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
      1934





For the fiscal year
ended December 31, 2009





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





For the transition
period from __________ to __________





Commission
File Number: 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.)





116
John Street, Suite 1120, New York, New York 10038


(Address
of principal executive offices, including zip code)





Registrant’s
telephone number, including area code:


(212)
629-8260





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 $.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.


Yes
 ̈ No x





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


Yes
 ̈ No x





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 whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes  ̈ No  x





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.  Yes  ̈ No  x





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 $27,094,615 as of June 30, 2009.





As of March 22, 2010, 19,039,850 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.





2009
FORM 10-K ANNUAL REPORT




TABLE OF
CONTENTS





PagePART I
            
            
            
            2Item 1.
            
            Business.
            
            4Item 1A.
            
            Risk
      Factors.
            
            13Item 1B.
            
            Unresolved
      Staff Comments.
            
            21Item 2.
            
            Properties.
            
            22Item 3.
            
            Legal
      Proceedings.
            
            23Item 4.
            
            Submission
      of Matters to a Vote of Security Holders.
            
            23PART
      II
            
            
            
            24Item 5.
            
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities.
            
            24Item 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.
            
            40Item 8.
            
            Financial
      Statements and Supplementary Data.
            
            41Item 9.
            
            Changes
      and Disagreements With Accountants on Accounting and Financial
      Disclosure.
            
            42Item 9A.
            
            Controls
      and Procedures.
            
            42Item 9B.
            
            Other
      Information.
            
            43PART
      III
            
            
            
            44Item 10.
            
            Directors,
      Executive Officers and Corporate Governance.
            
            44Item 11.
            
            Executive
      Compensation.
            
            46Item
      12.
            
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.
            
            55Item
      13.
            
            Certain
      Relationships and Related Transactions, and Director
      Independence.
            
            56Item
      14.
            
            Principal
      Accounting Fees and Services.
            
            57PART
      IV
            
            
            
            58Item
      15.
            
            Exhibits,
      Financial Statement Schedules.
            
            58Signatures
            
            63




1





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:





·
            we
      have a significant working capital shortage; as of the filing date of this
      report, we are currently in default in payment of $1 million of
      indebtedness which became due in March 2009 and $268,000 of indebtedness
      (plus redemption penalties and accrued interest) which became due in June
      2009, and may face litigation or even bankruptcy if we are unable to meet
      or restructure 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 additional losses in 2010
      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;





·
            we
      are required to raise additional capital to support our Kraft Elektronkai
      Zrt operating subsidiary and complete our acquisition of BudaSolar
      Technologies Co., Ltd.;





·
            our
      sole customer has advised that they are withholding their final payment to
      us due to certain maintenance and repair complaints with respect to our
      amorphous silicon equipment line;





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





·
            we
      may not be able to complete our proposed acquisition of BudaSolar
      Technologies Co., Ltd.;





·
            we
      may be unable to acquire a significant equity interest in Algatec Solar
      AG;





·
            our
      equipment business is dependent on one customer and loss of this customer
      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
      “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;




2




·
            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
      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;





·
            our
      research and development activities may not yield any commercially viable
      technologies; 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.




3





Item 1. Business





Overview





Solar
Thin Films, Inc. (the “Company”) is a business focused on the solar energy
industry.  We engage in the design, manufacture and installation
of thin-film amorphous silicon (“a-Si”) photovoltaic manufacturing equipment.
The equipment is used in plants that produce photovoltaic thin-film a-Si solar
panels or modules. The Company operates through its wholly owned
subsidiary, Kraft Elektronikai Zrt (“Kraft”). The Company expects the primary
use of such photovoltaic thin film modules will be the construction of solar
power plants by corporations and governments throughout the world.





On April
3, 2009, the Company and Kraft entered into a share exchange agreement with
BudaSolar Technologies Co. Ltd. (“BudaSolar”) and its
shareholders.  The agreement restated a prior agreement entered into
in 2008.  Under the terms of the restated agreement, the BudaSolar
shareholders were to have acquired a 49% equity interest in Kraft, in exchange
for transferring 100% of the BudaSolar equity to Kraft.  Such
agreement was subject to the satisfaction of certain closing conditions,
including the Company’s repayment of all outstanding June 2006 convertible notes
in order to secure the release of the shares of Kraft pledged as security to the
June 2006 note holders.  Although only $268,000 of such notes are
still outstanding, the Kraft shares still remain subject to the pledge
agreement.  At the present time, the Company is negotiating a new
agreement with the BudaSolar shareholders, the proposed terms of which are
described below.





For more
than the past 18 months, BudaSolar has been providing technical support to our
Kraft subsidiary under a separate agreement.  In connection with these
services, Kraft has paid $1,370,000 in advances to BudaSolar during the second
quarter of 2009. BudaSolar has provided $747,891 worth of services in 2009 to
Kraft, which left a credit balance of advances wired to BudaSolar of $622,109 as
of December 31, 2009.  In addition, during 2008, BudaSolar received
$750,000 in advances from the Company, which was fully repaid in the second
quarter of 2009.





The
Company’s Kraft subsidiary is highly dependent upon the ongoing technical
expertise of the BudaSolar personnel in completing and making operational the
Kraft line of a-Si solar module equipment.   In such connection,
Kraft recently completed the installation of equipment for its sole customer,
Grupo Unisolar SA in Spain.  The customer has resisted payment of the
final €968,265 installment due under the April 8, 2008 contract allegedly due to certain maintenance
and repair complaints with respect to our amorphous silicon equipment
line.  Representatives of BudaSolar are assisting Kraft in
attempting to resolve this problem.  If the Company is unable to
satisfy its only existing customer, its a-Si module equipment business could be
materially and adversely affected.





There can
be no assurance that the Company will enter into the new share exchange
agreement with BudaSolar and its shareholders, or if such agreement is entered
into by the parties, that the Company will be able to consummate the acquisition
of BudaSolar and the transactions contemplated therein.





Effective as of October 30, 2008, the
Company entered into a stock exchange agreement with Algatec Solar AG and its
shareholders, which expired on July 15, 2009.  Algatec produces, sells
and distributes metallurgical and other types of crystalline silicon solar
panels or modules.  As of the date of this report, the Company intends
to acquire Algatec Equity Partners LP, a Delaware limited partnership (the
“Algatec Partnership”), which, in turn, owns a 47% equity interest in the
capital stock of Algatec Solar AG.  As previously disclosed, a trust
established by Robert M. Rubin, the President and Chief Executive Officer of the
Company, owns approximately 25% of the equity of the Algatec Partnership and is
an affiliate of the general partner of the Algatec Partnership.  It is
anticipated that the equity stake in Algatec will be obtained from the Algatec
Partnership in exchange for approximately 43.0 million shares of the Company’s
Common Stock.  However, such number of shares of Common Stock are
subject to adjustment based on an independent fairness opinion to be obtained by
the Company. The acquisition of the partnership and its equity in Algatec is
subject to (i) execution of definitive exchange agreements, (ii) obtaining the
requisite approvals and consents of the partners of the partnership, (iii) the
delivery of audited financial statements of Algatec for the two fiscal years
ended December 31, 2009, and (iv) receipt of the fairness opinion. The Company
anticipates that the acquisition of the partnership and its 47% equity interest
in Algatec will be completed within the next 90 days.  The Company is
also continuing negotiations with the other shareholders of Algatec to acquire
the remaining 53% interest in the capital stock of Algatec.  There can
be no assurance that the conditions to complete the acquisition of the 47%
equity interest in Algatec owned by the Algatec Partnership will be satisfied to
enable the Company to acquire such equity, or that the Company will be able to
acquire any additional equity interests in Algatec.





In the event that the Company is unable
to acquire BudaSolar or any of the equity of Algatec, absent an alternative
strategic acquisition or a significant increase in the current business of its
Kraft subsidiary, it is unlikely that the Company will be able to achieve its
expansion plans in the solar business, and may be required to cease doing
business altogether.




4




Consummation
of either or both of the BudaSolar 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 $1.3 million of indebtedness currently in
default as of the filing date of this report ($1 million of which became in
default in March 2009 and $268,000 of indebtedness which became in default in
June 2009 (plus redemption penalties and accrued interest)) 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.





Subject
to consummation of either or both of the BudaSolar or Algatec transactions, the
Company will seek to 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 through governmental incentive programs, 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.





Kraft and
BudaSolar 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 116 John Street, Suite
1120, New York, New York 10038.  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 addition, the Company acquired the remaining 4.5% minority interest in
August 2007 and, as a result, now conducts its operations via Kraft, its
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 production facilities in
New Jersey, Germany, Hungary, China, Taiwan, Greece and Portugal. In producing
equipment for these facilities, Kraft developed substantial equipment
manufacturing expertise. More recently as a supplier for a solar project in
Weihai, China, Kraft developed additional process expertise required to allow it
to become a manufacturer of “turnkey” plants, including the delivery of both
equipment and services that produce photovoltaics modules utilizing thin-film
technology. Kraft has delivered its first "turnkey" plant in Spain which is now
in final acceptance testing.





BudaSolar
Technologies Co. Ltd.





On April
3, 2009, the Company and Kraft entered into a restated share exchange agreement
with BudaSolar and its shareholders.  Under the terms of the
agreement, the BudaSolar shareholders were to have acquired a 49% equity
interest in Kraft, in exchange for transferring 100% of the BudaSolar equity to
Kraft.  Such agreement was subject to the satisfaction of certain
closing conditions, including the Company’s repayment of all outstanding June
2006 convertible notes in order to secure the release of the shares of Kraft
pledged as security to the June 2006 note holders.  Although only
$268,000 of such notes remain outstanding, the Kraft shares still remain subject
to the pledge agreement.




5




At the
present time, the Company is negotiating a new agreement with the BudaSolar
shareholders.  The proposed revised transaction contemplates that the
Company will directly acquire 100% of the share capital of BudaSolar in exchange
for 70,000 shares of the Company’s Series B-5 convertible voting preferred stock
(the “B-5 Preferred Stock”).  The B-5 Preferred Stock has a
liquidation value of $7.0 million and is convertible at any time by the holders
into a minimum of 2.1 million and a maximum of 49.0 million shares of the
Company’s common stock, $0.01 par value per share (the “Common
Stock”).  The aggregate number of shares of Company Common Stock into
which all if the B-5 Preferred Stock would be convertible (the “Conversion
Shares”) will depend upon the audited combined pre-tax income of the Company’s
Kraft and BudaSolar subsidiary corporations (the “Corporations Pre-Tax Income”)
at the end of each of the five consecutive fiscal years ending December 31, 2010
through December 31, 2014 (the “Measuring Period”).  The target
Corporations Pre-Tax Income and the corresponding number of Conversion Shares
that can be exercised at the end of any one or more fiscal years during the
Measuring Period is based on a “grid” of such Pre-Tax Income and Conversion
Shares.  For example if the Corporations Pre-Tax Profits at the end of
any of the five fiscal years in the Measuring Period is 0 to $2.5 million, the
number of Conversion Shares would be 2.1 million; if such Pre-Tax Income is
$10.0 million, then the number of Conversion Shares would be 21.0 million; and
if such Pre-Tax Income is $55.0 million or more, the Conversion Shares would be
49.0 million.  On March 31, 2015, any B-5 Preferred Stock not
converted into Common Stock would automatically convert based upon the
Corporations Pre-Tax Income for the fiscal year ending December 31,
2014.





At the time of execution of the
BudaSolar purchase agreement, the Company will provide $55,000 to BudaSolar as a
working capital advance, and is obligated to provide additional working capital
thereafter.  In addition, we shall assume the obligations of repayment
of all outstanding loans made by the BudaSolar shareholders or their affiliates
to BudaSolar prior to the date of the agreement, so that, as of the closing
date, BudaSolar will have either positive stockholders equity or capital of not
less than US $1,000.  It is expected that such loans will be evidenced
by a 5 year subordinated note of the Company, which shall (i) bear interest at
an annual rate equal to LIBOR plus a margin of 3%; and (ii) will be repaid to
the BudaSolar shareholders following completion of working capital contributions
to BudaSolar and Kraft by the Company and thereafter only out of excess cash
flow of BudaSolar and Kraft.





Under the
terms of a separate agreement with BudaSolar, Kraft has contracted to purchase
from BudaSolar (1) equipment assembly services on some of its equipment based on
a fixed fee per equipment, and (2) installation related technical services based
on hourly rates.  In connection with these services, Kraft has paid
$1,370,000 in advances to BudaSolar during the second quarter of 2009. BudaSolar
has provided $747,891 worth of services in 2009 to Kraft, which left a balance
of advances wired to BudaSolar of $622,109 as of December 31, 2009.  During
2008, BudaSolar received $750,000 pursuant to the Stock Exchange Agreement from
the Company, which was fully repaid in the second quarter of 2009.





In the event that the Company
consummates the BudaSolar acquisition, each of Messrs. Robert M. Rubin, Gary
Maitland and Dr. Boris Goldstein (the current board members of the Company) and
Istvan Krafcsik and Attila Horvath, the principal stockholders and executive
officers of BudaSolar, have agreed to vote their shares of voting capital stock
of the Company to elect to the board of directors of the Company and its Kraft
and BudaSolar subsidiaries five persons, two of whom shall be Istvan Krafcsik
and Attila Horvath, two of which would be designated by the Company and a fifth
independent director acceptable to Messrs. Krafcsik and
Horvath.   In addition, such parties and the Company agreed that
during the five year Measuring Period, so long as the Corporations Pre-Tax
Income equaled or exceeded $5.0 million, the members of the Company’s board of
directors will include Messrs. Krafscik and Horvath and other persons reasonably
acceptable to them.





BudaSolar
currently operates its business at Kraft’s facility in Budapest, and the
BudaSolar personnel and management work closely with the Kraft personnel and
management.  Kraft is highly dependent upon the ongoing technical
expertise of the BudaSolar personnel in executing the turn-on and related
computer functions of the Kraft line of a-Si solar module equipment, and making
such equipment lines operational.   In such connection, in April
2010 the Company recently completed the installation of equipment for Grupo
Unisolar SA in Spain.  The customer has resisted payment of the final
€968,265 installment due under the April 8, 2008 contract allegedly due to certain maintenance
and repair complaints with respect to our amorphous silicon equipment
line.  Representatives of BudaSolar are assisting Kraft in
attempting to resolve this problem and the Company expects to collect the
payment in full. If the Company is unable to satisfy its only existing customer,
its a-Si module equipment business could be materially and adversely
affected.





The ongoing operations of Kraft and
BudaSolar will require approximately $3.2 million of working capital to sustain
and expand their operations during 2010.   In addition, if the
Company were to acquire Algatec, it is anticipated that a condition of such
acquisition would be that the Company provide expansion financing of not less
than $5.0 million for that corporation.  Accordingly, the Company’s
ability to achieve it acquisition plans and expand its business will require the
Company to source additional debt or equity financing from third
party.  Absent receipt of the final €968,265 installment due under the
April 8, 2008 contract with Group Solar AG, the Company’s operating subsidiaries
may be unable to pay its obligations as they come due.




6




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 “Algatec 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 Marital 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 Marital 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 were 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 up to 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, 2008, the Partnership consummated the
Second Closing with Algatec and funded a loan of €2,000,000 ($2.6 million).
Ultimately, the Partnership provided total funding of approximately $5.75
million to Algatec which, after allowing for unfavorable currency conversion
rates, left the Partnership with a total equity ownership in Algatec of
approximately 47% 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 shares of Company capital
stock. Consummation of the Algatec acquisition is subject to certain conditions,
including Algatec obtaining up to $50.0 million financing for Algatec to enable
it to construct the addition to its existing manufacturing facility and purchase
the necessary equipment to expand its business.  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.  The
requisite financing for Algatec was not obtained and the agreement expired on
July 15, 2009.




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 owned a 15% interest in CG Solar Company Limited, the
Company’s joint venture in China (and agreed to purchase another 5%), and was 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 CG
Solar 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
Thin Power had the right to require Solar Thin Films to repurchase half of their
portion of their minority equity in Solar Thin Power for $1,767,500. This
obligation was eliminated with the merger of Solar Thin Power into Solar Thin
Films effective June 30, 2009.




7




At the time of the merger, an aggregate
of 64,403,333 shares of Solar Thin Power were issued and outstanding, of which
Solar Thin Films owned 43,000,000 shares or 66.77% of Solar Thin Power common
stock, and stockholders of Solar Thin Power, other than Solar Thin Films, owned
an aggregate of 21,403,333 shares of the 64,403,333 outstanding shares of Solar
Thin Power common stock.   The Company consummated an Agreement and
Plan of Merger dated effective June 30, 2009 pursuant to which Solar Thin Power
was merged with and into the Company (the “Merger”).  Following the
consummation of the Merger, effective June 30, 2009, Solar Thin Power is
operated as a division of the Company and will seek to facilitate power projects
and joint ventures designed to provide solar electricity using thin film a-Si
solar modules.





Under the
terms of the Merger:




·
            the shareholders of Solar Thin
      Power, other than the Company, received an aggregate of 6,421,000 shares
      of the Company’s common stock, or one and one-half shares of the Company’s
      common stock for each share of Solar Thin Power common stock owned by
      them;





·
            each full share of Solar Thin
      Power common stock that is issuable upon exercise of any Solar Thin Power
      warrants as at the effective time of the Merger will be converted into and
      exchanged for the right to purchase or receive one full share of the
      Company’s common stock upon exercise of such Solar Thin Power warrants;
      and





·
            all of the 43,000,000 shares of
      Solar Thin Power common stock owned by the Company were
      cancelled.





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. The equipment
is used in plants that produce photovoltaic thin-film a-Si solar panels or
modules. The primary buyers of photovoltaic thin-film manufacturing equipment
are businesses as well as investment partnerships, engaged in the production of
photovoltaic thin-film modules. Governments and government agencies throughout
the world support the industry with marketing and incentive schemes. The
photovoltaic manufacturing equipment deposits a-Si as the active layer in the
production of photovoltaic thin-film modules 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
produce power from a-Si solar modules at a cost of less than $1.15 per Watt of
capacity.




BudaSolar
is a corporation formed in 2007 and engaged in the development of a-Si
technology and integrated systems using photovoltaic manufacturing
equipment.  BudaSolar offers turn-key solutions for the production of
49” x 25” amorphous silicon solar modules. In 2009, Kraft further consolidated
the BudaSolar operations. Personnel and company assets have been integrated into
the Company. For example, the two companies, Kraft and BudaSolar, operated as
one for the turn-key line manufacturing of its client Grupo Unisolar and also
provided installation and training.





Kraft has
been providing equipment that is incorporated into a single manufacturing line
capable of manufacturing a-Si solar modules that produce approximately 5MW of
solar power annually. Kraft has been able to improve the throughput of a single
line to 6MW as well as make other qualitative improvements in its offering.
Through the successful consolidation with BudaSolar Kraft accelerated its
transition from an equipment vendor to an integrated supplier by offering a
holistic turn-key program. This provides its customers with high margin
production facilities incorporating multiple solar module equipment lines with
the annual capacity of manufacturing a-Si solar modules that generate from 6MW
over 18MW to 36MW solar power.





BudaSolar
started a new photovoltaic R&D laboratory in Budapest Hungary, which opened
in April 2010. The construction of the lab is the first step of the €3 million
budget “TFsolar2” project that has heavy support of the Hungarian National
Office for Research and Technology. The new laboratory will enable the company
to develop further the existing know-how of Kraft in the field of quality and
operational improvement for a-Si solar cell processes and equipment to maximize
the efficiency of the a-Si modules in short term and elaborate the processing
technology of the high efficiency micromorph solar modules by the end of the
three year project and reduce cost.




8




Pricing
Factors





Based on
available market information, a-Si solar module manufacturing equipment is
currently available at costs averaging $1.50 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 “6MW (1,000,000 Watts) equipment facility”
consists of a single line of manufacturing equipment that is capable of
producing a-Si solar modules with a cumulated rated capacity of 6MW (6,000,000
Watts) of solar power on an annual basis.  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 6MW facility to between $0.84 to $1.90 per
Watt of rated capacity, or roughly $5.04 and $11.4 million for a 6MW facility,
and between $15.12 and $34.2 million for a 18MW facility and between $30.24 and
$68.4 million for semi-automated 36MW turn-key
facilities, respectively.  The current cost of manufacture of
a-Si solar modules using the Company’s equipment is estimated between
approximately $0.81 to $1.15 per Watt from our “turn-key” facility, depending on
line size, location and its relating expenses, 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
average price per Watt for a-Si and other modules is expected to continue to
fall towards $1.33 per Watt over the next two to three years, while crystalline
module prices will range between $1.50 to $1.95 per Watt.





Backlog
and Order Pipeline





In April
2008, Kraft entered into a purchase agreement with Grupo Unisolar SA 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 in June 2008 and began delivery of the system
in December of 2008. Kraft and Grupo Unisolar are currently in acceptance
testing of the 6MW a-Si thin-film PV plant Kraft provided. We anticipate that
substantially all of the revenues from the Grupo Unisolar order will be
recognized in the second quarter of 2010. Grupo Unisolar has also indicated
an interest in expanding the facility to 12MW in 2010.





China
City Investments Limited, a project company set up by Chinese investors, signed
a contract with BudaSolar as technology provider for the turnkey delivery of
production lines at the capacity of 85MWp/year using silicon based thin film PV
technology. The agreement is the first phase of the Dalian City Industrial Park
Project targeting the development of a complex, vertically integrated production
center with cumulative PV production capacity of 1GW to be achieved in 10
phases.





In
addition, both Kraft and BudaSolar have submitted detailed proposals and
contracts for additional orders, both single line and multi-line, totaling in
tens of millions of dollars, with companies based in Europe, Russia, the
Ukraine, Pakistan, China, North America, India, 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 and Competition





The
photovoltaic (or PV) industry is a significant global industry in which buyers
are dominant. We believe that the current state of affairs is merely growing
pains of a rapidly maturing industry, based on the aftermath of a global
recession and a strong winter. We are anticipating a phase of further
consolidation within the industry. The Company believes this consolidation is
needed to prepare the industry for further growth that will be aided by the
concerns of global warming, governmental incentives, political and institutional
involvement. STF believes the strongest forces promoting the industry will be
combined effects of the further improving economics of PV and rising fuel
prices. Module cost will further drop and will represent a decreasing share of
total system costs (approximately 45% currently), as raw material and module
prices continue to decline. Manufacturers will have to pay attention to the
total cost and efficiency of systems and their manufacturing costs.





As of the
first quarter of 2010, global economies are slowly growing again. Consolidation,
cheaper Asian products, and overcapacity have however led to falling prices with
narrower and shrinking margins within the solar industry. After additional
global installations of 6.4 GW, despite the difficult economic climate, we
believe that the industry will further stabilize in the second quarter of 2010
and that the outlook for the third quarter of 2010 is generally favorable on a
global basis. We expect strong markets in Germany, Italy (while both the German
and the Italian incentive scheme remain in flux), France (expected stronger
incentive scheme), and Japan (among other parts of Asia). We expect strong
prospects in the U.S. and upcoming future markets, such as China, Mexico,
Brazil, South Africa, and India. We expect the market to grow 33% in 2010 (to
approximately 8.51GW) on a global level due to cost savings, efficiency
improvements and the expansion of distribution channels. Using a very
conservative estimate of 25% annual industry growth, we expect 17GW of new
installations by 2013. The main obstacle will be the difficulty of raising
capital for plants and projects, especially in the thin film field.




9




Thin film
technologies have had an especially challenging time, as a market with heavily
decreased crystalline product prices and a lack of financing have favored more
efficient cells and 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. 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
crystalline modules are more suited to commercial and residential
uses.





Approximately
20% of the world’s supply of solar modules is of the thin film a-Si type and
approximately 80% are crystalline modules. The Company believes that most
of the planned thin film capacity extensions will be deferred to 2011, but that
it can continue to drive costs down through further process improvements for
existing technology (a-Si) and the introduction of newer technologies, including
CIGS, to service existing thin film companies and large cap companies (new
entrants) that will access awakening capital markets to add capacity necessary
for a low cost base.





The
market for solar cell-embedded building materials (“BIPV for building integrated
photovoltaic), such as roofing shingles or sides of a building, is an additional
opportunity. Through the integration of BudaSolar and Kraft, the Company can
offer equipment for BIPV manufacturing companies. Globally, we believe there is
a trend for subsidies concentrating more toward roof-top and BIPV installations
for solar PV. Markets, such as France, already offer high BIPV subsidies as
extra premiums (here the feed-in tariff for BIPV is 0.60 EUR/kWh, and 0.33
EUR/kWh for large scale plants). We believe all growth markets offer potential
for BIPV products. The U.S. BIPV market, as an example, is currently small with
approximately 85MW BIPV installed; however, we estimate that the market will
become the second most important market after Europe with a CAGR of 113% to
3,700MW in 2013.





Since
October 2008, crystalline prices have fallen by 30% to 50%, depending on region.
We believe that, upon completion of its expansion plans, the Company and Kraft
will be significant suppliers of thin-film amorphous silicon solar module
equipment. The Company will thus be affected by the deferral of thin film
technologies, but backed by its ability and opportunity to gain new business in
the expectedly strong crystalline and BIPV markets, which will reach 17GW-20GW
of annual new installed capacity by 2013.




Our
Growth Strategy





The
Company’s strategy is to market complete turn-key manufacturing equipment and
training to manufacture thin-film based PV modules. The Company’s main focus
will be the delivery of turn-key amorphous silicon production lines, and in
future turn-key production lines based on newer materials. Customers include
companies with manufacturing expertise (such as large cap companies entering the
solar space) and local knowledge, but without the technology base required to
build and manage their own production lines.





We offer
a “turn-key” amorphous silicon manufacturing facility that is sold, installed
and with certain guarantees regarding throughput, module efficiency, and
therefore by implication, manufacturing cost. Such turn-key facilities consist
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.





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. We are also
considering integrating or acquiring a solar developer. 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 BudaSolar) for use in power projects in Europe, India,
Russia, the Ukraine, North America, the Middle East, and
Asia.





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.




10




As an equipment and “turn-key” systems
supplier Kraft and BudaSolar 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 therefore
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 customer of Kraft is located in Spain. Prospective customers of Kraft
and BudaSolar are located in the US, Europe, Russia, the Ukraine and
Asia.  In 2009, our Kraft subsidiary had one key customer, which
accounted for approximately 100% of total revenue.




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, 2009, the Company employed 6 full-time and 22 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




One
member of management and one sales engineer 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 one project manager, 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.




Engineering





The
Companies engineering department consists of two dedicated mechanical engineers
and five 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.





11




Production
(Equipment manufacturing)





The
largest group in the Company is the production (equipment manufacturing)
department, consisting of 12 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




The
following sets forth a discussion of the business of Algatec, assuming the
transactions contemplated by the acquisition will be consummated.  See
“Agreements with Algatec Solar
AG”above.




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.




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.





As of the date of this report,
the Company intends to acquire Algatec Equity Partners LP, a Delaware limited
partnership (the “Algatec Partnership”), which, in turn, owns a 47% equity
interest in the capital stock of Algatec.  As previously disclosed, a
trust established by Robert M. Rubin, the President and Chief Executive Officer
of the Company, owns approximately 25% of the equity of the Algatec Partnership
and is an affiliate of the general partner of the Algatec
Partnership.   It is anticipated that the equity stake in Algatec
will be obtained from the Algatec Partnership in exchange for approximately 43.0
million shares of the Company’s Common Stock.  However, such number of
shares of Common Stock are subject to adjustment based on an independent
fairness opinion to be obtained by the Company.





The
acquisition of the partnership and its equity in Algatec is subject to (i)
execution of definitive exchange agreements, (ii) obtaining the requisite
approvals and consents of the partners of the partnership, (iii) the delivery of
audited financial statements of Algatec for the two fiscal years ended December
31, 2009 described below, and (iv) receipt of the fairness opinion. The Company
anticipates that the acquisition of the partnership and its 47% equity interest
in Algatec will be completed within the next 90 days.





The
Company is also continuing discussions with the other shareholders of Algatec to
acquire the remaining 53% interest in the capital stock of
Algatec.  However, such acquisition is subject to a number of factors
and conditions, including (a) receipt of financial statements of Algatec for the
two fiscal years ended December 31, 2009 audited in accordance with GAAP or
International Financial Reporting Accounting Standards by an accounting firm
recognized by the Public Company Accounting Oversight Board, (b) completion of
mutually satisfactory working capital financing for Algatec, and (c) if the
Company consummates the acquisition of BudaSolar, the approval of the former
stockholders of BudaSolar.





There can
be no assurance that the conditions to complete the acquisition of the 47%
equity interest in Algatec owned by the Algatec Partnership will be satisfied to
enable the Company to acquire such equity, or that the Company will be able to
acquire any additional equity interests in Algatec.





12




Item 1A. Risk Factors.





An
investment in our common stock is risky. You should carefully consider the
following risks, as well as the other information contained in this Form 10-K,
before investing. If any of the following risks actually occurs, our business,
business prospects, financial condition, cash flow and results of operations
could be materially and adversely affected. In this case, the trading price of
our common stock could decline, and you might lose part or all of your
investment.  We may amend or supplement the risk factors described below
from time to time by other reports we file with the SEC in the
future.





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, 2009 have been prepared
under the assumption that we will continue as a going concern. 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 consolidated 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 million of indebtedness which became due in March 2009,
$268,000 of indebtedness (plus redemption penalties and accrued interest) which
became due in June 2009, and accounts payable and accrued liabilities of
approximately $1.8 million that are also due, and may face
litigation or even bankruptcy if we are unable to meet or restructure
our obligations.




As at
December 31, 2009, the Company’s consolidated current liabilities exceeded its
consolidated current assets by $3,878,549.   The Company is
currently in default in the payment of $1 million of indebtedness which became
due in March 2009, $268,000 of indebtedness (plus redemption penalties and
accrued interest) which became due in June 2009, and accounts payable and
accrued liabilities of approximately $1.8 million that are also due, and
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 the
Company’s other indebtedness 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.





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.   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 loss from operations of $2,872,048and $6,974,675 for the
years ended December 31, 2009 and 2008, respectively.




13




The Company has suffered operating
losses and negative cash flows from operations since inception and, at December
31, 2009, the Company had an accumulated deficit of $29,551,979. 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.





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 $8,720,938 and $3,436,779 for the
years ended December 31, 2009 and December 31, 2008, respectively, and the
Company incurred losses from operations of $2,827,048 and $6,974,675 for the
years ended December 31, 2009 and 2008, 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.




14




We
are required to raise additional capital to support our Kraft operating
subsidiary and complete our proposed acquisitions of  BudaSolar and
Algatec.





Both our existing operating subsidiary
Kraft Elektronikai Zrt and our proposed additional subsidiary BudaSolar
Technologies Co., Ltd., require additional working capital to obtain additional
orders for a-Si module equipment lines and, if such orders are obtained, to
finance infrastructure and component purchases.  There can be no
assurance that Kraft will receive in the near future the final payment due from
Grupo Unisolar SA or that the Company will be able to provide such working
capital from third party financing. Although the Company is actively seeking
financing, given the current market price of the Company’s Common Stock, raising
equity or equity related capital may be difficult if not
impossible.  In addition, even if the Company is able to raise such
financing, it may not be on attractive terms, and will likely result in
significant dilution of the equity interests of the Company’s existing
stockholders.





Our
sole customer has advised that they are withholding their final payment to us
due to certain maintenance and repair complaints with respect to our amorphous
silicon equipment line.





Kraft
recently completed the installation of equipment for its sole customer, Grupo
Unisolar SA in Spain.  The customer has resisted payment of the final
€968,265 installment due under the April 8, 2008 contract allegedly due to certain maintenance
and repair complaints with respect to our amorphous silicon equipment
line.  Representatives of BudaSolar are assisting Kraft in
attempting to resolve this problem.  If the Company is unable to
satisfy its only existing customer, Kraft may not receive final payment from
Grupo Unisolar SA.  In addition, the issue could result in adversely
affect Kraft’s reputation as a turn-key equipment supplier and its a-Si module
equipment business could be materially and adversely affected.





We
may not be able to complete our proposed acquisition of BudaSolar Technologies
Co., Ltd.





As at the date of this report, we have
not signed a definitive purchase agreement to acquire BudaSolar and are still
negotiating final terms and conditions.  There can be no assurance
that we will be able to reach a final agreement with the shareholders of
BudaSolar on terms that are attractive to the Company, if at
all.  Even if we are successful in completing the BudaSolar
acquisition, we may be unable to raise adequate financing to support our a-Si
equipment manufacturing business. Our existing Kraft subsidiary is highly
dependent upon the technical expertise of the BudaSolar to facilitate the
turn-on function and operation of our a-Si equipment line.  If we are
unable to acquire BudaSolar and if BudaSolar terminates its existing business
relationship with Kraft, it is probable that we will never be able to develop
our a-Si equipment business.





We
may never be able to acquire any equity of Algatec





Our proposed acquisition of a 47%
equity interest in Algatec Solar AG is dependent upon certain factors, some of
which may not be within our control, including receipt of acceptable audited
financial statements of Algatec Solar AG, the approval of the holders of a
majority of the limited partnership interests in the Algatec Partnership, and
the approval of the existing stockholders of BudaSolar.  In addition,
even if we are able to acquire a significant minority interest in Algatec, there
can be no assurance that we will reach agreement with the current owners of 53%
of the Algatec equity to acquire their shares.   Our failure to
acquire any equity in Algatec could have a material adverse effect on our future
business prospects or operations.





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
$14,932,828 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;




15




·
            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 one customer and any loss of this customer will have a negative
impact on our operations.




For the
year ended December 31, 2009, Kraft derived approximately 100% 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 BudaSolar 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.




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.




16




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,
      BudaSolar 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.




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, Hungary, China, Taiwan, Greece and
Portugal, 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;




17




·
            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.




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, Robert
Rubin, the Chief Executive Officer and Chief Financial Officer, and Gary
Maitland, Esq., our Vice President and General Counsel, 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, Robert Rubin or Gary Maitland, Esq., 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 agreements entered between our
company and Rubin expired in June 2009, subject to one year automatic renewal
provisions.




18




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 are 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.





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. Our
manufacturing, processing and distribution facilities are 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.




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.




19




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.





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
March 22, 2010, we had 19,039,850 shares of common stock issued and
outstanding.   In addition, 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.




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





We are currently negotiating a new
agreement with the BudaSolar shareholders.  The proposed revised
transaction contemplates that the Company will directly acquire 100% of the
share capital of BudaSolar in exchange for 70,000 shares of the Company’s Series
B-5 convertible voting preferred stock (the “B-5 Preferred
Stock”).  The B-5 Preferred Stock has a liquidation value of $7.0
million and is convertible at any time by the holders into a minimum of 2.1
million and a maximum of 49.0 million shares of the Company’s common
stock.  Consummation of this proposed transaction will therefore
substantially dilute the equity of the 19,039,850 shares owned by our current
common stockholders.





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 “SLTZ". 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.




20




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.




Foreign
Currency and Exchange Risks and Rate Revaluation.




We will be su ject to significant foreign
exchange risk. Th%re 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 distri`utions is subject to, among other things, restrictions
on div)dends 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
profit3 subject to the maintenance of registered capital and required reserves
and a&ter the recovery of accumulated losses.




Item
1B. Unresolved Staff Comments.





Not applicabl%.




21




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
              
              Lease
      terminated in January 2010Kraft
            
            9900
      Körmend
              Hegyalja
      u 42.
              Hungary
            
            Equipment
      manufacturing plant
            
            
            10,760
            
            USD
      1,600
            Unlimited
      with 6 months cancellation period
              
              Lease
      terminated in July 2009Kraft
            
            1121
      Budapest,
              Konkoly-T,
      út 29-33.
              Hungary
            
            General
      operation
              Equipment
      manufacturing plant
              Office
            
            
            1,500
            
            USD
      1,310
            Unlimited
              period
      with 3 months
              notice
      of cancellationKraft
            
            1121
      Budapest,
              Konkoly-T,
      út 29-33.
              Hungary
            
            Storage
      room
            
            
            743
            
            USD
      360
            Unlimited
              period
      with 6 months
              notice
      of cancellation




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 $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 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, 2009 and 2008 are $267,215
and $266,359, 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.





As set
forth in the table above, in July 2009 and January 2010, Kraft terminated its
lease agreements covering its corporate offices and facilities in Budapest and
Körmend Hungary.  In addition, in December 2009 and January 2010,
Kraft entered into new lease agreements for its corporate offices and facilities
in Budapest, Hungary as set forth above.




The
Company also has a mailing address within the United States located at 116 John
Street, Suite 1120, New York, New York 10038.





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.




22




Item 3. Legal
Proceedings.





Grace Brothers Ltd. vs. Solar Thin
Films, Inc. (Supreme
Court, New York State, New York County). On March 4, 2009, Grace Brothers
Ltd. brought an action against the Company in the Supreme Court of the State of
New York, County of New York, seeking damages of approximately $255,000 in
alleged registration delay penalties.  On July 16, 2009, the Company
filed its answer to the complaint denying all of Grace’s
allegations.  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.





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 2009 or thereafter.




23




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 "SLTZ". 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 and in
September 2009 the Company’s symbol was changed to SLTZ. 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, 2009
            
            High
            
            
            LowFirst
      Quarter ended March 31, 2009
            
            $
            1.45
            
            
            $
            0.78Second
      Quarter ended June 30, 2009
            
            $
            1.05
            
            
            $
            0.76Third
      Quarter ended September 30, 2009
            
            $
            1.75
            
            
            $
            0.20Fourth
      Quarter ended December 31, 2009
            
            $
            1.02
            
            
            $
            0.26




Year
      Ended December 31, 2008
            
            High
            
            
            LowFirst
      Quarter ended March 31, 2008
            
            $
            8.25
            
            
            $
            3.60Second
      Quarter ended June 30, 2008
            
            $
            5.70
            
            
            $
            3.80Third
      Quarter ended September 30, 2008
            
            $
            4.50
            
            
            $
            2.90Fourth
      Quarter ended December 31, 2008
            
            $
            3.25
            
            
            $
            0.85





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.




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 March 22, 2010, there were
19,039,850 shares of our common stock issued and outstanding and 187 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.




24




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.





Equity Compensation Plan Information





The
following table presents information as of December 31, 2009 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 16 of the 2009 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 2009, we
issued (or contracting to issue) equity securities without registration under
the Securities Act of 1933, as amended, as follows:





On December 7, 2009, two of the
Company’s March 2006 convertible note holders settled for an aggregate of
200,000 shares of the Company’s common stock and demand notes of
$169,167.  The Company intends to issue such shares during the second
quarter of 2010.




25




On December 28, 2009 one of the
Company’s June 2006 convertible note holders converted $350,000 of convertible
notes to 940,625 shares of the Company’s common stock, representing $350,000 in
principal settlement with the remainder as redemption penalty and related
interest of $120,312.





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 design, manufacture and installation
of thin-film amorphous silicon (“a-Si”) photovoltaic manufacturing equipment.
The equipment is used in plants that produce photovoltaic thin-film a-Si solar
panels or modules. The Company operates through its wholly owned
subsidiary, Kraft Elektronikai Zrt (“Kraft”). The Company expects the primary
use of such photovoltaic thin film modules will be the construction of solar
power plants by corporations and governments throughout the world.





On April
3, 2009, the Company and Kraft entered into a share exchange agreement with
BudaSolar Technologies Co. Ltd. (“BudaSolar”) and its
shareholders.  The agreement restated a prior agreement entered into
in 2008.  Under the terms of the restated agreement, the BudaSolar
shareholders were to have acquired a 49% equity interest in Kraft, in exchange
for transferring 100% of the BudaSolar equity to Kraft.  Such
agreement was subject to the satisfaction of certain closing conditions,
including the Company’s repayment of all outstanding June 2006 convertible notes
in order to secure the release of the shares of Kraft pledged as security to the
June 2006 note holders.  Although only $268,000 of such notes are
still outstanding, the Kraft shares still remain subject to the pledge
agreement.  At the present time, the Company is negotiating a new
agreement with the BudaSolar shareholders, the proposed terms of which are
described below.





For more
than the past 18 months, BudaSolar has been providing technical support to our
Kraft subsidiary under a separate agreement.  In connection with these
services, Kraft has paid $1,370,000 in advances to BudaSolar during the second
quarter of 2009. BudaSolar has provided $747,891 worth of services in 2009 to
Kraft, which left a credit balance of advances wired to BudaSolar of $622,109 as
of December 31, 2009.  In addition, during 2008, BudaSolar received
$750,000 in advances from the Company, which was fully repaid in the second
quarter of 2009.





The
Company’s Kraft subsidiary is highly dependent upon the ongoing technical
expertise of the BudaSolar personnel in completing and making operational the
Kraft line of a-Si solar module equipment.   In such connection,
Kraft recently completed the installation of equipment for its sole customer,
Grupo Unisolar SA in Spain.  The customer has resisted payment of the
final €968,265 installment due under the April 8, 2008 contract allegedly due to certain maintenance
and repair complaints with respect to our amorphous silicon equipment
line.  Representatives of BudaSolar are assisting Kraft in
attempting to resolve this problem and the Company expects to collect the
payment in full. If the Company is unable to satisfy its only existing customer,
its a-Si module equipment business could be materially and adversely
affected.




26




There can
be no assurance that the Company will enter into the new share exchange
agreement with BudaSolar and its shareholders, or if such agreement is entered
into by the parties, that the Company will be able to consummate the acquisition
of BudaSolar and the transactions contemplated therein.





Effective as of October 30, 2008, the
Company entered into a stock exchange agreement with Algatec Solar AG and its
shareholders, which expired on July 15, 2009.  Algatec produces, sells
and distributes metallurgical and other types of crystalline silicon solar
panels or modules.  As of the date of this report, the Company intends
to acquire Algatec Equity Partners LP, a Delaware limited partnership (the
“Algatec Partnership”), which, in turn, owns a 47% equity interest in the
capital stock of Algatec Solar AG.  As previously disclosed, a trust
established by Robert M. Rubin, the President and Chief Executive Officer of the
Company, owns approximately 25% of the equity of the Algatec Partnership and is
an affiliate of the general partner of the Algatec Partnership.  It is
anticipated that the equity stake in Algatec will be obtained from the Algatec
Partnership in exchange for approximately 43.0 million shares of the Company’s
Common Stock.  However, such number of shares of Common Stock are
subject to adjustment based on an independent fairness opinion to be obtained by
the Company. The acquisition of the partnership and its equity in Algatec is
subject to (i) execution of definitive exchange agreements, (ii) obtaining the
requisite approvals and consents of the partners of the partnership, (iii) the
delivery of audited financial statements of Algatec for the two fiscal years
ended December 31, 2009, and (iv) receipt of the fairness opinion. The Company
anticipates that the acquisition of the partnership and its 47% equity interest
in Algatec will be completed within the next 90 days.  The Company is
also continuing negotiations with the other shareholders of Algatec to acquire
the remaining 53% interest in the capital stock of Algatec.  There can
be no assurance that the conditions to complete the acquisition of the 47%
equity interest in Algatec owned by the Algatec Partnership will be satisfied to
enable the Company to acquire such equity, or that the Company will be able to
acquire any additional equity interests in Algatec.





In the event that the Company is unable
to acquire BudaSolar or any of the equity of Algatec, absent an alternative
strategic acquisition or a significant increase in the current business of its
Kraft subsidiary, it is unlikely that the Company will be able to achieve its
expansion plans in the solar business, and may be required to cease doing
business altogether.





Consummation
of either or both of the BudaSolar 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 $1.3 million of indebtedness currently in
default as of the filing date of this report ($1 million of which became in
default in March 2009 and $268,000 of indebtedness which became in default in
June 2009 (plus redemption penalties and accrued interest)) 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.





Subject
to consummation of either or both of the BudaSolar or Algatec transactions, the
Company will seek to 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 through governmental incentive programs, 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.





Kraft and BudaSolar 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 116 John Street, Suite 1120, New
York, New York 10038.  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 addition, the Company acquired the remaining 4.5% minority interest in
August 2007 and, as a result, now conducts its operations via Kraft, its
wholly-owned subsidiary.




27




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 production facilities in
New Jersey, Germany, Hungary, China, Taiwan, Greece and Portugal. In producing
equipment for these facilities, Kraft developed substantial equipment
manufacturing expertise. More recently as a supplier for a solar project in
Weihai, China, Kraft developed additional process expertise required to allow it
to become a manufacturer of “turnkey” plants, including the delivery of both
equipment and services that produce photovoltaics modules utilizing thin-film
technology. Kraft has delivered its first "turnkey" plant in Spain which is now
in final acceptance testing.





BudaSolar
Technologies Co. Ltd.





On April
3, 2009, the Company and Kraft entered into a restated share exchange agreement
with BudaSolar and its shareholders.  Under the terms of the
agreement, the BudaSolar shareholders were to have acquired a 49% equity
interest in Kraft, in exchange for transferring 100% of the BudaSolar equity to
Kraft.  Such agreement was subject to the satisfaction of certain
closing conditions, including the Company’s repayment of all outstanding June
2006 convertible notes in order to secure the release of the shares of Kraft
pledged as security to the June 2006 note holders.  Although only
$268,000 of such notes remain outstanding, the Kraft shares still remain subject
to the pledge agreement.





At the
present time, the Company is negotiating a new agreement with the BudaSolar
shareholders.  The proposed revised transaction contemplates that the
Company will directly acquire 100% of the share capital of BudaSolar in exchange
for 70,000 shares of the Company’s Series B-5 convertible voting preferred stock
(the “B-5 Preferred Stock”).  The B-5 Preferred Stock has a
liquidation value of $7.0 million and is convertible at any time by the holders
into a minimum of 2.1 million and a maximum of 49.0 million shares of the
Company’s common stock, $0.01 par value per share (the “Common
Stock”).  The aggregate number of shares of Company Common Stock into
which all if the B-5 Preferred Stock would be convertible (the “Conversion
Shares”) will depend upon the audited combined pre-tax income of the Company’s
Kraft and BudaSolar subsidiary corporations (the “Corporations Pre-Tax Income”)
at the end of each of the five consecutive fiscal years ending December 31, 2010
through December 31, 2014 (the “Measuring Period”).  The target
Corporations Pre-Tax Income and the corresponding number of Conversion Shares
that can be exercised at the end of any one or more fiscal years during the
Measuring Period is based on a “grid” of such Pre-Tax Income and Conversion
Shares.  For example if the Corporations Pre-Tax Profits at the end of
any of the five fiscal years in the Measuring Period is 0 to $2.5 million, the
number of Conversion Shares would be 2.1 million; if such Pre-Tax Income is
$10.0 million, then the number of Conversion Shares would be 21.0 million; and
if such Pre-Tax Income is $55.0 million or more, the Conversion Shares would be
49.0 million.  On March 31, 2015, any B-5 Preferred Stock not
converted into Common Stock would automatically convert based upon the
Corporations Pre-Tax Income for the fiscal year ending December 31,
2014.





At the time of execution of the
BudaSolar purchase agreement, the Company will provide $55,000 to BudaSolar as a
working capital advance, and is obligated to provide additional working capital
thereafter. In addition, we shall assume the obligations of repayment of all
outstanding loans made by the BudaSolar shareholders or their affiliates to
BudaSolar prior to the date of the agreement, so that, as of the closing date,
BudaSolar will have either positive stockholders equity or capital of not less
than US $1,000.  It is expected that such loans will be evidenced by a
5 year subordinated note of the Company, which shall (i) bear interest at an
annual rate equal to LIBOR plus a margin of 3%; and (ii) will be repaid to the
BudaSolar shareholders following completion of working capital contributions to
BudaSolar and Kraft by the Company and thereafter only out of excess cash flow
of BudaSolar and Kraft.





Under the
terms of a separate agreement with BudaSolar, Kraft has contracted to purchase
from BudaSolar (1) equipment assembly services on some of its equipment based on
a fixed fee per equipment, and (2) installation related technical services based
on hourly rates.  In connection with these services, Kraft has paid
$1,370,000 in advances to BudaSolar during the second quarter of 2009. BudaSolar
has provided $747,891 worth of services in 2009 to Kraft, which left a balance
of advances wired to BudaSolar of $622,109 as of December 31, 2009.  During
2008, BudaSolar received $750,000 pursuant to the Stock Exchange Agreement from
the Company, which was fully repaid in the second quarter of 2009.




28




In the event that the Company
consummates the BudaSolar acquisition, each of Messrs. Robert M. Rubin, Gary
Maitland and Dr. Boris Goldstein (the current board members of the Company) and
Istvan Krafcsik and Attila Horvath, the principal stockholders and executive
officers of BudaSolar, have agreed to vote their shares of voting capital stock
of the Company to elect to the board of directors of the Company and its Kraft
and BudaSolar subsidiaries five persons, two of whom shall be Istvan Krafcsik
and Attila Horvath, two of which would be designated by the Company and a fifth
independent director acceptable to Messrs. Krafcsik and
Horvath.   In addition, such parties and the Company agreed that
during the five year Measuring Period, so long as the Corporations Pre-Tax
Income equaled or exceeded $5.0 million, the members of the Company’s board of
directors will include Messrs. Krafscik and Horvath and other persons reasonably
acceptable to them.





BudaSolar
currently operates its business at Kraft’s facility in Budapest, and the
BudaSolar personnel and management work closely with the Kraft personnel and
management.  Kraft is highly dependent upon the ongoing technical
expertise of the BudaSolar personnel in executing the turn-on and related
computer functions of the Kraft line of a-Si solar module equipment, and making
such equipment lines operational.   In such connection, in April
2010 the Company recently completed the installation of equipment for Grupo
Unisolar SA in Spain.  The customer has resisted payment of the final
€968,265 installment due under the April 8, 2008 contract allegedly due to certain maintenance
and repair complaints with respect to our amorphous silicon equipment
line.  Representatives of BudaSolar are assisting Kraft in
attempting to resolve this problem and the Company expects to collect the
payment in full. If the Company is unable to satisfy its only existing customer,
its a-Si module equipment business could be materially and adversely
affected.





The ongoing operations of Kraft and
BudaSolar will require approximately $3.2 million of working capital to sustain
and expand their operations during 2010.  In addition, if the Company
were to acquire Algatec, it is anticipated that a condition of such acquisition
would be that the Company provide expansion financing of not less than $5.0
million for that corporation.  Accordingly, the Company’s ability to
achieve it acquisition plans and expand its business will require the Company to
source additional debt or equity financing from third party.  Absent
receipt of the final €968,265 installment due under the April 8, 2008 contract
with Group Solar AG, the Company’s operating subsidiaries may be unable to pay
its obligations as they come due.





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 “Algatec 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 Marital 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 Marital 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 were 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 up to 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, 2008, the Partnership consummated the
Second Closing with Algatec and funded a loan of €2,000,000 ($2.6 million).
Ultimately, the Partnership provided total funding of approximately $5.75
million to Algatec which, after allowing for unfavorable currency conversion
rates, left the Partnership with a total equity ownership in Algatec of
approximately 47% of the total number of outstanding Algatec
shares.




29




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 shares of Company capital
stock. Consummation of the Algatec acquisition is subject to certain conditions,
including Algatec obtaining up to $50.0 million financing for Algatec to enable
it to construct the addition to its existing manufacturing facility and purchase
the necessary equipment to expand its business.  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.  The
requisite financing for Algatec was not obtained and the agreement expired on
July 15, 2009.





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 owned a 15% interest in CG Solar Company Limited, the
Company’s joint venture in China (and agreed to purchase another 5%), and was 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 CG
Solar 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
Thin Power had the right to require Solar Thin Films to repurchase half of their
portion of their minority equity in Solar Thin Power for $1,767,500. This
obligation was eliminated with the merger of Solar Thin Power into Solar Thin
Films effective June 30, 2009.





At the time of the merger, an aggregate
of 64,403,333 shares of Solar Thin Power were issued and outstanding, of which
Solar Thin Films owned 43,000,000 shares or 66.77% of Solar Thin Power common
stock, and stockholders of Solar Thin Power, other than Solar Thin Films, owned
an aggregate of 21,403,333 shares of the 64,403,333 outstanding shares of Solar
Thin Power common stock.   The Company consummated an Agreement and
Plan of Merger dated effective June 30, 2009 pursuant to which Solar Thin Power
was merged with and into the Company (the “Merger”).  Following the
consummation of the Merger, effective June 30, 2009, Solar Thin Power is
operated as a division of the Company and will seek to facilitate power projects
and joint ventures designed to provide solar electricity using thin film a-Si
solar modules.





Under the
terms of the Merger:




·
            the shareholders of Solar Thin
      Power, other than the Company, received an aggregate of 6,421,000 shares
      of the Company’s common stock, or one and one-half shares of the Company’s
      common stock for each share of Solar Thin Power common stock owned by
      them;





·
            each full share of Solar Thin
      Power common stock that is issuable upon exercise of any Solar Thin Power
      warrants as at the effective time of the Merger will be converted into and
      exchanged for the right to purchase or receive one full share of the
      Company’s common stock upon exercise of such Solar Thin Power warrants;
      and





·
            all of the 43,000,000 shares of
      Solar Thin Power common stock owned by the Company were
      cancelled.




30




Critical
Accounting Policies




The
Company's discussion and analysis of its consolidated 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 consolidated 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;





·
            General, Selling and
      Administrative Expenses;





·
            Allowance for doubtful
      accounts;





·
            Research and
      development;





·
            Derivative
      liability;





·
            Product warranty
      reserve;





·
            Stock Based Compensation;
      and





·
            Use of
      Estimates.




Revenue
Recognition





For
revenue from Equipment sales, which include equipment and sometimes
installation, the Company recognizes revenue in accordance with Accounting
Standards Codification subtopic 605-10, Revenue Recognition (“ASC 605-10”). ASC
605-10 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,
2009 and December 31, 2008 amounted to $2,373,067 and $33,452, respectively. ASC
605-10 incorporates Accounting Standards Codification subtopic 605-25,
Multiple-Element Arraignments (“ASC 605-25”). ASC 605-25 addresses accounting
for arrangements that may involve the delivery or performance of multiple
products, services and/or rights to use assets.




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:





·
            Title and risk of ownership have
      passed to the customer;




·
            The Company has obtained a
      written fixed purchase
commitment;





·
            The customer has requested the
      transaction be on a bill and hold
basis;




·
            The customer has provided a
      delivery schedule;





·
            All performance obligations
      related to the sale have been
completed;




·
            The product has been processed to
      the customer’s specifications, accepted by the customer and made ready for
      shipment; and





·
            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, 2009 and 2008.




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
process) upon completion of the installation and commissioning
process.  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 or completion of the training
process.  The Company has started its shipment of the factory sales,
product portion (pieces of equipment) in December 2008, and the service portion
(installation and commissioning) is expected to be completed during the fiscal
year 2010.




31




The
Company has accounted for its Equipment Sales and Factory Sales arrangements as
separate units of accounting as a) the shipped equipment (both Equipment Sales
and Factory Sales) has value to the customer on a standalone basis, b) there is
an objective and reliable evidence of the fair value of the service portion of
the revenue (installation and commissioning) as such approximate the fair value
that a third party would charge the Company’s customer for the installation and
commissioning fees if the customer so desire not to use the Company’s services,
or the customer could complete the process using the information in the owner’s
manual, although it would probably take significantly longer than it would take
the Company’s technicians and or a third party to perform the installation and
commissioning process, and c) there is no right of return for the shipped
equipment and all equipments are inspected and approved by the customer before
shipment.





Cost
of Sales





Cost of
sales includes cost of raw materials, labor, production depreciation and
amortization, 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.





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 Films accounts for research and development costs in accordance with the
Accounting Standards Codification subtopic 730-10, Research and Development
(“ASC 730-10”). ASC 730-10, 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.





Derivative
Liability




Effective
January 1, 2009, Solar Thin Films adopted certain required provisions of
Accounting Standards Codification subtopic 815-40, Derivatives and Hedging:
Contracts in Entity’s Own Equity (“ASC 815-40”). ASC 815-40 provides that an
entity should use a two-step approach to evaluate whether an equity-linked
financial instrument (or embedded feature) is indexed to its own stock,
including evaluating the instrument’s contingent exercise and settlement
provisions. It also clarifies the impact of foreign currency denominated strike
prices and market-based employee stock option valuation instruments on the
evaluation. ASC 815-40 is effective for fiscal years beginning after
December 15, 2008. We adopted ASC 815-40 effective January 1, 2009 and
the adoption resulted in our warrants with anti-dilutive provisions being
classified as derivatives in accordance with Accounting Standards Codification
subtopic 815-10, Derivatives and Hedging.




32




Product
Warranty Reserves





The
Company provides for estimated costs to fulfill customer warranty obligations
upon recognition of the related revenue in accordance with the Accounting
Standards Codification subtopic Guarantees 460-10 (“ASC 460-10”) 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 costs of approximately $180,000
during 2007; of which approximately $85,000 was utilized during the year ended
December 31, 2007. During 2008, an additional $73,000 in warranty costs were
accrued and a total of $108,070 was utilized, leaving a balance of approximately
$59,930 remaining as of December 31, 2008. During 2009, the Company accrued an
additional $157,757 in warranty costs as a result of shipments to Grupo
Unisolar, and did not incur any product warranty costs, leaving a balance of
$212,687 in product warranty provision as of December 31,
2009.





Stock
Based Compensation





Effective for the year beginning
January 1, 2006, the Company has adopted Accounting Standards Codification
subtopic 718-10, Compensation (“ASC 718-10”).  The Company made no
employee stock-based compensation grants before December 31, 2005 and therefore
had no unrecognized stock compensation related liabilities or expense unvested
or vested prior to 2006. Stock-based compensation expense recognized under ASC
718-10 for the year ended December 31, 2009 and 2008 was $680,761 and
$1,085,251, respectively.





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.





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 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 37,523 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
      600,000 shares of common stock at an exercise price of $2.665 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.




33




For the
period commencing April 1, 2009 and ending September 30, 2009, Mr. Lewis’ base
salary was 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 was obligated 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
2,000,000 shares of common stock of ST Power owned by Mr. Lewis immediately and
irrevocably vested.  Moreover, with respect to the stock options
entitling Mr. Lewis to purchase up to 720,000 shares of Company common stock
(the “Option Shares”), the parties agreed as follows (i)  options for
600,000 Options Shares shall be deemed to have fully vested as of March 31, 2009
and the remaining 120,000 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 $2.665 per share to $0.90 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 37,523 shares of Company common stock
previously granted to him annually under the original employment
agreement.





In June
2009, the amended employment agreement with Peter Lewis was terminated by the
parties. Effective as of October 1, 2009, Mr. Lewis was engaged as a
non-exclusive sales and marketing consultant and representative of the Company
through May 31, 2010; specifically with respect to the manufacture and sale of
amorphous silicon thin film solar module manufacturing equipment and/or
equipment lines (the “PV Equipment”).  As a marketing representative,
Mr. Lewis will be primarily responsible for generating orders and sales of the
PV Equipment. In full settlement of Mr. Lewis’ claims to accrued salary, stock
options, future earnings and other benefits, he will be paid $112,500 for the
period ending September 30, 2009.  For the period from October 1, 2009
through June 30, 2010, Mr. Lewis will be paid a monthly stipend of
$15,000.  In addition, Mr. Lewis will be entitled to receive sales
commissions pursuant to his agreement with Kraft.




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
through December 31, 2010. In July 2009 and January 2010, Kraft terminated its
lease agreements covering its corporate offices and facilities in Budapest and
Körmend Hungary.  In addition, in December 2009 and January 2010,
Kraft entered into new lease agreements for its corporate offices and facilities
in Budapest, Hungary. The minimum future cash flow for the leases at December
31, 2009 is as follows:





Amount:Year
      ending December 31, 2010
            
            $
            249,600Total
            
            $
            249,600




34


Results
of Operations





Year
ended December 31, 2009 as compared to the year ended December 31,
2008





Revenues





The
following table summarizes our revenues for the years ended December 31, 2009
and 2008:





Years ended December
      31,
            
            2009
            
            
            2008Total
      Revenues
            
            $
            8,720,938
            
            
            $
            3,436,779




For the year ended December 31, 2009,
revenues increased by 154% or $5,284,159 as compared to 2008.  The
154% increased revenue for the year ended December 31, 2009 as compared to year
ended December 31, 2008 is primarily due to continued deliveries on a large
Factory Sale contract to Grupo Unisolar, S.A. of Spain. Since the Company did
not deliver any Equipment Sales in 2009, revenues transitioned during the year
from 96% Equipment Sales in 2008 to 100% product portion of Factory Sales
in 2009.





During
2007 and 2008, the Company 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 or
commissioning process). The Company signed its first deal in June of 2008 (and
received the balance of its deposit in September 2008), for which it completed
its first minor equipment portion of the Factory Sales 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 2010. During 2010, the Company
also expects that a 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 on a comparative
period over period percentage 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% period over period 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 Sale order or only managed to book
and invoice orders 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 actual historical
figures.  For example, recent increases and decreases in revenue are
not dramatic as compared to our existing 7.9 million euro contract with Grupo
Unisolar, which is expected to be completed during 2010 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.




35




Cost
of sales





The
following table summarizes our cost of sales for the years ended December 31,
2009 and 2008:





Years ended December
      31,
            
            2009
            
            
            2008Total
      cost of sales
            
            $
            6,460,524
            
            
            $
            2,403,808




For the
year ended December 31, 2009, our cost of sales was $6,460,524, or 74% of
revenue as compared to $2,403,808, or 70% of our revenue for the year ended
December 31, 2008. The increase in cost of sales of $4,056,716 from 2008 to 2009
was primarily a result of an increase in sales of 154%. The margin
reduction  was a function of i) reduced margins due to the transition
from Equipment Sales to Factory Sales and offset by ii) 0.9% swings in the
US dollar as compared to the Hungarian Forint. The average exchange rate
for the year ended December 31, 2009 increased to 188.07 in HuF from 187.91 in
HuF for each US Dollar for the year ended December 31, 2008.




Our cost
of revenue predominantly consists of the cost of labor, raw materials,
depreciation and absorbed indirect manufacturing cost.





Selling,
General and Administration Expenses





The
following table summarizes our selling, general and administration expense for
the years ended December 31, 2009 and 2008:





Years ended December
      31,
            
            2009
            
            
            2008Total
      selling, general and administration expense
            
            $
            5,014,321
            
            
            $
            7,745,174





For the
year ended December 31, 2009, selling, general and administrative expenses were
$5,014,321 as compared to $7,745,174 for the year ended December 31, 2008. The
decrease in selling, general and administrative expenses is attributable to
reduction in staff costs, consultants, legal and audit related incurred in 2009
as compared with in 2008.




Research
and development





The
following table summarizes our research and development expenses for the years
ended December 31, 2009 and 2008:





Years ended December
      31,
            
            2009
            
            
            2008Research
      and development expenses
            
            $
            -0-
            
            
            $
            120,000





Our
research and development for the year ended December 31, 2009 were $-0- compared
to $120,000 for the year ended December 31, 2008. In late 2005, the Company
suspended its internal research and development activity and in December 2006
signed a contract for certain research and development activities with Renewable
Energy Solutions, Inc. (RESI). This contract - at a rate of $30,000 per month -
remained in force through the first part of 2008. Subsequently, the Company
suspended the research and development contract with RESI in anticipation of its
planned acquisition of BudaSolar, a company with its own internal research and
development activity.





Depreciation
and amortization





The
following table summarizes our depreciation (excluding depreciation allocated to
cost of sales) and amortization for the years ended December 31, 2009 and
2008:





Years ended December
      31,
            
            2009
            
            
            2008Depreciation
      and amortization
            
            $
            73,141
            
            
            $
            142,472




Depreciation
and amortization has decreased by $69,331 in the year ended December 31, 2009
compared to 2008. The decrease is mainly due to the aging of equipment purchased
in previous years, and the company’s ability to increase production
incrementally with minimal capital investment.




36




Interest
expense, net





The
following table summarizes our interest expense, net for the years ended
December 31, 2009 and 2008:





Years ended December
      31,
            
            2009
            
            
            2008Interest
      expense, net
            
            $
            866,749
            
            
            $
            1,178,465





Interest
expense, net has decreased by $311,716 in the year ended December 31, 2009
compared to 2008. The decrease is mainly due to the reduction of the amortized
debt discount of our debt from the 2008 year.





Gain
on extinguishment of Debt





In 1996, we issued an unsecured 8%,
$1.5 million note to an unrelated party in connection with the 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 we had previously the note as a liability on
its balance sheet, it does not believe that it has any further liability under
this note.  Based on the appropriate opinion of our legal counsel, we
removed this item as a liability on its financial statements as at December 31,
2009 and the related accrued interest. As such, we realized a gain on
extinguishment of debt of $3,310,200 as other income for the year ended December
31, 2009. The Company also recognized $15,000 of gain from settlement of one of
its June 2006 notes during the year ended December 31, 2009.





Other
income





In
private placements in June 2006, we issued convertible promissory notes and
warrants to purchase the Company’s common stock. Pursuant to the terms of a
registration rights agreement, we were 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 we failed 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.





As of December 31, 2009, we concluded
that the payment of liquidated damages under these commitments were not probable
since the majority of the related notes have been converted or settled as of
December 31, 2009. Accordingly, we reversed the accrued expenses for the
potential liquidated damages of $720,000 as other income in the statement of
operations during the year ended December 31, 2009.





Liquidity
and Capital Resources




During
the year ended December 31, 2008, Solar Thin Power, Inc., a then 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 for $1,500,000. The
investment of $1,500,000 is carried at cost under the cost method of accounting
for investment.





On September 16, 2009, the Company
consummated the sale and transfer of the equity interest to Innofast Investments
Limited (the “Transferee”) pursuant to an equity transfer agreement dated as of
September 16, 2009 with Renewable Energy Solutions, Inc. and the Transferee
under which the Company received gross proceeds of $1,350,000.  As
part of the transaction, Renewable Energy Solutions, Inc. (“RESI”), another
former equity owner of CG Solar, sold its equity to the Transferee and assigned
its $450,000 payment to the Company in order to retire accounts payable owed by
RESI to the Company’s Kraft Elektronikai Zrt subsidiary.  As a result,
the Company received a total of $1,800,000 from the
transaction.  Accordingly, we determined that CG Solar investment was
impaired and charged to current period operations an impairment of
$150,000.




As of
December 31, 2009, we had working capital deficit of $3,878,549. We generated a
deficit in cash flow from operations of $634,147 for the year ended December 31,
2009. This deficit is primary attributable to our net loss of $194,089, net with
depreciation and amortization, amortization of debt discount, deferred
compensation and deferred financing costs of $532,135 as well as $1,159,484 fair
value of vested and repriced options, common stock and warrants issued for
services and settlement of interest and penalties, $50,000 of allowance for
doubtful account and bad debt, impairment of investment of $150,000, $71,248
loss on deposit and sale of equipment, $(21,776) change in fair value of
derivative liability, gain on extinguishment of debt of $(3,325,200) and the
changes in the balances of assets and liabilities. Operating assets decreased
$44,791, net with an increase in operating liabilities of $899,260.




37




Cash flow
generated by investing activities for the year ended December 31, 2009 was
$1,282,253, resulted from sale of investment in the amount of $1,350,000,
$27,158 from sale of property and equipment, net with $94,905 property and
equipment acquired.





Cash used
in financing activities for the year ended December 31, 2009 was $640,000
payments on our notes payable.





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.  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, 2009, the Company’s consolidated current liabilities exceeded its
consolidated current assets by $3,878,549.   As of the filing
date of this report, the Company is currently in default in the payment of
certain notes payable aggregating $1 million and $268,000 (plus redemption
penalties and accrued interest) which became due in March and June 2009,
respectively, and accounts payable and accrued liabilities of approximately $1.8
million are also 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.  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.





During the year ended December 31,
2009, the Company repaid $640,000 to certain June 2006 investors and other
noteholders.





On October 14, 2009, one of the
Company’s June 2006 convertible note holders settled for a payment of $315,830
from the Company, representing $250,000 in note principal settlement with the
remainder as redemption penalty and related interest.





On October 26, 2009, one of the
Company’s June 2006 convertible note holders settled for a payment of $62,500
from the Company, representing $50,000 in note principal settlement with the
remainder as redemption penalty and related interest.





On October 29, 2009, one of the
Company’s June 2006 convertible note holders settled for a payment of $115,000
for unpaid note balance of $130,000 and accrued unpaid interest.





On December 7, 2009, two of the
Company’s March 2006 convertible note holders settled for an aggregate of
200,000 shares of the Company’s common stock and demand notes of $169,167. The
Company intends to issue such shares during the second quarter of
2010.





On December 27, 2009, one of the
Company’s June 2006 convertible note holders settled for 940,625 shares of its
Common Stock as settlement of convertible debentures of $350,000 and unpaid
accrued interest.





As of the date of this report, an
aggregate of $268,000 of the Company’s June 2006 convertible notes held by 2
noteholders remain unpaid and in default, and a former holder of convertible
notes is suing the Company for $255,000 of alleged fees and penalties it claims
is owed under the June 2006 agreements.  See Note 18, “Litigation.”
The Company is in the process of negotiating settlements with such note
holders.




38




There can
be no assurance that the Company will enter into definitive settlement
agreements to retire or reconstitute the remaining outstanding 2006 convertible
notes.  If the Company is unable to enter into settlement or other
agreements with the Investors, or is unable to obtain financing on terms
acceptable to the Company in order to repay the outstanding debt owed to the
Investors, the Investors may elect to exercise their first priority security
interest in all of the assets of the Company, as well as sell, transfer or
assign the Pledged Shares.  In such event, the Company may be required
to cease operations and/or seek protection from its creditors under the Federal
Bankruptcy Act.




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
in the United States of America and Hungarian Forint for Kraft in
Hungary.





We
operate primarily outside of the United States through our 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 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, 2009, has 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 187.91 as of December 31, 2008 to 188.07 as of
December 31, 2009, approximate 0.9% 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 years
ended December 31, 2009 and 2008 were 202.26 and 171.80, respectively, an
approximate 17.7% depreciation in value.




New
Accounting Pronouncements




With the exception of those stated
below, there have been no recent accounting pronouncements or changes in
accounting pronouncements during the year ended December 31, 2009, as compared
to the recent accounting pronouncements described in the 2008 Annual Report that
are of material significance, or have potential material significance, to the
Company.





In February 2010 the FASB issued Update
No. 2010-09 “Subsequent Events (Topic 855)” (“2010-09”). 2010-09 clarifies the
interaction of Accounting Standards Codification 855 “Subsequent Events” (“Topic
855”) with guidance issued by the Securities and Exchange Commission (the “SEC”)
as well as the intended breadth of the reissuance disclosure provision related
to subsequent events found in paragraph 855-10-50-4 in Topic 855. This update is
effective for annual or interim periods ending after June 15, 2010. Management
is currently evaluating whether these changes will have any material impact on
its financial position, results of operations or cash flows.





In
February 2010 the FASB issued Update No. 2010-08 “Technical Corrections to
Various Topics” (“2010-08”). 2010-08 represents technical corrections to SEC
paragraphs within various sections of the Codification. Management is currently
evaluating whether these changes will have any material impact on its financial
position, results of operations or cash flows.





In January 2010 the FASB issued Update
No. 2010-06 “Fair Value Measurements and Disclosures—Improving Disclosures about
Fair Value Measurements” (“2010-06”). 2010-06 requires new disclosures regarding
significant transfers between Level 1 and Level 2 fair value measurements, and
disclosures regarding purchases, sales, issuances and settlements, on a gross
basis, for Level 3 fair value measurements. 2010-06 also calls for further
disaggregation of all assets and liabilities based on line items shown in the
statement of financial position. This amendment is effective for fiscal years
beginning after December 15, 2010 and interim periods within those fiscal years.
The Company is currently evaluating whether adoption of this standard will have
a material impact on its financial position, results of operations or cash
flows.




39




In
January 2010 the FASB issued Update No. 2010-05 “Compensation—Stock
Compensation—Escrowed Share Arrangements and Presumption of Compensation”
(“2010-05”). 2010-05 re-asserts that the Staff of the Securities Exchange
Commission (the “SEC Staff”) has stated the presumption that for certain
shareholders escrowed share represent a compensatory arrangement. 2010-05
further clarifies the criteria required to be met to establish a position
different from the SEC Staff’s position. The Company does not believe this
pronouncement will have any material impact on its financial position, results
of operations or cash flows.





In
January 2010 the FASB issued Update No. 2010-04 “Accounting for Various
Topics—Technical Corrections to SEC Paragraphs” (“2010-04”). 2010-04 represents
technical corrections to SEC paragraphs within various sections of the
Codification. Management is currently evaluating whether these changes will have
any material impact on its financial position, results of operations or cash
flows.





In
January 2010 the FASB issued Update No. 2010-02 “Accounting and Reporting for
Decreases in Ownership of a Subsidiary—a Scope Clarification” (“2010-02”) an
update of ASC 810 “Consolidation.” 2010-02 clarifies the scope of ASC 810 with
respect to decreases in ownership in a subsidiary to those of a: subsidiary or
group of assets that are a business or nonprofit, a subsidiary that is
transferred to an equity method investee or joint venture, and an exchange of a
group of assets that constitutes a business or nonprofit activity to a
non-controlling interest including an equity method investee or a joint venture.
Management, does not expect adoption of this standard to have any material
impact on its financial position, results of operations or operating cash flows.
Management does not intend to decrease its ownership in any of its wholly-owned
subsidiaries.





In January 2010 the FASB issued Update
No. 2010-01 “Accounting for Distributions to Shareholders with Components of
Stock and Cash—a consensus of the FASB Emerging Issues Task Force” (“2010-03”)
an update of ASC 505 “Equity.” 2010-03 clarifies the treatment of stock
distributions as dividends to shareholders and their affect on the computation
of earnings per shares. Management does not expect adoption of this standard to
have any material impact on its financial position, results of operations or
operating cash flows.





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.





40





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, 2009 and 2008
            
            F-2Consolidated Statements of Operations
      and Comprehensive Loss for the years ended December  31,
      2009 and 2008
            
            F-3Consolidated Statements
      of Stockholders' Deficit for the years ended December 31, 2009
      and 2008
            
            F-4
      to F-5Consolidated Statements
      of Cash Flows for the years ended December 31, 2009 and
      2008
            
            F-6Notes
      to Consolidated Financial Statements
            
            F-7
      to F-41




41





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Shareholders


Solar
Thin Films, Inc.


New York,
New York





We have
audited the consolidated balance sheets of Solar Thin Films, Inc. and
Subsidiaries (the “Company”) as of December 31, 2009 and 2008, 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, 2009. 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, 2009 and 2008, and the
results of its operations and its cash flows for each of the two years in the
period ended December 31, 2009 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,
2010





F-1




SOLAR THIN FILMS,
      INCCONSOLIDATED
      BALANCE SHEETSDECEMBER
      31, 2009 AND 2008




2009
            
            
            2008ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            631,155
            
            
            $
            619,257Accounts
      receivable, net of allowance for doubtful accounts of
    $696,067
            
            
            1,397,593
            
            
            
            194,341Accounts
      receivable, related party, net of allowance for doubtful accounts of
      $831,863
            
            
            -
            
            
            
            500,000Inventory
            
            
            131,240
            
            
            
            207,041Advances
      to suppliers
            
            
            622,526
            
            
            
            931,370Note
      receivable, net of allowance for doubtful accounts of
    $250,000
            
            
            -
            
            
            
            -Deposits
      and other current assets
            
            
            115,580
            
            
            
            378,331Total
      current assets
            
            
            2,898,094
            
            
            
            2,830,340Property,
      plant and equipment, net of accumulated depreciation of $446,718 and
      $439,998, respectively
            
            
            256,136
            
            
            
            413,241Other
      assets:Deferred
      financing costs, net of accumulated amortization of $607,500 and $581,000,
      respectively
            
            
            -
            
            
            
            26,500Investments
      into CG Solar, at cost
            
            
            -
            
            
            
            1,500,000Deposits
            
            
            -
            
            
            
            38,072Other
      assets
            
            
            -
            
            
            
            3,893Total
      other assets
            
            
            -
            
            
            
            1,568,465Total
      assets
            
            $
            3,154,230
            
            
            $
            4,812,046LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      liabilities:Accounts
      payable and accrued liabilities
            
            $
            2,563,910
            
            
            $
            4,028,115Capital
      leases, current portion
            
            
            2,499
            
            
            
            -Notes
      payable, current portion
            
            
            1,837,167
            
            
            
            2,560,997Advances
      received from customers
            
            
            -
            
            
            
            1,969,390Deferred
      revenue
            
            
            2,373,067
            
            
            
            33,452Note
      payable-other
            
            
            -
            
            
            
            1,500,000Total
      current liabilities
            
            
            6,776,643
            
            
            
            10,091,954Capital
      leases, long term
            
            
            4,981
            
            
            
            -Dividends
      payable
            
            
            143,656
            
            
            
            143,778Total
      long term debt
            
            
            148,637
            
            
            
            143,778Total
      liabilities
            
            
            6,925,280
            
            
            
            10,235,732Commitments
      and contingenciesStockholder's
      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, 2009 and 2008Series
      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 issued and outstanding at December 31, 2009 and
      2008
            
            
            2,286
            
            
            
            2,286Series
      B-3 Preferred stock, par value $0.01 per share, 232,500 shares designated,
      47,502 and 47,518 issued and outstanding at December 31, 2009 and 2008,
      respectively
            
            
            475
            
            
            
            475Series
      B-4 Preferred stock, par value $0.01 per share, 100,000 shares designated,
      -0- issued and outstanding at December 31, 2009 and 2008
            
            
            -
            
            
            
            -Common
      stock, par value $0.01 per share, 150,000,000 shares authorized,
      18,988,893 and 11,562,120 issued and outstanding as of December 31, 2009
      and 2008, respectively
            
            
            189,889
            
            
            
            115,621Shares
      to be issued
            
            
            200,000
            
            
            
            -Additional
      paid in capital
            
            
            24,660,277
            
            
            
            25,300,488Treasury
      stock
            
            
            (80,000
            )
            
            
            (80,000
            )Deferred
      compensation
            
            
            -
            
            
            
            (26,250
            )Accumulated
      deficit
            
            
            (29,551,979
            )
            
            
            (32,549,564
            )Accumulated
      other comprehensive income
            
            
            808,002
            
            
            
            666,670Total
      Solar Thin Film's shareholders' deficit
            
            
            (3,771,050
            )
            
            
            (6,570,274
            )Noncontrolling
      interest
            
            
            -
            
            
            
            1,146,588Total
      shareholders' deficit
            
            
            (3,771,050
            )
            
            
            (5,423,686
            )Total
      Liabilities and Stockholders' Deficit
            
            $
            3,154,230
            
            
            $
            4,812,046




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





F-2





SOLAR THIN FILMS, INCCONSOLIDATED
      STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
  (LOSS)




Years ended December 31,2009
            
            
            2008REVENUE:Equipment
      sales
            
            $
            -
            
            
            $
            3,289,517Factory
      Sales
            
            
            8,720,938
            
            
            
            147,262Total
      revenue
            
            
            8,720,938
            
            
            
            3,436,779Cost
      of sales
            
            
            6,460,524
            
            
            
            2,403,808Gross
      profit
            
            
            2,260,414
            
            
            
            1,032,971OPERATING
      EXPENSES:General,
      selling and administrative expenses
            
            
            5,014,321
            
            
            
            7,745,174Research
      and development
            
            
            -
            
            
            
            120,000Depreciation
      and amortization expense
            
            
            73,141
            
            
            
            142,472Total
      operating expenses
            
            
            5,087,462
            
            
            
            8,007,646NET
      (LOSS) FROM OPERATIONS
            
            
            (2,827,048
            )
            
            
            (6,974,675
            )Other
      income/(expense):Gain
      from extinguishment of debt
            
            
            3,325,200
            
            
            
            -Loss
      on settlement of real estate deposit
            
            
            -
            
            
            
            (260,746
            )Loss
      on sale and write off of equipment
            
            
            (40,513
            )
            
            
            -Foreign
      exchange (expense):
            
            
            (356,841
            )
            
            
            (56,061
            )Interest
      expense, net
            
            
            (866,749
            )
            
            
            (1,178,465
            )Gain
      on change in fair value of reset provision liability
            
            
            21,776
            
            
            
            -Impairment
      on investment
            
            
            (150,000
            )
            
            
            -Debt
      acquisition costs
            
            
            (26,500
            )
            
            
            (74,204
            )Other
      income
            
            
            726,586
            
            
            
            2,237Total
      other income (expenses)
            
            
            2,632,959
            
            
            
            (1,567,239
            )Net
      loss before provision for income taxes
            
            
            (194,089
            )
            
            
            (8,541,914
            )Income
      taxes
            
            
            -
            
            
            
            -Net
      loss
            
            
            (194,089
            )
            
            
            (8,541,914
            )Noncontrolling
      interest
            
            
            (8,771
            )
            
            
            67,904NET
      LOSS ATTRIBUTABLE TO SOLAR THIN FILMS, INC.
            
            $
            (202,860
            )
            
            $
            (8,474,010
            )Net
      loss per common share (basic)
            
            $
            (0.01
            )
            
            $
            (0.73
            )Net
      loss per common share (fully diluted)
            
            $
            (0.01
            )
            
            $
            (0.73
            )Weighted
      average shares used in los per share calculation:Basic
            
            
            14,366,619
            
            
            
            11,532,990Diluted
            
            
            14,366,619
            
            
            
            11,532,900Comprehensive
      loss:Net
      loss
            
            $
            (194,089
            )
            
            $
            (8,541,914
            )Foreign
      currency translation gain
            
            
            141,332
            
            
            
            225,626Comprehensive
      loss
            
            
            (52,757
            )
            
            
            (8,316,288
            )Comprehensive
      loss (income) attributable to the non controlling interest
            
            
            (8,771
            )
            
            
            67,904Comprehensive
      loss attributable to Solar Thin Films, Inc.
            
            $
            (61,528
            )
            
            $
            (8,248,384
            )






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





F-3




SOLAR
      THIN FILMS, INCCONSOLIDATED
      STATEMENTS OF DEFICIENCY OF STOCKHOLDERS' DEFICITYEARS
      ENDED DECEMBER 31, 2009 AND 2008




SOLAR
      THIN FILMS, INC.Preferred
              Series
      B-1
            
            
            Preferred
              Series
      B-3
            
            
            Common
              shares
            
            
            Shares
      to
              be
      issuedShares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            AmountBalance,
      December 31, 2007 (Note 12)
            
            
            228,652
            
            
            $
            2,286
            
            
            
            47,518
            
            
            $
            475
            
            
            
            11,402,520
            
            
            $
            114,025
            
            
            
            -
            
            
            $
            -Issuance
      of 119,000 shares of common stock in exchange for convertible notes
      payable (Note 12)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            119,000
            
            
            
            1,190
            
            
            
            -
            
            
            
            -Fair
      value of vested portion of employee options issued
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Sale
      of majority owned subsidiary common stock by subsidiary
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Reduction
      in ownership of majority owned subsidiary
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Issuance
      of 39,800 shares of common stock in exchange for convertible notes payable
      (Note 12)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            39,800
            
            
            
            398
            
            
            
            -
            
            
            
            -Issuance
      of 800 shares of common stock in exchange for convertible notes payable
      (Note 12)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            800
            
            
            
            8
            
            
            
            -
            
            
            
            -Amortization
      of deferred compensation
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Foreign
      currency translation gain
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Balance,
      December 31, 2008
            
            
            228,652
            
            
            
            2,286
            
            
            
            47,518
            
            
            
            475
            
            
            
            11,562,120
            
            
            
            115,621
            
            
            
            -
            
            
            
            -Cumulative
      effect of a change in accounting principle-adoption of EITF 07-05
      effective January 1, 2009
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Issuance
      of 65,000 shares of common stock in exchange for services rendered (Note
      12)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            65,000
            
            
            
            650
            
            
            
            -
            
            
            
            -Issuance
      of 102 shares of common stock in exchange for 16 Preferred Series B-3
      shares (Note 12)
            
            
            -
            
            
            
            -
            
            
            
            (16
            )
            
            
            -
            
            
            
            102
            
            
            
            1
            
            
            
            -
            
            
            
            -Change
      in majority owned subsidiary equity
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Warrants
      issued in exchange for services
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Fair
      value of vested portion of employee options issued
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Change
      in fair value of re priced vested employee options
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Issuance
      of majority owned subsidiary common stock for services
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Amortization
      of deferred compensation
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Issuance
      of 6,421,000 shares of common stock in exchange for non controlling
      interest in majority owned subsidiary (Note 12)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            6,421,000
            
            
            
            64,210
            
            
            
            -Issuance
      of 940,625 shares of common stock in exchange for convertible notes
      payable and related interest
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            940,625
            
            
            
            9,406
            
            
            
            -Common
      stock to be issued in settlement of convertible note and interest
      expenses
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            200,000
            
            
            
            200,000Rounding
      due to reverse split (Note 12)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            46
            
            
            
            1
            
            
            
            -Foreign
      currency translation gain
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Balance
      at December 31, 2009
            
            
            228,652
            
            
            $
            2,286
            
            
            
            47,502
            
            
            $
            475
            
            
            
            18,988,893
            
            
            $
            189,889
            
            
            
            200,000
            
            
            $
            200,000





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





F-4





SOLAR
      THIN FILMS, INCCONSOLIDATED
      STATEMENT OF DEFICIENCY OF STOCKHOLDERS' DEFICITYEARS
      ENDED DECEMBER 31, 2009 AND 2008




SOLAR
      THIN FILMS, INC.Additional
            
            
            
            
            
            
            
            
            Other
            
            
            
            
            
            Non
            
            
            TotalPaid
            
            
            Deferred
            
            
            Treasury
            
            
            Comprehensive
            
            
            Accumulated
            
            
            controlling
            
            
            Stockholders'in Capital
            
            
            Compensation
            
            
            Stock
            
            
            Income (loss)
            
            
            Deficit
            
            
            Interest
            
            
            DeficiencyBalance,
      December 31, 2007 (Note 12)
            
            $
            23,313,843
            
            
            $
            (79,750
            )
            
            $
            (80,000
            )
            
            $
            441,044
            
            
            $
            (24,075,554
            )
            
            $
            999,496
            
            
            $
            635,865Issuance
      of 119,000 shares of common stock in exchange for convertible notes
      payable (Note 12)
            
            
            593,810
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            
            
            
            
            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
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            44,775
            
            
            
            150,000Reduction
      in ownership of majority owned subsidiary
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            170,221
            
            
            
            170,221Issuance
      of 199,000 shares of common stock in exchange for convertible notes
      payable (Note 12)
            
            
            198,602
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            199,000Issuance
      of 800 shares of common stock in exchange for convertible notes payable
      (Note 12)
            
            
            3,992
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            4,000Amortization
      of deferred compensation
            
            
            -
            
            
            
            53,500
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            53,500Foreign
      currency translation gain
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            225,626
            
            
            
            -
            
            
            
            -
            
            
            
            225,626Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (8,474,010
            )
            
            
            (67,904
            )
            
            
            (8,541,914
            )Balance,
      December 31, 2008
            
            
            25,300,488
            
            
            
            (26,250
            )
            
            
            (80,000
            )
            
            
            666,670
            
            
            
            (32,549,564
            )
            
            
            1,146,588
            
            
            
            (5,423,686
            )Cumulative
      effect of a change in accounting principle-adoption of EITF 07-05
      effective January 1, 2009
            
            
            (3,222,222
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            3,200,445
            
            
            
            -
            
            
            
            (21,777
            )Issuance
      of 65,000 shares of common stock in exchange for services rendered (Note
      12)
            
            
            77,350
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            78,000Issuance
      of 102 shares of common stock in exchange for 16 Preferred Series B-3
      shares (Note 12)
            
            
            (1
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Change
      in majority owned subsidiary equity
            
            
            (9,156
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            9,156
            
            
            
            -Fair
      value of vested portion of employee options issued
            
            
            635,268
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            635,268Change
      in fair value of re priced vested employee options
            
            
            45,493
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            45,493Warrants
      issued in exchange for services
            
            
            222,706
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            222,706Issuance
      of majority owned subsidiary common stock for services
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            49,141
            
            
            
            49,141Amortization
      of deferred compensation
            
            
            -
            
            
            
            26,250
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            26,250Issuance
      of 6,421,000 shares of common stock in exchange for non controlling
      interest in majority owned subsidiary (Note 12)
            
            
            1,149,446
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,213,656
            )
            
            
            -Issuance
      of 940,625 shares of common stock in exchange for convertible notes
      payable and related interest
            
            
            460,906
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            470,312Common
      stock to be issued in settlement of convertible note and interest
      expenses
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            200,000Rounding
      due to reverse split
            
            
            (1
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Foreign
      currency translation gain (Note 12)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            141,332
            
            
            
            -
            
            
            
            
            
            
            
            141,332Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (202,860
            )
            
            
            8,771
            
            
            
            (194,089
            )Balance
      at December 31, 2009
            
            $
            24,660,277
            
            
            $
            -
            
            
            $
            (80,000
            )
            
            $
            808,002
            
            
            $
            (29,551,979
            )
            
            
            -
            
            
            $
            (3,771,050
            )




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




F-5




SOLAR
      THIN FILMS, INCCONSOLIDATED
      STATEMENTS OF CASH FLOWSYEARS
      ENDED DECEMBER 31, 2009 AND 2008




2009
            
            
            2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
            
            $
            (194,089
            )
            
            $
            (8,541,914
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization expense
            
            
            117,382
            
            
            
            190,025Allowance
      for doubtful accounts and bad debt
            
            
            50,000
            
            
            
            1,605,797Loss
      on sale and write off of equipment
            
            
            40,513
            
            
            
            -Impairment
      of investment
            
            
            150,000
            
            
            
            -Amortization
      of deferred financing costs
            
            
            26,500
            
            
            
            74,204Amortization
      of debt discounts
            
            
            362,003
            
            
            
            1,085,251Amortization
      of deferred and prepaid compensation
            
            
            63,648
            
            
            
            53,500Warrants
      issued in exchange for services
            
            
            222,706
            
            
            
            -Stock
      based compensation
            
            
            680,761
            
            
            
            1,085,016Common
      stock issued and to be issued in settlement of interest and redemption
      penalties
            
            
            169,479
            
            
            
            -Change
      in fair value of reset liability
            
            
            (21,776
            )
            
            
            -Gain
      on extinguishment of debt
            
            
            (3,325,200
            )
            
            
            -Common
      stock of majority owned subsidiary issued for services
            
            
            49,140
            
            
            
            170,220Loss
      on settlement of deposits
            
            
            30,735
            
            
            
            260,746Changes
      in operating assets and liability:Accounts
      receivable
            
            
            (1,118,989
            )
            
            
            (512,164
            )Accounts
      receivable, related party
            
            
            493,646
            
            
            
            113,628Inventory
            
            
            70,320
            
            
            
            (33,836
            )Note
      receivable
            
            
            -
            
            
            
            -Advances
      and other current assets
            
            
            599,814
            
            
            
            (1,106,030
            )Other
      assets
            
            
            -
            
            
            
            (366,179
            )Accounts
      payable and accrued liabilities
            
            
            548,839
            
            
            
            1,144,115Advances
      received from customers
            
            
            (1,829,661
            )
            
            
            2,154,063Deferred
      revenue
            
            
            2,180,082
            
            
            
            33,452Net
      cash used in operations
            
            
            (634,147
            )
            
            
            (2,590,106
            )CASH
      FLOWS FROM INVESTING ACTIVITIES:Sale
      (purchase) of investments
            
            
            1,350,000
            
            
            
            (1,500,000
            )Sale
      of property, plant and equipment
            
            
            27,158
            
            
            
            -Acquisition
      of property, plant and equipment
            
            
            (94,905
            )
            
            
            (44,181
            )Net
      cash provided by (used in) investing activities:
            
            
            1,282,253
            
            
            
            (1,544,181
            )CASH
      FLOWS FROM FINANCING ACTIVITIES:(Payments)
      proceeds from notes payable
            
            
            (640,000
            )
            
            
            500,000Proceeds
      from sale of common stock by majority owned subsidiary
            
            
            -
            
            
            
            150,000Net
      cash (used in) provided by financing activities:
            
            
            (640,000
            )
            
            
            650,000Effect
      of currency rate change on cash
            
            
            3,792
            
            
            
            (53,932
            )Net
      increase (decrease) in cash and cash equivalents
            
            
            11,898
            
            
            
            (3,538,219
            )Cash
      and cash equivalents at beginning of period
            
            
            619,257
            
            
            
            4,157,476Cash
      and cash equivalents at end of period
            
            $
            631,155
            
            
            $
            619,257SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Cash
      paid during the period for interest
            
            $
            2,772
            
            
            $
            3,572Cash
      paid during the period for taxes
            
            
            -
            
            
            
            -NON
      CASH INVESTING AND FINANCING ACTIVITIES:Common
      stock issued for deferred compensation
            
            $
            78,000
            
            
            $
            -





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, 2009 and 2008




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 “turnkey” systems and
equipment for the manufacture of low cost thin film solar modules and building
integrated photovoltaic tags on a world-wide basis.





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





The
Company consummated an Agreement and Plan of Merger dated June 30, 2009 (the
“Agreement”) with Solar Thin Power and its shareholders, pursuant to which Solar
Thin Power was merged with and into the Company (the
“Merger”).  Following the Merger, effective on June 30 2009, Solar
Thin Power is operated as a division of the Company (see Note
14).





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 as of December 31, 2009 and 2008. As of December 31,
2008, the Company determined accounts receivable, related party of $831,863,
trade receivables of $696,067 and a note receivable of $250,000 were impaired
and accordingly recorded an allowance for doubtful accounts. During the year
December 31, 2009, the Company collected accounts receivable, related party, in
the amount of $450,000 pursuant to an Equity Transfer Agreement the Company
executed in September 2009 and the remaining uncollectible receivable of $50,000
was charged to operations during the year ended December 31, 2009.





Revenue
Recognition





For
revenue from Equipment sales, which include equipment and sometimes
installation, the Company recognizes revenue in accordance with Accounting
Standards Codification subtopic 605-10, Revenue Recognition (“ASC 605-10”). ASC
605-10 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.


F-7


SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2009 and 2008




NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





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,
2009 and 2008 amounted to $2,373,067 and $33,452, respectively. ASC 605-10
incorporates Accounting Standards Codification subtopic 605-25, Multiple-Element
Arraignments (“ASC 605-25”). ASC 605-25 addresses accounting for arrangements
that may involve the delivery or performance of multiple products, services
and/or rights to use assets.





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, 2009 and 2008.





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
process) upon completion of the installation and commissioning
process.  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 or completion of the training
process.





F-8




SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2009 and 2008




NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





The
Company has accounted for its Equipment Sales and Factory Sales arrangements as
separate units of accounting as a) the shipped equipment (both Equipment Sales
and Factory Sales) has value to the customer on a standalone basis, b) there is
an objective and reliable evidence of the fair value of the service portion of
the revenue (installation and commissioning) approximated by the fair value
that a third party would charge the Company’s customer for the installation and
commissioning fees if the customer so desired not to use the Company’s services
(or the customer could complete the process using the information in the owner’s
manual, although it would probably take significantly longer than it would take
the Company’s technicians and or a third party to perform the installation and
commissioning process), and c) there is no right of return for the shipped
equipment and all equipments are inspected and approved by the customer before
shipment.





Cost of
sales





Cost of
sales includes cost of raw materials, labor, production related depreciation and
amortization, 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.





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 Renewable Energy Solutions, Inc. (“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.




During
the year ended December 31, 2009, the Company executed an Equity Transfer
Agreement pursuant to which the Company transferred its investment in CG Solar
to a third party in exchange for considerations of $1,350,000. Accordingly, the
Company recorded an impairment charge to current period operations of
$150,000.




F-9





SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2009 and 2008




NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Segment
information





Accounting
Standards Codification subtopic Segment Reporting 280-10 (“ASC 280-10”) which
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.  ASC 280-10 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 ASC 280-10. The information disclosed herein materially represents all of
the financial information related to the Company’s principal operating
segment




Product Warranty
costs





The
Company provides for estimated costs to fulfill customer warranty obligations
upon recognition of the related revenue in accordance with the Accounting
Standards Codification subtopic Guarantees 460-10 (“ASC 460-10”) 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 had accrued provision for product warranty costs of approximately
$95,000 at January 1, 2008. During 2008 an additional $73,000 in warranty costs
were accrued and a total of $108,070 was utilized, leaving a balance of
approximately $59,930 remaining as of December 31, 2008. During the year ended
December 31, 2009 the Company accrued an additional $152,757 in warranty costs
as a result of shipments to Grupo Unisolar, and did not incur any product
warranty costs, leaving a balance of $212,687 in product warranty provision as
of December 31, 2009.





Research and
Development





The
Company accounts for research and development costs in accordance with
Accounting Standards Codification subtopic 730-10, Research and Development
(“ASC 730-10”).  Under ASC 730-10, 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 $-0- and $120,000 for the years ended
December 31, 2009 and 2008, respectively.




F-10




SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2009 and 2008




NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Reclassification





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





Fair Value of Financial
Instruments




Effective
January 1, 2008, the Company adopted the provisions of FASB ASC 820-10 (the
“Fair Value Topic”) which provides a framework for measuring fair value under
GAAP for assets and liabilities that are recognized using fair values on a
recurring basis. The Fair Value Topic defines fair value as the exchange price
that would be received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability
in an orderly transaction between market participants on the measurement date.
It requires that valuation techniques maximize the use of observable inputs and
minimize the use of unobservable inputs. It also establishes a fair value
hierarchy, which prioritizes the valuation inputs into three broad
levels.




There are
three general valuation techniques that may be used to measure fair value, as
described below:




A) Market
approach—Uses prices and other relevant information generated by market
transactions involving identical or comparable assets or liabilities. Prices may
be indicated by pricing guides, sale transactions, market trades, or other
sources;




B) Cost
approach—Based on the amount that currently would be required to replace the
service capacity of an asset (replacement cost); and




C) Income
approach—Uses valuation techniques to convert future amounts to a single present
amount based on current market expectations about the future amounts (includes
present value techniques, and option-pricing models). Net present value is an
income approach where a stream of expected cash flows is discounted at an
appropriate market interest rate.




The
Company had no assets and liabilities that were measured on a recurring basis at
fair value for the year ended December 31, 2009 using the market and income
approaches.




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:





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-11




SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2009 and 2008




NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Stock Based
Compensation





Effective
for the year beginning January 1, 2006, the Company has adopted Accounting
Standards Codification subtopic 718-10, Compensation (“ASC 718-10”). 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 ASC 718-10 for the years ended December 31, 2009 and 2008 was $680,761 and
$1,085,016, respectively.





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 Accounting Standards Codification subtopic 220-10, Comprehensive
Income (“ASC 220-10”) which 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. ASC 220-10 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 or reporting period end or average exchange rates in accordance
with the requirements of Accounting Standards Codification subtopic 830-10,
Foreign Currency Matters (“ASC 830-10”). 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 Accounting
Standards Codification subtopic 260-10, Earnings Per Share (“ASC 260-10”), which
requires presentation of basic and diluted earnings per share (“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.





F-12




SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2009 and 2008




NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





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) per share for the years
ended December 31, 2009 and 2008 do not reflect the effects of 306,702and
306,805 shares potentially issuable upon conversion of our convertible
preferred shares as of December 31, 2009 and 2008, respectively; 370,433 and
484,600 shares potentially issuable upon the conversion of convertible debt as
of December 31, 2009 and December 31, 2008, respectively;  and -0-
shares potentially issuable upon the exercise of the Company's stock options and
warrants (calculated using the treasury stock method) as of December 31, 2009
and December 31, 2008. These potentially issuable shares would have an
anti-dilutive effect on our net (loss) per share.




Recent Accounting
Pronouncements




In
February 2010 the FASB issued Update No. 2010-09 “Subsequent Events (Topic 855)”
(“2010-09”). 2010-09 clarifies the interaction of Accounting Standards
Codification 855 “Subsequent Events” (“Topic 855”) with guidance issued by the
Securities and Exchange Commission (the “SEC”) as well as the intended breadth
of the reissuance disclosure provision related to subsequent events found in
paragraph 855-10-50-4 in Topic 855. This update is effective for annual or
interim periods ending after June 15, 2010. Management is currently evaluating
whether these changes will have any material impact on its financial position,
results of operations or cash flows.




In
February 2010 the FASB issued Update No. 2010-08 “Technical Corrections to
Various Topics” (“2010-08”). 2010-08 represents technical corrections to SEC
paragraphs within various sections of the Codification. Management is currently
evaluating whether these changes will have any material impact on its financial
position, results of operations or cash flows.




In
January 2010 the FASB issued Update No. 2010-06 “Fair Value Measurements and
Disclosures—Improving Disclosures about Fair Value Measurements” (“2010-06”).
2010-06 requires new disclosures regarding significant transfers between Level 1
and Level 2 fair value measurements, and disclosures regarding purchases, sales,
issuances and settlements, on a gross basis, for Level 3 fair value
measurements. 2010-06 also calls for further disaggregation of all assets and
liabilities based on line items shown in the statement of financial position.
This amendment is effective for fiscal years beginning after December 15, 2010
and interim periods within those fiscal years. The Company is currently
evaluating whether adoption of this standard will have a material impact on its
financial position, results of operations or cash flows.




In
January 2010 the FASB issued Update No. 2010-05 “Compensation—Stock
Compensation—Escrowed Share Arrangements and Presumption of Compensation”
(“2010-05”). 2010-05 re-asserts that the Staff of the Securities Exchange
Commission (the “SEC Staff”) has stated the presumption that for certain
shareholders escrowed share represent a compensatory arrangement. 2010-05
further clarifies the criteria required to be met to establish a position
different from the SEC Staff’s position. The Company does not believe this
pronouncement will have any material impact on its financial position, results
of operations or cash flows.




In
January 2010 the FASB issued Update No. 2010-04 “Accounting for Various
Topics—Technical Corrections to SEC Paragraphs” (“2010-04”). 2010-04 represents
technical corrections to SEC paragraphs within various sections of the
Codification. Management is currently evaluating whether these changes will have
any material impact on its financial position, results of operations or cash
flows.




F-13





SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2009 and 2008




NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)




Recent Accounting
Pronouncements (continued)




In
January 2010 the FASB issued Update No. 2010-02 “Accounting and Reporting for
Decreases in Ownership of a Subsidiary—a Scope Clarification” (“2010-02”) an
update of ASC 810 “Consolidation.” 2010-02 clarifies the scope of ASC 810 with
respect to decreases in ownership in a subsidiary to those of a subsidiary or
group of assets that are a business or nonprofit, a subsidiary that is
transferred to an equity method investee or joint venture, and an exchange of a
group of assets that constitutes a business or nonprofit activity to a
non-controlling interest including an equity method investee or a joint venture.
Management, does not expect adoption of this standard to have any material
impact on its financial position, results of operations or operating cash flows.
Management does not intend to decrease its ownership in any of its wholly-owned
subsidiaries.




In
January 2010 the FASB issued Update No. 2010-01 “Accounting for Distributions to
Shareholders with Components of Stock and Cash—a consensus of the FASB Emerging
Issues Task Force” (“2010-03”) an update of ASC 505 “Equity.” 2010-03 clarifies
the treatment of stock distributions as dividends to shareholders and their
affect on the computation of earnings per shares. Management does not expect
adoption of this standard to have any material impact on its financial position,
results of operations or operating cash flows.





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 loss from operations
of $2,827,048 and $6,974,675 for the years ended December 31, 2009 and 2008,
respectively. Additionally, the Company has negative working capital of
$3,878,549 as of December 31, 2009. The Company is currently in default in the
payment of certain notes payable.  These factors among others raised
substantial doubt about the Company’s ability to continue as a going
concern.




The
Company has undertaken further steps as part of a plan to improve operations
with the goal of sustaining our operations for the next twelve months and beyond
to address its lack of liquidity by raising additional funds, either in the form
of debt or equity or some combination thereof.  However, there can be no
assurance that the Company can successfully accomplish these steps and or
business plans, and it is uncertain that the Company will achieve a profitable
level of operations and be able to obtain additional financing.





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.





There can
be no assurance that any additional financings will be available to the Company
on satisfactory terms and conditions, if at all.  In the event that
the Company is unable to continue as a going concern, it may elect or be
required to seek protection from its creditors by filing a voluntary petition in
bankruptcy or may be subject to an involuntary petition in bankruptcy. To date,
management has not considered this alternative, nor does management view it as a
likely occurrence.




F-14


SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2009 and 2008




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, 2009 and 2008
consist of the following.





2009
            
            
            2008Work
      in Progress
            
            $
            103,831
            
            
            $
            103,919Raw
      Materials
            
            
            27,409
            
            
            
            103,122$
            131,240
            
            
            $
            207,041





NOTE
4 - NOTE RECEIVABLE





Note
receivable as of December 31, 2009 and 2008 consists of the
following:





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




The
Company’s note receivable along with accrued interest was due on June 10, 2009
and can be prepaid at any time without penalty or premium. The note is secured
by the Solar Thin Films, Inc’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 the Company’s operations.  There was no change in allowance
for doubtful accounts at December 31, 2009.




NOTE
5 – DEPOSITS AND OTHER CURRENT ASSETS





Deposits
and other current assets as of December 31, 2009 and 2008 are comprised of the
following:





2009
            
            
            2008Real
      estate deposits, net of liquidated damages (see below)
            
            $
            -
            
            
            $
            194,254Common
      stock issued for services to be rendered
            
            
            40,603
            
            
            
            -Tax
      receivable
            
            
            60,980
            
            
            
            176,601Other
            
            
            13,997
            
            
            
            7,476Total
            
            $
            115,580
            
            
            $
            378,331





F-15


SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2009 and 2008





NOTE
5 – DEPOSITS AND OTHER CURRENT ASSETS (continued)





On August
20, 2008, the Company entered into an agreement 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 was then adjourned in order to
complete the Phase I environmental assessment and to address any issues
identified.  Subsequently the Company had identified an environmental
condition, which it believed might lead to contamination, and determined not to
purchase the property.





The
Company then negotiated a 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. The Company received the refund of $194,254 during the second quarter for
the year ended December 31, 2009.




In
January 2009, the Company issued 65,000 shares of its Common Stock in exchange
for services to be rendered through January 2011 (Note 12). The shares of Common
Stock were valued at $78,000, which was estimated to be approximate the fair
value of the Company's common shares during the period covered by the consulting
agreement. The Company amortized and charged to operations a
stock-based compensation expense of $37,397 during the year ended December
31, 2009.





NOTE
6 - PROPERTY, PLANT AND EQUIPMENT





The
Company's property and equipment at December 31, 2009 and 2008 consist of the
following:




2009
            
            
            2008Land
      and buildings
            
            $
            135,604
            
            
            $
            223,132Furniture
      and fixture
            
            
            85,629
            
            
            
            78,644Machinery,
      plant and equipment
            
            
            481,621
            
            
            
            551,463Total
            
            
            702,854
            
            
            
            853,239Accumulated
      depreciation
            
            
            (446,718
            )
            
            
            (439,998
            )Property
      and equipment
            
            $
            256,136
            
            
            $
            413,241





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.





During
the year ended December 31, 2009, the Company disposed of vehicles for $27,158
with a book value of $37,279 resulting in a loss to current period operations of
$9,266.  In addition, the Company charged $31,247 to operations assets
scrapped during the year ended December 31, 2009. The Company also wrote off
certain fully-depreciated assets resulted in no gain or losses.





Depreciation
expense was $117,382 and $190,025 for the year ended December 31, 2009 and 2008,
respectively, of which $44,241 and $47,553 was included as part of cost of
sales.




F-16




SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2009 and 2008





NOTE
7 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES





Accounts
payable and accrued liabilities at December 31, 2009 and 2008 were as
follows:





2009
            
            
            2008Accounts
      payable
            
            $
            435,393
            
            
            $
            149,324Other
      accrued expenses, including a penalty in the amount of  $720,000
      in connection with liquidating charges as of December 31, 2008 (see
      below)
            
            
            1,174,315
            
            
            
            2,068,591Redemption
      penalty relating to convertible debentures, see Note 10
    below
            
            
            67,000
            
            
            
            -Accrued
      interest, see Note 8 and Note 10 below
            
            
            124,934
            
            
            
            1,810,200$
            1,801,642
            
            
            $
            4,028,115





As
described on Note 17 below, the Company entered into a stock exchange
agreement.  As such, the Company recorded estimated legal and other
related costs of $500,000 as other accrued expenses for service rendered during
the year ended December 31, 2008. The expenses were paid in 2009 with no
remaining accrual at December 31, 2009.





Registration Rights
Liquidated Damages




In
private placements in June 2006, the Company issued convertible promissory notes
and warrants to purchase the Company’s common stock. Pursuant to the terms of a
registration rights agreement, the Company was 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.





As of
December 31, 2009, the Company concluded that the payment of liquidated damages
under these commitments were not probable since the majority of the related
notes have been converted or settled as of December 31, 2009 (see Note 10).
Accordingly, the Company reversed the accrued expenses for the potential
liquidated damages of $720,000 as other income in the statement of operations
during the year ended December 31, 2009.





NOTE
8 - NOTES PAYABLE OTHER





A summary
of notes payable other at December 31, 2009 and 2008 consists of the
following:




2009
            
            
            2008Demand
      note payable: interest payable at 8.0% per annum (default rate of 10% per
      annum); unsecured
            
            $
            -
            
            
            $
            1,500,000$
            -
            
            
            $
            1,500,000




F-17




SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2009 and 2008





NOTE
8 - NOTES PAYABLE OTHER (continued)





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 listed the note as a liability on its balance sheet, it
does not believe that it has any further liability under this
note.  Based on the appropriate opinion of its legal counsel, the
Company removed this item as a liability on its financial statements as at
December 31, 2009 and the related accrued interest. As such, the Company
realized a gain on extinguishment of debt of $3,310,200 as other income for the
year ended December 31, 2009.





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,
2009 and 2008, the outstanding balance was $143,656 and $143,778, 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, 2009 and 2008 are as
follows:





2009
            
            
            2008Convertible
      notes payable (“March 2006”) non-interest bearing; secured and due March
      2009. The Company is currently in default under the terms of this note
      agreement.
            
            $
            1,000,000
            
            
            $
            1,250,000Debt
      Discount, net of accumulated amortization of $1,250,000 and $1,165,525,
      respectively
            
            
            (
      -
            )
            
            
            (84,475
            )Net
            
            
            1,000,000
            
            
            
            1,165,525Convertible
      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 $5.00 per share. The Company is
      currently in default under the terms of this agreement
            
            
            268,000
            
            
            
            1,173,000Debt
      Discount, net of accumulated amortization of $1,048,000 and $895,472,
      respectively
            
            
            (
      -
            )
            
            
            (277,528
            )Net
            
            
            268,000
            
            
            
            895,472Note
      payable, non interest bearing, due March 4, 2009. The Company was in
      default under the terms of the note agreement.  Interest accrued
      at 8% per annum upon the default. The Company subsequently extended
      this note payable on October 25, 2009 with a new promissory note payable
      (see Note 20).
            
            
            400,000
            
            
            
            500,000Notes
      payable, demand, 12% per annum, unsecured
            
            
            169,167
            
            
            
            -Total
            
            
            1,837,167
            
            
            
            2,560,997Less
      Current Maturities
            
            
            (1,837,167
            )
            
            
            ( 2,560,997
            )Convertible
      notes payable – long-term portion
            
            $
            -
            
            
            $
            -




F-18




SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2009 and 2008





NOTE
10- PRIVATE PLACEMENT OF CONVERTIBLE NOTES AND NOTE PAYABLE
(continued)





March 2006
Financing





In
connection with the merger and corporate restructure on June 14, 2006, 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) 125,000 shares of common
stock of the Company (the "Shares") (Note 11) and (iii) common stock purchase
warrants to purchase 125,000 shares of common stock at $5.00 price per share for
a period of five years (the "Warrants").





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 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
contractually agreed to restrict their ability to convert the March 2006 Notes
and exercise the March 2006 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.





The sale
of the Notes was completed on March 16, 2006. As of December 31, 2009, the
Company was obligated on $1,000,000 in face amount of Notes issued to the March
investors.





In
accordance with Accounting Standards Codification subtopic 470-20, Debt, Debt
With Conversions and Other Options), 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 Accounting Standards Codification subtopic 470-10, Debt (“ASC
470-10”), 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 ASC
470-10 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 was 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 $84,475 and $372,163 for the years ended December 31,
2009 and 2008, respectively.





On
November 5, 2009, the Company settled $250,000 of the March 2006 convertible
notes and related accrued interest with a commitment to issue an aggregate of
200,000 shares of its common stock and a demand notes payable totally
$169,167.





F-19


SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2009 and 2008




NOTE
10- PRIVATE PLACEMENT OF CONVERTIBLE NOTES AND NOTE PAYABLE
(continued)





June 2006
Financing





In
connection with the merger and corporate restructure on June 14, 2006, 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”);





·
            600,000
      shares of the Company’s common
stock;





·
            Series
      A Common Stock Purchase Warrants to purchase 600,000 shares of common
      stock at $10.00 per share for a period of three years (“Series A
      Warrants”);





·
            Series
      B Common Stock Purchase Warrants to purchase 600,000 shares of common
      stock at $11.00 per share for a period of four years (“Series B
      Warrants”);





·
            Series
      C Common Stock Purchase Warrants to purchase 600,000 shares of common
      stock at $15.00 per share for a period of three years (“Series C
      Warrants”); and





·
            Series
      D Common Stock Purchase Warrants to purchase 600,000 shares of common
      stock at $16.50 per share for a period of four years (“Series D
      Warrants”).





The
warrants and warrant agreement provide for certain anti-dilution rights (see
Note 11).





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 matured in June 2009 and are convertible into
the Company’s common stock, at the June 2006 Investors’ option, at a conversion
price equal to $5.00 per share (Note 11).




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.





As of December 31, 2009,
the Company concluded that the payment of liquidated damages under these
commitments were not probable. Accordingly, the Company reversed the accrued
expenses for the potential liquidated damages of $720,000 as other income in the
statement of operations during the year ended December 31, 2009.





F-20




SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2009 and 2008




NOTE
10- PRIVATE PLACEMENT OF CONVERTIBLE NOTES AND NOTE PAYABLE
(continued)





June 2006 Financing
(continued)





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 Accounting Standards Codification subtopic 470-10, Debt (“ASC
470-10”), 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 ASC 470-10, 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.





The
Company amortized and wrote off the Convertible Notes’ debt discount and
recorded a non-cash interest expense of $277,528 and $1,153,980 for the years
ended December 31, 2009 and 2008, respectively.





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 ASC 470-10, the warrants were recorded as a derivative
liability and valued at fair market value until the Company meets the criteria
under ASC 470-10 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, 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.





F-21




SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2009 and 2008




NOTE
10- PRIVATE PLACEMENT OF CONVERTIBLE NOTES AND NOTE PAYABLE
(continued)





June 2006 Financing
(continued)





The
Company granted the Investors of the June 2006 Financing a first priority
security interest in all of its assets. In addition, the Company pledged 100% of
the shares (the “Pledged Shares”) held in its wholly owned subsidiary, Kraft
Elektronikai Zrt (“Kraft”), as collateral to the Investors. The Company did
not repay the note at its maturity in June 2009. As a result of the default, the
Investors may seek a redemption premium equal to 125% of the outstanding
principal amount.  At December 31, 2009, the Company had accrued
redemption penalty in an aggregate amount of $67,000, which represents the
redemption premium in excess of the outstanding notes principal of $268,000 that
was included in the Company’s current liabilities.





In the
year ended December 31, 2007, certain June 2006 investors converted $4,029,000
of convertible notes to 805,800 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 159,600 shares of the Company’s common stock.





During
the year ended December 31, 2009, the Company settled an aggregate of $905,000
of convertible notes, related interest and redemption penalties by issuing (or
committed to issue) 1,140,625 shares common stock, promissory notes of $169,167
and cash of $640,000 to certain June 2006 investors. One of the notes was
settled less than its unpaid outstanding balance, the Company recognized $15,000
of gain from settlement of debt during the year ended December 31, 2009 related
to this note.





There can
be no assurance that the Company will enter into definitive settlement
agreements to retire or reconstitute the remaining outstanding 2006 convertible
notes.  If the Company is unable to enter into settlement or other
agreements with the Investors, or is unable to obtain financing on terms
acceptable to the Company in order to repay the outstanding debt owed to the
Investors, the Investors may elect to exercise their first priority security
interest in all of the assets of the Company, as well as sell, transfer or
assign the Pledged Shares. In such event, the Company may be required to cease
operations and /or seek protection from its creditors under the Federal
Bankruptcy Act.





Note
payable





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. During
the year ended December 31, 2009, the Company paid $100,000 towards the note,
leaving the balance of the note in the amount of $400,000 at December 31,
2009.





On
October 25, 2009, the Company issued a note for the remaining unpaid balance of
$400,000 due on January 4, 2011 with interest of 8% per annum accrued starting
at the date of default, due at maturity.





NOTE
10- PRIVATE PLACEMENT OF CONVERTIBLE NOTES AND NOTE PAYABLE
(continued)





Notes payable,
demand




On
November 5, 2009, in conjunction with the settlement
of  $250,000  March 2006 convertible notes and related
accrued interest, the Company issued unsecured demand notes in the aggregate
amount of $169,167 at accrued interest 12% per annum with these two note March
2006 note holders.




F-22




SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2009 and 2008




NOTE
11 – DERIVATIVE LIABILITY





The
Company issued convertible debentures and related warrants with certain reset
exercise price provisions (see Note 10).  If the Company issues or
sells shares of its common stock (other than certain “Excluded Securities” as
defined in the June 2006 Senior Secured Convertible Note Agreement) after the
June 2006 Financing for an amount less than the original price per share, the
conversion price of the warrants is reduced to equal the new issuance price of
those shares.




Upon
the Company’s adoption of Accounting Standards Codification subtopic 815-40,
Derivatives and Hedging (“ASC 815-40”) effective January 1, 2009, the Company
determined that the warrants did not qualify for a scope exception under
Accounting Standards Codification subtopic 815-10, Derivatives and Hedging (“ASC
815-10”) as they were determined to not be indexed to the Company’s stock as
prescribed by ASC 815-40.  On January 1, 2009, the warrants, under ASC
815-40, were reclassified from equity to derivative liability for the then
relative fair market value of $3,222,222 and marked to market.  The
Company determined the fair value of these reset provisions at January 1, 2009
was $21,777 as the initial fair value at the adoption date of ASC 815-40. 
The value of the warrants decreased by $3,200,445 from the warrants issuance
date to the adoption date of ASC 815-40.  As of January 1, 2009, the
cumulative effect in adopting ASC 815-40 was a reduction to additional paid in
capital of $3,222,222 to reclassify the warrants from equity to derivative
liability and a decrease in accumulated deficit of $3,200,446 as a cumulative
effect of a change in accounting principle to reflect the change in the value of
the warrants between their issuance date and January 1, 2009.  At
March 31, 2009, the warrant liability was marked to market and the Company
recorded a gain of $12,909 due to the decrease in the fair value related to
these instruments during the first quarter of fiscal 2009.  Under ASC
815-40, the warrants will be carried at fair value and adjusted at each
reporting period. In June 2009, the warrants expired and the related warrant
liability adjusted to $-0-.





The fair
value of the warrants at the adoption date of ASC 815-40 was determined using
the Black Scholes Option Pricing Model based on the following
assumptions:  dividend yield: -0-%; volatility: 97.17%, risk free
rate: 0.27% to 0.37%, expected term: 0.43 to 1.43 years.





NOTE
12- 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, 2009 and December 31, 2008, 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. Eighty five (85) Series B-1 Preferred shares may be
      converted to one (1) share of the Company’s common stock. As of December
      31 2009 and 2008 there were 228,652 shares of Series B-1 Preferred issued
      and outstanding.




F-23




SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2009 and 2008





NOTE
12- CAPITAL STOCK (continued)





·
            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 six and four tenths (6.4) 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 six and four tenths (6.4) shares of the Company’s
      common stock. As of December 31, 2009 and 2008, there were 47,502 and
      47,518 shares of Series B-3 Preferred issued and outstanding,
      respectively.





·
            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 seventy
      (70) 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 6,685,000 shares of the Company’s common stock. As of
      December 31, 2009 and 2008, there were no shares of Series B-4 Preferred
      issued and outstanding.





Common
Stock





On
September 3, 2009, the Company affected a one-for-five (1 to 5) reverse stock
split of its issued and outstanding shares of common stock, $0.01 par value. All
references in the consolidated financial statements and the notes to
consolidated financial statements, number of shares, and share amounts have been
retroactively restated to reflect the reverse split. The Company has restated
from 57,810,601 to 11,562,120 shares of common stock issued and outstanding as
of December 31, 2008 to reflect the reverse split.  Due to the reverse
split, previously reported loss per share of $0.15 increased to $0.73 per share
for the year ended December 31, 2008.





On
September 3, 2009, the Company is authorized to issue 150,000,000 shares of
common stock with a par value of $0.01 per share. As of December 31, 2009 and
2008, there were 18,988,893 and 11,562,120 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
January 2008, the Company issued 80,000 shares of its Common stock in exchange
for convertible debentures of $400,000.





In March
2008, the Company issued 39,000 shares of its Common stock in exchange for
convertible debentures of $195,000.





In April
2008, the Company issued 200 shares of its Common stock in exchange for
convertible debentures of $1,000.





In June
2008, the Company issued 35,000 shares of its Common stock in exchange for
convertible debentures of $175,000.





In
September 2008, the Company issued 4,600 shares of its Common stock in exchange
for convertible debentures of $23,000.




F-24




SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2009 and 2008





NOTE
12- CAPITAL STOCK (continued)





In
October 2008, the Company issued 800 shares of its Common Stock in exchange for
convertible debentures of $4,000.





In
January 2009, the Company issued 65,000 shares of its Common Stock in exchange
for services to be rendered through January 2011. The shares of Common Stock
were valued at $78,000, which was estimated to be approximate the fair value of
the Company’s common shares during the period covered by the consulting
agreement. The Company amortized and charged to operations a
stock-based compensation expense of $37,397 during the year ended December
31, 2009.





In
February 2009, the Company issued 102 shares of its Common Stock in conversion
of 16 shares of Series B-3 Preferred Stock.





Pursuant
to the Agreement and Plan of Merger dated and effective on June 30, 2009 (the
“Agreement”) with Solar Thin Power, Inc. and its shareholders, the shareholders
of Solar Thin Power, other than the Company, received an aggregate of 6,421,000
shares of the Company’s common stock (see Note 14).





In
December 2009, the Company issued 940,625 shares of its Common Stock as
settlement of convertible debentures of $350,000 and related accrued or
additional interest and redemption penalties in an aggregate amount of $120,312.
The Company also committed to issue 200,000 shares of its common stock and
issued a demand note of $169,167 as settlement for $250,000 of its June 2006
notes and related interest expenses in an aggregate amount of
$119,167.




NOTE
13- RELATED PARTY NOTES PAYABLE AND TRANSACTIONS




A
significant majority of sales during 2008 were 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). 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, was
also a shareholder of TSI. Zoltan Kiss, a shareholder and former director of the
Company, is also the Chairman and majority owner of RESI. Mr. Kiss resigned as
Chairman and a Director of the Company effective December 20,
2007.




The
Company had related party trade receivables of $1,197,548 from RESI as of
December 31, 2008 from the Blue Star Contract and $134,315 from another
project. Renewable Energy Solutions, Inc (“RESI”) assumed the trade payable from
Terrasolar upon assumption of the Blue Star contract in April 2007 and made
several payments during 2007. The Company has decided to reserve $831,863 out of
the total balance of $1,331,863 related party trade receivable based on
management’s evaluation of the related party’s current financial condition as of
December 31, 2008. During the year ended December 31, 2009, the Company
collected $450,000 pursuant to an Equity Transfer Agreement the Company executed
in September 2009 and the remaining uncollectible receivable of $50,000 was
charged to operations during the year ended December 31, 2009.




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 $-0- and $120,000
for the years ended December 31, 2009 and 2008, respectively.





During
2008, the Company also entered into a Settlement Agreement with Zoltan Kiss,
replacing both the Research and Development Contract and the Marketing
Contract.





There
were no related party sales and/or cost of sales for the years ended December
31, 2009 and 2008.





The
Company has a dividend payment obligation due to the former shareholders valued
at $143,656 and $143,778 as of December 31, 2009 and December 31, 2008,
respectively.





F-25




SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2009 and 2008





NOTE
14 – NON CONTROLLING INTEREST




Formation and Merger of
Subsidiary





On
October 18, 2007, the Company organized a wholly owned subsidiary, Solar Thin
Power, Inc. (“Solar Thin Power”) under the laws of the state of Nevada. On
October 24, 2007, Solar Thin Power 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 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, the Company issued 737,000
warrants to purchase shares in the Company’s common stock at $16.50 per share
for five years (Notes 12 and 16).




On June
30, 2009, pursuant to the Company’s Agreement and Plan of Merger (the
“Agreement”) with Solar Thin Power and its shareholders, Solar Thin Power was
merged with and into the Company (the “Merger”).  Following the Merger
effective on June 30, 2009, Solar Thin Power is operated as a division of the
Company and will seek to facilitate power projects and joint ventures designed
to provide solar electricity using thin film a-Si solar modules.





Under the
terms of the Merger:





·
            the
      shareholders of Solar Thin Power, other than the Company, received an
      aggregate of 6,421,000 shares of the Company’s common stock, or one and
      one-half shares of Company common stock for each share of Solar Thin Power
      common stock owned by them;





·
            each
      full share of Solar Thin Power common stock that is issuable upon exercise
      of any Solar Thin Power warrants as at the effective time of the Merger
      will be converted into and exchanged for the right to purchase or receive
      one full share of the Company’s common stock upon exercise of such Solar
      Thin Power warrants; and





·
            all
      of the 43,000,000 shares of Solar Thin Power common stock owned by the
      Company were cancelled.





For the
period from October 18, 2007 (date of incorporation) to the date of the Merger,
Solar Thin Power, Inc. did not generate any revenue, had net income of $24,624
from January 1, 2009 to June 30, 2009 (date of Merger), mainly attributable to
accrued interest receivable, net loss of $240,881 for the year ended December
31, 2008, and a total accumulated deficit of $273,507 as of June 30, 2009,
date of Merger.  Prior to the Merger, the Company owned a 63.64%
interest in Solar Thin Power. During the year ended December 31, 2009, the
Company issued 6,421,000 shares of its commons stock to shareholders of Solar
Thin Power, Inc. pursuant to the Agreement and Plan of Merger, and the Company
had eliminated the non controlling interests on its consolidated balance sheets
upon the Merger effective on June 30, 2009; and the consolidated results of
operations and cash flows reflected an elimination of 36.36% of Solar Thin Power
financial results for the period prior to the Merger that pertain to the non
controlling interest shareholders of Solar Thin Power.




F-26
 SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2009 and 2008





NOTE
14 – NON CONTROLLING INTEREST (continued)




The
following table summarizes the changes in Non Controlling Interest from January
1, 2008 to June 30, 2009 (date of Merger):


Balance
      as of January 1, 2008
            
            $
            999,496Period
      loss applicable to non controlling interest for 2008
            
            
            (67,904
            )Dilution
      of ownership interest from 70.15% ownership to 65.12% through issuance of
      Solar Power’s common stock by the Company for services
      rendered
            
            
            214,996Balance
      as of December 31, 2008
            
            
            1,146,588Period
      income applicable to non controlling interest for the six months ended
      June 30, 2009
            
            
            8,771Dilution
      of ownership interest related to change in equity of non controlling
      interest
            
            
            9,156Dilution
      of ownership interest from 65.12% to 63.64% through issuance of Solar
      Power’s common stock by Company for services rendered
            
            
            49,141Common
      stock to be issued in exchange for the outstanding non controlling
      interest
            
            
            (1,213,656
            )Balance
      as of June 30, 2009 (date of Merger)
            
            $
            -




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 Accounting Standards Codification subtopic 450-10, Contingencies (“ASC
450-10”) in accounting for this put liability, which provides that loss
contingencies should be recognized as liabilities if they are probable and
reasonably estimable. At December 31, 2008, the Company believed that its
obligations under the put option are not probable due to the fact that it was
anticipated that Solar Thin Power will enter into an agreement with the Company
to merge with and into the Company prior to the Effective Date.  Upon the
execution of the Agreement and Plan of Merger (the “Agreement”) with Solar Thin
Power, Inc. and its shareholders, and the closing of the acquisition effective
June 30, 2009, the put liability had been eliminated at June 30, 2009 (date of
Merger).





NOTE
15- ECONOMIC DEPENDENCY




During
the year ended December 31, 2009, $8,720,938 or 100% of the total revenues were
derived from one customer; for the year ended December 31, 2008; $3,289,517 or
96% were derived from another customer. For the years ended December 31,
2009 and 2008, these customers accounted for 99% and 85.6% of accounts
receivable, respectively.





The
Company has no supplier that accounts for greater than 10% of the Company’s
costs of sales during the years ended December 31, 2009 and 2008.





F-27




SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2009 and 2008





NOTE
16 – 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,
2009:




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
            
            400,000
            
            
            2.25
            
            
            $
            1.00
            
            
            
            400,000
            
            
            $
            1.005.00
            
            66,667
            
            
            0.47
            
            
            
            5.00
            
            
            
            66,667
            
            
            
            5.0011.00
            
            600,000
            
            
            0.46
            
            
            
            11.00
            
            
            
            —
            
            
            
            -16.50
            
            1,337,000
            
            
            1.81
            
            
            
            16.50
            
            
            
            1,337,000
            
            
            
            16.50Total
            
            2,403,667
            
            
            1.51
            
            
            $
            12.23
            
            
            
            1,803,667
            
            
            $
            12.64




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




Number
      of
              Shares
            
            
            WeightedAverage
              Price
      Per ShareOutstanding
      at December 31, 2007
            
            
            3,268,667
            
            
            $
            13.40Granted
            
            
            60,000
            
            
            
            16.50Exercised
            
            
            —
            
            
            
            —Canceled
      or expired
            
            
            —
            
            
            
            —Outstanding
      at December 31, 2008
            
            
            3,328,667
            
            
            
            13.45Granted
            
            
            400,000
            
            
            
            1.00ExercisedCanceled
      or expired
            
            
            (1,325,000
            )
            
            
            (11.90
            )Outstanding
      at December 31, 2009
            
            
            2,403,667
            
            
            $
            12.23





In
conjunction with the sale of the common stock of the Company’s then majority
owned subsidiary, Solar Thin Power, Inc., the Company issued 60,000 warrants
during the year ended December 31, 2008 to purchase the Company’s common stock
at $16.50 per share exercisable until five years from the date of issuance.
During the year ended December 31, 2009, 125,000 warrants issued to a placement
agent and 1,200,000 warrants issued to Investors in connection with June 2006
financing during the year ended December 31, 2006 (Note 10)
expired.




F-28


SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2009 and 2008





NOTE
16 – STOCK OPTIONS AND WARRANTS (continued)





Warrants
(continued)





During
the year ended December 31, 2009, the Company issued to a consultant 400,000
warrants to purchase Solar Thin Power common stock at $1.00 per share
exercisable over three years. The warrants vested immediately and were issued
for services rendered. Effective June 30, 2009, in conjunction with the merger
of Solar Thin Power (See Note 14), the Company exchanged the issued warrants to
warrants to purchase the Company’s common stock with the same terms and
conditions. The fair value of the issued warrants of $222,706 was charged to
operations during the year ended December 31, 2009. The fair value of the
warrants was determined using the Black Scholes Option Pricing Model based on
the following assumptions:





Significant
      assumptions (weighted-average):Risk-free
      interest rate at grant date
            
            
            1.16
            %Expected
      stock price volatility
            
            
            103.89
            %Expected
      dividend payout
            
            
            —Expected
      option life-years (a)
            
            
            3


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





Stock
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, 2009:





Options Outstanding
            
            
            
            Options ExercisableExercise Prices
            
            Number
              Outstanding
            
            Weighted
              Average
              Remaining
              Contractual Life
              (Years)
            
            Weighted
              Average
              Exercise Price
            
            Number
              Exercisable
            
            Weighted
              Average
              Exercise Price$
            0.90
            
            600,000
            
            7.47
            
            $
            0.90
            
            600,000
            
            $
            0.90$
            2.10
            
            100,000
            
            3.82
            
            $
            2.10
            
            38,889
            
            $
            2.10$
            3.75
            
            126,000
            
            8.25
            
            $
            3.75
            
            126,000
            
            $
            3.75Total
            
            826,000
            
            7.12
            
            $
            1.55
            
            764,889
            
            $
            1.46




F-29




SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2009 and 2008





NOTE
16 – STOCK OPTIONS AND WARRANTS (continued)





Stock options
(continued)





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




Weighted
              AverageNumber
      of
            
            
            PriceShares
            
            
            Per
      ShareOutstanding
      at December 31, 2007:
            
            
            603,125
            
            
            $
            2.75Granted
            
            
            354,000
            
            
            
            3.30Exercised
            
            
            —
            
            
            
            —Canceled
      or expired
            
            
            (8,000
            )
            
            
            (10.90
            )Outstanding
      at December 31, 2008:
            
            
            949,125
            
            
            $
            2.95Granted
            
            
            -
            
            
            
            -Exercised
            
            
            -
            
            
            
            -Canceled
      or expired
            
            
            (123,125
            )
            
            
            (4.17
            )Outstanding
      at December 31, 2009:
            
            
            826,000
            
            
            $
            1.55





During
the year ended December 31, 2008, the Company granted an aggregate of 346,000
stock options (net of cancellations, see stock option table per above) to
officers, employees and consultants with an exercise prices from $2.10 to $4.00
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.





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.





During
the year ended December 31, 2009, a total of 3,125 stock options expired.
Additionally, the Company canceled 120,000 unvested stock options and re-priced
certain employee options initially with exercise price of $2.67 to $0.90 per
share with other terms remaining the same.  The re-priced stock
options were originally granted and fair valued in June 2007, and the original
fair value was amortized over the vesting period of two years.  The
Company had amortized and charged to operations the entire original value of the
options as of the second quarter of fiscal 2009.  In addition, upon
the modification of the exercise price of these options during the year ended
December 31, 2009, the Company calculated the fair value of the fully vested
re-priced options based on the modified terms, and additional compensation of
$45,494 was charged to current period operations.




F-30




SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2009 and 2008





NOTE
16 – STOCK OPTIONS AND WARRANTS (continued)





Stock options
(continued)





The fair
values of the fully vested re-priced employee options were determined using the
Black Scholes option pricing model with the following assumptions:




Dividend
      yield:
            
            
            -0-
            %Volatility
            
            
            103.89
            %Risk
      free rate:
            
            
            2.25
            %Expected
      option life-years (a)
            
            
            8.17




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





Stock-based compensation
expense in connection with stock options granted, vested and re-priced in
the aggregate amount of $680,761 and $1,085,016 was charged to operating
results in connection with the stock options grant for the year ended December
31, 2009 and 2008, respectively.





On
September 4, 2009, the Company's board of directors authorized warrants to
purchase up to 2,500,000 shares of common stock of the Company.  The
Company intends to issue these warrants to potential investors and other persons
who have rendered or may render services on behalf of the Company, including
certain of its officers, directors, consultants and other affiliates. The
warrants will, if and when issued, entitle the holder to purchase, at any time
on or before the earlier to occur of five years from the date of issuance or
December 31, 2014, common stock at an exercise price of $1.00 per share,
representing the average closing bid price of the Company’s common stock for the
20 trading days after the Company’s one-for-five reverse stock split consummated
on September 3, 2009.  The warrants may be exercised on a cashless
basis.  To the extent that the Company issues these warrants to persons,
other than its officers and directors, such warrants may be issued at any time
by the board of directors and will be immediately exercisable.  If and
to the extent that warrants are issued to the Company’s officers and directors,
they may only be exercised if and when the Company achieves net profits for two
or more consecutive fiscal quarters, and the other terms and conditions of such
warrants have been reviewed and are deemed to be fair and reasonable to the
Company by an independent investment banking firm.  In addition, such
warrants, if exercisable, would automatically terminate if such person ceases
for any reason (other than death or disability) to be an officer or director of
the Company prior to their exercise.





The
Company’s board of directors will consider registering the shares of common
stock underlying the warrants for resale under the Securities Act of 1933, as
amended.





NOTE
17 – INCOME TAXES





The
Company has adopted Accounting Standards Codification subtopic 740-10, Income
Taxes (“ASC 740-10”) 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.





F-31




SOLAR
THIN FILMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2009 and 2008





NOTE
17 – INCOME TAXES (continued)





At
December 31, 2009, the Company has available for federal income tax purposes a
net operating loss carryforward of approximately $29,900,000, expiring in the
year 2023 through the year 2029, subject to limitations of Sections 382 of the
Internal Revenue Code, as amended that may be used to offset future taxable
income.  The deferred tax asset relating to the net operating loss
carryforward is approximately $10,465,000. 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 possible
significant changes in the Company's ownership, the future use of its existing
net operating losses may be limited. Income tax expense for the year ended
December 31, 2009 is comprised of State taxes which primarily are not based on
earnings.  No other income taxes were recorded on the earnings in 2009
as a result of the utilization of the carry forwards.  All or portion
of the remaining valuation allowance may be reduced in future years based on an
assessment of earnings sufficient to fully utilize these potential tax
benefits.




For
income tax reporting purposes, the Company has available for Hungary unused net
operating loss carry forward of approximately $2,129,000 with no expiration,
subject to limitations of Hungary income tax rules.  The deferred tax
asset related to the carrying forward is approximately $400,390.  The
Company has provided a valuation reserve against the full amount of Hungary
unused 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, 2009 are as follows:





Deferred
      tax assets – non current:Net
      operating loss carryforward
            
            $
            10,465,000Valuation
      allowance
            
            
            (10,465,000
            )Net
      deferred tax asset
            
            $
            —




The
provision for income taxes differ from the amount of income tax determined by
applying the applicable U.S statutory rate to losses before income tax expense
for the years ended December 31, 2009 and 2008 as follows:




December
      31,2009
            
            
            2008Statutory
      federal income tax rate
            
            
            35
            %
            
            
            35
            %Statutory
      state and local income tax rate (0%), net of federal
    benefit
            
            
            -
            
            
            
            -Net
      operating losses and other tax benefits for which no current benefit is
      being realized
            
            
            (35
            %)
            
            
            (35
            %)Effective
      tax rate
            
            
            0.00
            %
            
            
            0.00
            %




An income
tax provision for the years ended December 31, 2009 and 2008 consists of the
following:





2009
            
            
            2008Provision
      for income taxes
            
            $
            -0-
            
            
            $
            -0-




The
Company paid local filing fees which are not deemed to be income taxes and have
been included in general, selling and administrative expenses for the years
ended December 31, 2009 and 2008.




F-32




SOLAR THIN FILMS,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2009 and 2008





NOTE
18 - 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 Company also has other month to month
leases for its offices and facilities. The minimum future cash flow for the
leases at December 31, 2009 is as follows:





Amount:Year
      ending December 31, 2010
            
            $
            249,600





During
the year ended December 31, 2009, the Company abandoned their facilities in
Budapest, Hungary.  As such the Company accrued $250,000 for potential
lease cancellation penalties.  Settlement is currently under
negotiations.





Rent
expense amounted to $267,215 and $266,359 for the year ended December 31, 2009
and 2008, respectively.




Litigation





Grace Brothers Ltd. vs. Solar Thin
Films, Inc. (Supreme Court, New York State, New York County). On March 4,
2009, Grace Brothers Ltd. brought an action against the Company in the Supreme
Court of the State of New York, County of New York, seeking damages of
approximately $255,000 in alleged registration delay penalties.  On
July 16, 2009, the Company filed its answer to the complaint denying all of
Grace’s allegations.  The Company is 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.




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.





F-33




SOLAR THIN FILMS,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2009 and 2008





NOTE
18 - COMMITMENTS AND CONTINGENCIES (continued)





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.





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 (see Note 8). Based on the appropriate opinion of the Company’s legal
counsel, the Company removed this item as a liability on its financial
statements as at December 31, 2009 and the related accrued interest. As such,
the Company realized a gain on extinguishment of debt of $3,310,200 as other
income for the year ended December 31, 2009.





Product Warranty
Obligation





The
Company provides for estimated costs to fulfill customer warranty obligations
upon recognition of the related revenue in accordance with ASC 460-10. 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 $212,687
and $59,930 as of December 31, 2009 and 2008, 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 Robert M. Rubin pursuant to which each would
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.


F-34


SOLAR THIN FILMS,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2009 and 2008





NOTE
18 - COMMITMENTS AND CONTINGENCIES (continued)





Share exchange
agreement





On April
3, 2009, the Company and Kraft entered into a restated share exchange agreement
with BudaSolar and its shareholders.  Under the terms of the
agreement, the BudaSolar shareholders were to have acquired a 49% equity
interest in Kraft, in exchange for transferring 100% of the BudaSolar equity to
Kraft.  Such agreement was subject to the satisfaction of certain
closing conditions, including the Company’s repayment of all outstanding June
2006 convertible notes in order to secure the release of the shares of Kraft
pledged as security to the June 2006 note holders.  Although only
$283,000 of such notes remain outstanding, the Kraft shares still remain subject
to the pledge agreement.





At the
present time, the Company is negotiating a new agreement with the BudaSolar
shareholders.  The proposed revised transaction contemplates that the
Company will directly acquire 100% of the share capital of BudaSolar in exchange
for 70,000 shares of the Company’s Series B-5 convertible voting preferred stock
(the “B-5 Preferred Stock”).  The B-5 Preferred Stock has a
liquidation value of $7.0 million and is convertible at any time by the holders
into a minimum of 2.1 million and a maximum of 49.0 million shares of the
Company’s common stock, $0.01 par value per share (the “Common
Stock”).  The aggregate number of shares of Company Common Stock into
which all if the B-5 Preferred Stock would be convertible (the “Conversion
Shares”) will depend upon the audited combined pre-tax income of the Company’s
Kraft and BudaSolar subsidiary corporations (the “Corporations Pre-Tax Income”)
at the end of each of the five consecutive fiscal years ending December 31, 2010
through December 31, 2014 (the “Measuring Period”).  The target
Corporations Pre-Tax Income and the corresponding number of Conversion Shares
that can be exercised at the end of any one or more fiscal years during the
Measuring Period is based on a “grid” of such Pre-Tax Income and Conversion
Shares.  For example if the Corporations Pre-Tax Profits at the end of
any of the five fiscal years in the Measuring Period is 0 to $2.5 million, the
number of Conversion Shares would be 2.1 million; if such Pre-Tax Income is
$10.0 million, then the number of Conversion Shares would be 21.0 million; and
if such Pre-Tax Income is $55.0 million or more, the Conversion Shares would be
49.0 million.  On March 31, 2015, any B-5 Preferred Stock not
converted into Common Stock would automatically convert based upon the
Corporations Pre-Tax Income for the fiscal year ending December 31,
2014.





Under the
terms of a separate agreement with BudaSolar, Kraft has contracted to purchase
from BudaSolar (1) equipment assembly services on some of its equipment based on
a fixed fee per equipment, and (2) installation related technical services based
on hourly rates.  In connection with these services, Kraft has paid
$1,370,000 in advances to BudaSolar during the second quarter of 2009. BudaSolar
has provided $747,891 worth of services in 2009 to Kraft, which left a balance
of advances wired to BudaSolar of $622,109 as of December 31, 2009.  During
2008, BudaSolar received $750,000 pursuant to the Stock Exchange Agreement from
the Company, which was fully repaid in the second quarter of 2009.




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 3.6 million shares of common stock of the Company owned by
the Selling Stockholders. The purchase price for the 3.6 million shares is $2.07
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 $4.0 per share.




F-35


SOLAR THIN FILMS,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2009 and 2008





NOTE
18 - COMMITMENTS AND CONTINGENCIES (continued)





Agreement with Mr. Kiss and
other Stockholders (continued)





Z. Kiss,
a former director and executive officer of the Company, is selling 2.0 million
of the 3.6 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 2.0 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 800,000 shares in the transaction, and, after the sale, such persons
will retain 10,000 and 200,000 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 3.6 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 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.





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”) – In July 2009, the parties negotiated the sale back of
      the 5% interest in CG Solar for $450,000. In September 2009, the Company
      collected the $450,000 and charged the remaining uncollectible amount of
      $50,000 to current period
operations.





·
            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 2,000,000 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 $0.22 to be paid for each such 2,000,000 subject
      shares sold; and




F-36


SOLAR THIN FILMS,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2009 and 2008





NOTE
18 - COMMITMENTS AND CONTINGENCIES (continued)





Agreement with Mr. Kiss and
other Stockholders (continued)





·
            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
      $2,000,000, 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.





On
December 4, 2009, the Company and Kraft Elektronikai Zrt, the Company’s wholly
owned subsidiary, entered into a Second Amendment (the “Second Amendment”) to
the Master Settlement Agreement (the “Settlement Agreement”) with Zoltan Kiss,
Amelio Solar, Inc. (“Amelio Solar”) and Renewable Energy Solutions, Inc.
(“RESI”), and a Second Amendment to the Stock Purchase Agreement (the “Purchase
Agreement”) with Zoltan Kiss, Maria Gabriella Kiss and Gregory Joseph Kiss
(collectively, the “Sellers”).





Under the
Second Amendment, the outside closing date of the transactions contemplated
pursuant to the Settlement Agreement was extended to December 4, 2009 (the
“Closing Date”). In addition, the definition of “RESI Debt” was amended to
include the net amount of indebtedness, not to exceed $831,863, owed by RESI to
the Company or its affiliates as of the Closing Date together with accrued
interest thereon.





Section
2.4 of the Settlement Agreement, entitled “RESI Debt Settlement Payment and
Deliverables”, was amended so that the RESI Debt will be fully and finally
satisfied as follows:





(a) Z. Kiss
will surrender all of his 2,000,000 shares of Company common stock to the
Company;




F-37


SOLAR THIN FILMS,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2009 and 2008





NOTE
18 - COMMITMENTS AND CONTINGENCIES (continued)





Agreement with Mr. Kiss and
other Stockholders (continued)





(b)       an
option (the “Option”) is granted to the Company or its designees to purchase all
of the shares of Company common stock owned by both M. Kiss (1,018,400 shares)
and G. Kiss (810,000 shares) until December 4, 2010.  For a period of
nine months following the execution of the Second Amendment, the Option will be
fixed at a price of $0.30 per share and any shares not purchased by the Company
or its designees during such nine-month period may be purchased at the higher of
(i) $0.30 per share, or (ii) 75% of the trading price of the Company’s common
stock on the trading day prior to the Company’s payment of the exercise price;
and





(c)        any
unexercised rights, options and/or warrants to purchase Company common stock
owned by the Sellers as of the Closing Date, whether vested, unvested,
exercisable or otherwise, are cancelled and rendered null and void.





The
definition of “RESI Debt Settlement Deliverables” was also revised to mean the
documents specified in Section 2.4 of the Settlement Agreement to be delivered
by Amelio Solar and the Sellers to the Company on or prior to December 31,
2009.





Pursuant
to the Second Amendment, the parties agreed to terminate the Purchase Agreement,
except for the terms of the Purchase Agreement cancelling all indebtedness owed
to Robert M. Rubin and The Rubin Family Irrevocable Marital Trust by Nanergy
Solar, Inc. and the surrender of any and all equity interests of Nanergy Solar,
Inc. owned by The Rubin Family Irrevocable Marital Trust.





Moreover,
under the Second Amendment, the parties agreed to terminate the Strategic
Alliance and Cross License Agreement dated as of August 12, 2008.  All
prior agreements among the parties, including, but not limited to, the
Cooperative R&D Agreement dated as of December 19, 2006 between RESI and the
Company, the Marketing and Turn-on Agreement between RESI and the Company dated
as of January 30, 2007 and the Consulting Agreement between Z. Kiss and the
Company have either expired or are terminated as of December 4,
2009.





On
December 4, 2009, Z. Kiss surrendered his shares of Company common stock to the
Company, which shares were cancelled by the Company in April 2010.





Proposed Acquisition of
Algatec





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 “Algatec 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.




F-38


SOLAR THIN FILMS,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2009 and 2008





NOTE
18 - COMMITMENTS AND CONTINGENCIES (continued)





Proposed Acquisition of
Algatec (continued)





The
general partner of the Partnership is Algatec Management LLP, a Delaware limited
liability company owned by The Rubin Family Irrevocable Marital 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 Marital 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 were 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 up
to 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, 2008, the Partnership consummated the Second Closing with Algatec
and funded a loan of €2,000,000 ($2.6 million). Ultimately, the Partnership
provided total funding of approximately $5.75 million to Algatec which, after
allowing for unfavorable currency conversion rates, left the Partnership with a
total equity ownership in Algatec of approximately 47% 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 shares of Company capital
stock. Consummation of the Algatec acquisition is subject to certain conditions,
including Algatec obtaining up to $50.0 million financing for Algatec to enable
it to construct the addition to its existing manufacturing facility and purchase
the necessary equipment to expand its business.  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.  The
requisite financing for Algatec was not obtained and the agreement expired on
July 15, 2009.




F-39


SOLAR THIN FILMS,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2009 and 2008





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 year ended December 31, 2009 and
2008:





Geographic
information for the year ended December 31, 2009:





Hungary
            
            
            (Corporate)
            
            
            TotalTotal
      Revenues
            
            $
            8,720,938
            
            
            $
            -
            
            
            $
            8,720,938Depreciation
      and amortization expense
            
            
            117,382
            
            
            
            -
            
            
            
            117,382Interest
      Income
            
            
            26,907
            
            
            
            -
            
            
            
            26,907Interest
      expense
            
            
            -
            
            
            
            (893,656
            )
            
            
            (893,656
            )Net
      interest income (expense)
            
            
            26,907
            
            
            
            (893,656
            )
            
            
            (866,749
            )Debt
      acquisition cost
            
            
            -
            
            
            
            (26,500
            )
            
            
            (26,500
            )Research
      and development
            
            
            -
            
            
            
            -
            
            
            
            -Net
      income (loss) attributable to Solar Thin Films, Inc.
            
            
            (1,269,153
            )
            
            
            1,066,293
            
            
            
            (202,860
            )Fixed
      assets, net
            
            
            256,136
            
            
            
            -
            
            
            
            256,136Fixed
      asset additions
            
            $
            94,905
            
            
            $
            -
            
            
            $
            94,905




Geographic
information for year ended December 31, 2008:





Hungary
            
            
            (Corporate)
            
            
            TotalTotal
      Revenues
            
            $
            3,436,779
            
            
            $
            -
            
            
            $
            3,436,779Depreciation
      and amortization expense
            
            
            190,025
            
            
            
            -
            
            
            
            190,025Interest
      Income
            
            
            5,164
            
            
            
            46,929
            
            
            
            52,093Interest
      expense
            
            
            (3,572
            )
            
            
            (1,226,986
            )
            
            
            (1,230,558
            )Net
      interest income (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 attributable to Solar Thin Films, Inc.
            
            
            (2,582,591
            )
            
            
            (5,891,419
            )
            
            
            (8,474,010
            )Fixed
      assets, net
            
            
            413,241
            
            
            
            -
            
            
            
            413,241Fixed
      asset additions
            
            $
            44,181
            
            
            $
            -
            
            
            $
            44,181




F-40


SOLAR THIN FILMS,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2009 and 2008





NOTE
19 – SEGMENT INFORMATION (continued)





Geographic
information of revenues by customers’ locations/countries for years ended
December 31, 2009 and 2008:




Customer
      Countries:
            
            December
      31,
              2009
            
            
            December
      31,
              2008Spain
            
            $
            8,720,938
            
            
            $
            -Hungary
            
            
            
            
            
            
            147,262U.S.
            
            
            -
            
            
            
            3,289,517Total
            
            $
            8,720,938
            
            
            $
            3,436,779





NOTE
20 – SUBSEQUENT EVENTS




In
accordance with the provisions of ASC 855, Subsequent Events Topic, the
Company has adopted the requirements of ASC 855 and has evaluated for disclosure
subsequent events that have occurred up through April 15, 2010, the date of
issuance of these financial statements. As of April 15, 2010, there were no
subsequent events which required recognition or disclosure.




F-41




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





We have
had no disagreements with our independent registered public accountants with
respect to accounting practices or procedures or financial
disclosure.





Item 9A. Controls and
Procedures.





Evaluation of Disclosure Controls and
Procedures





We maintain disclosure controls and
procedures that are designed to ensure that material information required to be
disclosed in our periodic reports filed under the Securities Exchange Act of
1934, as amended, or 1934 Act, is recorded, processed, summarized, and reported
within the time periods specified in the SEC’s rules and forms and to ensure
that such information is accumulated and communicated to our management,
including our chief executive officer and chief financial officer (principal
financial officer) as appropriate, to allow timely decisions regarding required
disclosure. During the quarter ended December 31, 2009 we carried out an
evaluation, under the supervision and with the participation of our management,
including the principal executive officer and the principal financial officer
(principal financial officer), of the effectiveness of the design and operation
of our disclosure controls and procedures, as defined in Rule 13(a)-15(e)
under the 1934 Act. Based on this evaluation, because of the Company’s limited
resources and limited number of employees, management concluded that our
disclosure controls and procedures were ineffective
as of December 31, 2009.





Management’s
Report on Internal Control over Financial Reporting





Our management is responsible for
establishing and maintaining adequate internal control over financial reporting.
The Company’s internal control over financial reporting is designed to provide
reasonable assurances regarding the reliability of financial reporting and the
preparation of the financial statements of the Company in accordance with U.S.
generally accepted accounting principles, or GAAP. 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 or compliance with the policies or
procedures may deteriorate.





With the participation of our Chief
Executive Officer and Chief Financial Officer (principal financial officer), our
management conducted an evaluation of the effectiveness of our internal control
over financial reporting as of December 31, 2009 based on the framework in
Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO"). Based on our evaluation
and the material weaknesses described below, management concluded that the
Company did not
maintain effective internal control over financial reporting as of
December 31, 2009 based on the COSO framework criteria. Management has
identified control deficiencies regarding the lack of segregation of duties and
the need for a stronger internal control environment. Management of the Company
believes that these material weaknesses are due to the small size of the
Company’s accounting staff.  The small size of the Company’s
accounting staff may prevent adequate controls in the future, such as
segregation of duties, due to the cost/benefit of such
remediation.





To mitigate the current limited
resources and limited employees, we rely heavily on direct management oversight
of transactions, along with the use of legal and accounting professionals. As we
grow, we expect to increase our number of employees, which will enable us to
implement adequate segregation of duties within the internal control
framework.





These control deficiencies could result
in a misstatement of account balances that would result in a reasonable
possibility that a material misstatement to our consolidated financial
statements may not be prevented or detected on a timely basis. Accordingly, we
have determined that these control deficiencies as described above together
constitute a material weakness.





In light of this material weakness, we
performed additional analyses and procedures in order to conclude that our
consolidated financial statements for the year ended December 31, 2009
included in this Annual Report on Form 10-K were fairly stated in accordance
with US GAAP. Accordingly, management believes that despite our material
weaknesses, our consolidated financial statements for the year ended December
31, 2009 are fairly stated, in all material respects, in accordance with US
GAAP.




This annual report does not include an
attestation report of our registered public accounting firm regarding internal
control over financial reporting. Management’s report was not subject to
attestation by our registered public accounting firm pursuant to temporary rules
of the Securities and Exchange Commission that permit us to provide only
management’s report in this Annual Report on Form 10-K.




42





Limitations
on Effectiveness of Controls and Procedures




Our management, including our Chief
Executive Officer and Chief Financial Officer (principal financial officer),
does not expect that our disclosure controls and procedures or our internal
controls will prevent all errors 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. Because
of 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 the Company have been detected. These inherent limitations
include, but are not limited to, the realities that judgments in decision-making
can be faulty and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions. Over time, controls may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be
detected.




Changes
in Internal Controls





During the fiscal quarter ended
December 31, 2009, there have been no changes in our internal control over
financial reporting that have materially affected or are reasonably likely to
materially affect our internal controls over financial reporting.





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 2009 that
was not reported.


43




PART III





Item 10. Directors, Executive Officers
and Corporate
Governance.





Executive
Officers and Directors





The
following table sets forth the name, age and position of each of the members of
our board of directors and executive officers as of the date of this
report:





Name
            
            Age
            
            Position(s)Robert
      M. Rubin
            
            70
            
            Chief
      Executive Officer, Chief Financial Officer and Chairman of the Board of
      DirectorsGary
      Maitland, Esq.
            
            56
            
            Vice
      President, General Counsel and DirectorDr.
      Boris Goldstein
            
            46
            
            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. was appointed as our Vice President and General Counsel in August
2009 and he 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.





Board
of Directors





All directors will hold office until
the next annual meeting of shareholders and until their successors have been
duly elected and qualified. Officers are elected by and serve at the discretion
of the Board of Directors.





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.




44





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 have procured director’s and officer’s
liability insurance.





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 Dr. Boris Goldstein is considered an independent director 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. To our knowledge, based solely on review
of the copies of such reports furnished to us for the year ended December 31,
2009, 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.





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.




45





Item 11. Executive
Compensation.





Summary
Compensation Table





The following table sets forth certain information
concerning the compensation of the chief executive officer and certain of other
executive officers of the Company whose aggregate cash compensation exceeded
$100,000 for each of the last two fiscal years.





Name &
              Principal
      Position
            
            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
            
            
            2009
            
            $
            131,250
            
            
            —
            
            $
            —
            
            $
            45,494
            (5)
            
            —
            
            
            —
            
            
            —
            
            $
            176,744Former
      Group Vice President and General Manager and Former Chief Executive
      Officer and Director (1)
            
            
            2008
            
            $
            225,000
            
            
            
            
            $
            50,765
            (2)
            $
            857,935
            (3)
            
            
            
            
            
            
            
            
            
            $
            1,133,700Robert
      Rubin
            
            
            2009
            
            $
            231,250
            
            
            —
            
            $
            —
            
            $
            —
            
            
            —
            
            
            —
            
            
            —
            
            $
            231,250Chief
      Executive Officer, Chief Financial Officer and Director (4)
            
            
            2008
            
            $
            225,000
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            $
            225,000







(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)
            In
      accordance with Mr. Lewis’ employment agreement, Mr. Lewis was entitled to
      receive 37,523 shares of common stock per year. The shares are valued at
      the stated value in the employment agreement of $2.665 per share, which
      was the average closing bid price for the 20 trading days immediately
      prior to the date of the employment
agreement.





Under Mr.
Lewis’ amended employment agreement, for the period commencing April 1, 2009 and
ending September 30, 2009, Mr. Lewis’ base salary was 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 was obligated
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
2,000,000 shares of common stock of ST Power owned by Mr. Lewis immediately and
irrevocably vested.  Moreover, with respect to the stock options
entitling Mr. Lewis to purchase up to 720,000 shares of Company common stock
(the “Option Shares”), the parties agreed as follows (i)  options for
600,000 Options Shares shall be deemed to have fully vested as of March 31, 2009
and the remaining 120,000 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 $2.665 per share to $0.90 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 37,523 shares of Company common stock
previously granted to him annually under the original employment
agreement.





In June
2009, the amended employment agreement with Peter Lewis was terminated by the
parties and Mr. Lewis was engaged as a marketing representative of the
Company.




(3)
            In
      2007, Mr. Lewis was granted a ten year option to purchase 600,000 shares
      of common stock at an exercise price of $2.673 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 120,000 shares of common stock at an exercise price of
      $4.00 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%.




46




(4)
            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.





(5)
            In
      April 2009, 600,000 options granted to Mr. Lewis as described in (3) above
      were re-priced from an exercise price of $2.67 to $0.90.  The
      change in fair value was determined using the Black-Scholes option pricing
      model assuming a remaining live of 8.17 years, no expected dividend
      payments, a volatility of 103.89% and a risk free rate of
      2.25%.





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, 2009.




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)
              
              
              600,000
              (2)
              —
              
              —
              
              $
              0.90
              
              06/20/2017
              
              --
              
              $
              -
              
              —
              
              
              —


(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.  In June 2009, the amended employment agreement with Peter
      Lewis was terminated by the parties and Mr. Lewis was engaged as a
      marketing representative of the
Company.




(2)
            Mr.
      Lewis received a ten year option to purchase 600,000 shares of common
      stock at an exercise price of $2.665 per share on a cashless basis vesting
      on a pro-rata basis over a period of two years.  Subsequent to
      issuance, the options were repriced to $0.90 per
  share.





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




47





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, 2009.





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)
            —
            
            $
            50,471
            
            —
            
            
            —
            
            —
            
            $
            50,471Gary
      Maitland, Esq.
            
            
            —
            (2)
            —
            
            $
            50,471
            
            —
            
            
            —
            
            —
            
            $
            50,471





(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 100,000 shares of common stock at an exercise price equal to
      $2.10 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 16,666 shares of common stock
      vested on October 27, 2009; (ii) options to purchase 16,667 shares of
      common stock vest on October 27, 2010; and (iii) options to purchase
      16,667 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 7,500,000 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").




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




48





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.





(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.




49





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.




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.




50





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 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 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.




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
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 37,523 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
      600,000 shares of common stock at an exercise price of $2.665 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.




51





For the
period commencing April 1, 2009 and ending September 30, 2009, Mr. Lewis’ base
salary was 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 was obligated 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
2,000,000 shares of common stock of ST Power owned by Mr. Lewis immediately and
irrevocably vested.  Moreover, with respect to the stock options
entitling Mr. Lewis to purchase up to 720,000 shares of Company common stock
(the “Option Shares”), the parties agreed as follows (i)  options for
600,000 Options Shares shall be deemed to have fully vested as of March 31, 2009
and the remaining 120,000 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 $2.665 per share to $0.90 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 37,523 shares of Company common stock
previously granted to him annually under the original employment
agreement.





In June 2009, the amended employment
agreement with Peter Lewis was terminated by the parties. Effective as of
October 1, 2009, Mr. Lewis was engaged as a non-exclusive sales and marketing
consultant and representative of the Company through May 31, 2010; specifically
with respect to the manufacture and sale of amorphous silicon thin film solar
module manufacturing equipment and/or equipment lines (the “PV
Equipment”).  As a marketing representative, Mr. Lewis will be
primarily responsible for generating orders and sales of the PV Equipment. In
full settlement of Mr. Lewis’ claims to accrued salary, stock options, future
earnings and other benefits, he will be paid $112,500 for the period ending
September 30, 2009.  For the period from October 1, 2009 through June
30, 2010, Mr. Lewis will be paid a monthly stipend of $15,000.  In
addition, Mr. Lewis will be entitled to receive sales commissions pursuant to
his agreement with Kraft.





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 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 3.6
million shares of common stock of the Company owned by the Selling Stockholders.
The purchase price for the 3.6 million shares is $2.07 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 $4.0 per
share.





Z. Kiss, a former director and
executive officer of the Company, is selling 2.0 million of the 3.6 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 2.0
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 800,000 shares in the
transaction, and, after the sale, such persons will retain 10,000 and 200,000
shares of the Company’s common stock, respectively. Mr. Gifis is acting as agent
for each of the Selling Stockholders (the “Sellers’ Agent”).




52




The Company intends to finance the
purchase price for the 3.6 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 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.





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”) – In July 2009, the parties negotiated the sale back of
      the 5% interest in CG Solar for $450,000. In September 2009, the Company
      collected the $450,000 and charged the remaining uncollectible amount of
      $50,000 to current period
operations.




·
            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 2,000,000 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 $0.22 to be paid for each such 2,000,000 subject
      shares sold; and





·
            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
      $2,000,000, 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 Family Irrevocable Marital
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.





On December 4, 2009, the Company and
Kraft Elektronikai Zrt, the Company’s wholly owned subsidiary, entered into a
Second Amendment (the “Second Amendment”) to the Master Settlement Agreement
(the “Settlement Agreement”) with Zoltan Kiss, Amelio Solar, Inc. (“Amelio
Solar”) and Renewable Energy Solutions, Inc. (“RESI”), and a Second Amendment to
the Stock Purchase Agreement (the “Purchase Agreement”) with Zoltan Kiss, Maria
Gabriella Kiss and Gregory Joseph Kiss (collectively, the
“Sellers”).







53


Under the Second Amendment, the outside
closing date of the transactions contemplated pursuant to the Settlement
Agreement was extended to December 4, 2009 (the “Closing Date”). In addition,
the definition of “RESI Debt” was amended to include the net amount of
indebtedness, not to exceed $831,863, owed by RESI to the Company or its
affiliates as of the Closing Date together with accrued interest
thereon.





Section 2.4 of the Settlement
Agreement, entitled “RESI Debt Settlement Payment and Deliverables”, was amended
so that the RESI Debt will be fully and finally satisfied as
follows:





(a)        Z.
Kiss will surrender all of his 2,000,000 shares of Company common stock to the
Company;





(b)       an
option (the “Option”) is granted to the Company or its designees to purchase all
of the shares of Company common stock owned by both M. Kiss (1,018,400 shares)
and G. Kiss (810,000 shares) until December 4, 2010.  For a period of
nine months following the execution of the Second Amendment, the Option will be
fixed at a price of $0.30 per share and any shares not purchased by the Company
or its designees during such nine-month period may be purchased at the higher of
(i) $0.30 per share, or (ii) 75% of the trading price of the Company’s common
stock on the trading day prior to the Company’s payment of the exercise price;
and





(c)        any
unexercised rights, options and/or warrants to purchase Company common stock
owned by the Sellers as of the Closing Date, whether vested, unvested,
exercisable or otherwise, are cancelled and rendered null and void.





The definition of “RESI Debt Settlement
Deliverables” was also revised to mean the documents specified in Section 2.4 of
the Settlement Agreement to be delivered by Amelio Solar and the Sellers to the
Company on or prior to December 31, 2009.





Pursuant to the Second Amendment, the
parties agreed to terminate the Purchase Agreement, except for the terms of the
Purchase Agreement cancelling all indebtedness owed to Robert M. Rubin and The
Rubin Family Irrevocable Marital Trust by Nanergy Solar, Inc. and the surrender
of any and all equity interests of Nanergy Solar, Inc. owned by The Rubin Family
Irrevocable Marital Trust.





Moreover, under the Second Amendment,
the parties agreed to terminate the Strategic Alliance and Cross License
Agreement dated as of August 12, 2008.  All prior agreements among the
parties, including, but not limited to, the Cooperative R&D Agreement dated
as of December 19, 2006 between RESI and the Company, the Marketing and Turn-on
Agreement between RESI and the Company dated as of January 30, 2007 and the
Consulting Agreement between Z. Kiss and the Company have either expired or are
terminated as of December 4, 2009.





On December 4, 2009, Z. Kiss
surrendered his shares of Company common stock to the Company, which shares were
cancelled by the Company in April 2010.





Limitation
of Liability and Indemnification





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.




54




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.





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





The
following tables set forth certain information known to us with respect to
beneficial ownership of our Common Stock as of March 22, 2010,by:





·
              each
      person known by us to own beneficially more than 5% of the Company’s
      outstanding Common Stock;




·
            each
      of the Company’s directors;




·
            each
      named executive
officer; and




·
            all
      of the Company’s directors and executive officers as a
      group.





Beneficial
ownership is determined in accordance with the rules of the SEC and generally
includes voting or investment power over securities. The table below includes
the number of shares underlying options and warrants that are currently
exercisable or exercisable within 60 days of March 22, 2010. It is
therefore based on 19,039,850 shares of common stock outstanding as of March 22,
2010. Shares of Common Stock subject to options and warrants that are currently
exercisable or exercisable within 60 days of March 22, 2010 are considered
outstanding and beneficially owned by the person holding the options or warrants
for the purposes of computing beneficial ownership of that person but are not
treated as outstanding for the purpose of computing the percentage
ownership of any other person. To our knowledge, except as set forth in the
footnotes to this table and subject to applicable community property laws, each
person named in the table has sole voting and investment power with respect to
the shares set forth opposite such person’s name. Except as otherwise indicated,
the address of each of the persons in this table is as follows: c/o Solar Thin
Films, Inc., 116 John Street, Suite 1120, New York, New York 10038.





Name of Beneficial Owner
            
            Number of
              Shares
            
            Percentage of
              Shares
              Beneficially
              OwnedRobert
      Rubin (1)
            
            
            0
            
            ---Dr.
      Boris Goldstein (1)
            
            
            50,000
            (2)
            *Gary
      Maitland, Esq. (1)
            
            
            50,000
            (2)
            *Rubin
      Family Irrevocable Marital Trust
            
            
            1,765,620
            (3)
            9.3
            %J.
      Lee Barton
            
            
            1,900,000
            
            10.0
            %All
      Directors and Executive Officers as a group (3 persons)
            
            
            50,000
            
            *




*
            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 50,000 shares of common stock at an exercise price equal to
      $2.10 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 16,666 shares of common stock
      vested on October 27, 2009; (ii) options to purchase 16,667 shares of
      common stock vest on October 27, 2010; and (iii) options to purchase
      16,667 shares of common stock vest on October 27,
  2011.




55




(3)
            The
      Rubin Family Irrevocable Marital 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.





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





The Company had related party trade
receivables of $1,197,548 from Renewable Energy Solutions, Inc. (“RESI”) as of
December 31, 2008 from the Blue Star Contract and $134,315 from another
project. RESI assumed the trade payable from Terrasolar upon assumption of the
Blue Star contract in April 2007 and made several payments during 2007. The
Company has decided to reserve $831,863 out of the total balance of $1,331,863
related party trade receivable based on management’s evaluation of the related
party’s current financial condition as of December 31, 2008. During the year
ended December 31, 2009, the Company collected $450,000 pursuant to an Equity
Transfer Agreement the Company executed in September 2009 and the remaining
uncollectible receivable of $50,000 was charged to operations during the year
ended December 31, 2009.




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 $-0- and $120,000 for the year ended
December 31, 2009 and 2008, respectively.





During 2008 and 2009, the Company also
entered into a Settlement Agreements with Zoltan Kiss, replacing both the
Research and Development Contract and the Marketing Contract.





There were no related party sales
and/or cost of sales for the years ended December 31, 2009 and
2008.





The Company has a dividend payment
obligation due to the former shareholders valued at $143,656 and $143,778 as of
December 31, 2009 and December 31, 2008, 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.





Review,
Approval and Ratification of Related Party Transactions




The board
of directors has responsibility for establishing and maintaining guidelines
relating to any related party transactions between the Company and any of its
officers or directors. Under the Company’s Code of Ethics, any conflict of
interest between a director or officer and the Company must be referred to the
non-interested directors for approval. The Company intends to adopt written
guidelines for the board of directors which will set forth the requirements for
review and approval of any related party transactions.





Director
Independence




The
Company periodically reviews the independence of each director. Pursuant to this
review, the directors and officers of the Company, on an annual basis, are
required to complete and forward to the Corporate Secretary a detailed
questionnaire to determine if there are any transactions or relationships
between any of the directors or officers (including immediate family and
affiliates) and the Company. If any transactions or relationships exist, the
Company then considers whether such transactions or relationships are
inconsistent with a determination that the director is independent. Pursuant to
this process, the Board of Directors has determined that Dr. Goldstein qualifies
as an independent director.





Conflicts of Interest




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


56


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.





Item 14. Principal Accountant Fees and
Services.





The following is a summary of the fees
billed to the Company by RBSM LLP for professional services rendered for the
fiscal years ended December 31, 2009 and 2008:





Fee
      Category
            
            Fiscal
      2009
              Fees
            
            
            Fiscal
      2008
              FeesAudit
      Fees
            
            $
            198,604
            
            
            $
            163,348Audit-Related
      Fees
            
            
            24,400
            
            
            
            13,800Tax
      Fees
            
            
            1,625
            
            
            
            5,537All
      Other Fees
            
            
            —
            
            
            
            —Total
      Fees
            
            $
            224,629
            
            
            $
            182,685




Audit Fees consist of fees
billed for professional services rendered for the audit of Solar thin Films,
Inc’s consolidated financial statements and review of the interim consolidated
financial statements included in quarterly reports and services that are
normally provided by RBSM LLP in connection with statutory and regulatory
filings or engagements.




Audit Related Fees consist of
fees billed for assurance and related services that are reasonably related to
the performance of the audit or review of Solar thin Films, Inc’s consolidated
financial statements and are not reported under "Audit Fees".




Tax Fees consist of fees
billed for professional services for tax compliance, tax advice and tax
planning.




All Other Fees consist of fees
for products and services other than the services reported above. There were no
management consulting services provided in fiscal 2009 or 2008.




Pre-Approval
Policies and Procedures




The Company currently does not have a
designated Audit Committee, and accordingly, the Company's Board of Directors'
policy is to pre-approve all audit and permissible non-audit services provided
by the independent auditors. These services may include audit services,
audit-related services, tax services and other services. Pre-approval is
generally provided for up to one year and any pre-approval is detailed as to the
particular service or category of services and is generally subject to a
specific budget. The independent auditors and management are required to
periodically report to the Company's Board of Directors regarding the extent of
services provided by the independent auditors in accordance with this
pre-approval, and the fees for the services performed to date. The Board of
Directors may also pre-approve particular services on a case-by-case
basis.




The Board of Directors has considered
whether the provision of non-audit services is compatible with maintaining the
principal accountant's independence.




57




PART
IV





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 at December 31, 2009 and
2008.




B.
            Consolidated
      Statements of Operations and Comprehensive Loss for the years ended
      December 31, 2009 and 2008.




C.
            Consolidated
      Statement of Stockholders’ Deficit for the years ended December 31,
      2009 and 2008.




D.
            Consolidated
      Statements of Cash Flows for the years ended of December 31, 2009 and
      2008.





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.





EXHIBIT
INDEX




Exhibit
              No.
            
            Description2.1
            
            Agreement
      and Plan of Merger dated as of June 30, 2009 by and among Solar Thin
      Films, Inc., Solar Thin Power, Inc. and the shareholders of Solar Thin
      Power, Inc. (incorporated by reference to the Current Report on Form 8-K
      filed with the Securities and Exchange Commission on July 16,
      2009).3.1
            
            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).3.3
            
            Certificate
      of Amendment to the Certificate of Incorporation of Solar Thin Films, Inc.
      (incorporated by reference to the Current Report on Form 8-K filed with
      the Securities and Exchange Commission on September 8,
    2009).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).




58




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).




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).




59




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).




60




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).




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).




61




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).10.59
            
            Equity
      Transfer Agreement dated as of September 16, 2009 by and among Solar Thin
      Films, Inc., Renewable Energy Solutions, Inc. and Innofast Investments
      Limited (incorporated by reference to the Current Report on Form 8-K filed
      with the Securities and Exchange Commission on September 22,
      2009).10.60
            
            Second
      Amendment to the Master Settlement Agreement dated as of December 4, 2009
      by and among Solar Thin Films, Inc., Kraft Elektronikai Zrt, Zoltan Kiss,
      Amelio Solar, Inc. and Renewable Energy Solutions, Inc., and Second
      Amendment to the Stock Purchase Agreement by and among Solar Thin Films,
      Inc., Zoltan Kiss, Maria Gabriella Kiss and Gregory Joseph Kiss, and
      Termination of the Strategic Alliance and Cross License Agreement 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 December 8,
      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.





62




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, 2010, 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, 2010Robert
      M. Rubin
            
            Chairman
      of the Board of Directors/s/
      Gary Maitland
            
            Vice
      President, General Counsel and Director
            
            April
      15, 2010Gary
      Maitland, Esq./s/
      Dr. Boris Goldstein
            
            Director
            
            April
      15, 2010Dr.
      Boris Goldstein




63