated by reference to the Current Report on Form 8-K filed with
      the Securities and Exchange Commission on June 19,
  2006).10.8
            
            Security
      Agreement dated June 14, 2006 by and between the Company and Smithfield
      Fiduciary LLC as Collateral Agent (incorporated by reference to the
      Current Report on Form 8-K filed with the Securities and Exchange
      Commission on June 19, 2006).10.9
            
            Guaranty
      dated as of June 14, 2006 by and between Kraft Rt. and Smithfield
      Fiduciary LLC as Collateral Agent (incorporated by reference to the
      Current Report on Form 8-K filed with the Securities and Exchange
      Commission on June 19, 2006).10.10
            
            Pledge
      Agreement dated as of June 14, 2006 by and between the Company and
      Smithfield Fiduciary LLC as Collateral Agent (incorporated by
      reference to the Current Report on Form 8-K filed with the Securities and
      Exchange Commission on June 19, 2006).10.11
            
            Account
      Receivables Lien Agreement entered by and between Kraft Rt. and the
      Investors dated June 12, 2006 (incorporated by reference to the Current
      Report on Form 8-K filed with the Securities and Exchange Commission on
      June 19, 2006).10.12
            
            Mortgage
      Agreement entered by and between Kraft Rt. and the Investors dated June
      12, 2006 (incorporated by reference to the Current Report on Form 8-K
      filed with the Securities and Exchange Commission on June 19,
      2006).10.13
            
            Security
      Agreement entered by and between Kraft Rt. and the Investors dated June
      12, 2006 (incorporated by reference to the Current Report on Form 8-K
      filed with the Securities and Exchange Commission on June 19,
      2006).10.14
            
            Securities
      Purchase Agreement dated September 22, 2005 by and among the Company and
      Iroquois Master Fund Ltd., Smithfield Fiduciary LLC and Lilac Ventures
      Master Fund (incorporated by reference to the Current Report on Form 8-K
      filed with the Securities and Exchange Commission on September 30,
      2005).10.15
            
            Form
      of Senior Secured Convertible Note September 23, 2005 (incorporated by
      reference to the Current Report on Form 8-K filed with the Securities and
      Exchange Commission on September 30, 2005).10.16
            
            Security
      Agreement dated September 22, 2005 by and among the Company and Iroquois
      Master Fund Ltd., Smithfield Fiduciary LLC and Lilac Ventures Master Fund
      (incorporated by reference to the Current Report on Form 8-K filed with
      the Securities and Exchange Commission on September 30,
    2005).10.17
            
            Guaranty
      of Payment (incorporated by reference to the Current Report on Form 8-K
      filed with the Securities and Exchange Commission on September 30,
      2005).10.18
            
            Form
      of Amended and Restated Note issued on due March 20, 2007 (incorporated by
      reference to the Current Report on Form 8-K filed with the Securities and
      Exchange Commission on July 17, 2006).10.19
            
            Form
      of Warrant issued on March 16, 2006 (incorporated by reference to the
      Current Report on Form 8-K filed with the Securities and Exchange
      Commission on July 17, 2006).10.20
            
            Securities
      Purchase Agreement dated March 16, 2006 (incorporated by reference to the
      Current Report on Form 8-K filed with the Securities and Exchange
      Commission on July 17, 2006).10.21
            
            Amendment
      No. 1 to the Securities Purchase Agreement dated May 18, 2006
      (incorporated by reference to the Current Report on Form 8-K filed with
      the Securities and Exchange Commission on July 17,
  2006).10.22
            
            Amendment
      No. 1 to the Senior Secured Convertible Note (incorporated by reference to
      the Current Report on Form 8-K filed with the Securities and Exchange
      Commission on July 17, 2006).




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10.23
            
            Amendment
      No. 1 to the Subscription Agreement for the purchase of shares of common
      stock (incorporated by reference to the Current Report on Form 8-K filed
      with the Securities and Exchange Commission on July 17,
    2006).10.24
            
            Form
      of Subscription Agreement - Solar Thin Power Offering (incorporated by
      reference to the Current Report on Form 8-K filed with the Securities and
      Exchange Commission on December 28, 2007).10.25
            
            Form
      of Series E Warrant (incorporated by reference to the Current Report on
      Form 8-K filed with the Securities and Exchange Commission on December 28,
      2007).10.26
            
            Securities
      Purchase Agreement dated March 16, 2006 by and between the Company, Kraft
      Rt., Zoltan Kiss and Dr. Laszlo Farkas (incorporated by reference to the
      Current Report on Form 8-K filed with the Securities and Exchange
      Commission on July 17, 2006).10.27
            
            Securities
      Purchase Agreement dated March 20, 2006 by and between the Company, Kraft
      Rt., Nagyezsda Kiss, Joseph Gregory Kiss, Maria Gabriella Kiss and Gyula
      Winkler (incorporated by reference to the Current Report on Form 8-K filed
      with the Securities and Exchange Commission on July 17,
    2006).10.28
            
            Securities
      Purchase Agreement dated May 20, 2006 by and between the Company, Kraft
      Rt., Joel Spival and Jacqueline Spivak (incorporated by reference to the
      Current Report on Form 8-K filed with the Securities and Exchange
      Commission on June 19, 2006).10.29
            
            Secured
      Promissory Note made by Kraft Rt. dated September 28, 2005 (incorporated
      by reference to the Current Report on Form 8-K filed with the Securities
      and Exchange Commission on September 30, 2005).10.30
            
            Security
      Interest and Pledge Agreement entered by and between American United
      Global, Inc., Kraft Rt. and Zoltan Kiss (incorporated by reference to the
      Current Report on Form 8-K filed with the Securities and Exchange
      Commission on September 30, 2005).10.31
            
            Agreement
      of Settlement entered on September 27, 2005 by and among American United
      Global, Inc., North Sound Legacy International Ltd. and North Sound Legacy
      Institutional Fund LLC (incorporated by reference to the Current Report on
      Form 8-K filed with the Securities and Exchange Commission on September
      30, 2005).10.32
            
            Supplemental
      Agreement entered on September 22, 2005 by and among Altitude Group, LLC,
      Birch Associates, Inc., and D.C. Capital LLC and American United Group,
      Inc. (incorporated by reference to the Current Report on Form 8-K filed
      with the Securities and Exchange Commission on September 30,
      2005).10.33
            
            Amendment
      No. 1 to the Share Purchase Agreement dated December 29, 2005
      (incorporated by reference to the Current Report on Form 8-K filed with
      the Securities and Exchange Commission on December 30,
    2005).10.34
            
            Letter
      Agreement by and between the Company and Kraft Rt. (incorporated by
      reference to the Current Report on Form 8-K filed with the Securities and
      Exchange Commission on December 30, 2005).10.35
            
            Cooperative
      R&D Contract Between Renewable Energy Solutions Inc. and Solar Thin
      Films Inc. dated December 19, 2006 (incorporated by reference to the
      Current Report on Form 8-K filed with the Securities and Exchange
      Commission on December 21, 2006).10.36
            
            Secured Term Note dated February
      11, 2008 (incorporated by reference to the
      Current Report on Form 8-K filed with the Securities and Exchange
      Commission on April 17, 2008).10.37
            
            Exclusive
      Project Management Design and Marketing Agreement dated February 11, 2008
      (incorporated by reference to the Current Report on Form 8-K filed with
      the Securities and Exchange Commission on April 17,
  2008).10.38
            
            Security
      Agreement dated February 11, 2008 (incorporated by reference to the
      Current Report on Form 8-K filed with the Securities and Exchange
      Commission on April 17, 2008).10.39
            
            Stock
      Purchase Agreement dated as of August 12, 2008 by and among Solar Thin
      Films, Inc., Zoltan Kiss, Gregory Joseph Kiss, Maria Gabriella Kiss and
      Steven Gifis, as sellers’ agent (incorporated by reference to the Current
      Report on Form 8-K filed with the Securities and Exchange Commission on
      August 18, 2008).10.40
            
            Master Settlement Agreement dated
      as of August 12, 2008 by and among Solar Thin Films, Inc., Kraft
      Elektronikai Zrt, Zoltan Kiss, Amelio Solar, Inc. and Renewable Energy
      Solutions, Inc. (incorporated by reference to the
      Current Report on Form 8-K filed with the Securities and Exchange
      Commission on August 18, 2008).10.41
            
            Strategic Alliance and Cross
      License Agreement dated as of August 12, 2008 by and among Solar Thin
      Films, Inc., Kraft Elektronikai Zrt and Amelio Solar, Inc. (incorporated by reference to the
      Current Report on Form 8-K filed with the Securities and Exchange
      Commission on August 18, 2008).10.42
            
            Stock
      Exchange Agreement dated as of September 29, 2008 by and among Solar Thin
      Films, Inc., Kraft Electronikai Zrt, BudaSolar Technologies Co. Ltd., New
      Palace Investments Ltd., Istvan Krafcsik and Attila Horvath (incorporated
      by reference to the Current Report on Form 8-K filed with the Securities
      and Exchange Commission on October 3, 2008).10.43
            
            Cooperation
      Agreement dated as of September 29, 2008 by and among Solar Thin Films,
      Inc., Kraft Electronikai Zrt, BudaSolar Technologies Co. Ltd., Istvan
      Krafcsik and Attila Horvath (incorporated by reference to the Current
      Report on Form 8-K filed with the Securities and Exchange Commission on
      October 3, 2008).10.44
            
            Form
      of Shareholders Agreement by and among Kraft and the shareholders of Kraft
      listed on the signatures pages thereto (incorporated by reference to the
      Current Report on Form 8-K filed with the Securities and Exchange
      Commission on October 3, 2008).




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10.45
            
            Form
      of Employment Agreement between Kraft and Istvan Krafcsik (incorporated by
      reference to the Current Report on Form 8-K filed with the Securities and
      Exchange Commission on October 3, 2008).10.46
            
            Form
      of Employment Agreement between Kraft and Attila Horvath (incorporated by
      reference to the Current Report on Form 8-K filed with the Securities and
      Exchange Commission on October 3, 2008).10.47
            
            Stock
      Exchange Agreement dated as of October 30, 2008 by and among Solar Thin
      Films, Inc., Algatec Equity Partners, L.P., Rainer Ruschke, Ullrich Jank,
      Dr. Stefan Malik, Andre Freud, Anderkonto R. Richter, as Trustee and
      Algatec Solar AG (incorporated by reference to the Current Report on Form
      8-K filed with the Securities and Exchange Commission on November 6,
      2008).10.48
            
            Share
      Purchase Agreement dated as of October 30, 2008 by and among Algatec
      Equity Partners, L.P., Rainer Ruschke, Ullrich Jank, Dr. Stefan Malik,
      Andre Freud, Anderkonto R. Richter, as Trustee, and Algatec Solar AG
      (incorporated by reference to the Current Report on Form 8-K filed with
      the Securities and Exchange Commission on November 6,
    2008).10.49
            
            Loan Agreement, dated as of
      October 30, 2008 by and between Algatec Equity Partners, L.P. and Algatec
      Solar AG (incorporated by reference to the
      Current Report on Form 8-K filed with the Securities and Exchange
      Commission on November 6, 2008).10.50
            
            Agreement of Limited Partnership
      of Algatec Equity Partners, L.P. (incorporated by reference to the
      Current Report on Form 8-K filed with the Securities and Exchange
      Commission on November 6, 2008).10.51
            
            Amendment
      to Master Settlement Agreement by and among Solar Thin Films, Inc., Kraft
      Elektronikai Zrt, Zoltan Kiss, Amelio Solar, Inc. and Renewable Energy
      Solutions, Inc. and Amendment to Stock Purchase Agreement by and among
      Solar Thin Films, Inc., Zoltan Kiss, Gregory Joseph Kiss and Maria
      Gabriella Kiss dated as of December 22, 2008 (incorporated by reference to
      the Current Report on Form 8-K filed with the Securities and Exchange
      Commission on December 24, 2008).10.52
            
            Amended
      and Restated Stock Exchange Agreement dated as of April 2, 2009 by and
      among Solar Thin Films, Inc., Kraft Electronikai Zrt, BudaSolar
      Technologies Co. Ltd., New Palace Investments Ltd., Istvan Krafcsik and
      Attila Horvath (incorporated by reference to the Current Report on Form
      8-K filed with the Securities and Exchange Commission on April 7,
      2009).10.53
            
            Shareholders
      Agreement dated as of April 2, 2009 by and among Kraft Electronikai Zrt
      and the shareholders of Kraft Electronikai Zrt listed on the signatures
      pages thereto (incorporated by reference to the Current Report on Form 8-K
      filed with the Securities and Exchange Commission on April 7,
      2009).10.54
            
            Employment
      Agreement by and between Kraft Electronikai Zrt and Istvan Krafcsik,
      effective as of April 15, 2009 (incorporated by reference to the Current
      Report on Form 8-K filed with the Securities and Exchange Commission on
      April 7, 2009).10.55
            
            Employment
      Agreement by and between Kraft Electronikai Zrt and Attila Horvath,
      effective as of April 15, 2009 (incorporated by reference to the Current
      Report on Form 8-K filed with the Securities and Exchange Commission on
      April 7, 2009).10.56
            
            Side
      Letter Bonus Agreement to the Share Exchange Agreement dated as of April
      2, 2009 by and among Solar Thin Films, Inc., Kraft Electronikai Zrt, New
      Palace Investments Ltd., Istvan Krafcsik and Attila Horvath (incorporated
      by reference to the Current Report on Form 8-K filed with the Securities
      and Exchange Commission on April 7, 2009).10.57
            
            Inter-Company
      Services Agreement dated as of April 2, 2009 by and among Solar Thin
      Power, Inc., Kraft Electronikai Zrt and BudaSolar Limited (incorporated by
      reference to the Current Report on Form 8-K filed with the Securities and
      Exchange Commission on April 7, 2009).10.58
            
            Amendment
      to Employment Agreement dated as of April 7, 2009 by and between Solar
      Thin Films, Inc. and Peter Lewis (incorporated by reference to the Current
      Report on Form 8-K filed with the Securities and Exchange Commission on
      April 7, 2009).14.1
            
            Code
      of Ethics (incorporated by reference to the Annual Report on Form 10-K
      filed with the Securities and Exchange Commission on July 16,
      2004).21.1
            
            List
      of Subsidiaries of the Company (incorporated by reference to the
      Registration Statement on Form SB-2 filed with the Securities and Exchange
      Commission on July 25, 2006).31.1
            
            Certification
      by Chief Executive Officer pursuant to Sarbanes Oxley Section
      302.*31.2
            
            Certification
      by Chief Financial Officer pursuant to Sarbanes Oxley Section
      302.*32.1
            
            Certification
      by Chief Executive Officer pursuant to 18 U.S.C. Section
      1350.*32.2
            
            Certification
      by Chief Financial Officer pursuant to 18 U.S.C. Section
      1350.*




* Filed
herewith.




-58-





SIGNATURES





Pursuant to the requirements of
Section 13 or 15(d) of the Exchange Act, the registrant has duly caused
this Form 10-K Annual Report to be signed on its behalf by the undersigned
on April 15, 2009, thereunto duly authorized.








SOLAR THIN FILMS,
      INC./s/
      Robert M. RubinRobert
      M. RubinChief
      Executive Officer (Principal Executive Officer) and Chief Financial
      Officer (Principal Accounting and Financial Officer)




Pursuant
to the requirements of the Securities Exchange Act of 1934, this Form 10-K
Annual Report has been signed by the following persons in the capacities and on
the dates indicated.




Signature
            
            Position
            
            Date/s/
      Robert M. Rubin
            
            Chief
      Executive Officer, Chief Financial Officer and
            
            April
      15, 2009Robert
      M. Rubin
            
            Chairman
      of the Board of Directors/s/ Boris Goldstein
            
            Director
            
            April
      15, 2009Dr.
      Boris Goldstein/s/
      Gary Maitland
            
            Director
            
            April
      15, 2009Gary
      Maitland, Esq.




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