UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
DC 20549
  
  FORM
20-F
  
 (Mark
One)
  ̈
              Registration
      statement pursuant to Section 12(b) or 12(g) of the Securities
      Exchange Act of 1934
 
 or
 
 x
              Annual
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act
      of 1934
 For
the fiscal year ended December 31, 2008.
 or
   ̈
              Transition
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act
      of 1934
 For
the transition period from 
to
 or
   ̈
              Shell
      company report pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934
 Date
of event requiring this shell company report
 
 Commission
file number: 001-33433
 CHINA
SUNERGY CO., LTD.
 (Exact
name of Registrant as specified in its charter)
 
 N/A
 (Translation
of Registrant’s name into English)
 
 Cayman
Islands
 (Jurisdiction
of incorporation or organization)
 
 No. 123
Focheng West Road
 Jiangning
Economic & Technical Development Zone
 Nanjing,
Jiangsu 211100, People’s Republic of China
 (Address
of principal executive offices)
 Ruennsheng
Allen Wang, (86 25) 5276 6890,
 allen.wang@chinasunergy.com,
 No. 123
Focheng West Road
 Jiangning
Economic & Technical Development Zone
 Nanjing,
Jiangsu 211100, People’s Republic of China
 (Name,
Telephone, E-mail and/or Facsimile number and Address of Company Contact
Person)
   Securities
registered or to be registered pursuant to Section 12(b) of the
Act:
 
 Title of each class
                    
                    Name of each exchange on which
      registeredAmerican
      Depositary Shares, each representing
                      six
      ordinary shares, par value
                      $0.0001
      per share
                    
                    Nasdaq
      Global Market
  
  Securities
registered or to be registered pursuant to Section 12(g) of the
Act:
 None
 (Title
of Class)
 
 Securities
for which there is a reporting obligation pursuant to Section 15(d) of the
Act:
 None
 (Title
of Class)
 
 Indicate
the number of outstanding shares of each of the Issuer’s classes of capital or
common stock as of the close of the period covered by the annual
report.
 
 267,766,443
ordinary shares, par value $0.0001 per share, as of December 31,
2008.
 
 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
 If this
report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d)
of the Securities Exchange Act of
1934.    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  o    No  o
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
 Large
accelerated filer   ̈    Accelerated
filer  x    Non-accelerated
filer   ̈
 Indicate
by check mark which basis of accounting the registrant has been to prepare the
financial statements included in this filing:
 U.S. GAAP
x
International Financial Reporting Standards as issued by the International
Accounting Standards Board  ̈ Other
 ̈
 Indicate
by check mark which financial statement item the registrant has elected to
follow:    Item 17   ̈
   Item 18  x
 If
“other” has been checked in response to the previous question, indicate by check
mark which financial statement item the registrant has elected to follow.Item
17   ̈
   Item 18   ̈
 If this
is an annual report, indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange
Act).    Yes   ̈
   No  x
 (APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE
YEARS)
 Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.    Yes   ̈    No   ̈
 
 
 TABLE
OF CONTENTS
  INTRODUCTION
                                    3I.          PART
      I
                                    4ITEM
      1.
                                    IDENTITY
      OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
                                    4ITEM
      2.
                                    OFFER
      STATISTICS AND EXPECTED TIMETABLE
                                    4ITEM
      3.
                                    KEY
      INFORMATION
                                    4ITEM
      4.
                                    INFORMATION
      ON THE COMPANY
                                    28ITEM
      4A.
                                    UNRESOLVED
      STAFF COMMENTS
                                    41ITEM
      5.
                                    OPERATING
      AND FINANCIAL REVIEW AND PROSPECTS
                                    41ITEM
      6.
                                    DIRECTORS,
      SENIOR MANAGEMENT AND EMPLOYEES
                                    62ITEM
      7.
                                    MAJOR
      SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
                                    71ITEM
      8.
                                    FINANCIAL
      INFORMATION
                                    78ITEM
      9.
                                    THE
      OFFER AND LISTING
                                    79ITEM
      10.
                                    ADDITIONAL
      INFORMATION
                                    80ITEM
      11.
                                    QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                                    90ITEM
      12.
                                    DESCRIPTION
      OF SECURITIES OTHER THAN EQUITY SECURITIES
                                    90II.          PART
      II
                                    90ITEM
      13.
                                    DEFAULTS,
      DIVIDEND ARREARAGES AND DELINQUENCIES
                                    90ITEM
      14.
                                    MATERIAL
      MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
      PROCEEDS
                                    90ITEM
      15.
                                    CONTROLS
      AND PROCEDURES
                                    91ITEM
      16A.
                                    AUDIT
      COMMITTEE FINANCIAL EXPERT
                                    92ITEM
      16B.
                                    CODE
      OF ETHICS
                                    92ITEM
      16C.
                                    PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
                                    93ITEM
      16D.
                                    EXEMPTIONS
      FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
                                    93ITEM
      16E.
                                    PURCHASES
      OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
    PURCHASERS.
                                    93ITEM
      16F.
                                    CHANGE
      IN REGISTRANT’S CERTIFYING ACCOUNTANT
                                    93ITEM
      16G.
                                    CORPORATE
      GOVERNANCE.
                                    93III.          PART
      III
                                    94ITEM
      17.
                                    FINANCIAL
      STATEMENTS
                                    94ITEM
      18.
                                    FINANCIAL
      STATEMENTS
                                    94ITEM
      19.
                                    EXHIBITS
                                    94
  2
  INTRODUCTION
  In this
annual report, except where the context otherwise requires:
  ·
              “we,”
      “us,” “our company,” “our,” “Sunergy” and “China Sunergy” refer to China
      Sunergy Co., Ltd., its predecessor entities and its
      subsidiaries;
  ·
              “shares”
      or “ordinary shares” refers to our ordinary shares, “ADSs” refers to our
      American depositary shares, each of which represents six ordinary shares,
      and “ADRs” refers to the American depositary receipts that evidence our
      ADSs;
  ·
              “China”
      or “PRC” refers to the People’s Republic of China, excluding, for the
      purposes of this annual report, the Hong Kong Special Administrative
      Region, the Macau Special Administrative Region and
  Taiwan;
  ·
              “RMB”
      or “Renminbi” refers to the legal currency of China; “$” or “U.S. dollars”
      refers to the legal currency of the United States; and “Euro” or “€”
      refers to the legal currency of the European
  Union;
  ·
              “original
      equipment manufacturing” or “OEM” refers to arrangements under which we
      process silicon wafers provided by our customers into solar cells and
      charge processing fees from these
customers;
  ·
              “Matrix
      cell” previously named as passivated emitter and rear cell, refers to a
      solar cell that uses oxide on its front and rear surfaces, and that makes
      contact with metal at the rear surface only at certain
      regions;
  ·
              “selective
      emitter cell” refers to a solar cell in which the regions under its front
      metal contact and the rest of the front surface areas are separately
      diffused and optimized;
  ·
              “HP
      solar cell” refers to a more efficient version of our standard P-type
      cell, the conversion efficiency rate of which may generally be higher than
      that of standard P-type solar cell as a result of an enhanced production
      process used; and
  ·
              when
      calculating our manufacturing or production capacity of solar cells, we
      have assumed that all products will be made using 156-millimeter
      monocrystalline silicon wafers, even though we currently use and expect to
      continue to use a mixture of monocrystalline and multicrystalline silicon
      wafers, each in sizes of 125-millimeter and 156-millimeter; to the extent
      we use smaller wafers or multicrystalline wafers, our actual production
      will be less than our capacity.
  Our
financial statements are expressed in the U.S. dollar, which is the reporting
and functional currency of China Sunergy Co., Ltd. However, a major portion of
the revenues and expenses of our consolidated operating subsidiary is
denominated in Renminbi. With respect to amounts not recorded in our
consolidated financial statements included elsewhere in this report, all
translations from Renminbi to U.S. dollars were made at the noon buying rate in
the City of New York for cable transfers in Renminbi per U.S. dollar as
certified for customs purposes by the Federal Reserve Bank of New York. Unless
otherwise noted, all translations from Renminbi to U.S. dollars have been made
at a rate of RMB6.8225 to $1.00, the noon buying rate in effect as of December
31, 2008. We make no representation that any Renminbi or U.S. dollar amounts
could have been, or could be, converted to U.S. dollars or Renminbi, at any
particular rate, or at all. On June 19, 2009 the noon buying rate was RMB6.8360
to $1.00.
  We
completed our initial public offering of 9,775,000 ADSs on May 22, 2007. On May
17, 2007, we listed our ADSs on the Nasdaq Global Market under the symbol
“CSUN.” On July 1, 2008, we completed an offering of $54.5 million principal
amount of 4.75% convertible senior notes due June 2013 to qualified
institutional buyers pursuant to Rule 144A under the Securities Act of 1933.
Concurrently with the note offering, we also registered the offering of
4,431,000 ADSs, which we loaned to an affiliate of the initial purchaser of the
notes, who in turn sold the borrowed ADSs in the offering. We did not receive
any proceeds from the offering of the borrowed ADSs, but have received a nominal
lending fee from the ADS borrower.
  3
 
 FORWARD-LOOKING
INFORMATION
  This
annual report on Form 20-F contains statements of a forward-looking nature.
These statements relate to events involving known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from those expressed or implied by
the forward-looking statements. These statements are made under the “safe
harbor” provisions of Section 27A of the Securities Exchange Act of 1934, or
Exchange Act. Whenever you read a statement that is not simply a statement of
historical fact (such as when we describe what we “believe,” “expect” or
“anticipate” will occur, and other similar statements), you must remember that
our expectations may not materialize, even though we believe that they are
reasonable.
  Whether
actual results will conform with our expectations and predictions is subject to
a number of risks and uncertainties, many of which are beyond our control, and
reflect future business decisions that are subject to change. Some of the
assumptions, future results and levels of performance expressed or implied in
the forward-looking statements we make inevitably will not materialize, and
unanticipated events affecting our results may occur.
  We
caution you not to place undue reliance on forward-looking statements. You
should read these statements in conjunction with the risk factors disclosed in
Item 3 of this annual report, “Key Information—Risk Factors.” We do not
undertake any obligation to update or revise the forward-looking statements
except as required under applicable law.
 
 I.
              PART
      I
  ITEM
      1.
              IDENTITY
      OF DIRECTORS, SENIOR MANAGEMENT AND
ADVISERS
  Not Applicable.
  ITEM
      2.
              OFFER
      STATISTICS AND EXPECTED TIMETABLE
  Not Applicable.
  ITEM
      3.
              KEY
      INFORMATION
  A.           Selected Financial
Data
  The
following table presents our selected consolidated financial information. You
should read the following information in conjunction with Item 5, “Operating and
Financial Review and Prospects.” The selected consolidated statement of
operations data for the three years ended December 31, 2006, 2007 and 2008 and
the selected consolidated balance sheet data as of December 31, 2006, 2007 and
2008 have been derived from our audited consolidated financial statements
included in this annual report and should be read in conjunction with those
statements. Our selected consolidated statement of operations data for the
period from August 2, 2004 to December 31, 2004 and the year ended December 31,
2005, and the selected consolidated balance sheet data as of December 31, 2004
and 2005, have been derived from our audited consolidated financial statements
not included in this annual report.  Our audited consolidated
financial statements are prepared and presented in accordance with United States
generally accepted accounting principles, or U.S. GAAP.
  4
  For
      the Period fromAugust 2, 2004 (Dateof
      Inception)
      to
                      
                      
                      For the Year Ended
      December 31,December 31, 2004
                      
                      
                      2005
                      
                      
                      2006
                      
                      
                      2007
                      
                      
                      2008(in thousands, except share, per share,operating data and percentages)Consolidated
      Statement of Operations DataNet
      revenues
                      
                      
                      —
                      
                      
                      $
                      13,750
                      
                      
                      $
                      149,521
                      
                      
                      $
                      234,908
                      
                      
                      $
                      350,920Cost
      of revenues
                      
                      
                      —
                      
                      
                      
                      (11,796
                      )
                      
                      
                      (122,889
                      )
                      
                      
                      (216,881
                      )
                      
                      
                      (335,454
                      )Gross
      profit
                      
                      
                      —
                      
                      
                      
                      1,954
                      
                      
                      
                      26,632
                      
                      
                      
                      18,027
                      
                      
                      
                      15,466Operating
      expenses:Selling
      expenses
                      
                      
                      —
                      
                      
                      
                      (38
                      )
                      
                      
                      (1,014
                      )
                      
                      
                      (1,644
                      )
                      
                      
                      (3,866
                      )General
      and administrative expenses
                      
                      $
                      (953
                      )(1)
                      
                      
                      (1,584
                      )
                      
                      
                      (9,901
                      )(2)
                      
                      
                      (13,664
                      )
                      
                      
                      (16,779
                      )Research
      and development expenses
                      
                      
                      —
                      
                      
                      
                      (49
                      )
                      
                      
                      (546
                      )
                      
                      
                      (2,555
                      )
                      
                      
                      (1,871
                      )Total
      operating expenses
                      
                      
                      (953
                      )(1)
                      
                      
                      (1,671
                      )
                      
                      
                      (11,461
                      )(2)
                      
                      
                      (17,863
                      )
                      
                      
                      (22,516
                      )Income
      (loss) from operations
                      
                      
                      (953
                      )
                      
                      
                      283
                      
                      
                      
                      15,171
                      
                      
                      
                      164
                      
                      
                      
                      (7,050
                      )Net
      income (loss)
                      
                      $
                      (959
                      )
                      
                      $
                      (307
                      )
                      
                      $
                      11,814
                      
                      
                      $
                      (4,855
                      )
                      
                      $
                      (22,938
                      )Dividend
      on Series A redeemable convertible preferred shares
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (13,377
                      )(3)
                      
                      
                      (155
                      )
                      
                      
                      —Dividend
      on Series B redeemable convertible preferred shares
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (28,552
                      )(4)
                      
                      
                      (330
                      )
                      
                      
                      —Dividend
      on Series C redeemable convertible preferred shares
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (7,097
                      )(5)
                      
                      
                      (233
                      )
                      
                      
                      —Net
      loss attributable to holders of ordinary shares
                      
                      $
                      (959
                      )
                      
                      $
                      (307
                      )
                      
                      $
                      (37,212
                      )
                      
                      $
                      (5,573
                      )
                      
                      $
                      (22,938
                      )Net
      loss per share-Basic
                      
                      $
                      (0.01
                      )
                      
                      $
                      (0.00
                      )
                      
                      $
                      (0.36
                      )
                      
                      $
                      (0.04
                      )
                      
                      $
                      (0.10
                      )-Diluted
                      
                      $
                      (0.01
                      )
                      
                      $
                      (0.00
                      )
                      
                      $
                      (0.36
                      )
                      
                      $
                      (0.04
                      )
                      
                      $
                      (0.10
                      )
  5
 
 For
      the Period fromAugust 2,2004 (Dateof
      Inception) to
                        
                        
                        For the Year Ended
      December 31,December 31, 2004
                        
                        
                        2005
                        
                        
                        2006
                        
                        
                        2007
                        
                        
                        2008(in thousands, except share, per share,operating data and percentages)Shares
      used in computation-Basic
                        
                        
                        108,000,000
                        
                        
                        
                        108,000,000
                        
                        
                        
                        103,583,178
                        
                        
                        
                        185,165,757
                        
                        
                        
                        238,079,890-Diluted
                        
                        
                        108,000,000
                        
                        
                        
                        108,000,000
                        
                        
                        
                        103,583,178
                        
                        
                        
                        185,165,757
                        
                        
                        
                        238,079,890Other
      Consolidated Financial DataGross
      margin
                        
                        
                        —
                        
                        
                        
                        14.2
                        %
                        
                        
                        17.8
                        %
                        
                        
                        7.7
                        %
                        
                        
                        4.4
                        %Consolidated
      Operating DataSolar
      cells sold (inmegawatts, or
      MW)
                        
                        
                        —
                        
                        
                        
                        4.4
                        
                        
                        
                        46.4
                        
                        
                        
                        70.0
                        
                        
                        
                        100.4Average
      selling price (in $ per watt)
                        
                        
                        —
                        
                        
                        $
                        3.10
                        
                        
                        $
                        3.22
                        
                        
                        $
                        2.92
                        
                        
                        $
                        3.32
 
 (1)
              Includes
      a non-cash charge of $0.8 million relating to forgiveness of shareholder
      receivables from certain of our directors and executive
      officers.
  (2)
              Includes
      a non-cash charge of $3.7 million relating to the excess distribution to
      our president and a non-cash charge of $0.5 million relating to
      forgiveness of shareholder receivables from certain of our directors and
      executive officers.
  (3)
              Includes
      a one-time beneficial conversion feature of
  $13,110,400.
  (4)
              Includes
      a one-time beneficial conversion feature of
  $27,999,948.
  (5)
              Includes
      a one-time beneficial conversion feature of
  $6,941,170.
  As
      of December 31,2004
                
                
                2005
                
                
                2006
                
                
                2007
                
                
                2008Consolidated
      Balance Sheet DataCash
      and cash equivalents
                
                $
                1,032
                
                
                $
                2,765
                
                
                $
                14,750
                
                
                $
                60,458
                
                
                $
                94,800Restricted
      cash
                
                
                2,016
                
                
                
                21,959
                
                
                
                4,952
                
                
                
                23,473
                
                
                
                62,400Inventories
                
                
                30
                
                
                
                6,647
                
                
                
                44,331
                
                
                
                56,092
                
                
                
                59,125Accounts
      receivable, net
                
                
                —
                
                
                
                1,705
                
                
                
                43,048
                
                
                
                26,817
                
                
                
                8,906
  6
 
 As
      of December 31,2004
                
                
                2005
                
                
                2006
                
                
                2007
                
                
                2008Advances
      to suppliers, net
                
                
                —
                
                
                
                17,408
                
                
                
                26,281
                
                
                
                79,912
                
                
                
                7,320Amounts
      due from related parties
                
                
                2,256
                
                
                
                14,104
                
                
                
                1,977
                
                
                
                2,112
                
                
                
                18,583Property,
      plant and equipment, net
                
                
                2,290
                
                
                
                13,414
                
                
                
                38,730
                
                
                
                52,929
                
                
                
                102,609Total
      assets
                
                
                8,602
                
                
                
                79,307
                
                
                
                176,327
                
                
                
                321,144
                
                
                
                397,725Short-term
      bank borrowings
                
                
                —
                
                
                $
                21,685
                
                
                $
                69,263
                
                
                $
                121,841
                
                
                $
                97,299Accounts
      payable
                
                
                721
                
                
                
                3,216
                
                
                
                11,845
                
                
                
                7,157
                
                
                
                29,099Advances
      from customers
                
                
                —
                
                
                
                11,132
                
                
                
                950
                
                
                
                4,892
                
                
                
                706Amounts
      due to related parties
                
                
                2,335
                
                
                
                28,437
                
                
                
                4
                
                
                
                8
                
                
                
                246Total
      current liabilities
                
                
                3,114
                
                
                
                65,393
                
                
                
                92,104
                
                
                
                136,243
                
                
                
                146,622Long-term
      bank borrowings
                
                
                1,812
                
                
                
                8,674
                
                
                
                —
                
                
                
                —
                
                
                
                —Convertible
      senior notes payable
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                48,098Total
      shareholders’ equity
                
                
                3,193
                
                
                
                5,240
                
                
                
                22,280
                
                
                
                183,848
                
                
                
                174,957Total
      liabilities, mezzanine equity and shareholders’ equity
                
                
                8,602
                
                
                
                79,307
                
                
                
                176,327
                
                
                
                321,144
                
                
                
                397,725
  Exchange
Rate Information
  This
annual report contains translations of certain Renminbi amounts into U.S.
dollars at the rate of RMB6.8225 to $1.00, the noon buying rate in effect on
December 31, 2008 in New York City for cable transfers of Renminbi as certified
for customs purposes by the Federal Reserve Bank of New York. We make no
representation that the Renminbi or U.S. dollar amounts referred to in this
annual report could have been or could be converted into U.S. dollars or
Renminbi, as the case may be, at any particular rate or at all. See Item 3, “Key
Information—Risk Factors—Risks Related to Our Company and Our
Industry—Fluctuations in exchange rates could adversely affect our business” for
discussions of the effects of fluctuating exchange rates. On June 19, 2009, the
noon buying rate was RMB6.8360 to $1.00.
  The
following table sets forth information concerning exchange rates between the RMB
and the U.S. dollar for the periods indicated. These rates are provided solely
for your convenience and are not necessarily the exchange rates that we used in
this annual report or will use in the preparation of our periodic reports or any
other information to be provided to you. The source of these rates is the
Federal Reserve Bank of New York.
  7
  Noon
      Buying RatePeriod
                
                Period
      End
                
                
                Average(1)
                
                
                Low
                
                
                High(RMB
      per $1.00)2004
                
                
                8.2765
                
                
                
                8.2768
                
                
                
                8.2774
                
                
                
                8.27652005
                
                
                8.0702
                
                
                
                8.1826
                
                
                
                8.2765
                
                
                
                8.07022006
                
                
                7.8041
                
                
                
                7.9579
                
                
                
                8.0702
                
                
                
                7.80412007
                
                
                7.2946
                
                
                
                7.5806
                
                
                
                7.8127
                
                
                
                7.29462008
                
                
                6.8225
                
                
                
                6.9193
                
                
                
                7.2946
                
                
                
                6.7800December
      2008
                
                
                6.8225
                
                
                
                6.8539
                
                
                
                6.8842
                
                
                
                6.82252009January
      2009
                
                
                6.8392
                
                
                
                6.8360
                
                
                
                6.8403
                
                
                
                6.8225February
      2009
                
                
                6.8395
                
                
                
                6.8363
                
                
                
                6.8470
                
                
                
                6.8241March
      2009
                
                
                6.8329
                
                
                
                6.8360
                
                
                
                6.8438
                
                
                
                6.8240April
      2009
                
                
                6.8180
                
                
                
                6.8304
                
                
                
                6.8361
                
                
                
                6.8180May
      2009
                
                
                6.8278
                
                
                
                6.8235
                
                
                
                6.8326
                
                
                
                6.8176June
      2009 (through June 19, 2009)
                
                
                6.8360
                
                
                
                6.8337
                
                
                
                6.8371
                
                
                
                6.8264
 
 
 (1)
              Annual
      averages are calculated from month-end rates. Monthly averages are
      calculated using the average of the daily rates during the relevant
      period.
  B.           Capitalization and
Indebtedness
  Not Applicable.
  C.           Reasons for the Offer and
Use of Proceeds
  Not Applicable.
  D.           Risk
Factors
  Risks
Related to Our Company and Our Industry
  Current
economic and credit environment may adversely affect the demand for our
products.
  The
demand for solar power products is influenced by macroeconomic factors, such as
the supply and price of other energy products, as well as government regulations
and policies concerning the electric utility industry. The global financial
markets have experienced significant disruptions recently, and most of the
world’s major economies have entered into recession. The global economic
downturn could result in weakened market demand for products that require
significant initial capital expenditures, including solar power products. For
example, recent economic recession in several key solar power markets could
result in slower investments in new installation projects that make use of solar
power products. Existing projects may also be delayed as a result of the credit
and other disruptions. The unfavorable credit environment, which affects the
ability of sponsors to obtain financing for their projects, has also contributed
to the slowdown of the large solar project market segments. Furthermore, a
decrease in the price of other energy products, such as oil, coal and natural
gas, may reduce the urgency of the market to invest in alternative energy. These
macroeconomic factors have resulted in reduced demand for our solar power
products, and have adversely affected our operating results.  In 2008,
particularly in the fourth quarter, partly due to the impact of global financial
market disruption and economic slowdown, some of our customers cancelled or
delayed orders for our products. If such negative economic and market trends
continue, our business and results of operations may be materially and adversely
affected.
  8
  Volatile
market and industry trends, in particular, the decline in demand for solar
products may cause the average selling price of our products to decline, and
reduce our revenues and profitability.
  We are
affected by solar power market and industry trends. In the fourth quarter of
2008, the global solar power industry experienced a precipitous decline in
demand. During the same period, the global supply of solar products exceeded the
global demand due to the excess production capacity as a result of the global
economic downturn. Such oversupply of solar products contributed to the decline
in the average selling price of solar cells. The average selling price per watt
of our solar cells decreased from $3.22 in 2006 to $2.92 in 2007 and increased
to $3.32 in 2008. The increase in 2008 was primarily due to an increase in the
average selling price of our solar cells in the first three quarters of 2008,
which was offset by a decrease in the average selling price of our solar cells
in the fourth quarter of 2008.If
demand for solar products continues to decline and the oversupply of solar
products continues to exist, the average selling price of our products will be
materially and adversely affected, which may reduce our revenues and
profitability.
  The
availability and price of silicon raw materials may affect our gross margins and
profitability.
  Polysilicon
is an essential raw material in our production of solar cells. The procurement
costs of silicon wafers and other silicon-based raw materials have accounted for
a substantial majority of our cost of revenues since we began our commercial
production of solar cells in August 2005. The global supply of polysilicon is
controlled by a limited number of producers and in the past several years there
was an industry-wide shortage of polysilicon due to the growing demand for solar
power products and the continuing expansion of the semiconductor industry.
According to Solarbuzz LLC, or Solarbuzz, an independent solar energy research
firm, the average long-term supply contract price of polysilicon increased from
approximately $50-$55 per kilogram in 2006 to $60-$65 per kilogram in 2007 and
further increased to $60-$75 per kilogram in 2008. In addition, according to
Solarbuzz, spot prices for solar grade polysilicon were in the range of
$230-$375 per kilogram for most of the first half of 2008 but rose to a peak of
$400-$450 per kilogram by mid-2008. Increases in the price of polysilicon have
in the past resulted in increases in the price of wafers, and these increases in
the price of silicon raw materials have in the past increased our production
costs and thus affected our profitability. However, in late 2008 and 2009, newly
available polysilicon supply and slowed global solar power market growth have
resulted in an excess supply of polysilicon, which created a downward pressure
on the price of polysilicon.  According to Solarbuzz, spot prices for
solar grade polysilicon decreased rapidly to $150-$300 per kilogram in the
fourth quarter of 2008. We cannot assure you that the price of polysilicon will
continue to decline. Given the current silicon raw materials price environment,
we seek to exert greater control over incoming silicon raw materials quality
while establishing stable and long-term relationships with high quality
suppliers. We cannot assure you, however, that our procurement efforts will be
successful in ensuring an adequate supply of silicon raw materials at viable
prices to meet our solar cell production requirements, especially once the
global solar power market regains its growth momentum.
  We
have a limited operating history and we have incurred losses in certain prior
periods and may incur losses in the future.
  We
incurred net losses of $0.3 million, $4.9 million and $22.9 million in 2005,
2007 and 2008, respectively. We cannot assure you that we will not incur net
losses in the future or that there will not be any earnings or revenue declines
in any future periods. Our ability to achieve and maintain profitability depends
on, among others, the growth rate of the solar power market, the continued
global market acceptance of solar power products in general and our existing and
future products in particular, our ability to secure quality raw materials,
primarily silicon wafers, the pricing trend of solar power products, the
competitiveness of our products as well as our ability to provide new products
to meet the demands of our customers, our ability to achieve our manufacturing
expansion plans and our ability to control our costs and expenses. We may not be
able to achieve or sustain profitability on a quarterly or annual basis.
Furthermore, our limited operating history may not provide a meaningful basis
for evaluating our business, financial performance and prospects. Accordingly,
even though we achieved growth or profitability during certain prior periods,
you should not rely on our results of operations for any prior periods as an
indication of our future performance. You should consider our business and
prospects in light of the risks, expenses and challenges that we have as a
company which has a limited operating history and is seeking to develop and
manufacture new products in a rapidly evolving market.
  9
 
 Our
dependence on a limited number of third-party suppliers for key raw materials
and customized manufacturing equipment could prevent us from timely delivering
our products to our customers in the required quantities, which could result in
order cancellations and decreased revenue.
  We
purchase silicon raw materials, primarily silicon wafers, from a limited number
of third-party suppliers. Our top ten suppliers supplied approximately 58.8% of
the silicon raw material supplies we procured in 2008, mostly under contracts
with a term of less than one year. If we fail to develop or maintain our
relationships with our major suppliers, we may be unable to manufacture our
products or our products may only be available at a higher cost or after a long
delay, and we could be prevented from delivering our products to our customers
in the required quantities and at prices that are profitable. Problems of this
kind could cause order cancellations and loss of market share. Historically, we
encountered problems with respect to the quality of silicon raw material
supplied by some of our suppliers, which resulted in lower conversion
efficiencies of our solar cells. Some of our suppliers have failed to perform
their delivery obligations in the past. In addition, many of our contracts do
not provide for a remedy for non-delivery beyond a refund of any advance payment
that we may have made, and our legal recourse in cases of non-delivery may be
limited.
  The
failure of any major supplier to supply raw materials that meet our quality,
quantity and cost requirements in a timely manner could impair our ability to
manufacture our products and could increase our costs, particularly if we are
unable to obtain these materials and components from alternative sources on a
timely basis or on commercially reasonable terms. The pricing terms under our
raw material supply framework agreements generally are to be determined based on
future negotiations. If we cannot reach agreement on pricing terms with those
suppliers in the future, those agreements will not be enforceable and we would
then need to seek alternative supplies. In such an event, we may not be able to
secure sufficient alternative supplies.
  In
addition, certain of our manufacturing equipment has been designed and made
specifically for us. As a result, such equipment is not readily available from
multiple vendors and would be difficult to repair or replace. Any significant
damage to, or breakdown of, our customized manufacturing equipment could cause
material interruptions to our operations and consequentially could have a
material adverse effect on our business and results of operations.
  Our
costs and expenses may increase as a result of entering into fixed price, firm
purchase commitment arrangements  with our suppliers.
  In
response to the industry-wide shortage of silicon raw materials experienced
during the past few years, we have purchased silicon raw materials using
short-term and long-term contracts from a limited number of international and
domestic suppliers. Some agreements provide for firm purchase commitments and
fixed pricing or pricing adjustable within a relatively small range. Beginning
the fourth quarter of 2008, the price of silicon raw materials decreased
precipitously because of the excess supply of silicon raw materials resulting
from slower global solar power market growth. In light of such excess supply, we
are seeking to re-negotiate with our long-term supply partner in regard to
certain long-term supply contracts signed in 2008. We cannot assure you that we
will be successful in re-negotiating or terminating existing contracts. If we
fail to re-negotiate or terminate these contracts, we may be subject to
contractual damages. If we pay more for supplies than the current market prices
available to our competitors because of our commitments under long-term supply
contracts, we may be placed at a competitive disadvantage, and our profitability
could decline. In addition, if demand for our solar power products decreases and
such agreements require us to purchase more silicon raw materials than are
required to meet our demand, we may incur costs associated with carrying excess
inventory, which may have a material adverse effect on our cash flows. To the
extent we are not able to pass these increased costs and expenses on to our
customers, our business, financial condition and results of operations may be
materially and adversely affected.
  We
have significant outstanding bank borrowings, and we may not be able to arrange
adequate financing when they mature or may encounter other difficulties in
maintaining liquidity.
  As of
December 31, 2008, we had $94.8 million in cash and cash equivalents, and we had
$97.3 million in outstanding borrowings, all of which would become due within
one year. In the first quarter of 2009, we borrowed additional loans and repaid
some of our loans, and all of our current loans will become due within one year
of the date of this report. Recent turmoil in the credit markets and the
potential impact on the liquidity of financial institutions may adversely affect
our ability to fund our business through borrowings, under either existing or
newly created instruments in the public or private markets on terms that we
believe to be reasonable, if at all. We cannot assure you that we will be able
to obtain extensions of these facilities as they mature. If we are unable to
obtain extensions of these facilities, or if we are unable to obtain sufficient
alternative funding on reasonable terms to make repayments, we will have to
repay these borrowings with cash generated by our operating activities. We
cannot assure you that our business will generate sufficient cash flows from
operations to repay these borrowings. In addition, repaying these borrowings
with cash generated by our operating activities will divert our financial
resources from the requirements of our ongoing operations and future
growth.
  10
  Historically,
given the state of the industry, we generally needed to make prepayments at a
certain percentage of the order value to our suppliers of silicon raw materials
in advance of shipment. Due to the relative oversupply of polysilicon, since the
first quarter of 2009, prepayment as a percentage of the entire contract has
been reducing. However, we anticipate that our purchases of silicon raw
materials will continue to require us to make significant working capital
commitments. We may also need additional capital for the expansion and
modification of our manufacturing lines in the future. As a result of these
requirements, we may require additional debt or equity financing. Furthermore,
we have granted credit terms for our sales to some of our large customers.
Receivables from our top three customers represented approximately 96.4% of our
total accounts receivable as of December 31, 2008, including CEEG (Shanghai)
Solar Science and Technology Co., Ltd., an entity controlled by our chairman,
Mr. Tingxiu Lu, which accounted for over 42.9% of our total accounts receivable
as of December 31, 2008. Failure to timely collect our receivables may adversely
affect our cash flows. Any of our customers may fail to meet their payment
obligations, especially due to the current credit crisis, which would materially
and adversely affect our financial position, liquidity and results of
operations. If we fail to effectively manage our cash flows from operations,
borrowings and equity contributions to support our cash flow requirements, we
may encounter difficulty in liquidity, which would have a material adverse
effect on our business, financial condition and future prospects.
  Our
advance payments to most of our silicon raw material suppliers expose us to the
credit risk of these suppliers, and if these suppliers default in delivery or
refunding the payment,  our financial condition, results of operations
and liquidity may be adversely affected.
  Under the
supply contracts with most of our silicon raw material suppliers entered into
during an industry-wide shortage of silicon raw materials in the past few years,
we made prepayments to our suppliers prior to the scheduled delivery dates for
silicon raw materials. The prepayment as a percentage of the entire contract has
been reducing due to the dramatic change of the availability of polysilicon
since the fourth quarter of 2008, and our advances to suppliers decreased to
approximately $7.3 million as of December 31, 2008. However, we still depend on
a limited number of suppliers and we make such advance payments without
receiving collateral. As a result, our claims for such advance payments would
rank only as unsecured claims, exposing us to the credit risks of the suppliers
in the event of their insolvency or bankruptcy. We may not be able to recover
such advance payments and would suffer losses should the suppliers fail to
fulfill their delivery obligations under the contracts.
  Our
dependence on a limited number of customers may cause significant fluctuations
or declines in our revenues.
  We
currently sell a substantial portion of our solar cells to a limited number of
customers. Our top three customers contributed over 46.3% of our net revenues in
2008, including CEEG (Shanghai) Solar Science and Technology Co., Ltd., an
entity controlled by our chairman, Mr. Tingxiu Lu, which contributed over 13.2%
of our net revenues in 2008. Sales to our top five customers accounted for 60.0%
of our net revenues during the same period, including CEEG (Shanghai) Solar
Science and Technology Co., Ltd. Sales to each of aleo solar AG and Wuxi Guofei
Green Energy Source Co., Ltd. contributed over 10% of our net revenues for the
year ended December 31, 2008.
  Sales to
our customers are typically made through non-exclusive arrangements. We
anticipate that our dependence on a limited number of customers will continue in
the foreseeable future. Consequently, any one of the following events may cause
material fluctuations or declines in our revenues:
  •
              reduction,
      delay or cancellation of orders from one or more of our significant
      customers;
  •
              loss
      of one or more of our significant customers and our failure to identify
      additional or replacement customers;
and
  •
              failure
      of any of our significant customers to make timely payment for our
      products.
  The
practice of requiring customers to make advance payments when they place orders
with us has declined, and we have experienced and will continue to experience
increased needs to finance our working capital requirements and are exposed to
increased credit risk of our customers.
  We
generally required our customers to make an advance payment of a certain
percentage of their orders, a business practice that helped us to manage our
accounts receivable, prepay our suppliers and reduce the amount of funds that we
needed to finance our working capital requirements. In line with market trend,
this practice of requiring our customers to make advance payments is on the
decline, and has resulted in our increased need to obtain additional short-term
borrowings to fund our current cash requirements. Furthermore, a larger portion
of our revenues have been and may continue to be, derived from credits sales to
our customers. As a result of the disruptions in the financial markets and other
macro-economic challenges currently affecting the world economy, our customers
may experience cash flow concerns. As a result, they may delay their payment to
us. Any inability of current or potential customer to pay us may adversely
affect our earnings and cash flow.
  11
  If
we are unable to maintain a high utilization rate of our manufacturing capacity,
our operating margins may decline substantially.
 
 Our
ability to achieve profitability depends in part on our ability to maintain a
high utilization rate of our manufacturing capacity. With our recent expansion
of manufacturing capacity and the slowed growth of the solar power market, it is
more difficult for us to obtain enough orders for the solar cells that we are
capable of producing. If we are unable to obtain sufficient orders for our
products, procure sufficient raw materials, or if we experience any material
equipment failure, then we will not be able to maintain a high utilization rate
of our manufacturing capacity. As we incur fixed costs associated with our
facilities and equipment whether they are being utilized, operating at less than
full utilization results in expenses without corresponding revenue, which may
reduce our operating margins.
  The
reduction or elimination of government subsidies and economic incentives for
on-grid solar energy applications could cause demand for our products and our
revenues to decline.
  Almost
all of our solar cells sold are eventually used in the on-grid market, where the
solar power systems are connected to the utility grid and generate electricity
to feed into the grid. We believe that the near-term growth of the market for
on-grid applications depends in large part on the availability and size of
government subsidies and economic incentives. The reduction or elimination of
subsidies and economic incentives may adversely affect the growth of this market
or result in increased price competition, either of which could cause our
revenues to decline.
  Today,
when upfront system costs are factored into cost per kilowatt, the cost of solar
power substantially exceeds the cost of power furnished by the electric utility
grid in almost all locations. As a result, national and local governmental
bodies in many countries, most notably in Germany, Spain, Italy, the United
States and China, have provided subsidies and economic incentives in the form of
feed-in tariffs, rebates, tax credits and other incentives to distributors,
system integrators and manufacturers of solar power products in order to promote
the use of solar energy in on-grid applications and to reduce dependence on
other forms of energy. These government economic incentives could potentially be
reduced or eliminated altogether. For example, Germany has been a strong
supporter of solar power products and systems and is a significant market for
our customers that engage in solar module manufacturing and system integration
businesses. Utilities in Germany are generally obligated to purchase electricity
generated from grid-connected solar power systems at defined feed-in tariff
rates, which will decline over time according to a predetermined schedule.
Specifically, German subsidies decline at a rate of 5.0% to 6.5% per year for
systems installed after 2006 based on the type and size of the solar power
systems. Political or market changes in Germany could result in significant
reductions or eliminations of subsidies or economic incentives, such as a more
accelerated reduction of feed-in tariffs than as planned according to the
current schedule. Furthermore, in September 2008, the Spanish government
introduced a cap of 500 MW for 2009 for the feed-in tariff, which may limit the
demand in the grid-connected market in Spain. Reductions in, or eliminations of,
subsidies and economic incentives for on-grid solar energy applications could
result in decreased demand for our products and cause our revenues to
decline.
  Because
the markets in which we compete are highly competitive and many of our
competitors have greater resources than we do, we may not be able to compete
successfully and we may lose or be unable to gain market share.
  The
market for solar power products is highly competitive and continually evolving.
We expect to face increased competition, which may result in price reductions,
reduced margins or loss of market share. Our competitors include solar power
divisions of large conglomerates such as BP Solar, Kyocera, Sanyo and Sharp
Corporation, as well as specialized cell manufacturers such as JA Solar Holdings
Co., Ltd., Motech Industries Inc., Q-Cells AG, Suntech Power Holdings Co., Ltd.
and Solarfun Power Holdings Co., Ltd. Some of our competitors, for example
Renewable Energy Corporation ASA, have also become vertically integrated, from
upstream polysilicon manufacturing to solar system integration. During periods
of silicon supply shortage, their internally produced raw materials may enable
them to realize a higher margin in comparison with other solar cell
manufacturers.
  12
  We may
also face new competition from semiconductor manufacturers, several of which
have already announced their intention to start production of solar cells.
Decrease in polysilicon price and increase in solar power product manufacturing
could result in substantial downward pressure on the price of solar power
products and intensify the competition in 2009. In addition, the entire solar
power industry faces competition from conventional and non-solar renewable
energy technologies. Due to the relatively high manufacturing costs compared to
most other energy sources, solar energy is generally not competitive without
government subsidies and economic incentives.
  Many of
our existing and potential competitors have substantially greater financial,
technical, manufacturing and other resources than we do. Our competitors’
greater size in some cases provides them with a competitive advantage with
respect to manufacturing costs due to their economies of scale and their ability
to purchase raw materials at lower prices. For example, those of our competitors
that also manufacture semiconductors may source both semiconductor grade silicon
wafers and solar grade silicon wafers from the same supplier. As a result, such
competitors may have stronger bargaining power with the supplier and have an
advantage over us in pricing as well as obtaining silicon wafer supplies at
times of shortage. Many of our competitors also have more established
distribution networks and larger customer bases. In addition, many of our
competitors have well-established relationships with our customers and have
extensive knowledge of our target markets. As a result, they may be able to
devote greater resources to the research, development, promotion and sale of
their products or respond more quickly to evolving industry standards and
changes in market conditions than we can. It is possible that new competitors or
alliances among existing competitors could emerge and rapidly acquire
significant market share, which would harm our business. If we fail to compete
successfully, our business would suffer and we may lose or be unable to gain
market share.
  Prices
for our silicon raw materials and products, and therefore our results of
operations, may vary according to seasonal demand, unpredictable events such as
adverse weather conditions and natural disasters, and other
factors.
  The price
of polysilicon, an essential raw material for our production of solar cells, is
volatile. Historically our margins and results of operations have been
materially and adversely affected by the availability and price of polysilicon
and other silicon raw materials. The market prices for our products are also
subject to fluctuation due to a number of other factors and could decline
unexpectedly. For example, the price for solar cells in Germany, which is used
throughout our industry as a pricing benchmark, could be adversely affected by
changes in the subsidies available for solar power, and price declines in
Germany or in any other major market for solar cells could adversely affect our
average selling prices. Purchases of solar power products also tend to decrease
during the winter months because of adverse weather conditions in certain
regions, which complicate the installation of solar power systems. Historically,
our results of operations have been affected by such seasonality of
industry-wide demand for solar power products. Our quarterly operating results
also may fluctuate from period to period due to other factors, including adverse
weather conditions and natural disasters. For example, unusually heavy
snowstorms in central China in the first quarter of 2008 disrupted our power
supply and the transportation of our raw materials and finished products,
forcing us to suspend our operations for three weeks. Any of these various
factors could negatively affect our production, margins and results of
operations and, as a result of these factors, you may not be able to rely on
period to period comparisons of our operating results as an indication of our
future performance.
  If
solar power technology is not suitable for widespread adoption, or if sufficient
demand for solar power products does not develop or takes longer to develop than
we anticipate, our revenues may not continue to increase or may even decline,
and we may be unable to achieve or sustain our profitability.
  The solar
power market is at a relatively early stage of development, and the extent of
acceptance of solar power products is uncertain. Historical and current market
data on the solar power industry are not as readily available as those for other
more established industries where trends can be assessed more reliably from data
gathered over a longer period of time. In addition, demand for solar power
products may not develop or may develop to a lesser extent than we anticipate.
Many factors may affect the viability of widespread adoption of solar power
technology and demand for solar power products, including:
  •
              cost-effectiveness,
      performance and reliability of solar power products compared to
      conventional and other renewable energy sources and
    products;
  •
              success
      of other alternative energy generation technologies, such as wind power,
      hydroelectric power and biomass;
  13
  •
              fluctuations
      in economic and market conditions that affect the viability of
      conventional and other renewable energy sources, such as increases or
      decreases in the prices of oil and other fossil fuels or decreases in
      capital expenditures by end users of solar power
  products;
  •
              availability
      of government subsidies and incentives to support the development of the
      solar power industry;
  •
              capital
      expenditures by end users of solar power products, which tend to decrease
      when the economy slows down; and
  •
              deregulation
      of the electric power industry and the broader energy
      industry.
  If solar
power technology is not viable for widespread adoption or sufficient demand for
solar power products does not develop or develops to a lesser extent than we
anticipate, our revenues may suffer and we may be unable to sustain our
profitability.
  Advances
in solar power technology could render our products uncompetitive or obsolete,
which could reduce our market share and cause our sales and profit to
decline.
  The solar
power market is characterized by evolving technology standards that require
improved features, such as higher conversion efficiencies and higher power
output. This requires us to develop new solar power products and enhancements
for existing solar power products to keep pace with evolving industry standards
and changing customer requirements. For example, currently we are focused on
crystalline silicon technology and the expansion of production capacity based on
crystalline silicon, which today is the primary technology used by most solar
cell manufacturers. Some overseas producers have focused on developing
alternative forms of solar power technologies, such as thin-film technologies.
Failure to further refine our technology and to develop and introduce new solar
power products could cause our products to become uncompetitive or obsolete,
which could reduce our market share and cause our revenues to decline. We will
need to invest significant financial resources in research and development to
maintain our market position, keep pace with technological advances in the solar
power industry and effectively compete in the future.
  If our
future innovations fail to enable us to maintain or improve our competitive
position, we may lose market share. If we are unable to successfully design,
develop and bring to market competitive new solar power products or enhance our
existing solar power products, we may not be able to compete successfully.
Competing solar power technologies may result in lower manufacturing costs or
higher product performance than those expected from our solar power products. In
addition, if we, or our customers, are unable to manage product transitions, our
business and results of operations would be negatively affected.
  We
may not be successful in the commercial production of N-type solar cells or
other new products, which could limit our growth prospects.
  We are
currently developing process technology for manufacturing N-type solar cells.
The conversion efficiency rate of N-type solar cells may generally be higher
than that of P-type solar cells. But there are substantial technical
difficulties in manufacturing N-type solar cells on a large scale, such as the
difficulties associated with applying electrical contacts to silicon materials.
Therefore, we believe that to date, only a limited number of manufacturers in
the world produce N-type solar cells on a commercial scale.
  We may
face significant challenges in manufacturing N-type solar cells. Minor
deviations in the manufacturing process can cause substantial decreases in yield
and cell conversion efficiencies and, in some cases, cause production to be
suspended or yield no output. In addition, the silicon wafer required for the
manufacture of N-type solar cells is different from that used for the
manufacture of P-type solar cells. We may face difficulty in securing wafer
supply for the manufacture of N-type solar cells. If we are unable to commence
manufacturing our N-type solar cells on a timely basis, or if we face
technological difficulties in cost-efficiently producing our N-type solar cells
with the expected performance on a stable level, or if we are unable to secure
sufficient raw material supplies or generate sufficient customer demand for our
N-type solar cells, our business and prospects may be adversely
impacted.
  14
  In
addition, we commenced mass commercial production of selective emitter cells, an
improved version of the P-type solar cells that we and most other solar cell
manufacturers produce, in the fourth quarter of 2007. We are also developing
Matrix cells. However, these products are still new and their stability and
performance is still unproven. We may face difficulty in the development and
commercial production of selective emitter cells, Matrix cells or other new
products. We may also have difficulty in converting existing manufacturing lines
or installing new manufacturing lines for the production of new products. These
difficulties could arise from a number of reasons, including difficulties or
delays in obtaining or installing equipment, adapting our production to new
processes or training our personnel. We may also have difficulties in achieving
the higher conversion efficiencies that we expect to achieve with these new
products. Any of these difficulties may adversely affect our business, results
of operations and financial condition.
  Our
future success substantially depends on our ability to increase both our
manufacturing capacity and total output, which exposes us to a number of risks
and uncertainties.
  We
currently have ten solar cell manufacturing lines, with an aggregate annual
production capacity of 320 MW, assuming the use of 156-millimeter
monocrystalline silicon wafers. Our future success depends on our ability to
increase both our manufacturing capacity and total output. If we are unable to
do so, we may be unable to expand our business, decrease our costs per watt,
maintain our competitive position and improve our profitability. Our ability to
establish additional manufacturing capacity and increase output is subject to
significant risks and uncertainties, including:
  •
              the
      need to raise significant additional funds, which we may be unable to
      obtain on commercially viable terms or at all, to purchase raw materials
      and to build additional manufacturing
  facilities;
  •
              delays
      and cost overruns as a result of a number of factors, many of which are
      beyond our control, such as increases in the price of silicon raw
      materials and problems with equipment
vendors;
  •
              delays
      or denial of required approvals by relevant government
      authorities;
  •
              diversion
      of significant management
attention;
  •
              the
      ability to secure sufficient silicon raw materials, primarily silicon
      wafers, to support our expanded manufacturing capacity;
  and
  •
                the
      recovery of global economy and demand for solar products in overseas
      markets as influenced by world wide credit crisis and its
      effects.
  If we are
unable to establish or successfully operate additional manufacturing capacity,
or if we encounter any of the risks described above, we may be unable to expand
our business as planned. Moreover, we cannot assure you that if we do expand our
manufacturing capacity as planned, we will be able to generate sufficient
customer demand for our solar power products to support our increased production
levels.
  We
may experience difficulty in achieving acceptable yields and product performance
as a result of manufacturing problems, which could negatively impact our future
revenue.
  The
technology for the manufacture of solar cells is highly complex and is
continually being modified in an effort to improve yields and product
performance. The quality of the raw materials used, microscopic impurities such
as dust and other contaminants, difficulties in the manufacturing process, or
malfunctions of the equipment or facilities used can lower yields, cause quality
control problems, interrupt production or result in losses of products in
process.
  Because
our existing manufacturing capabilities are, and our future manufacturing
capabilities will likely remain, concentrated in our manufacturing facilities in
Nanjing, China, any problem in our facilities may limit our ability to
manufacture products. We may encounter problems in our manufacturing facilities
as a result of, among other things, production failures, construction delays,
human errors, equipment malfunction or process contamination, which could
seriously harm our operations. We may also experience floods, droughts, power
losses and similar events beyond our control that would affect our facilities.
For example, the unusually heavy snowstorms in the first quarter of 2008
disrupted our power supply and forced us to suspend our manufacturing operations
for three weeks. Any disruption in our manufacturing process that forces us to
shut down and restart our production causes a drop-off in production quality
during the first two or three weeks after we resume production, which in turn
reduces our yield as more of our output falls below our quality control
standards during that period.
  15
  Our
business depends substantially on the continuing efforts of our chairman,
executive officers and key employees, and our business may be severely disrupted
if we lose their services.
  Our
future success depends substantially on the continued services of Mr. Tingxiu
Lu, our chairman, our executive officers and key employees, especially Dr.
Jianhua Zhao, our vice chairman and chief technology officer, Mr. Ruennsheng
Allen Wang, our chief executive officer and Dr. Aihua Wang, our vice president.
If one or more of our executive officers or key employees were unable or
unwilling to continue in their present positions, we might not be able to
replace them easily, timely, or at all. For example, Mr. Kenneth Luk resigned
from the position as our chief financial officer in March 2009. Dr. Fengming
Zhang resigned from the positions as our director and vice president in charge
of manufacturing technology in April 2009. We subsequently appointed Mr.
Shiliang Guo as our acting chief financial officer and director. An external
search for a new chief financial officer and a vice president has been initiated
but we may not timely find replacements. If we lose the services of our
executive officers or key employees due to their resignation, non-compliance
with applicable law or any other reason, especially if we cannot timely find
replacements, our business may be severely disrupted, our financial conditions
and results of operations may be materially and adversely affected and we may
incur additional expenses to recruit, train and retain personnel. If any of our
executive officers or key employees joins a competitor or forms a competing
company, we may lose customers, suppliers, know-how and key professionals and
staff members. Each of our executive officers and key employees has entered into
an employment agreement with us which contains non-competition provisions.
However, if any dispute arises between our executive officers or our key
employees and us, these agreements may not be enforceable in China, where these
executive officers or our key employees reside, in light of the uncertainties
with China’s legal system. See “—Risks Related to Doing Business in
China—Uncertainties with respect to the Chinese legal system could have a
material adverse effect on us.”
  If
we fail to manage our growth and expansion effectively, our business may be
adversely affected.
  We have
experienced a period of rapid growth and expansion that has placed, and
continues to place, significant strain on our management personnel, systems and
resources. To accommodate our growth, we anticipate that we will need to
implement a variety of new and upgraded operational and financial systems,
procedures and controls, including improvements to our accounting and other
internal management systems, all of which require substantial management
efforts. We also will need to continue to expand, train, manage and motivate our
workforce, manage our customer relationships and manage our relationships with
raw material suppliers. All of these endeavors will require substantial
management effort and skill and the incurrence of additional expenditures. If we
fail to manage our growth effectively, that failure may have a material adverse
effect on our business.
  Future
acquisitions may have an adverse effect on our ability to manage our
business.
  If we are
presented with appropriate opportunities, we may acquire technologies,
businesses or assets that are complementary to our business. Future acquisitions
would expose us to potential risks, including risks associated with the
assimilation of new personnel, unforeseen or hidden liabilities, the diversion
of management attention and resources from our existing business and the
inability to generate sufficient revenues to offset the costs and expenses of
acquisitions. Any difficulties encountered in the acquisition and integration
process may have an adverse effect on our ability to manage our
business.
  We
face risks associated with the marketing, distribution and sale of our solar
power products internationally, and if we are unable to effectively manage these
risks, they could impair our ability to expand our business abroad.
  In 2008,
we derived 44.0% of our net revenues from sales of our products to customers
outside of China. We intend to continue to expand our sales in Europe as well as
in other overseas markets such as the United States, Korea and other Asian
countries and regions. The marketing, distribution and sale of our solar power
products in the international markets expose us to a number of risks,
including:
  •
              fluctuations
      in currency exchange rates;
  •
              increased
      costs associated with maintaining marketing efforts in various
      countries;
  •
              difficulty
      and costs relating to compliance with the different commercial and legal
      requirements of the overseas markets in which we offer our
      products;
  •
              difficulty
      in engaging and retaining sales personnel who are knowledgeable about, and
      can function effectively in, overseas
markets;
  16
  •
              trade
      barriers such as export requirements, tariffs, taxes and other
      restrictions and expenses, which could increase the prices of our products
      and make us less competitive in some countries;
  and
  •
              demand
      for solar products in overseas markets as influenced by world wide credit
      crisis and its effects.
  If
we are unable to attract, train and retain qualified personnel, our business may
be materially and adversely affected.
  Our
future success depends, to a significant extent, on our ability to attract,
train and retain qualified personnel, particularly technical personnel with
expertise in the solar power industry. Since our industry is characterized by
high demand and intense competition for talent, there can be no assurance that
we will be able to attract or retain the qualified technical staff or other
highly- skilled employees that we will need to achieve our strategic objectives.
As we are still a relatively young company and our business has grown rapidly,
our ability to train and integrate new employees into our operations may not
meet the growing demands of our business. If we are unable to attract and retain
qualified personnel, our business may be materially and adversely
affected.
  We
may be exposed to infringement or misappropriation claims by third parties,
which, if determined adversely to us, could cause us to pay significant damage
awards.
  Our
success depends largely on our ability to use and develop our technology and
know-how without infringing the intellectual property rights of third parties.
The validity and scope of claims relating to solar power technology patents
involve complex scientific, legal and factual questions and analysis and,
therefore, may be highly uncertain. We may be subject to litigation involving
claims of patent infringement or violation of other intellectual property rights
of third parties. The defense and prosecution of intellectual property suits,
patent opposition proceedings and related legal and administrative proceedings
can be both costly and time-consuming and may significantly divert the efforts
and resources of our technical and management personnel. An adverse
determination in any such litigation or proceedings to which we may become a
party could subject us to significant liability to third parties, require us to
seek licenses from third parties, to pay ongoing royalties, or to redesign our
products, or subject us to injunctions prohibiting the manufacture and sale of
our products or the use of our technologies. Protracted litigation could also
result in our customers or potential customers deferring or limiting their
purchase or use of our products until resolution of such
litigation.
  Failure
to protect our intellectual property rights may undermine our competitive
position, and litigation to protect our intellectual property rights may be
costly.
  We rely
primarily on trade secrets, patent laws and other contractual restrictions to
protect our intellectual property. Nevertheless, these afford only limited
protection, and the actions we take to protect our intellectual property rights
may not be adequate to provide us with meaningful protection or commercial
advantage. For example, we have three patents and five pending patent
applications in China. We cannot assure you that in a legal proceeding the
claims of our patents would be found valid or that the claims would be
interpreted as having sufficient scope to protect the technology we consider
important to our business, nor can we assure you that our patent applications
will eventually issue with claims of sufficient scope to protect additional
technology significant to our business. As a result, we may be unable to exclude
third parties from using the technologies that we have developed and compete
with us, which could have a material adverse effect on our business, financial
condition or operating results.
  Furthermore,
we have granted NewSouth Innovations Pty Limited, a non-exclusive, royalty-free
license to use the technology for manufacturing N-type solar cells covered in
one of our patents in China for internal research purposes, and a right to
commercially utilize or sublicense such technology after March 1, 2009, provided
that they may not sublicense such technology to certain of our Chinese
competitors until after March 1, 2010. As a result, we may not be able to block
our competitors from using the technology covered by this patent after March 1,
2010, which could have a material adverse effect on our business, financial
condition or operating results.
  In
addition, litigation may be necessary to enforce our intellectual property
rights. We cannot assure you that the outcome of such potential litigation will
be in our favor. Such litigation may be costly and may divert management
attention as well as divert other resources away from our business. In addition,
we have no insurance coverage against litigation costs and would have to bear
all costs arising from such litigation to the extent we are unable to recover
them from other parties. The occurrence of any of the foregoing could have a
material adverse effect on our business, results of operations and financial
condition.
  17
  Changes
to existing regulations and policies may present technical, regulatory and
economic barriers to the purchase and use of solar power products, which may
significantly reduce demand for our products.
  The
market for electricity generation products is heavily influenced by government
regulations and policies concerning the electric utility industry, as well as
policies adopted by electric utilities. These regulations and policies often
relate to electricity pricing and technical requirements regarding the
interconnection between customer-owned electricity generation and the grid. In a
number of countries, these regulations and policies are being modified and may
continue to be modified. Customer purchases of, or further investment in the
research and development of, alternative energy sources, including solar power
technology, could be deterred by these regulations and policies, which could
result in a significant reduction in the potential demand for our products. For
example, without a regulatory mandated exception for solar power systems,
utility customers are often charged interconnection or standby fees for putting
distributed power generation on the electric utility grid. These fees could
increase the cost to customers of using our solar power products and make them
less desirable, thereby harming our business, prospects, results of operations
and financial condition.
  We
anticipate that our products and their installation will be subject to oversight
and regulation in accordance with national and local regulations relating to
building codes, safety, environmental protection, utility interconnection and
metering and related matters. It is difficult to track the requirements of
individual jurisdictions and to design products that comply with the varying
standards. Any new government regulations or utility policies pertaining to our
solar power products may result in significant additional expenses to us or
cause a significant reduction in demand for our solar power
products.
  Fluctuations
in exchange rates could adversely affect our business.
  The value
of the Renminbi against the U.S. dollar, Euro and other currencies is affected
by, among other things, changes in China’s political and economic conditions and
China’s foreign exchange policies. On July 21, 2005, the PRC government changed
its decade-old policy of pegging the value of the Renminbi to the U.S. dollar.
Under the new policy, the Renminbi was permitted to fluctuate within a narrow
and managed band against a basket of certain foreign currencies. This change in
policy caused the Renminbi to appreciate approximately 21.5% against the U.S.
dollar over the following three years. Since reaching a high against the U.S.
dollar in July 2008, however, the Renminbi has traded within a narrow band
against the U.S. dollar, remaining within 1% of its July 2008 high but never
exceeding it. As a consequence, the Renminbi has fluctuated sharply since July
2008 against other freely traded currencies, in tandem with the U.S.
dollar.  For example, the Renminbi appreciated approximately 27%
against the Euro between July 2008 and November 2008.  It is difficult
to predict how long the current situation may last and when and how it may
change again.
  A major
portion of our sales are denominated in Renminbi and Euros, with the remainder
in U.S. dollars, while a substantial portion of our costs and expenses is
denominated in Renminbi and U.S. dollars, with the remainder in Euros.
Fluctuations in exchange rates, particularly among the U.S. dollars, Renminbi
and Euros, may affect our net profit margins and could result in fluctuations in
foreign currency exchange and operating gains and losses. We incurred a net
foreign exchange loss of approximately $6.9 million in 2008. We cannot predict
the impact of future exchange rate fluctuations on our results of operations and
may incur net foreign currency losses in the future. In addition, as we rely
entirely on dividends paid to us by our operating subsidiaries in China, any
significant revaluation of the Renminbi may have a material adverse effect on
our revenues and financial condition, and the value of, and any dividends
payable on, our ordinary shares and ADSs. For example, to the extent that we
need to convert U.S. dollars into Renminbi for our operations, appreciation of
the Renminbi against the U.S. dollar would have an adverse effect on the
Renminbi amount we receive from the conversion. Conversely, if we decide to
convert our Renminbi into U.S. dollars for the purpose of making payments for
dividends on our common shares or for other business purposes, appreciation of
the U.S. dollar against the Renminbi would have a negative effect on the U.S.
dollar amount available to us. As a large proportion of our revenue is paid to
us in Euros, fluctuation between the Euro and the RMB may also have a material
effect on our results of operations.
  18
  Noncompliance
with present or future construction and environmental regulations may result in
potentially significant monetary damages and fines.
  In the
past, we had begun operating facilities without having obtained all the
necessary approvals on the completion acceptance of our certain facilities from
relevant PRC construction and environmental protection authorities. As of the
date of this annual report, we have obtained the approval from the relevant PRC
environmental protection authorities and are in the process of obtaining all the
approvals from the relevant PRC construction authorities with respect to the
completion acceptance for these facilities. As of the date of this annual
report, we have not received any administrative penalties in respect of such
non-compliance. If we are not able to obtain these approvals, we could be
required to pay fines, suspend production or cease operations.
  As our
manufacturing processes generate noise, waste water, gases and other industrial
wastes, we are required to comply with all national and local regulations
regarding protection of the environment. We believe we are in material
compliance with present environmental protection requirements and have all
necessary environmental permits to conduct our business, except as disclosed
herein. However, if more stringent regulations are adopted in the future, the
costs of compliance with such new regulations could be substantial. We believe
that we have all of the permits necessary to conduct our business as it is
presently conducted. If we fail to comply with present or future environmental
regulations, however, we may be required to pay substantial fines, suspend
production or cease operations. We use, generate and discharge toxic, volatile
and otherwise hazardous chemicals and wastes in our research and development and
manufacturing activities. Any failure by us to control the use of, or to
restrict adequately the discharge of, hazardous substances could subject us to
potentially significant monetary damages and fines or suspensions in our
business operations.
  We
have limited insurance coverage and may incur losses resulting from product
liability claims.
  As the
insurance industry in China is still in an early stage of development, product
liability insurance available in China offer limited coverage compared to that
offered in many other countries. We do not have any product liability insurance.
As with other solar power product manufacturers, we are exposed to risks
associated with product liability claims if the use of our solar power products
results in injury. Since our products generate electricity, it is possible that
users could be injured or killed by our products as a result of product
malfunctions, defects, improper installation or other causes. We only began
commercial shipment of our solar power products in August 2005, and, because of
our limited operating history, we cannot predict whether product liability
claims will be brought against us in the future or the effect of any resulting
negative publicity on our business. The successful assertion of product
liability claims against us could result in potentially significant monetary
damages and require us to make significant payments. In addition, we have
purchased business interruption insurance in 2008, but we can not assure you
that it is adequate.
  Problems
with product quality or product performance may result in a decrease in
customers and revenues, incur unexpected expenses or cause us to incur warranty
expenses, and may damage our market reputation and prevent us from achieving
increased sales and market share.
  Our
products may contain defects that are not detected until after they are sold or
are installed because we cannot test for all possible scenarios. We have
received in the past, and may receive from time to time in the future,
complaints from certain customers that portions of our solar cells have quality
deficiencies. If we deliver solar cells that do not satisfy our customers’ or
end users’ quality requirements, or if there is a perception that our products
are of poor quality, our credibility and the market acceptance and sales of our
solar power products could be harmed. We may also incur substantial expenses to
compensate the customers. Historically, some of our sales contracts with
overseas customers provided for a 10-year warranty for the performance of our
solar cells, and in some cases, our solar cells were sold with up to a 20-year
warranty. In 2008, we sold 2.6 MW of solar modules, in most cases with a
two-year warranty for defects in material and workmanship and a minimum power
output warranty of up to 25 years following the date of purchase. As a result,
we bear the risk of extensive warranty claims long after we have sold our
products and recognized revenues. We have sold solar cells only since August
2005. Due to the short usage history of our products, we cannot assure you that
our assumptions regarding the durability and reliability of our products are
reasonable. Our warranty provisions may be inadequate, and we may have to incur
substantial expense to repair or replace defective products in the future. Any
increase in the defect rate of our products would cause us to increase the
amount of our warranty reserves and have a correspondingly negative impact on
our operating results. Furthermore, widespread product failures may damage our
market reputation, reduce our market share and cause our sales to
decline.
  If we fail to maintain an effective
system of internal controls, we may be unable to accurately report our financial
results or prevent fraud, and investor confidence and the market price of our
common shares may, therefore, be adversely impacted.
  We are
subject to reporting obligations under the U.S. securities laws. Beginning with
our annual report on Form 20-F for the fiscal year ending December 31, 2008, we
are required to prepare a management report on our internal controls over
financial reporting containing our management’s assessment of the effectiveness
of our internal controls over financial reporting. In addition, our independent
registered public accounting firm must attest to and report on the effectiveness
of our internal controls over financial reporting.
  19


There
have been historical deficiencies with our internal controls. For example, in
connection with the audit of our financial statements as of and for the year
ended December 31, 2007, we and our independent registered public accounting
firm identified several significant deficiencies in connection with access
control on important transactions in our enterprise resource planning, or ERP,
system, our management of inventory and fixed assets, bad debt provision and ERP
software application development. We have undertaken remedial steps to improve
our internal control over financial reporting and our disclosure
controls.




In
connection with the preparation of this annual report on Form 20-F, we carried
out an evaluation of the effectiveness of our internal control over financial
reporting. Based on this evaluation, our management concluded that our internal
control over financial reporting was effective as of December 31, 2008. See
“Item 15. Control and Procedures.” If we fail to maintain an effective
system of internal control over financial reporting and an effective system of
disclosure controls in the future, we may be unable to accurately report our
financial results or prevent fraud, and as a result, investor confidence and the
market price of our ADSs may be adversely impacted. Furthermore, we have
incurred and anticipate that we will continue to incur considerable costs,
management time and other resources in an effort to comply with Section 404
and other requirements of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley
Act.




Our
chairman has substantial influence over our company, and his interests may not
be aligned with the interests of our other shareholders.




Mr.
Tingxiu Lu, our chairman, currently beneficially owns 14.6% of our outstanding
share capital. Further, most of our bank borrowings are guaranteed by China
Electric Equipment Group Co., Ltd., or CEEG, an entity controlled by Mr. Lu.
CEEG guaranteed the bank borrowings of Sunergy Nanjing for up to RMB1 billion
until May 2010, subject to adjustment in the event of a material change in
CEEG’s credit or operational status. Mr. Lu has substantial influence over our
business, including decisions regarding mergers, consolidations and the sale of
all or substantially all of our assets, election of directors and other
significant corporate actions. This concentration of ownership may discourage,
delay or prevent a change in control of our company, which could deprive our
shareholders of an opportunity to receive a premium for their shares as part of
a sale of our company and might reduce the price of our ADSs. These actions may
be taken even if they are opposed by our other shareholders and holders of our
ADSs, including those who purchased our ADSs in our initial public
offering.




We
have been named as defendant in connection with securities class action
lawsuits, which, if determined adversely, could negatively affect our business
and results of operations.




We and
several of our directors and officers were named defendants in three purported
class actions currently pending in the United States District Court for the
Southern District of New York—Brown v. China Sunergy Co., Ltd. et al., Case No.
07-CV-07895 (DAB), Sheshtawy v. China Sunergy Co., Ltd. et al., Case No.
07-CV-08656 (DAB), and Giombetti v. China Sunergy Co., Ltd. et al., Case No.
07-CV-09689 (DAB). On September 29, 2008, the District Court appointed a lead
plaintiff and consolidated the three cases. The lead plaintiff alleges that we
made false and misleading statements in our registration statement and
prospectus in connection with our initial public offering in May 2007 regarding,
among other things, the procurement of polysilicon, and seek unspecified
damages. Although we intend to vigorously defend against the class actions, it
is time-consuming and costly and could divert the attention of our senior
management. An unfavorable resolution of these lawsuits or any future lawsuits
could materially and adversely affect our results of operations and financial
condition. See Item 8, “Financial Information—Legal Proceedings.”




Risks
Related to Doing Business in China




Adverse
changes in political and economic policies of the PRC government could have a
material adverse effect on the overall economic growth of China, which could
reduce the demand for our products and materially and adversely affect our
competitive position.




All of
our business operations are conducted in China and a majority of our sales are
made in China. Accordingly, our business, financial condition, results of
operations and prospects are affected significantly by economic, political and
legal developments in China. The Chinese economy differs from the economies of
most developed countries in many respects, including:




•
            the
      amount of government involvement;




20


•
            the
      level of development;




•
            the
      growth rate;




•
            the
      control of foreign exchange; and




•
            the
      allocation of resources.




While the
Chinese economy has grown significantly in the past 20 years, the growth has
been uneven, both geographically and among various sectors of the economy. The
PRC government has implemented various measures to encourage or control economic
growth and guide the allocation of resources. Some of these measures benefit the
overall Chinese economy, but may also have a negative effect on us. For example,
our financial condition and results of operations may be adversely affected by
government control over capital investments or changes in tax regulations that
are applicable to us. As the PRC economy is increasingly linked to the global
economy, it is affected in various respects by downturns and recessions of major
economies around the world, such as the recent financial services and economic
crises of these economies. The various economic and policy measures enacted by
the PRC government to forestall economic downturns or shore up the PRC economy
could materially affect our clients’ businesses and our business.




The
Chinese economy has been transitioning from a planned economy to a more
market-oriented economy. Although in recent years the PRC government has
implemented measures emphasizing the utilization of market forces for economic
reform, the reduction of state ownership of productive assets and the
establishment of sound corporate governance in business enterprises, a
substantial portion of the productive assets in China is still owned by the PRC
government. The continued control of these assets and other aspects of the
national economy by the PRC government could materially and adversely affect our
business. The PRC government also exercises significant control over Chinese
economic growth through the allocation of resources, controlling payment of
foreign currency- denominated obligations, setting monetary policy and providing
preferential treatment to particular industries or companies. Efforts by the PRC
government to slow the pace of growth of the Chinese economy could result in
decreased capital expenditures by solar energy users, which in turn could reduce
demand for our products.




Uncertainties
with respect to the Chinese legal system could have a material adverse effect on
us.




We
conduct substantially all of our manufacturing operations through our wholly
owned subsidiary, China Sunergy (Nanjing) Co., Ltd., or Sunergy Nanjing,
previously named CEEG (Nanjing) PV-Tech Co., Ltd., a limited liability company
established in China. Sunergy Nanjing is generally subject to laws and
regulations applicable to foreign investment in China and, in particular, laws
applicable to wholly foreign-owned enterprises. The PRC legal system is based on
written statutes. Prior court decisions may be cited for reference but have
limited precedential value. Since 1979, PRC legislation and regulations have
significantly enhanced the protections afforded to various forms of foreign
investments in China. However, since these laws and regulations have not been
fully developed and the PRC legal system continues to rapidly evolve, the
interpretations of many laws, regulations and rules are not always uniform and
enforcement of these laws, regulations and rules involves uncertainties. We
cannot predict the effect of future developments in the PRC legal system,
including the promulgation of new laws, changes to existing laws or the
interpretation or enforcement thereof, the preemption of local regulations by
national laws, or the overturn of local government’s decisions by the superior
government. These uncertainties may limit legal protections available to us. In
addition, any litigation in China may be protracted and result in substantial
costs and diversion of resources and management attention.




We
rely on dividends paid by our subsidiary for our cash needs.




We
conduct substantially all of our operations through Sunergy Nanjing. We rely on
dividends paid by Sunergy Nanjing for our cash needs, including the funds
necessary to pay dividends and other cash distributions to our shareholders, to
service any debt we may incur and to pay our operating expenses. The payment of
dividends by entities organized in China is subject to limitations. Regulations
in the PRC currently permit payment of dividends only out of accumulated profits
as determined in accordance with accounting standards and regulations in China.
Sunergy Nanjing is also required to set aside at least 10% of its after-tax
profit based on PRC accounting standards each year to its general reserves until
the accumulative amount of such reserves reaches 50% of its registered capital.
These reserves are not distributable as cash dividends. Sunergy Nanjing is also
required to allocate a portion of its after-tax profits, as determined by its
board of directors, to its staff welfare and bonus funds, which may not be
distributed to equity owners. In addition, if Sunergy Nanjing incurs debt on its
own behalf in the future, the instruments governing the debt may restrict its
ability to pay dividends or make other distributions to us.


21


Furthermore,
the dividends we receive from our PRC subsidiary may also be adversely affected
by the new PRC Enterprise Income Tax Law, or the New EIT Law, and its
Implementing Regulation, which became effective on January 1, 2008. See “—Our
global income and the dividends we receive from our PRC subsidiary may be
subject to PRC tax under the New EIT Law, which would have a material adverse
effect on our results of operations.”




Our
global income and the dividends we receive from our PRC subsidiary may be
subject to PRC tax under the New EIT Law, which would have a material adverse
effect on our results of operations.




Under the
New EIT Law and its Implementing Regulation, which have become effective on
January 1, 2008, an enterprise established outside of the PRC with “de facto
management bodies” within the PRC is considered a resident enterprise and will
be subject to a 25% PRC income tax on its global income. The implementation
rules define the term “de facto management bodies” as “establishments that carry
out substantial and overall management and control over the manufacturing and
business operations, personnel, accounting, properties, etc. of an enterprise.”
On April 22, 2009, the State Administration of Taxation released a circular, or
the Resident Enterprise Circular which sets out the standards and procedures for
recognizing the location of the “de facto management bodies” of an enterprise
registered outside of the PRC and funded by Chinese enterprises as controlling
investors, or the Chinese Funded Enterprise. Under the Resident Enterprise
Circular, if (i) a Chinese Funded Enterprise’s major management department and
personnel who are responsible for carrying out daily operations are located in
the PRC; (ii) the department or the personnel who have the right to decide or
approve the Chinese Funded Enterprise’s financial and human resource matters are
located in the PRC; (iii) the major assets, account book, company seal and
meeting minutes of the Chinese Funded Enterprise are located or stored in the
PRC; and (iv) the directors or management personnel holding no less than 50%
voting rights of the Chinese Funded Enterprise habitually reside in the PRC,
such Chinese Funded Enterprise shall be considered a resident enterprise. The
Resident Enterprise Circular explicitly provides that the above standards shall
apply to the enterprises which are registered outside the PRC and funded by
Chinese enterprises as controlling investors, therefore such standards may be
cited for reference only and may not be directly adopted when considering
whether our Company’s “de facto management body” is in the PRC or not.
Accordingly, it is still uncertain whether we may be considered a resident
enterprise under the New EIT Law. If we are considered a resident enterprise and
earn income other than dividends from our PRC subsidiary, we will be subject to
a 25% PRC income tax on our global income and such 25% PRC income tax on our
global income could significantly increase our tax burden and materially and
adversely affect our cash flow and profitability.




Under the
applicable PRC tax laws in effect before January 1, 2008, dividend payments to
foreign investors made by foreign- invested enterprises such as our PRC
subsidiary, Sunergy Nanjing, were exempt from PRC withholding tax. Pursuant to
the New EIT Law and its Implementing Regulation, however, dividends generated
after January 1, 2008 and payable by a foreign-invested enterprise to its
foreign investors will be subject to a 10% withholding tax if the foreign
investors are considered as non-resident enterprises without any establishment
or place of business within China or if the dividends payable have no connection
with the establishment or place of business of the foreign investors within
China, unless any such foreign investor’s jurisdiction of incorporation has a
tax treaty with China that provides for a reduced withholding arrangement. The
Cayman Islands, where we are incorporated, does not have such a tax treaty with
China. China Sunergy (Hong Kong) Co., Ltd., or Sunergy Hong Kong, the direct
holder of the 100% equity interest in Sunergy Nanjing, is incorporated in Hong
Kong. According to the Mainland and Hong Kong Special Administrative Region
Arrangement on Avoiding Double Taxation or Evasion of Taxation on Income agreed
between China and Hong Kong in August 2006, dividends paid by a foreign-invested
enterprise in China to its direct holding company in Hong Kong will be subject
to withholding tax at a rate of no more than 5% (if the foreign investor owns
directly at least 25% of the shares of the foreign-invested enterprise). Under
the Implementing Regulation of the New EIT Law, if we and Sunergy Hong Kong were
regarded as resident enterprises, the dividends payable to us from Sunergy
Nanjing would be exempt from the PRC income tax. If we were regarded as a
non-resident enterprise and Sunergy Hong Kong were regarded as a resident
enterprise, then Sunergy Hong Kong would be required to withhold a 10%
withholding tax on any dividends payable to us, while if Sunergy Hong Kong is
regarded as a non-resident enterprise, then Sunergy Nanjing would be required to
withhold a 5% withholding tax on any dividends payable to Sunergy Hong Kong. In
either case, the amount of funds available to us to meet our cash requirements,
including the payment of dividends to our shareholders and debt service on any
debt we incur, could be materially reduced.


22


In
addition, because there remains uncertainty regarding the interpretation and
implementation of the concept of “de facto management bodies,” if we are
regarded as a PRC resident enterprise, under the New EIT Law any dividends to be
distributed by us to our non-PRC shareholders or holders of ADSs will be subject
to a withholding tax. We also cannot assure you that any gain realized by
non-PRC shareholders or holders of our ADSs from the transfer of our shares or
ADSs will not be subject to a withholding tax. Unless there are further rules
announced by the Chinese tax authorities, we are required under the New EIT Law
to withhold PRC income tax on our dividends payable to our non-PRC shareholders
or holders of ADSs, or any gain realized by our non-PRC shareholders or holders
of ADSs from transfer of the shares or ADSs, and your investment in our ADSs may
be materially and adversely affected.




Restrictions
on currency exchange may limit our ability to receive and use our revenues or
financing effectively.




Certain
portions of our revenues and expenses are denominated in Renminbi. If our
revenues denominated in Renminbi increase or expenses denominated in Renminbi
decrease in the future, we may need to convert a portion of our revenues into
other currencies to meet our foreign currency obligations, including, among
others, payment of dividends declared, if any, in respect of our ordinary shares
or ADSs. Under China’s existing foreign exchange regulations, Sunergy Nanjing is
able to pay dividends in foreign currencies, without prior approval from the
State Administration of Foreign Exchange, or SAFE, by complying with certain
procedural requirements. However, we cannot assure you that the PRC government
will not take further measures in the future to restrict access to foreign
currencies for current account transactions.




Most
foreign exchange transactions by Sunergy Nanjing under capital accounts continue
to be subject to significant foreign exchange controls and require the approval
of, or registration with, PRC governmental authorities. In particular, if
Sunergy Nanjing borrows foreign currency loans from us or other foreign lenders,
these loans must be registered with the SAFE, and if we finance Sunergy Nanjing
by means of additional capital contributions, these capital contributions must
be approved or registered by certain government authorities including the SAFE,
the Ministry of Commerce or their local counterparts. These limitations could
affect the ability of Sunergy Nanjing to obtain foreign exchange through debt or
equity financing, and could affect our business and financial
condition.




Our
business benefits from certain PRC preferential tax treatments. Expiration of,
or changes to, these incentives could have a material adverse effect on our
operating results.




The PRC
government has provided various incentives to foreign-invested enterprises.
Because Sunergy Nanjing is a foreign- invested enterprise engaged in
manufacturing businesses and located in Nanjing, which is within a coastal
economic zone, it was entitled to a preferential enterprise income tax rate of
24% prior to January 1, 2008. As a foreign-invested enterprise engaged in
manufacturing businesses, Sunergy Nanjing was also entitled to a two-year
exemption from the enterprise income tax for its first two profitable years of
operation and to a 50% reduction of its applicable income tax rate for the
succeeding three years. On March 16, 2007, the National People’s Congress of
China, or the Congress, enacted the New EIT Law, under which foreign invested
enterprises and domestic companies would be subject to enterprise income tax at
a uniform rate of 25%. The New EIT Law also provides for transitional measures
for enterprises established prior to the promulgation of the New EIT Law and
eligible for lower tax rate preferential treatment in accordance with the
then-prevailing tax laws and administrative regulations. These enterprises will
gradually become subject to the unified tax rate over a five-year transitional
period from January 1, 2008 (enterprises which were subject to enterprise income
tax rate of 24% before January 1, 2008 are subject to enterprise income tax of
25% from January 1, 2008); enterprises which were established and already
enjoyed preferential income tax treatments before March 16, 2007 will continue
to enjoy them (i) in the case of preferential tax rates, for a period of five
years from January 1, 2008, and the enterprises which previously enjoyed the tax
rate of 24% shall be subject to the tax rate of 25% in 2008, or (ii) in the case
of preferential tax exemption or reduction for a specified term, until the
expiration of such term. In addition, certain enterprises may still benefit from
a preferential tax rate of 15% under the New EIT Law if they qualify as “high
and new technology enterprises strongly supported by the State,” subject to
certain general factors described therein.  On April 14, 2008, the Ministry
of Finance, the Ministry of Science and Technology and the State Administration
of Taxation jointly promulgated the Administration Measures for Recognition of
High and New Technology Enterprises, or the Recognition Measures. Pursuant to
the New EIT Law, the Implementing Regulation and the Recognition Measures,
enterprises which have been granted the new and high technology enterprises
status shall enjoy a preferential income tax rate of 15%. In October 2008,
Sunergy Nanjing obtained the high and new technology enterprise certificate with
a three-year validity term. Therefore, Sunergy Nanjing is entitled to a
preferential income tax rate of 15% as long as it maintains its qualification as
“high and new technology enterprises” under the New EIT Law and the Recognition
Measures.  If Sunergy Nanjing fails to maintain the “high and new
technology enterprise” qualification, its applicable EIT rate may increase to up
to 25%, which could have a material adverse effect on our results of operations.
We cannot assure you that we will be able to maintain our current effective tax
rate in the future. Any discontinuation of preferential tax treatment or any
increase of the enterprise income tax rate applicable to Sunergy Nanjing could
have a material adverse effect on our financial condition and results of
operations.


23


Our
failure to obtain the prior approval of the China Securities Regulatory
Commission, or the CSRC, of the listing and trading of our ADSs on the Nasdaq
Global Market could have a material adverse effect on our business, operating
results, reputation and trading price of our ADSs.




On August
8, 2006, six PRC regulatory agencies, including CSRC, promulgated the Regulation
on Mergers and Acquisitions of Domestic Companies by Foreign Investors, which
became effective on September 8, 2006.




This
regulation, among other things, has certain provisions that purport to require
offshore special purpose vehicles, or SPVs, formed for the purpose of acquiring
PRC domestic companies and controlled by PRC individuals, to obtain the approval
of the CSRC prior to listing their securities on an overseas stock exchange. The
application of this PRC regulation remains unclear with no consensus currently
existing among the leading PRC law firms regarding the scope and applicability
of the CSRC approval requirement. On September 21, 2006, the CSRC published on
its official website a notice specifying the documents and materials that are
required to be submitted for obtaining CSRC approval. We believe, based on the
advice of our PRC counsel, Jun He Law Offices, that although the CSRC generally
has jurisdiction over overseas listing of SPVs like us, it was not necessary for
us to obtain CSRC approval for our initial public offering given the fact that
we had legally completed the acquisition of all the equity interest in Sunergy
Nanjing before the new regulation became effective. Uncertainty as to how this
regulation will be interpreted or implemented still remains. If the CSRC or
another PRC regulatory agency subsequently determines that the CSRC’s approval
was required for our initial public offering, we may face sanctions by the CSRC
or another PRC regulatory agency. If this happens, these regulatory agencies may
impose fines and penalties on our operations in the PRC, limit our operating
privileges in the PRC, delay or restrict the repatriation of the proceeds from
our initial public offering into the PRC, restrict or prohibit payment or
remittance of dividends by Sunergy Nanjing, or take other actions that could
have a material adverse effect on our business, financial condition, results of
operations, reputation and prospects, as well as the trading price of our ADSs.
Also, if later the CSRC requires that we obtain its approval, we may be unable
to obtain a waiver of the CSRC approval requirements, if and when procedures are
established to obtain such a waiver. Any uncertainties and/or negative publicity
regarding this CSRC approval requirement could have a material adverse effect on
the trading price of our ADSs.




Regulations
relating to offshore investment activities by PRC residents may limit our
ability to inject capital into our PRC subsidiary, limit our subsidiary’s
ability to distribute profits to us, or otherwise adversely affect
us.




In
October 2005, SAFE issued a regulation entitled “Circular on several issues
concerning foreign exchange regulation of corporate finance and roundtrip
investments by PRC residents through special purpose companies incorporated
overseas,” or Circular No. 75. Circular No. 75 states that if PRC residents use
assets or equity interests in their PRC entities as capital contributions to
establish offshore companies or inject assets or equity interests of their PRC
entities into offshore companies to raise capital overseas, they must register
with local SAFE branches with respect to their overseas investments in offshore
companies and must also file amendments to their registrations if their offshore
companies experience material events involving capital variation, such as
changes in share capital, share transfers, mergers and acquisitions, spin-off
transactions, long-term equity or debt investments or uses of assets in China to
guarantee offshore obligations. Under Circular No. 75, failure to comply with
the registration procedures set forth in such regulation may result in
restrictions being imposed on the foreign exchange activities of the relevant
PRC entity, including the payment of dividends and other distributions to its
offshore parent, as well as restrictions on the capital inflow from the offshore
entity to the PRC entity. While we believe our shareholders have complied with
existing SAFE registration procedures, any future failure by any of our
shareholders who is a PRC resident or controlled by a PRC resident to comply
with relevant requirements under Circular No. 75 could subject our company to
fines or sanctions imposed by the PRC government, including restrictions on
Sunergy Nanjing’s ability to pay dividends or make distributions to us and our
ability to increase our investment in or provide loans to Sunergy
Nanjing.


24


Increase
in labor costs and the new Labor Contract Law and other labor-related
regulations in the PRC may adversely affect our business and our
profitability.




On June
29, 2007, the National People’s Congress of China enacted a new Labor Contract
Law, which became effective on January 1, 2008. Compared to the PRC Labor Law
effective as of January 1, 1995, the new Labor Contract Law imposes more
restrictions and increases costs for the employers to terminate employment,
including specific provisions related to fixed term employment contracts,
temporary employment, probation, consultation with the labor union and employee
assembly, employment without a contract, dismissal of employees, compensation
upon termination and overtime work, and collective bargaining. According to the
new Labor Contract Law, the employer is obliged to sign an unlimited term labor
contract with an employee if the employer continues to hire the employee after
two consecutive fixed term labor contracts or after the employee spends 10
consecutive years working for the employer. The employer also has to pay a
compensation fee to the employee if the employer terminates an unlimited term
labor contract. Unless an employee refuses to extend an expired labor contract,
such compensation is also required when the labor contract expires. Further,
under the Regulations on Paid Annual Leave for Employees, which became effective
on January 1, 2008, employees who have served more than one year for an employer
are entitled to a paid vacation ranging from 5 to 15 days, depending on their
length of service. Employees who waive such vacation time at the request of
employers shall be compensated for three times their normal salaries for each
waived vacation day. As a result of these new protective labor measures, our
labor costs are expected to increase, which may adversely affect our business
and our results of operations.




We
face risks related to health epidemics and other outbreaks.




Our
business could be adversely affected by the effects of avian flu, SARS or
another epidemic or outbreak. China reported a number of cases of SARS in April
2004. Since 2005, there have been reports of occurrences of avian flu in various
parts of China, including a few confirmed human cases and deaths. Any prolonged
recurrence of avian flu, SARS or other adverse public health developments in
China may have a material adverse effect on our business operations. These could
include restrictions on our ability to travel or ship our products outside of
China as well as temporary closure of our manufacturing facilities. Such
closures or travel or shipment restrictions would severely disrupt our business
operations and adversely affect our results of operations. We have not adopted
any written preventive measures or contingency plans to combat any future
outbreak of avian flu, SARS or any other epidemic.




Risks
Related to Our Shares and ADSs




The
market price for our ADSs has been volatile since our ADSs began trading on
NASDAQ, and may be subject to fluctuations in the future, which could result in
substantial losses to investors.




The
closing price of our ADSs has ranged from a high of $17.88 to a low of $1.51
since our ADSs began trading on NASDAQ on May 17, 2007. We cannot assure you
that the market price of ADSs will not significantly fluctuate from its current
level. The market price of our ADSs may be subject to wide fluctuations in
response to factors including the following:




•
            announcements
      of technological or competitive
developments;




•
            regulatory
      developments in our target markets affecting us, our customers or our
      competitors;




•
            announcements
      of studies and reports relating to the conversion efficiencies of our
      products or those of our
competitors;




•
            actual
      or anticipated fluctuations in our quarterly operating
      results;




•
            changes
      in financial estimates by securities research
  analysts;




•
            changes
      in the economic performance or market valuations of other solar power
      technology companies;




•
            addition
      or departure of our executive officers and key research
      personnel;




•
            announcements
      regarding patent litigation or the issuance of patents to us or our
      competitors;




•
            fluctuations
      in the exchange rates between the U.S. dollar, the Euro and
      RMB;




•
            release
      or expiry of lock-up or other transfer restrictions on our outstanding
      ordinary shares or ADSs; and




•
            sales
      or perceived sales of additional
ADSs.




25


In
addition, the securities markets have from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may also have a material
adverse effect on the market price of our ADSs. In particular, the performance
and fluctuation of market prices of other companies with business operations
located mainly in China that have listed their securities in the United States
may affect the volatility in the price of and trading volumes for our ADSs. The
trading performances of these China-based companies’ securities at the time of
or after their offerings may affect the overall sentiment toward China-based
companies’ securities listed in the United States and consequently may impact
the trading performance of our ADSs. Volatility in global capital markets could
also have an effect on the market price of our ADSs. For example, financial
markets have experienced extreme disruption in recent months, including, among
other things, extreme volatility in security prices. In the event of a
continuing market downturn, the market price of our ADSs may further
decline.




Substantial
future sales of our ADSs or ordinary shares in the public market, or the
perception that these sales could occur, could cause the price of our ADSs to
decline.




Additional
sales of our ADSs or ordinary shares in the public market, or the perception
that these sales could occur, could cause the market price of our ADSs to
decline. If our shareholders sell substantial amounts of our ADSs, including
those issued upon the exercise of outstanding options, in the public market, the
market price of our ADSs could fall. Such sales also might make it more
difficult for us to sell equity or equity-related securities in the future at a
time and price that we deem appropriate. If any existing shareholder or
shareholders sell a substantial amount of ordinary shares, the prevailing market
price for our ADSs could be adversely affected.




In
addition, we may issue additional ordinary shares or ADSs for future
acquisitions. If we pay for our future acquisitions in whole or in part with
additionally issued ordinary shares or ADSs, your ownership interests in our
company would be diluted and this, in turn, could have a material adverse effect
on the price of our ADSs.




We
may be classified as a passive foreign investment company, which could result in
adverse U.S. federal income tax consequences to U.S. holders of our ADSs or
ordinary shares.




Based on
the market price of the ADSs, the value of our assets, and the composition of
our income and assets, we do not believe we were a “passive foreign investment
company,” or PFIC, for U.S. federal income tax purposes for our taxable year
ended December 31, 2008. A non-U.S. corporation will be a PFIC for any taxable
year if either (1) at least 75% of its gross income for such year is passive
income or (2) at least 50% of the value of its assets (based on an average of
the quarterly values of the assets) during such year is attributable to assets
that produce passive income or are held for the production of passive income. We
must make a separate determination after the close of each taxable year as to
whether we were a PFIC for that year. Accordingly, we cannot assure you that we
will not be a PFIC for our current taxable year ending December 31, 2009 or any
future taxable year. Because the value of our assets for purposes of the PFIC
test will generally be determined by reference to the market price of our ADSs
and ordinary shares, fluctuations in the market price of the ADSs and ordinary
shares may cause us to become a PFIC. If we are a PFIC for any taxable year
during which a U.S. Holder (as defined in Item 10, “Additional
Information—Taxation—United States Federal Income Taxation”) holds an ADS or an
ordinary share, certain adverse U.S. federal income tax consequences could apply
to such U.S. Holder. See Item 10, “Additional Information—Taxation—United States
Federal Income Taxation—Passive Foreign Investment Company.”




Your
right to participate in any future rights offerings may be limited, which may
cause dilution to your holdings and you may not receive cash dividends if it is
impractical to make them available to you.




We may
from time to time distribute rights to our shareholders, including rights to
acquire our securities. However, we cannot make rights available to you in the
United States unless we register the rights and the securities to which the
rights relate under the Securities Act or an exemption from the registration
requirements is available. Also, under the deposit agreement, the depositary
bank will not make rights available to you unless the distribution to ADS
holders of both the rights and any related securities are either registered
under the Securities Act, or exempted from registration under the Securities
Act. We are under no obligation to file a registration statement with respect to
any such rights or securities or to endeavor to cause such a registration
statement to be declared effective. Moreover, we may not be able to establish an
exemption from registration under the Securities Act. Accordingly, you may be
unable to participate in our rights offerings and may experience dilution in
your holdings.


26


In
addition, the depositary of our ADSs has agreed to pay to you the cash dividends
or other distributions it or the custodian receives on our ordinary shares or
other deposited securities after deducting its fees and expenses. You will
receive these distributions in proportion to the number of ordinary shares your
ADSs represent. However, the depositary may, at its discretion, decide that it
is inequitable or impractical to make a distribution available to any holders of
ADSs. For example, the depositary may determine that it is not practicable to
distribute certain property through the mail, or that the value of certain
distributions may be less than the cost of mailing them. In these cases, the
depositary may decide not to distribute such property and you will not receive
such distribution.




Anti-takeover
provisions in our charter documents may discourage a third party from acquiring
us, which could limit our shareholders’ opportunities to sell their shares at a
premium.




Our
amended and restated memorandum and articles of association include provisions
that could limit the ability of others to acquire control of us, modify our
structure or cause us to engage in change-of-control transactions. These
provisions could have the effect of depriving our shareholders of an opportunity
to sell their shares at a premium over prevailing market prices by discouraging
third parties from seeking to obtain control of us in a tender offer or similar
transaction.




For
example, our board of directors will have the authority, without further action
by our shareholders, to issue preferred shares in one or more series and to fix
the powers and rights of these shares, including dividend rights, conversion
rights, voting rights, terms of redemption and liquidation preferences, any or
all of which may be greater than the rights associated with our ordinary shares.
Preferred shares could thus be issued quickly with terms calculated to delay or
prevent a change in control or make removal of management more difficult. In
addition, if our board of directors issues preferred shares, the market price of
our ordinary shares may fall and the voting and other rights of the holders of
our ordinary shares may be adversely affected.




Our
amended and restated articles of association provide for a staggered board,
which means that our directors are divided into three classes, with around one-
third of our board standing for election every year. This means that, with our
staggered board, at least two annual shareholders’ meetings, instead of one, are
generally required in order to effect a change in a majority of our directors.
Our staggered board can discourage proxy contests for the election of our
directors and purchases of substantial blocks of our shares by making it more
difficult for a potential acquirer to take control of our board in a relatively
short period of time.




We
are a Cayman Islands company and, because judicial precedent regarding the
rights of shareholders is more limited under Cayman Islands law than that under
U.S. law, you may have less protection for your rights than you would under U.S.
law.




Our
corporate affairs are governed by our amended and restated memorandum and
articles of association, the Cayman Islands Companies Law and the common law of
the Cayman Islands. The rights of shareholders to take action against the
directors, actions by minority shareholders and the fiduciary responsibilities
of our directors to us under Cayman Islands law are to a large extent governed
by the common law of the Cayman Islands. The common law of the Cayman Islands is
derived in part from comparatively limited judicial precedent in the Cayman
Islands as well as that from English common law, which has persuasive, but not
binding, authority on a court in the Cayman Islands. The rights of our
shareholders and the fiduciary responsibilities of our directors under Cayman
Islands law are not as clearly established as they would be under statutes or
judicial precedent in some jurisdictions in the United States. In particular,
the Cayman Islands has a less developed body of securities laws than the United
States. In addition, some U.S. states, such as Delaware, have more fully
developed and judicially interpreted bodies of corporate law than the Cayman
Islands.




As a
result of all of the above, public shareholders may have more difficulty in
protecting their interests in the face of actions taken by management, members
of the board of directors or controlling shareholders than they would as
shareholders of a U.S. public company.




You
will have limited ability to bring an action against us or against our directors
and officers, or to enforce a judgment against us or them, because we are
incorporated in the Cayman Islands, because we conduct a majority of our
operations in China and because the majority of our directors and officers
reside outside the U.S.




We are
incorporated in the Cayman Islands, and conduct substantially all of our
operations in China through Sunergy Nanjing, our wholly owned subsidiary
established in China. Most of our directors and officers reside outside the
United States and substantially all of the assets of those persons are located
outside the United States. As a result, it may be difficult or impossible for
you to bring an action against us or against these individuals in the Cayman
Islands or in China in the event that you believe that your rights have been
infringed under the applicable securities laws or otherwise. Even if you are
successful in bringing an action of this kind, the laws of the Cayman Islands
and of China may render you unable to enforce a judgment against our assets or
the assets of our directors and officers.


27


The
voting rights of holders of our ADSs are limited in several significant ways by
the terms of the deposit agreement.




Holders
of our ADSs may only exercise their voting rights with respect to the underlying
ordinary shares in accordance with the provisions of the deposit agreement. Upon
receipt of voting instructions from a holder of ADSs in the manner set forth in
the deposit agreement, the depositary will endeavor to vote the underlying
ordinary shares in accordance with these instructions. Under our amended and
restated memorandum and articles of association and Cayman Islands law, the
minimum notice period required for convening a general meeting is ten days. When
a general meeting is convened, you may not receive sufficient notice of a
shareholders’ meeting to permit you to withdraw your ordinary shares to allow
you to cast your vote with respect to any specific matter at the meeting. In
addition, the depositary and its agents may not be able to send voting
instructions to you or carry out your voting instructions in a timely manner. We
will make all reasonable efforts to cause the depositary to extend voting rights
to you in a timely manner, but we cannot assure you that you will receive the
voting materials in time to ensure that you can instruct the depositary to vote
your shares. Furthermore, the depositary and its agents will not be responsible
for any failure to carry out any instructions to vote, for the manner in which
any vote is cast or for the effect of any such vote. As a result, you may not be
able to exercise your right to vote and you may lack recourse if your ordinary
shares are not voted as you requested.




You
may be subject to limitations on transfer of your ADSs.




Your
ADSs, represented by American depositary receipts, are transferable on the books
of the depositary. However, the depositary may close its books at any time or
from time to time when it deems expedient in connection with the performance of
its duties. The depositary may close its books from time to time for a number of
reasons, including in connection with corporate events such as a rights
offering, during which time the depositary needs to maintain an exact number of
ADS holders on its books for a specified period. The depositary may also close
its books in emergencies, and on weekends and public holidays. The depositary
may refuse to deliver, transfer or register transfers of our ADSs generally when
our books or the books of the depositary are closed, or at any time if we or the
depositary thinks it is necessary or advisable to do so in connection with the
performance of its duty under the deposit agreement, including due to any
requirement of law or any government or governmental body, or under any
provision of the deposit agreement.




ITEM
      4.
            INFORMATION
      ON THE COMPANY




A.
            History and
      Development of the Company




Our
operating subsidiary, Sunergy Nanjing, was incorporated in August 2004 in
Nanjing, China. China Sunergy Co., Ltd., or Sunergy BVI, our holding company
incorporated in the British Virgin Islands, acquired all of the equity interests
in Sunergy Nanjing in April 2006 through a series of transactions that we have
accounted for as a legal reorganization. As part of a restructuring in
anticipation of our initial public offering, we incorporated China Sunergy Co.,
Ltd., or Sunergy, in the Cayman Islands on August 4, 2006. Sunergy became our
ultimate holding company upon its issuance of shares to the existing
shareholders of Sunergy BVI on August 30, 2006 in exchange for all shares of
equivalent classes that these shareholders previously held in Sunergy BVI. In
December 2007, Sunergy BVI incorporated China Sunergy (Hong Kong) Co., Ltd., or
Sunergy Hong Kong, in Hong Kong. During the same month, Sunergy BVI transferred
all of the equity interests in Sunergy Nanjing to Sunergy Hong Kong, which
became the direct holding company of Sunergy Nanjing. We conduct substantially
all of our operations through Sunergy Nanjing.




In May
2007, we completed our initial public offering, in which we issued and sold
9,775,000 ADSs, representing 58,650,000 of our ordinary shares, at a public
offering price of $11.00 per ADS. In July 2008, we completed our offering of
$54.5 million aggregate principal amount of 4.75% convertible senior notes due
June 2013 and public offering of 4,431,000 ADSs, which were loaned to an
affiliate of the initial purchaser of the notes, who in turn sold the borrowed
ADSs in the offering. We did not receive any proceeds from the offering of the
borrowed ADSs, but has received a nominal lending fee from the ADS
borrower.


28


Our
principal executive offices are located at No. 123 Focheng West Road, Jiangning
Economic & Technical Development Zone, Nanjing, Jiangsu 211100, People’s
Republic of China. Our telephone number at this address is (86-25) 5276-6688 and
our fax number is (86-25) 5276-6882.




You
should direct all inquiries to us at the address and telephone number of our
principal executive offices set forth above. Our website is
www.chinasunergy.com. The information contained on our website does not form
part of this report. Our agent for service of process in the United States is CT
Corporation System, located at 111 Eighth Avenue, New York, New York
10011.




B.
            Business
      Overview




We
manufacture our solar cells from silicon wafers utilizing crystalline silicon
solar cell technology to convert sunlight directly into electricity through a
process known as the photovoltaic effect. We sell our solar cell products to
Chinese and overseas module manufacturers and system integrators, who assemble
our solar cells into solar modules and solar power systems for use in various
markets.




We
commenced business operations in August 2004. In 2005, we had only one solar
cell manufacturing line. In 2006, we installed five additional solar cell
manufacturing lines and expanded our annual manufacturing capacity by 160 MW,
assuming the use of 156-millimeter monocrystalline silicon wafers. In December
2008, we installed four new solar cell lines for the production of selective
emitter cells. As of the date of this annual report, our ten solar cell
manufacturing lines have an aggregate annual production capacity of 320 MW,
assuming the use of 156-millimeter monocrystalline silicon wafers.




Our
research and development team is led by two solar power researchers, Dr. Jianhua
Zhao and Dr. Aihua Wang, each with over 20 years of experience and established
credentials in the solar power industry. Our research and development efforts
focus on continually enhancing our solar cell conversion efficiencies, which
measure the ability of solar power products to convert sunlight into
electricity, and improving our manufacturing operations. In the fourth quarter
of 2007, we commenced commercial mass production of selective emitter cells
using monocrystalline silicon wafers, an improved version of the P-type solar
cells that we and most other solar cell manufacturers produce.  In the
first quarter of 2009, we successfully tested multicrystalline silicon wafers on
one of our selective emitter solar cells  manufacturing lines, which
enabled us to produce selective emitter multicrystalline solar cells using
multicrystalline silicon wafers as raw materials. Selective emitter
multicrystalline solar cells generally have a higher conversion efficiencies
than P-type multicrystalline solar cells that we and most other solar cell
manufacturers usually produce. We are also developing Matrix cells. In addition,
we are focusing on the development of advanced process technology for
manufacturing other new products, such as N-type solar cells, which generally
have higher conversion efficiencies than those of P-type solar
cells.




We sold
46.4 MW of solar cells in 2006. In 2007, the shipment of our solar power
products amounted to 74.0 MW, including 70.0 MW of solar cells sold, 2.4 MW of
solar cells processed under OEM arrangements, and 1.6 MW of modules sold. In
2008, the shipment of our solar power products amounted to 107.2 MW, including
100.4 MW of solar cells sold, 4.2 MW of solar cells processed under OEM
arrangements and 2.6 MW of modules sold. We had net revenues of  $149.5
million, $234.9 million and $350.9 million in 2006, 2007 and 2008, respectively.
We had net income of $11.8 million in 2006 and incurred net losses of $4.9
million and $22.9 million in 2007 and 2008, respectively.




Products




We
currently design, develop, manufacture and sell solar cells. A solar cell is a
device made from a silicon wafer that converts sunlight directly into
electricity by a process known as the photovoltaic effect. Currently, we produce
both monocrystalline and multicrystalline silicon solar cells. In addition to
standard P-type solar cells and HP solar cells, we also produce since the fourth
quarter of 2007 selective emitter cells, an improved version of the P-type solar
cells that we and most other solar cell manufacturers produce. In 2008, the
quarterly average conversion efficiency of our selective emitter cells ranged
from 17.2% to 17.3%.


29


The
following table sets forth the types of solar cells we offered in 2008 with the
specifications indicated.




Monocrystalline or
                                      Multicrystalline
                                      Solar Cell
                                    
                                    Dimensions
                                      (mm×mm)
                                    
                                    As a Percentage
                                      of Total Output
                                      in
                                      2008 as
                                      Measured by
                                      MW (%)Monocrystalline125×125
                                    
                                    
                                    70.7silicon solar cell
                                    
                                    156×156
                                    
                                    
                                    5.1Multicrystalline silicon125×125
                                    
                                    
                                    1.0solar
      cell
                                    
                                    156×156
                                    
                                    
                                    23.2




We
produce a test batch of solar cells from each shipment of silicon wafers that we
receive, and return the wafers if the quality is below our standards. However,
normal variation in the quality of silicon wafers in shipments that meet our
standards will still result in the production of a certain proportion of solar
cells that do not meet our customers’ specifications. We refer to these solar
cells as being off-specification. In 2007 we sold off-specification solar cells
at a discount to recover some or all of the expense we incur in the production
process. Off-specification solar cells can be difficult to sell and the market
price for them is volatile.




In
addition to solar cells, we also sell limited quantities of polysilicon and
solar modules.




Manufacturing
Process




The
manufacturing process for our solar cells includes the following main
steps:




•
            Chemical
      treatment of silicon wafers. We first fabricate a textured structure on
      the wafer surface through chemical treatment to reduce the reflection of
      sunlight. The chemical treatment process produces a surface structure,
      which traps sunlight into the
silicon.




•
            Diffusion
      process. Diffusion is a thermal process through which we selectively
      incorporate impurities into the silicon wafer and form an electrical field
      within the surface region of the
wafer.




•
            Edge
      isolation. We achieve electrical isolation between the front and back
      surfaces of the silicon wafer through a process known as edge isolation.
      We use both the conventional method of edge isolation, which is etching
      the edge with plasma, and chemical etching
  technology.




•
            Anti-reflection
      coating and surface passivation. We apply an anti-reflection coating to
      the front surface of the solar cell, which helps to significantly reduce
      the light reflection at the cell surface. Such coating also passivates the
      cell surface to reduce the carrier loss at the surface and hence increases
      the cell current density. Our surface coating technology ensures the
      appropriate thickness and refractive index of the coating to achieve high
      conversion efficiencies.




•
            Screen
      printing and firing. We screen print negative and positive metal contacts,
      or electrodes, on the solar cell. Silicon and metal electrodes are then
      connected through an electrode firing process in a furnace at a high
      temperature.




Manufacturing
Capacity and Manufacturing Facilities




Since our
inception in August 2004, we have significantly expanded our manufacturing
capacity to capture a larger portion of the market opportunity for our solar
cells. In June 2005, we completed construction on a green-field site and started
trial production of our first manufacturing line with a production capacity of
32 MW per year, assuming the use of 156-millimeter monocrystalline silicon
wafers. We sold 4.4 MW of solar cells in 2005.


30


We
completed our second to sixth solar cell manufacturing lines and started
generating revenues from these lines in 2006. We sold 46.4 MW of solar cells in
2006. In 2007, the shipment of our solar power products amounted to 74.0 MW,
including 70.0 MW of solar cells sold, 2.4 MW of solar cells processed under OEM
arrangements and 1.6 MW of modules sold. In 2008, the shipment of our solar
power products amounted to 107.2 MW, including 100.4 MW of solar cells sold, 4.2
MW of solar cells processed under OEM arrangements and 2.6 MW of modules
sold.




In 2008,
we converted four of our standard P-type solar cell manufacturing lines into HP
solar cell manufacturing lines, three of which are capable of producing HP solar
cells using multicrystalline silicon wafers as raw materials. In December 2008,
we installed four new solar cell lines for the production of selective emitter
cells. As of the date of this annual report, we have ten solar cell
manufacturing lines, five of which are capable of producing selective emitter
solar cells, four of which are capable of producing HP solar cells and one of
which is capable of producing standard P-type solar cells, with an aggregate
annual production capacity of 320 MW, assuming the use of 156-millimeter
monocrystalline silicon wafers. Our actual output of solar cells depends on the
size of the silicon wafers that we use; historically we have used a mix of
monocrystalline and multicrystalline silicon wafers, each in sizes of 125
millimeters or 156 millimeters. Our actual output does not match our production
capacity because we cannot obtain sufficient supply of 156-millimeter wafers, as
most of our suppliers and most of the suppliers in China sell the smaller size.
To the extent we use smaller wafers or multicrystalline wafers, our actual
production will be less than our production capacity.




The table
below sets forth a summary of our current manufacturing lines for solar cells as
of the date of this annual report:




Solar
      Cell
                            Manufacturing
      Line
                          
                          Time of Achieving Full-scale
                            Manufacturing
      Capacity
                          
                          Annualized
      Manufacturing
                            Capacity(1)
                            (in
      MW)Line
      1
                          
                          August
      2005
                          
                          32Line
      2
                          
                          May
      2006
                          
                          32Line
      3
                          
                          June
      2006
                          
                          32Line
      4
                          
                          November 2006
                          
                          32Line
      5
                          
                          November
      2006(2)
                          
                          32Line
      6
                          
                          December 2006
                          
                          32Line
      7
                          
                          December 2008(2)
                          
                          32Line
      8
                          
                          December 2008(2)
                          
                          32Line
      9
                          
                          December 2008(2)
                          
                          32Line
      10
                          
                          December 2008(2)
                          
                          32Total
                          
                          
                          
                          320




31







(1)
            Calculated
      by assuming the use of 156-millimeter monocrystalline silicon wafers, with
      assumptions regarding the number of cells per month and the conversion
      rates of those cells.




(2)
            Capable
      of producing selective emitter solar
cells.




Raw
Materials




Silicon
wafers are the most important raw materials for producing solar cells, with
monocrystalline and multicrystalline silicon wafers as the most commonly used
materials. We can produce solar cells with either of these types of silicon
wafers, and this dual capability provides us with flexibility in raw material
procurement.




We seek
to procure silicon wafers from various suppliers, including manufacturers and
trading companies, most of which are located in China. In addition, we procure
polysilicon, silicon ingots and other silicon-based raw materials throughout the
various segments of the supply chain, and outsource the production of silicon
wafers from these raw materials under toll manufacturing arrangements with third
parties. Sometimes, we sell polysilicon raw materials to wafer manufacturers and
purchase silicon wafers from them under buy-and-sell arrangements. In order to
meet a portion of our raw material requirements, we also enter into buy-and-sell
arrangements with some of our customers, under which we secure silicon wafers
from some of our customers, and sell solar cells to them in return.




In 2008,
our principal suppliers of silicon wafers and other silicon-based raw materials
included Jinzhou Yangguang Energy Co., Ltd., Jiangxi LDK Solar Hi-Tech Co. Ltd.,
Ningbo Jingyuan Solar Power Co., Ltd., Jingsu Zhongneng Polysilicon Technology
Development Co., Ltd. and Luoyang Zhonggui High-tech Co., Ltd. Our top five
suppliers supplied approximately 37.4% of silicon wafers and other silicon raw
material supplies that we procured in 2008. Due to the industry-wide shortage of
silicon raw materials experienced during the past few years, we have purchased
silicon raw materials using short-term and long-term contracts from a limited
number of international and domestic suppliers. Some agreements provide for firm
purchase commitments and fixed pricing or pricing adjustable within a relatively
small range. From the fourth quarter of 2008, the price of silicon raw materials
decreased rapidly due to the excess supply of silicon raw materials resulting
from a slowed global solar power market growth. In light of such excess supply,
we are seeking to re-negotiate with our long-term supply partner in regard to
certain long-term supply contracts signed in 2008. Given the current wafer price
environment, we also seek to exert greater control over incoming wafer quality
while establishing stable and long-term relationships with high quality
suppliers.




Our
manufacturing process also involves metallic paste, chemicals and other
materials. We secure these raw materials from multiple vendors who have
demonstrated good quality control and reliability.




Quality
Assurance and Customer Support and Service




Our
quality control consists of three components: incoming inspection through which
we ensure the quality of the raw materials that we source from third parties,
in-process quality control of our manufacturing processes, and output quality
control of finished products through inspection and testing. We have received
the ISO 9001:2000 certification for our quality assurance programs, which we
believe demonstrates our technological capabilities and instills customer
confidence. We adhere to strict standards when testing the conversion efficiency
of our products to ensure that our products perform to specified
standards.




A team
within our sales group works closely with our quality assurance group to provide
customer support and service. We emphasize gathering customer feedback for our
products and timely addressing customer concerns. Our customer support and
service team also provides our customers with training and consultation with
respect to the application of our products.


32




Customers
and Markets




We sell
our solar cells primarily to module manufacturers, who assemble our cells into
solar modules and solar power systems for use in various markets, particularly
the European markets. We also outsource to third parties the manufacturing of
solar modules from our solar cells or purchase solar modules from third parties
for sale of such solar modules to our customers. In 2008, solar module sales
accounted for only 3.1% of our revenues and we do not plan to substantially
increase our solar module sales in the near future. In 2008, our major customers
included aleo solar AG, Wuxi Guofei Green Energy Source Co., Ltd., CEEG
(Shanghai) Solar Science and Technology Co., Ltd., an entity controlled by our
chairman, Mr. Tingxiu Lu, Solarwatt AG and asola Advanced and Automotive Solar
Systems GmbH. In 2008, our top five customers contributed 60.0% of our net
revenues, including CEEG (Shanghai) Solar Science and Technology Co., Ltd.,
which contributed over 13.2% of our net revenues in 2008. Sales to each of aleo
solar AG  and Wuxi Guofei Green Energy Source Co., Ltd. contributed over
10% of our net revenues for the year ended December 31, 2008.




We
currently make a majority of our sales to customers located in China. We also
sell our solar power products to customers located in Germany, Italy and other
countries. The following table sets forth by region our net revenues derived
from sales of our products for the periods indicated:




Year Ended
      December 31,2006
                              
                              
                              2007
                              
                              
                              2008(in
      thousands, except percentages)Europe:—
      Germany
                              
                              $
                              15
                              
                              
                              
                              —
                              
                              
                              $
                              62,314
                              
                              
                              
                              26.5
                              %
                              
                              $
                              126,860
                              
                              
                              
                              36.2
                              %—
      Italy
                              
                              
                              12,235
                              
                              
                              
                              8.2
                              %
                              
                              
                              8,980
                              
                              
                              
                              3.8
                              
                              
                              
                              6,128
                              
                              
                              
                              1.7—
      Netherlands
                              
                              
                              8,957
                              
                              
                              
                              6.0
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              ——
      Spain
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              9,399
                              
                              
                              
                              2.7—
      Others
                              
                              
                              175
                              
                              
                              
                              0.1
                              
                              
                              
                              1,803
                              
                              
                              
                              0.8
                              
                              
                              
                              51
                              
                              
                              
                              0Europe
      Total
                              
                              
                              21,382
                              
                              
                              
                              14.3
                              
                              
                              
                              73,097
                              
                              
                              
                              31.1
                              
                              
                              
                              142,438
                              
                              
                              
                              40.6PRC
                              
                              
                              119,238
                              
                              
                              
                              79.7
                              
                              
                              
                              151,058
                              
                              
                              
                              64.3
                              
                              
                              
                              196,628
                              
                              
                              
                              56.0South
      Africa
                              
                              
                              3,712
                              
                              
                              
                              2.5
                              
                              
                              
                              83
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —India
                              
                              
                              1,054
                              
                              
                              
                              0.7
                              
                              
                              
                              2,332
                              
                              
                              
                              1.0
                              
                              
                              
                              1,154
                              
                              
                              
                              0.3South
      Korea
                              
                              
                              3,183
                              
                              
                              
                              2.1
                              
                              
                              
                              6,419
                              
                              
                              
                              2.8
                              
                              
                              
                              10,257
                              
                              
                              
                              2.9Others
                              
                              
                              952
                              
                              
                              
                              0.6
                              
                              
                              
                              1,919
                              
                              
                              
                              0.8
                              
                              
                              
                              444
                              
                              
                              
                              0.1Total
      net revenues
                              
                              $
                              149,521
                              
                              
                              
                              100.0
                              %
                              
                              
                              234,908
                              
                              
                              
                              100
                              %
                              
                              $
                              350,
      920
                              
                              
                              
                              100
                              %




33




In order
to continue growing our sales and to reduce our reliance on any particular
market segment, we intend to broaden our geographic presence and customer base.
While we expect China to continue to be one of our most significant markets for
the foreseeable future, we plan to expand into several overseas solar power
markets, including European countries and those countries and regions with
growing demand or market potential for solar power products, such as the United
States, Korea and other Asian countries and regions.




We sell
our products primarily under sales contracts, purchase orders and buy-and-sell
arrangements, as follows:




•
            Sales
      contracts and purchase orders. Historically, we entered into sales
      contracts of various terms with our customers and were obligated to
      deliver solar cells according to a pre-agreed price and schedule during
      the term of the contract. Given the volatility in average selling prices
      of silicon raw materials and solar cells in recent periods, a substantial
      portion of our contracts now provide for re-negotiation of price terms
      based on regular pricing reviews every three or six months or provide for
      adjustment of pricing terms when the change in exchange rate reaches
      certain benchmarks. We typically require our customers to pay a certain
      percentage of the purchase price as advance payment within a short period
      after signing the sales contracts. The percentage of advance payments
      varies depending on the credit status of our customers, our relationship
      with the customers, market demand and the terms of a particular contract.
      We may grant our large customers credit terms, usually within one month,
      according to our current credit policy. With respect to the other
      customers, we typically request full payment before or upon shipment. We
      also sell our solar cells via purchase orders placed by our
      customers.







•
            Buy-and-sell
      arrangements. Under buy-and-sell arrangements, we obtain silicon wafer
      supplies from our customers, and are obligated to sell solar cells to them
      in return. The payment we make for the wafers and the payment our
      customers make for the solar cells are either settled separately or
      sometimes offset against each
other.




We also
process silicon wafers provided by our customers into solar cells under OEM
arrangements, and we charge processing fees from these customers.




In
February 2009, we entered into a sales agreement with asola Advanced and
Automotive Solar System GmbH under which it agreed to purchase between 10MW and
30MW of solar cells in 2009. The prices of our solar cells under this agreement
for the first half of 2009 are fixed. In March 2009, we also entered into a
non-binding framework agreement with asola Advanced and Automotive Solar System
GmbH for the potential delivery of up to 480MW of solar cells from 2009 to 2018.
Specific terms and conditions of the supply will be set forth in definitive
sales agreements to be further negotiated.




In
December 2008, we entered into a sales agreement and its supplemental agreement
with Ajit Solar Pvt Ltd., under which it agreed to purchase a total of 12 MW of
our solar cells in 2009. The prices of our solar cells under this contract for
the first quarter of 2009 are fixed, and the prices for subsequent deliveries
are to be negotiated quarterly. During the same month, we also entered into a
sales agreement with Solarwatt AG, under which it agreed to purchase a total of
22 MW of our solar cells in 2009 with a fixed price.




In 2008,
particularly in the fourth quarter, partly due to the impact of global financial
market disruption and economic slowdown, some of our customers cancelled or
delayed orders for our products. Purchases of solar power products tend to
decrease during the winter months because of adverse weather conditions in
certain regions, which complicate the installation of solar power systems.
Historically, our results of operations have been affected by such seasonality
of industry-wide demand for solar power products.




Sales
and Marketing




We market
and sell our solar power products worldwide through our direct sales force,
which is based in our facilities in Nanjing, China. Our marketing programs
include industrial conferences, trade fairs, sales training, advertising and
public relation events. Our sales and marketing groups work closely with our
research and development and manufacturing groups to coordinate our product
development activities, product launches and ongoing demand and supply planning.
We plan to establish a global sales network and have expanded our sales network
by establishing two regional offices, one in Shanghai, China and the other in
Munich, Germany.


34


Historically,
the identity of our customers has changed substantially from year to year. We
aim to further develop long-term relationships with key customers who are market
leaders or strong niche players in their respective industrial or geographic
segments. We believe that these customers will provide consistent revenue
streams to minimize business volatility, and we target to achieve a substantial
portion of our total net revenues from sales to strategic customers. We believe
that our focus on solar cell manufacturing minimizes our conflict of interest
with module manufacturers and enables us to establish and maintain long-term
partnerships with our customers. We only engage in sales of modules under
limited circumstances, and sales of modules only account for a few percentage
points of our net revenues each year. As many module manufacturers are based in
China, our proximity to our customers gives us competitive advantages, such as
rapid delivery, effective communication and efficient post-sale services. To
further diversify our customer base, which currently consists primarily of
module manufacturers, we will seek to increase our sales to system integrators
and develop customers in the market for specialty applications, such as, solar
power streetlights and traffic lights.




Intellectual
Property




As of the
date of this annual report, we have three patents in China, one of which relates
to process technology for the manufacture of N-type solar cells, and the other
two of which relate to utility models for N-type solar cells. In addition, we
have five patent applications pending in China, one of which relates to
manufacture of selective emitter solar cells, three of which relate to
improvement on performance of solar cells, and the last one relates to
rectification of bowed solar cells.We intend to continue
to assess appropriate opportunities for patent protection of those aspects of
our technology that we believe provide significant competitive advantage to
us.




We also
rely on a combination of trade secrets and employee contractual protections to
establish and protect our proprietary rights. We believe that many elements of
our solar power products and manufacturing processes involve proprietary
know-how, technology or data that are not covered by patents or patent
applications, including technical processes, equipment designs, algorithms and
procedures. We have taken security measures to protect these elements. All of
our research and development personnel have entered into confidentiality and
proprietary information agreements with us. These agreements address
intellectual property protection issues and require our employees to assign to
us all of their inventions, designs and technologies that they develop primarily
utilizing our resources or when performing their duties during their
employment.




We filed
trademark applications for “NPV,” “SUNERGY,” and “CSUN” as well as several logos
with the PRC Trademark Office in 2006 and 2007. The registrations for these
trademarks have not been completed and, under PRC law, we have not obtained
proprietary rights to these trademarks yet. Further, CEEG and Sunergy Nanjing
entered into two trademark license agreements effective as of February 9, 2006
and June 7, 2006, respectively, pursuant to which CEEG granted to Sunergy
Nanjing the rights to use the trademarks of “CEEG” and its Chinese characters in
Sunergy Nanjing’s ordinary business for ten years.




Competition




The
market for solar cells is highly competitive and continually evolving. We expect
to face increased competition, which may result in price reductions, reduced
margins or loss of market share. We believe that the key competitive factors in
the market for solar cells include:




•
            manufacturing
      efficiency;




•
            conversion
      efficiency and performance;




•
            price;




•
            strength
      of supplier relationships; and




•
            reputation.




Our
competitors include solar power divisions of large conglomerates such as BP
Solar, Kyocera, Sanyo and Sharp Corporation, as well as specialized cell
manufacturers such as JA Solar Holdings Co., Ltd., Motech Industries Inc.,
Q-Cells AG, Suntech Power Holdings Co., Ltd. and Solarfun Power Holdings Co.
Ltd. Some of our competitors have also become vertically integrated, from
upstream polysilicon manufacturing to solar power system integration, such as
Renewable Energy Corporation ASA.




Many of
our competitors are developing or currently producing products based on
alternative solar power technologies, such as thin-film technologies, which may
ultimately have costs similar to, or lower than, our projected costs. We expect
that we will also need to compete with new entrants to the solar power market.
In addition, the entire solar power industry also faces competition from
conventional and non-solar renewable energy technologies.


35


Many of
our existing and potential competitors have substantially greater financial,
technical, manufacturing and other resources than we do. Our competitors’
greater size in some cases provides them with a competitive advantage with
respect to manufacturing costs due to their economies of scale and their ability
to purchase raw materials at lower prices. Many of our competitors also have
more established distribution networks and larger customer bases. As a result,
they may be able to devote greater resources to the research, development,
promotion and sale of their products or respond more quickly to evolving
industry standards and changes in market conditions than we can.




REGULATION




This
section sets forth a summary of the most significant regulations or requirements
that affect our business activities in China or our shareholders’ rights to
receive dividends and other distributions from us.




Renewable
Energy Law and Other Government Directives




In
February 2005, China enacted its Renewable Energy Law, which became effective on
January 1, 2006. The Renewable Energy Law sets forth policies to encourage the
development and use of solar energy and other non-fossil energy. The renewable
energy law sets out the national policy to encourage and support the use of
solar and other renewable energy and the use of on-grid generation. It also
authorizes the relevant pricing authorities to set favorable prices for the
purchase of electricity generated by solar and other renewable power generation
systems.




The law
also sets out the national policy to encourage the installation and use of solar
energy water-heating systems, solar energy heating and cooling systems, solar
photovoltaic systems and other solar energy utilization systems. It also
provides the general principles regarding financial incentives for the
development of renewable energy projects. The projects, as listed in the
renewable energy industry development guidance catalogue, may obtain
preferential loans from financial institutions and can enjoy tax preferences.
The State Council is authorized to stipulate the specific tax preferential
treatments. However, so far, no rule has been issued by the State Council
pertaining to this matter. In January 2006, China’s National Development and
Reform Commission promulgated two implementation directives of the Renewable
Energy Law. These directives set out specific measures in setting prices for
electricity generated by solar and other renewal power generation systems and in
sharing additional expenses occurred. The directives further allocate the
administrative and supervisory authorities among different government agencies
at the national and provincial levels and stipulate responsibilities of
electricity grid companies and power generation companies with respect to the
implementation of the Renewable Energy Law. In July 2007, China’s National
Development and Reform Commission further promulgated an implementation
directive of the Renewable Energy Law. The directive stipulates the
responsibility of electricity grid companies to buy all electricity generated by
renewable energy power generation systems.




China’s
Ministry of Construction also issued directives in September 2006 and February
2007, which seek to expand the use of solar energy in residential and commercial
buildings and encourages the increased application of solar energy in different
townships.




In
addition, the State Council promulgated a directive in July 2005 which sets out
specific measures to conserve energy resources.




On March
23, 2009, China’s Ministry of Finance promulgated the Interim Measures for
Administration of Government Subsidy Funds for Application of Solar Photovoltaic
Technology in Building Construction, or the Interim Measures, to support the
demonstration and the promotion of solar photovoltaic application in China.
Local governments are encouraged to issue and implement supporting policies for
the development of solar photovoltaic technology. Under these Interim Measures,
the Ministry of Finance provides subsidies for projects with individual solar
installations that are greater that 50 kilowatt-peak in size and have more than
16% conversion efficiency for monocrystalline solar power products, more than
14% conversion efficiency for multicrystalline solar power products and more
than 6% conversion efficiency for amorphous silicon solar power products, and
gives priority support to solar power technology integrated into building
construction, grid-connected solar power building applications and some public
solar power building applications such as schools, hospitals and offices. For
2009, the standard subsidy is set at RMB20 per watt in principle and the
detailed standard is to be determined by factors including, but not limited to,
the level of integration of buildings with solar power and the technology of
solar power products. The Interim Measures do not apply to projects completed
before March 23, 2009, the promulgation date of the Interim
Measures.


36


On April
16, 2009, the General Offices of the PRC Ministry of Finance and the PRC
Ministry of Housing and Urban-Rural Development jointly issued the Guidelines
for Declaration of Demonstration Project of Solar Photovoltaic Building
Applications. These guidelines set the subsidies given out in 2009 to qualified
solar projects at no more than RMB20 per watt for projects involving the
integration of solar power components into buildings’ structural elements and at
no more than RMB15 per watt for projects involving the installation of solar
power components onto building rooftops and wall surfaces.




Environmental
Regulations




We are
subject to a variety of governmental regulations related to environmental
protection. The major environmental regulations applicable to us include the
Environmental Protection Law of the PRC, the Law of PRC on the Prevention and
Control of Water Pollution, Implementation Rules of the Law of PRC on the
Prevention and Control of Water Pollution, the Law of PRC on the Prevention and
Control of Air Pollution, Implementation Rules of the Law of PRC on the
Prevention and Control of Air Pollution, the Law of PRC on the Prevention and
Control of Solid Waste Pollution, and the Law of PRC on the Prevention and
Control of Noise Pollution.




We are in
compliance with present environmental protection requirements in all material
aspects and have all necessary environmental permits to conduct our business,
except as disclosed herein, see “Item 3- Key Information—D. Risk
Factors—Risks
Related to Our Company and Our Industry—Noncompliance
with present or future construction and environmental regulations may result in
potentially significant monetary damages and fines”. Our operations are subject
to regulation and periodic monitoring by local environmental protection
authorities.




Restriction
on Foreign Ownership




The
principal regulation governing foreign ownership of solar power businesses in
the PRC is the Foreign Investment Industrial Guidance Catalogue, effective as of
December 1, 2007, or the Catalogue. The Catalogue classifies the various
industries into four categories: encouraged, permitted, restricted and
prohibited. As confirmed by the government authorities, Sunergy Nanjing, our
operating subsidiary, is engaged in an encouraged industry. Sunergy Nanjing is
permitted under the PRC laws to be wholly owned by a foreign company. Sunergy
Nanjing is, accordingly, also entitled to certain preferential treatments
granted by the PRC government authorities, such as exemption from tariffs on
equipment imported for its own use.




Tax




PRC
enterprise income tax is calculated primarily on the basis of taxable income
determined under PRC accounting principles. In accordance with Income Tax Law of
China for Enterprises with Foreign Investment and Foreign Enterprises
promulgated as of April 9, 1991 and effective as of July 1, 1991, or the Income
Tax Law, and the related implementing rules, foreign-invested enterprises
incorporated in the PRC were generally subject to an enterprise income tax rate
of 33% (30% of state income tax plus 3% of local income tax). The Income Tax Law
and the related implementing rules provided certain preferential tax treatments
to foreign- invested enterprises which were established in certain areas in the
PRC.




Sunergy
Nanjing, a foreign-invested enterprise engaged in a manufacturing business and
established in Nanjing, which is within a coastal economic zone, was entitled to
a preferential enterprise income tax rate of 24%. As a wholly foreign owned
enterprise engaged in a manufacturing business, Sunergy Nanjing was also
entitled to a two-year exemption from the enterprise income tax for its first
two profitable years of operation, which were 2006 and 2007, and to a 50%
reduction of its applicable income tax rate for the succeeding three years,
which would be 2008, 2009 and 2010. To enjoy the above preferential treatment,
the operation duration of Sunergy Nanjing shall be no less than 10
years.




On March
16, 2007, the National People’s Congress, enacted the New EIT Law. On December
6, 2007, the State Council adopted the Implementing Regulation for the New EIT
Law. Both the New EIT Law and its Implementing Regulation became effective on
January 1, 2008. Under the New EIT Law and its Implementing Regulation,
foreign-invested enterprises and domestic companies would be subject to
enterprise income tax at a uniform rate of 25%. On December 26, 2007, State
Council of China promulgated the circular on implementation of enterprise tax
transition preferential policy, or the Circular. Under the New EIT Law, the
Implementing Regulation and the Circular, enterprises which were established and
already enjoyed preferential enterprise income tax treatments before March 16,
2007 will continue to enjoy them (i) in the case of preferential tax rates, for
a period of five years from January 1, 2008, and the enterprises which
previously enjoyed the tax rate of 24% shall be subject to the tax rate of 25%
in 2008, and (ii) in the case of preferential tax exemption or reduction for a
specified term, until the expiration of such term. Therefore, Sunergy Nanjing is
subject to an applicable income tax rate of 12.5% in 2008, 2009 and
2010.


37


On April
14, 2008, the Ministry of Finance, the Ministry of Science and Technology and
the State Administration of Taxation jointly promulgated the Administration
Measures for Recognition of High and New Technology Enterprises, or the
Recognition Measures. Pursuant to the New EIT Law, the Implementing Regulation
and the Recognition Measures, enterprises which have been granted the high and
new technology enterprises status shall enjoy a preferential income tax rate of
15%. On October 21, 2008, Sunergy Nanjing obtained a high and new technology
enterprise certificate with a three-year validity term, showing that Sunergy
Nanjing has been granted the new and high technology enterprises status.
Therefore, Sunergy Nanjing is entitled to enjoy a preferential income tax rate
of 15%.




Pursuant
to the Circular, if an enterprise enjoying the tax preference treatment under
the income tax transition preference policy is also entitled to other tax
preference treatment under the New EIT Law, the enterprise shall choose to adopt
one of the tax preference treatments and may not simultaneously enjoy both
preference treatments. Therefore, Sunergy Nanjing is subject to an applicable
income tax rate of 12.5% in 2008, 2009 and 2010. From 2011, Sunergy Nanjing will
be subject to an applicable income tax rate of 15%, if the high and new
technology enterprise certificate is renewed.




Pursuant
to the Provisional Regulation of China on Value Added Tax and its implementing
rules, all entities and individuals that are engaged in the sale of goods, the
provision of processing, repairs and replacement services and the importation of
goods into China are generally required to pay value added tax, or VAT, at a
rate of 17.0% of the gross sales proceeds received, less any deductible VAT
already paid or borne by the taxpayer. Further, when exporting goods, the
exporter is entitled to a portion or all of the refund of VAT that it has
already paid or borne. Accordingly, Sunergy Nanjing is subject to the 17.0% VAT
with respect to its sales of solar cells in China, while Sunergy Nanjing’s
export sales of solar cells is exempt from such VAT.




Foreign
Currency Exchange




The
principal regulations governing foreign currency exchange in China are the
Foreign Exchange Administration Regulations (1996), as amended in 1997 and 2008
respectively. Under these regulations, the Renminbi is freely convertible for
current account items, including the distribution of dividends, interest
payments, trade and service-related foreign exchange transactions. However, for
capital account items, such as direct investment, loan, repatriation of
investment and investment in securities outside China, the conversion of foreign
currencies into Renminbi is subject to the prior approval of SAFE, but the
conversion of Renminbi into foreign currencies for the international payment and
remittance under capital accounts is generally exempt from SAFE’s prior approval
unless otherwise required by Chinese laws and regulations.




Pursuant
to the Administration Rules of the Settlement, Sale and Payment of Foreign
Exchange (1996), enterprises may only buy, sell or remit foreign currencies at
banks that are authorized to conduct foreign exchange business after the
enterprise provides valid commercial documents and relevant supporting documents
and, in the case of certain capital account transactions, after obtaining
approval from SAFE or its competent local branches. Capital investments by
enterprises outside of China are also subject to limitations, which include
approvals by the Ministry of Commerce, SAFE and the National Development and
Reform Commission, or their respective competent local branches.




Pursuant
to the Notice of the General Affairs Department of the State Administration of
Foreign Exchange on the Relevant Operating Issues concerning the Improvement of
the Administration of Payment and Settlement of Foreign Currency Capital of
Foreign-funded Enterprises (2008), the foreign currency capital of foreign
invested enterprises, after being converted to Renminbi, can only be used for
doing business within the business scope approved by relevant governmental
authorities, and shall not be used for domestic equity investment unless
otherwise provided for.




The
business operations of Sunergy Nanjing, which are subject to the foreign
currency exchange regulations, have all been in compliance with these
regulations in all material aspects.


38


Dividend
Distribution




The
principal regulations governing distribution of dividends of wholly
foreign-owned enterprises include the Wholly Foreign- owned Enterprise Law
(1986), as amended by the Decision on Amending the Law of the PRC on Wholly
Foreign-owned Enterprise (2000), and the Implementing Rules of the Wholly
Foreign-owned Enterprise Law (1990), as amended by the Decision of the State
Council on Amending the Implementing Rules of the Law of the PRC on Wholly
Foreign-owned Enterprises (2001).




Under
these regulations, foreign-invested enterprises in China may pay dividends only
out of their accumulated profits, if any, determined in accordance with Chinese
accounting standards and regulations. In addition, wholly foreign owned
enterprises in China are required to set aside at least 10% of their respective
after-tax profits based on PRC accounting standards each year, if any, to fund
its general reserves fund, until the accumulative amount of such reserves
reaches 50% of its registered capital. These reserves are not distributable as
cash dividends. A wholly foreign owned enterprise is also required to allocate a
portion of its after-tax profits, as determined by its board of directors, to
its staff welfare and bonus funds.




Intellectual
Property Rights




The
Patent Law (1984), as amended by the Decision on Amending the Patent Law (2000),
and the Implementing Rules of the Patent Law (2001), as amended by the Decision
on Amending the Implementing Rules of the Patent Law (2002) provide for the
application and protection of patents. An invention patent shall be valid for
twenty years and an external design patent and a utility model patent shall be
valid for ten years, commencing on their application dates, respectively. Any
persons or entities using a patent without the consent of the patent owner,
making counterfeits of patented products, or conducting other activities which
infringe upon patent rights will be held liable for compensation to the patent
owner, fines charged by the administrative authorities and even criminal
punishment. Our operating subsidiary, Sunergy Nanjing, has three patents in
China, one of which relates to process technology for the manufacture of N-type
solar cells, and the other two of which relate to utility models for N-type
solar cells.




The
Trademark Law of the PRC (1986), as amended in 2002, and the Implementing
Regulations of the Trademark Law (2002) provide for the application, protection
and license of trademarks. A registered trademark shall be valid for ten years,
commencing on the date of registration and can be renewed by an application made
within six months before expiration. The renewed registration shall also be
valid for ten years and can be renewed unlimitedly. We filed trademark
applications for “NPV,” “SUNERGY,” “CSUN” as well as several logos with the PRC
Trademark Office in 2006 and 2007, respectively. The registrations for these
trademarks have not been completed and, under PRC law, we have not obtained
proprietary rights to these trademarks yet.




Labor
and Work Safety




The laws
and regulations governing the labor relations for enterprises and institutions
in the PRC include Labor Law of the PRC (1995), or the Labor Law. Contracts must
be formed if labor relationships are established between entities and their
laborers. The Labor Law sets limits on the maximum number of hours a laborer can
work, and entities must establish and continuously develop its system for labor
safety and sanitation, strictly abide by national rules and standards on labor
safety and sanitation, provide laborers with safety and sanitation conditions
and educate laborers on labor safety and sanitation. The government provides
additional protection to female staff and workers and juvenile
workers.




On June
29, 2007, the National People’s Congress enacted the Labor Contract Law of the
PRC, or the Labor Contract Law, which came into effect as of January 1, 2008.
The Labor Contract Law imposes stricter requirements in terms of signing labor
contracts, paying remuneration, stipulating probation and penalties and
dissolving labor contracts.




The laws
and regulations governing the labor relations also include the Work Safety Law
of the PRC (2002), the Regulation on Occupational Injury Insurance (2004), the
Interim Measures Concerning the Maternity Insurance (1995), the Interim
Regulations on the Collection and Payment of Social Insurance Premiums (1999)
and its interim measures (1999), and the Regulation on the Administration of
Housing Fund (2002).




Sunergy
Nanjing is subject to the above laws and regulations.




C.
            Organizational
      Structure




The
following diagram illustrates our company’s organizational structure, and the
place of formation, ownership interest and affiliation of each of our
subsidiaries as of the date hereof.


39









In
November 2007, Sunergy BVI and CEEG jointly incorporated China Sunergy
(Shanghai) Co., Ltd., or Sunergy Shanghai., in which we hold a 95% interest, and
CEEG a 5% interest. In September 2008, Sunergy BVI transferred its 95% equity
interest in Sunergy Shanghai to Sunergy Hong Kong. In September 2008, CEEG
transferred its 5% equity interest in Sunergy Shanghai to Sunergy Hong Kong, as
a result of which Sunergy Hong Kong became the 100% holding company of Sunergy
Shanghai in April 2009.




According
to our current plan, Sunergy Shanghai will engage in solar cells production,
solar power research and development activities. We previously expected to build
a research and development center in Shanghai and completed the construction in
the first half of 2009. We decided to postpone such plan due to the impact of
global financial market disruption and economic slowdown. We will proceed to
build the research and development center when the market improves.




In
December 2007, Sunergy BVI incorporated Sunergy Hong Kong in Hong Kong. During
the same month, Sunergy BVI transferred all its equity interest in Sunergy
Nanjing to Sunergy Hong Kong, as a result of which Sunergy Hong Kong became the
direct holding company of our principal operating subsidiary, Sunergy Nanjing.
In November 2007, Sunergy BVI incorporated China Sunergy Europe GmbH in Munich,
Germany.




D.           Property, Plant and
Equipment




As of
December 31, 2008, we conducted our research, development and manufacturing of
solar cells at our facilities in Nanjing, China, where we occupied a site area
of approximately 79,800 square meters. These facilities include office premises
with a total floor space of approximately 9,600 square meters and manufacturing
facilities with a total floor space of approximately 10,600square meters that can
accommodate up to six solar cell manufacturing lines. In 2008, we also
constructed manufacturing facilities with a total floor space of approximately
10,000 square meters, where we installed additional four solar cell
manufacturing lines. We are in the process of obtaining all of the construction
approvals for these facilities. In addition, Sunergy Nanjing and CEEG, an entity
controlled by Mr. Tingxiu Lu, entered into an agreement on December 20, 2006.
Pursuant to the agreement, CEEG granted Sunergy Nanjing an option to purchase,
prior to December 31, 2007, the right to use a parcel of land of approximately
26,000 square meters at a price of approximately $0.5 million. On July 23, 2007,
CEEG and Sunergy Nanjing entered into a land use right transfer agreement, under
which Sunergy Nanjing purchased the use right to the foregoing parcel of land at
a price of approximately $1.2 million, which was equivalent to the valuation
price. Sunergy Nanjing agreed to increase the purchase consideration to avoid
that the land be compulsorily acquired by the government due to the price being
significantly lower than the valuation price. As of December 31, 2008, we
constructed facilities on this land and installed four additional solar cell
manufacturing lines. We are currently in the process of securing land use rights
to a plot of land in Shanghai for the business operation of Sunergy
Shanghai.


40




In 2008,
we pledged raw materials and inventories with a total value of approximately
$26.8 million to secure our repayment of short-term borrowings of approximately
$16.1 million due in the first quarter of 2009. We have repaid these short-term
borrowings in first quarter of 2009. In March 2009, we pledged raw materials and
inventories with a total value of approximately $14.6 million to secure our
repayment of short-term borrowings of approximately $8.8 million that will
become due in March 2010.




We
maintain property insurance policies with reputable insurance companies for
covering our equipment, facilities, buildings and their improvements, and office
furniture. These insurance policies cover losses due to fire, earthquake, flood
and a wide range of other natural disasters. We maintain director and officer
liability insurance for our directors and executive officers. We also maintain
business interruption insurance. Our insurance products contain various coverage
limits and deductibles. We do not currently maintain product liability
insurance. We have appointed an insurance broker to provide us with proposals
for insurance coverage for our company, and we plan to enlarge our coverage
during 2009.




ITEM
4A.              UNRESOLVED
STAFF COMMENTS




Not
Applicable.




ITEM
5.                 OPERATING
AND FINANCIAL REVIEW AND PROSPECTS




The
following discussion of our financial condition and results of operations is
based upon and should be read in conjunction with our consolidated financial
statements and their related notes included in this annual report on Form 20-F.
This report contains forward-looking statements. See
“Introduction—Forward-Looking. Information.” In evaluating our business, you
should carefully consider the information provided under the caption “Risk
Factors” in this annual report on Form 20-F. We caution you that our businesses
and financial performance are subject to substantial risks and
uncertainties.




A.           Overview




Overview




We sell
our solar cell products mostly to module manufacturers and, to a lesser extent,
to system integrators, who assemble our cells into solar modules and solar power
systems for use in various markets. Our management’s operational expertise and
execution capability, coupled with our strong research and development
capabilities, have allowed us to rapidly install our solar cell manufacturing
lines and expand our manufacturing capacity. As of the date of this annual
report, we have ten solar cell manufacturing lines with an aggregate production
capacity of 320 MW per year, assuming the use of 156-millimeter monocrystalline
silicon wafers. Our research and development efforts focus on continually
enhancing our solar cell conversion efficiencies, which measure the ability of
solar power products to convert sunlight into electricity, and improving our
manufacturing operations. In the fourth quarter of 2007, we commenced commercial
mass production of selective emitter cells using monocrystalline silicon wafers,
an improved version of the P-type solar cells that we and most other solar cell
manufacturers produce. We have successfully tested multicrystalline silicon
wafers on one of our selective emitter solar cells manufacturing lines, which
enabled us to produce selective emitter multicrystalline solar cells using
multicrystalline silicon wafers as raw materials. Selective emitter
multicrystalline solar cells generally have a higher conversion efficiencies
than P-type multicrystalline solar cells that we and most other solar cell
manufacturers usually produce. We are also developing Matrix cells. In addition,
we are focusing on the development of advanced process technology for
manufacturing other new products, such as N-type solar cells, which generally
have higher conversion efficiencies than those of P-type solar
cells.




We sold
46.4 MW of solar cells in 2006. In 2007, the shipment of our solar power
products amounted to 74.0 MW, including 70.0 MW of solar cells sold, 2.4 MW of
solar cells processed under OEM arrangements and 1.6 MW of modules sold. In
2008, the shipment of our solar power products amounted to 107.2 MW, including
100.4 MW of solar cells sold, 4.2 MW of solar cells processed under OEM
arrangements and  2.6 MW of modules sold. We had net revenues of
$149.5 million, $234.9 million and $350.9 million in  2006, 2007 and
2008, respectively. We had a net income of $11.8 million in 2006 and incurred
net losses of $4.9 million and $22.9 million in 2007 and 2008,
respectively.




We
operate and manage our business as a single segment.


41




Industry
Demand




The solar
power market has grown rapidly in the past several years. During that period,
our business and revenue growth have been primarily driven by industry demand
and our ability to retain existing customers, attract new customers and expand
our manufacturing capacity at the same time. According to Solarbuzz, the global
solar power market, as measured by annual solar power system installed
capacities, increased from 1,086 MW in 2004 to 5,948 MW in 2008, representing a
CAGR of 53.0%. Under the lowest of three different projections, Solarbuzz
expects the annual solar power system installed capacity may further increase to
8,311 MW in 2013, and solar power industry revenue may decrease from $37.1
billion in 2008 to $27.0 billion in 2013 as market demand growth is more than
offset by the market price declines. According to a Solarbuzz forecast named
“Green World,” the moderate one of three possible scenarios, annual solar power
system installed capacity may further increase to 14,792 MW in 2013, and solar
power industry revenue may increase from $37.1 billion in 2008 to $53.6 billion
in 2013.




We
believe that the following factors have driven and may continue to drive the
growth of the solar power industry in the long run as projected by the Solarbuzz
“Green World” forecast:




•
            government
      incentives for solar power;




•
            growing
      demand for electricity, supply constraints and desire for energy security;
      and




•
            growing
      awareness of the advantages of solar
power.




In the
fourth quarter of 2008, the global solar power industry experienced a
precipitous decline in demand.  During the same period, the global
supply of solar products exceeded the global demand because of excess production
capacity and the global economic downturn.  The demand for solar
products is affected by macroeconomic factors such as the worldwide credit
crisis, the supply and price of other energy products, such as oil, coal and
natural gas, as well as government regulations and policies concerning the
electric utility industry.  We cannot assure you that demand for solar
products in 2009 will exceed the demand for solar products in 2008 or that the
oversupply of solar products will not continue through 2009.  Pleases
see “Item 3. Key Information – D. Risk Factors” for discussions of the risks
related to declining industry demand for solar products.




We
believe that the near-term growth of the market for on-grid applications depends
in large part on the availability and size of government subsidies and economic
incentives. Today, the cost of solar power substantially exceeds the cost of
power provided by the electric utility grid in many locations, when upfront
system costs are factored into cost per kilowatt. As a result, governmental
bodies in many countries, most notably Germany, Spain, Italy, the United States
and China, have provided subsidies and economic incentives to reduce dependency
on non-renewable sources of energy. These subsidies and economic incentives have
come in the form of capital cost rebates, feed-in tariffs, tax credits and other
incentives to end users, distributors, system integrators and manufacturers of
solar power products.




The
demand for our cells is determined by the demand for our customers’ solar
modules and other downstream solar power products, which in turn is affected
significantly by government subsidies and economic incentives in their targeted
or potential markets. According to Solarbuzz, Spain and Germany accounted for
41% and 31% of the global solar power market demand in 2008, respectively.
Utilities in Germany are generally obligated to purchase electricity generated
from grid-connected solar power systems at defined feed-in tariff rates, which
decline over time according to a predetermined schedule. Specifically, German
subsidies decline at a rate of 5.0% to 6.5% per year for systems installed after
2006 based on the type and size of the solar power systems. The rapid rise of
the Spanish market in 2008 was due to a government policy that set feed-in
tariff terms at attractive rates.  However, in September 2008, the
Spanish government introduced a cap of 500 MW for 2009 for the feed-in tariff,
which is expected to limit the demand in the grid-connected market in Spain in
2009. Reductions in, or eliminations of, subsidies and economic incentives for
on-grid solar energy applications could result in decreased demand for our
products and cause our revenues to decline.




In March 2009, the Chinese government
announced new rules to support solar power applications in rural and remote
areas, which would allow for meaningful development of the solar power market in
China.  The Chinese government offers subsidies to assist construction
of building integrated solar power applications in urban and remote areas,
establishment of the technical standards on the installation of solar power
products on buildings, as well as integration and promotion of key universal
solar power building technologies.  According to the rules, projects
with more than 50 Kilowatts and a conversion efficiency of their monocrystalline
solar panels of higher than 16% are eligible to receive the
subsidies.  Priority will be given to the usage of solar modules for
building integrated solar power projects and grid-type projects, as well as
projects for public buildings. We believe that some of our customers may be
benefited by these incentives, which may in turn affect their demand for our
products.


42




Availability,
Price and Quality of Silicon Raw Materials




Silicon
wafers are the most important raw material from which our solar cells are made.
To manufacture silicon wafers, polysilicon is melted and processed into
crystalline silicon ingots, which are then sliced into wafers. The procurement
costs of silicon raw materials have accounted for more than half of our cost of
revenues since we began our commercial production of solar cells in August 2005.
Increases in the price of polysilicon have in the past increased our production
costs and impacted our cost of revenues and net income. According to Solarbuzz,
the average long-term supply contract price of polysilicon increased from
$60-$65 per kilogram in 2007 to $60-$75 per kilogram in 2008. In addition, spot
prices for polysilicon were in the range of $230-$375 per kilogram for most of
the first half of 2008, rose to a peak of $400-$450 per kilogram by mid-2008 and
decreased rapidly to $150-300 per kilogram in the fourth quarter of 2008. We
believe the average price of polysilicon will continue to decrease in
2009.




We
purchase silicon wafers from wafer manufacturers and trading companies. We also
procure polysilicon, silicon ingots and other silicon-based raw materials from
various suppliers, and outsource the production of silicon wafers from these raw
materials under toll manufacturing arrangements with third parties. Toll
manufacturing is a type of contract manufacturing frequently used in the solar
power industry, in which part of the manufacturing process is outsourced to
qualified third parties, or toll manufacturers. We also secure silicon wafers
from some of our customers, and sell solar cells to them in return. Due to the
industry-wide shortage of silicon raw materials experienced during the past few
years, we have purchased silicon raw materials using short-term and long-term
contracts from a limited number of international and domestic suppliers. Some
agreements provide for firm purchase commitments and fixed pricing or pricing
adjustable in a relatively small range. From the fourth quarter of 2008, the
price of silicon raw materials decreased precipitously due to the excess supply
of silicon raw materials resulting from a slowed global solar power market
growth. In light of such excess supply, we are seeking to re-negotiate with our
long-term supply partner in regard to certain long-term supply contracts signed
in 2008. Given the current wafer price environment, we also seek to exert
greater control over incoming wafer quality while establishing stable and
long-term relationships with high quality suppliers. In addition, partly as a
result of the historical industry-wide shortage, from time to time, we faced a
shortage of silicon raw materials and experienced late or non-delivery from
suppliers and have purchased silicon raw materials of lower grade quality that
have resulted in lower conversion efficiency and reduced average selling price
and revenues.




Historically,
given the state of the industry, suppliers of silicon raw materials typically
required customers to make payments in advance of shipment. Our suppliers
generally required us to make a prepayment at a certain percentage of the order
value prior to shipping. Due to the relative oversupply of polysilicon, since
the first quarter of 2009, prepayment as a percentage of the entire contract has
been reducing. However, our purchases of silicon raw materials will continue to
require us to make significant working capital commitments. We are required to
manage our borrowings and equity contributions to support our raw material
purchases.




The
silicon wafers required for the manufacture of N-type solar cells are different
from those used for the manufacture of P-type solar cells. We cannot assure you
that, if we are successful in commencing large-scale commercial production of
N-type solar cells, we will be able to obtain adequate supply of such
wafers.




Manufacturing
Capacity




In order
to capture the market opportunity for our solar cell products, we have expanded
our manufacturing capacity. When the market demand for solar cells exceeded
supply, increased capacity had a significant effect on our results of
operations, by allowing us to produce and sell more solar cell products
generating higher revenues, and by lowering certain manufacturing costs
resulting from economies of scale. In June 2005, we completed our first solar
cell manufacturing line with a manufacturing capacity of 32 MW per year, and we
started generating revenues from the first line in August 2005. We completed our
second to sixth solar cell manufacturing lines and started generating revenues
from these lines in 2006. We further installed our seventh to tenth solar cell
manufacturing lines in December 2008. We sold 46.4 MW of solar cells in 2006,
and in 2007 we shipped 74.0 MW of solar power products including 70.0 MW of
solar cells sold, 2.4 MW of solar cells processed under OEM arrangements and 1.6
MW of modules sold. In 2008, the shipment of our solar power products amounted
to 107.2 MW, including 100.4 MW of solar cells sold, 4.2 MW of solar cells
processed under OEM arrangements and 2.6 MW of modules sold. Our net revenues in
2008 amounted to $350.9 million, compared to $234.9 million in
2007.


43




When the
global supply of solar power products exceeds the global demand due to excess
production capacity, global economic downturn or other reasons, we may not be
able to fully utilize our manufacturing capacity due to declined demand for our
products. As we incur fixed costs associated with our facilities and equipment
whether they are being utilized, operating at less than full utilization will
result in expenses without corresponding revenue, which will reduce our
operating margins.




As of the
date of this annual report, we have ten solar cell manufacturing lines with an
aggregate manufacturing capacity of 320 MW per year, assuming the use of
156-millimeter monocrystalline silicon wafers. Our actual output of solar cells
depends on the size of the silicon wafers that we use. Historically, we have
used a mix of monocrystalline and multicrystalline silicon wafers, each in sizes
of 125 millimeters and 156 millimeters. Our actual output does not match our
production capacity because we cannot obtain sufficient supply of 156-millimeter
wafers, as most of our suppliers and most of the suppliers in China sell the
smaller wafers. To the extent we use smaller wafers or multicrystalline wafers,
our actual production will be less than our production capacity.




Pricing
of Our Solar Cells




Solar
cells are priced based on the number of watts of electricity they can generate
and on their conversion efficiency. Pricing per watt of solar cells is
principally affected by manufacturing costs per watt, comprising of primarily
the cost of silicon wafers, the overall market demand for solar cells, and some
other factors, such as the exchange rate. Increased economies of scale and
process technology advancements in the past resulted in a steady reduction in
manufacturing costs and the price per watt of solar cells. However, since 2004,
price per watt of solar cells began rising gradually due to rapid demand growth
worldwide and the resulting shortages of silicon raw materials. Following
several years of increases, prices of solar cells declined gradually in early
2007 mainly due to decreases in subsidies or feed-in tariffs in major
end-markets of solar power products, such as Germany, as well as increased
production output around the world. From the third quarter of 2007, average
selling prices of our solar cells have increased due to increasing demand for
solar power products and the appreciation of the Renminbi. In the fourth quarter
of 2008, global solar power industry demand decreased precipitously due to the
global economic downturn, and this decline in demand may continue in the first
half or all of 2009.  During the same period, the global supply of
solar power products begun to exceed the global demand due to the excess
production capacity and the global economic downturn, which contributed to the
decline in the price of solar cells.




We determine the power output of our
solar cells based on their size and measured conversion efficiencies. We
determine the price per watt of our solar cells based on the prevailing market
prices when we enter into sales contracts with our customers or when our
customers place purchase orders with us, taking into account the size of the
contract or the purchase order, the strength, history and prospects of our
relationship with the customer and our costs. Most of our customers pay premiums
over the price of cells with normal conversion efficiency, such as the standard
P- type cells for our high conversion efficiency cells, such as the selective
emitter solar cells due to their higher conversion efficiency rates. The average
selling prices of our solar cells increased from $2.92 per watt in 2007 to $3.32
per watt in 2008, due to an increase in the average selling price of our solar
cells in the first three quarters of 2008, which was offset by a decrease in the
average selling price of our solar cells in the fourth quarter of 2008. If
demand for solar products continues to decline and the oversupply of solar
products continues to exist, the average selling price of our solar cells will
be materially and adversely affected.  See “Item 3. Key Information—D.
Risk Factors—Risks Related to Our Company and Our Industry—Volatile market and
industry trends, in particular, the decline in demand for solar products may
cause the average selling price of our products to decline, and reduce our
revenues and profitability.” for more details.




Pace
of Advancement in Process Technologies




Our cell
products are priced based on the number of watts of electricity they can
generate. Process technologies advancement is important because it helps
increase conversion efficiencies of solar cells and the resultant number of
watts of electricity solar cells can generate, thereby generating higher
revenues per solar cell, and helps reduce the manufacturing cost of solar cells
per watt. As a result, solar cell manufacturers, ourselves included, are
continuously developing advanced process technology for large-scale
manufacturing.




In the
fourth quarter of 2007, we commenced commercial production of selective emitter
cells, an improved version of the P-type solar cells that most solar cell
manufacturers produce. We began pilot production of HP solar cells during the
same quarter. In the first quarter of 2009, we successfully tested
multicrystalline silicon wafers on one of our selective emitter solar cells
manufacturing lines, which enabled us to produce selective emitter
multicrystalline solar cells using multicrystalline silicon wafers as raw
materials. In addition, we are focusing on the development of advanced process
technology for manufacturing new products, such as N-type solar cells, which
generally have higher conversion efficiencies than those of P-type solar cells.
Our N-type cell consistently achieved an average efficiency of over 19% at the
laboratory level in the fourth quarter of 2008.


44




Seasonality
of Our Operations




We
believe that industry demand for solar power products may be affected by
seasonality. Demand tends to be lower during the winter season from December to
February, primarily because adverse weather conditions in certain regions make
installations of solar power systems more difficult. Furthermore, as there are
fewer working days for our China-based customers during Chinese New Year
holidays, usually in January or February, our sales volumes and revenues tend to
be lower during these periods. In addition, the prices of silicon raw materials
also tend to decrease during such periods.




Overview
of Financial Results




Net
Revenues




Our net
revenues are net of value-added tax. Factors affecting our net revenues include
average selling price per watt, unit volume sold and product demand for our
solar cells. In addition to sale of solar cells, in 2007 we derived revenues
from selling silicon raw materials under our buy-and-sell arrangements with
silicon wafer manufacturers and selling those raw materials that we could not
use. We also outsource to third parties the manufacturing of solar modules from
our solar cells or purchase solar modules from third parties, and sell these
solar modules to our customers.




In 2006,
2007 and 2008, customers contributing 10% or more of our total net sales
accounted for approximately 53.1%, 41.3% and 46.3% of our total net revenues,
respectively. CEEG (Shanghai) Solar Science and Technology Co., Ltd., an entity
controlled by our chairman, Mr. Tingxiu Lu, contributed over 13.2% of our net
revenues in 2008. Each of aleo solar AG and Wuxi Guofei Green Energy Source Co.,
Ltd. contributed over 10% of net revenues for the year ended December 31,
2008.




The
following table sets forth by region our total net revenues derived from sales
of our products for the periods indicated:




Year Ended December 31,2006
                        
                        
                        2007
                        
                        
                        2008(in thousands, except percentages)Europe:—
      Germany
                        
                        $
                        15
                        
                        
                        
                        —
                        
                        
                        $
                        62,314
                        
                        
                        
                        26.5
                        %
                        
                        $
                        126,860
                        
                        
                        
                        36.2
                        %—
      Italy
                        
                        
                        12,235
                        
                        
                        
                        8.2
                        %
                        
                        
                        8,980
                        
                        
                        
                        3.8
                        
                        
                        
                        6,128
                        
                        
                        
                        1.7—
      Netherlands
                        
                        
                        8,957
                        
                        
                        
                        6.0
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        ——
      Spain
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        9,399
                        
                        
                        
                        2.7—
      Others
                        
                        
                        175
                        
                        
                        
                        0.1
                        
                        
                        
                        1,803
                        
                        
                        
                        0.8
                        
                        
                        
                        51
                        
                        
                        
                        0Europe
      Total
                        
                        
                        21,382
                        
                        
                        
                        14.3
                        
                        
                        
                        73,097
                        
                        
                        
                        31.1
                        
                        
                        
                        142,438
                        
                        
                        
                        40.6PRC
                        
                        
                        119,238
                        
                        
                        
                        79.7
                        
                        
                        
                        151,058
                        
                        
                        
                        64.3
                        
                        
                        
                        196,628
                        
                        
                        
                        56.0South
      Africa
                        
                        
                        3,712
                        
                        
                        
                        2.5
                        
                        
                        
                        83
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —India
                        
                        
                        1,054
                        
                        
                        
                        0.7
                        
                        
                        
                        2,332
                        
                        
                        
                        1.0
                        
                        
                        
                        1,154
                        
                        
                        
                        0.3South
      Korea
                        
                        
                        3,183
                        
                        
                        
                        2.1
                        
                        
                        
                        6,419
                        
                        
                        
                        2.8
                        
                        
                        
                        10,257
                        
                        
                        
                        2.9Others
                        
                        
                        952
                        
                        
                        
                        0.6
                        
                        
                        
                        1,919
                        
                        
                        
                        0.8
                        
                        
                        
                        444
                        
                        
                        
                        0.1Total
      net revenues
                        
                        $
                        149,521
                        
                        
                        
                        100.0
                        %
                        
                        $
                        234,908
                        
                        
                        
                        100
                        %
                        
                        $
                        350,920
                        
                        
                        
                        100
                        %


45




Cost
of Revenues and Operating Expenses




The
following table sets forth our cost of revenues and our operating expenses as a
percentage of our total net revenues for the periods indicated.




Year Ended December 31,2006
                      
                      
                      2007
                      
                      
                      2008Cost
      of revenues
                      
                      
                      82.2
                      %
                      
                      
                      92.3
                      %
                      
                      
                      95.6
                      %Operating
      expenses:Selling
      expenses
                      
                      
                      0.7
                      
                      
                      
                      0.7
                      
                      
                      
                      1.1General
      and administrative expenses
                      
                      
                      6.6
                      
                      
                      
                      5.8
                      
                      
                      
                      4.8Research
      and development expenses
                      
                      
                      0.4
                      
                      
                      
                      1.1
                      
                      
                      
                      0.5Total
      operating expenses
                      
                      
                      7.7
                      %
                      
                      
                      7.6
                      %
                      
                      
                      6.4
                      %




Our cost
of revenues significantly increased as a percentage of our total net revenues in
2007, primarily due to the rising prices of silicon raw materials as a result of
the industry-wide shortage of polysilicon and the decreases in the prices of
off-specification solar cells. Our cost of revenues further increased in 2008 as
a percentage of our total net revenues in 2008 primarily due to higher inventory
provision we accrued.




Our
operating expenses include general and administrative expenses, selling expenses
and research and development expenses. In March 2006, two shareholders of
Sunergy Nanjing transferred a 10% equity interest in Sunergy Nanjing to Sunergy
Nanjing’s other shareholders, who were also our directors and employees, and we
accounted these transactions as a non-pro rata dividend distribution to the
transferees. As a result, we recorded a non-cash compensation charge of
approximately $3.7 million, equal to the fair value of the interest a
transferee, Dr. Jianhua Zhao, our then president, received in excess of what he
would have received had the distribution been made on a pro rata basis. In March
2006, Sunergy Nanjing also amended its articles of association to effectively
reduce the cash contribution requirements on certain of its shareholders, who
were also our directors and executive officers. We accounted for this as
forgiveness of shareholder receivables from certain shareholders of Sunergy
Nanjing and recorded a non-cash compensation charge of approximately $0.5
million. In the fourth quarter of 2006, we also recorded share-based
compensation expenses of $0.1 million in connection with the grants of share
options to certain employees.


46




Our total
operating expenses as a percentage of our total net revenues was 7.7%, 7.6% and
6.4% in 2006, 2007 and 2008, respectively.




Cost
of Revenues




Our cost
of revenues consists primarily of:




•
            Direct
      raw materials cost. Silicon raw materials, primarily in the form of
      silicon wafers, comprise a substantial majority of our cost of revenues.
      In addition to silicon raw materials, direct raw materials involved in our
      production also include metallic paste and
  chemicals.




•
            Direct
      labor cost. Direct labor costs include salaries and benefits for
      manufacturing personnel. We expect direct labor costs to increase as we
      hire additional manufacturing personnel as we expand our
      production.




•
            Overhead.
      Overhead costs include maintenance, utilities such as electricity and
      water used in manufacturing, and other support expenses associated with
      the manufacturing.




•
            Depreciation
      and amortization of manufacturing facilities and equipment. Due to our
      capacity expansion, our depreciation and amortization expenses have
      increased. We expect depreciation to increase in absolute terms in the
      near future following the expansion of our manufacturing
      capacity.




•
            Warranty
      costs. With respect to solar cell sales made with contractual warranty
      provisions, we accrue 0.5% of our net revenues as warranty costs at the
      time revenue is recognized. Our sales contracts concluded after December
      2006 do not contain warranty provisions, which we believe is in line with
      the practice of other solar cell manufacturers in China. We do not expect
      to enter into solar cell sales contracts with warranty provisions in the
      future. We still accrue warranty costs for deliveries of solar cells under
      the contracts concluded before December 2006. With respect to solar
      modules, which are typically sold with a two-year warranty for defects in
      material and workmanship and a minimum power output warranty of up to 25
      years following the date of purchase, we accrue 1.0% of our net revenues
      generated from module sales based on our competitors’ accrual history and
      industry practice.




•
            Shipping
      and handling costs. Cost of revenues also includes shipping and handling
      costs of products bought from suppliers or sold to
    customers.




General
and Administrative Expenses




General
and administrative expenses consist primarily of salaries and benefits for our
administrative and finance and human resources personnel, expenses associated
with our administrative offices, professional advisory fees and other
compliance-related costs, bad debt provision as well as depreciation of
equipment used for administrative purposes. Pursuant to PRC law, our board of
directors has the discretion to allocate a portion of our after-tax profit to
staff welfare and bonus funds, which may not be distributed to equity
owners.




General
and administrative expenses account for the largest part of our operating
expenses. In 2006, 2007 and 2008, we also recorded share-based compensation
expenses of $0.1 million $0.5 million and $3.2 million, respectively, in
connection with the grants of share options to certain employees. Since 2006,
our general and administrative expenses increased due to higher salaries,
benefits, depreciation and other administrative costs we have incurred as a
result of the expansion of our manufacturing capacity and sales
volume.




Selling
Expenses




Selling
expenses consist primarily of post-sale service expenses, sales employee
salaries, travel and entertainment expenses, freight expenses, and other sales
and marketing expenses.




We expect
that our selling expenses will increase in absolute terms in the near term as we
increase our sales efforts, hire additional sales personnel, develop new markets
and initiate additional marketing programs to establish our brand
name.


47




Research
and Development Expenses




Research
and development expenses consist primarily of cost of raw materials used in our
research and development activities, salaries and benefits for research and
development personnel, and prototype costs and depreciation of equipment related
to the design, development, testing and enhancement of our products and
manufacturing processes. We expect our research and development expenses to
increase as we purchase more raw materials to be used in our research and
development activities, and plan to hire additional personnel for the research
and development of our process technology.




Share-based
Compensation Expenses




In 2006,
2007 and 2008, we entered into option award agreements pursuant to our first
share incentive plan. Under these option award agreements, we had outstanding
options to purchase 1,280,126 ordinary shares as of December 31, 2008. We also
entered into two restricted share award agreements pursuant to our second share
incentive plan. Under these restricted share award agreements, we had an
aggregate of 2,317,391 outstanding restricted shares as of December 31, 2008.
See Item 6, “Directors, Senior Management and Employees—Compensation of
Directors and Executive Officers—Share Incentive Plan.” Changes in the amount of
share-based compensation will primarily affect our general and administrative
expenses, reported net income and earnings per share.




Under
Statement of Financial Accounting Standard No. 123R, “Share-Based Payment,” or
SFAS No. 123R, which became effective on January 1, 2006, we are required to
recognize share-based compensation as compensation expense in our statement of
operations based on the fair value of equity awards on the grant date, with the
compensation expense recognized over the period in which the recipient is
required to provide service in exchange for the award (usually the vesting
period). This statement also requires us to adopt a fair value-based method of
measuring the compensation expense related to share-based compensation. We
record share-based compensation expenses for the fair value of the options and
restricted shares at the grant date. We recognize such share-based compensation
expenses over the grant recipient’s requisite service periods.




As of
December 31, 2008, there was $2.5 million in total unrecognized compensation
expense related to unvested share-based compensation arrangements granted under
the plan, which is expected to be recognized over a weighted-average period of
1.92 years.




Beneficial
Conversion Feature




To be
consistent with our audited financial statements, all historical share
information, per-share and conversion price information contained in the
following two paragraphs has been retroactively adjusted to reflect a
100-for-one share split that became effective on April 24, 2007.




In 2006,
we issued Series A, Series B and Series C preferred shares, all of which have
been automatically converted upon the completion of our initial public offering
into the number of ordinary shares equal to the quotient of (a) the original
subscription price plus all accrued and unpaid dividends, divided by (b) the
conversion price, which initially equaled the original subscription price,
subject to adjustments in the case of certain dilution events. The conversion
prices were subject to certain earnings-based adjustments in the event our 2006
and 2007 net earnings, as defined in our then amended and restated memorandum of
association, should be less than a predefined amount. For each of the preferred
shares, we recognized an initial beneficial conversion feature, or BCF, based on
the conversion price that would be in effect assuming we would not generate any
additional income or issue any additional ordinary shares or other dilutive
securities after the date of issuance. As of the Series A, Series B and Series C
issuance dates, our earnings were below the pre-defined amounts. As such, we
assumed that if there are no changes to the current circumstances other than the
passage of time, the conversion price would be (a) approximately $0.0001 per
share for both the Series A and Series B shares as there was no floor on the
conversion price adjustment, and (b) $1.76 for the Series C shares, representing
the adjustment floor (collectively the “Effective Conversion Price”). Based on
this, we recorded a BCF, limited to proceeds received upon issuance, for the
Series A, Series B and Series C preferred shares of $13,110,400, $27,999,948 and
$6,941,170, respectively, during the year ended December 31, 2006. This amount
was amortized immediately as a dividend to holders of the preferred shares as
the preferred shares were convertible upon issuance.




As our
2006 net earnings were less than the pre-defined earnings target, the conversion
prices of the Series A and Series B preferred shares were adjusted to $0.39 and
$0.44, respectively (collectively the “Adjusted Conversion Price”), effective
December 31, 2006. The Adjusted Conversion Price was greater than the Effective
Conversion Price, resulting in an adjusted BCF (intrinsic value) that is lower
than the BCF (intrinsic value) recognized at issuance of the Series A and Series
B preferred shares. As the BCF had been fully amortized and there was no
incremental BCF to recognize based on the Adjusted Conversion Price, no further
adjustments were required.


48




Taxation




Under the
current laws of the Cayman Islands and the British Virgin Islands, we and
Sunergy BVI are not subject to income or capital gains tax. Additionally,
dividend payments made by us and Sunergy BVI are not subject to withholding tax
in those jurisdictions.




Under the
current Hong Kong Inland Revenue Ordinance, Sunergy Hong Kong is subject to
17.5% income tax on its taxable income generated from operations in Hong Kong.
Additionally, payments of dividends by Sunergy Hong Kong to us are not subject
to any Hong Kong withholding tax.




Pursuant
to the New EIT Law and the Implementing Regulation, both of which became
effective on January 1, 2008, dividends generated after January 1, 2008 and
payable by a foreign-invested enterprise to its foreign investors will be
subject to a 10% withholding tax if the foreign investors are considered as
non-resident enterprises without any establishment or place of business within
China or if the dividends payable have no connection with the establishment or
place of business of the foreign investors within China, unless any such foreign
investor’s jurisdiction of incorporation has a tax treaty with China that
provides for a reduced withholding arrangement. The Cayman Islands, where we are
incorporated, does not have such a tax treaty with China. Sunergy Hong Kong, our
wholly owned subsidiary and the direct holder of 100% equity interest in Sunergy
Nanjing, is incorporated in Hong Kong. According to the Mainland and Hong Kong
Special Administrative Region Arrangement on Avoiding Double Taxation or Evasion
of Taxation on Income agreed between China and Hong Kong, dividends paid by a
foreign-invested enterprise in China to its direct holding company in Hong Kong
will be subject to withholding tax at a rate of no more than 5% (if the foreign
investor owns directly at least 25% of the shares of the foreign-invested
enterprise). Under the New EIT Law and the Implementing Regulation, if we and
Sunergy Hong Kong were regarded as a resident enterprise, the dividends payable
to Sunergy Hong Kong from Sunergy Nanjing would be exempt from the PRC income
tax. If Sunergy Hong Kong is regarded as a non-resident enterprise, and
therefore would be subject to a 5% withholding tax for any dividends payable to
it from Sunergy Nanjing, the amount of funds available to us to meet our cash
requirements, including the payment of dividends to our shareholders and debt
service on any debt we may incur through our Cayman holding company, could be
materially reduced.




In
addition, because there remains uncertainty regarding the interpretation and
implementation of the concept of “place of effective management,” if we are
regarded as a PRC resident enterprise, under the New EIT Law any dividends to be
distributed by us to our non-PRC shareholders or holders of ADSs may be subject
to a withholding tax. Unless there are further rules announced by the Chinese
tax authorities, we are required under the New EIT Law to withhold PRC income
tax on our dividends payable to our non-PRC shareholders or holders of ADSs, or
any gain realized by our non-PRC shareholders or holders of ADSs from transfer
of the shares or ADSs.




PRC
Enterprise Income Tax




Up
through December 31, 2007, a foreign-invested enterprise in China was typically
subject to enterprise income tax at the statutory rate of 30% on taxable income
and local income tax at the rate of 3% on taxable income. Sunergy Nanjing, a
foreign-invested enterprise engaged in a manufacturing business and established
in Nanjing, which is within a coastal economic zone, was entitled to a
preferential enterprise income tax rate of 24%. As a wholly foreign owned
enterprise engaged in a manufacturing business, Sunergy Nanjing was also
entitled to a two-year exemption from enterprise income tax for its first two
profitable years of operation, which were 2006 and 2007, and to a 50% reduction
of its applicable income tax rate for the succeeding three years, which would be
2008, 2009 and 2010. On March 16, 2007, the National People’s Congress issued
the New EIT Law, under which foreign-invested enterprises and domestic companies
would be subject to enterprise income tax at a uniform rate of 25%. Both the New
EIT Law and its Implementing Regulation have become effective on January 1,
2008. On December 6, 2007, the Congress also adopted its Implementing
Regulation. On December 26, 2007, State Council of China promulgated the
circular on implementation of enterprise tax transition preferential policy, or
the Circular. Under the New EIT Law, the Implementing Regulation and the
Circular, enterprises which were established and already enjoyed preferential
income tax treatments before March 16, 2007 will continue to enjoy them (i) in
the case of preferential tax rates, for a period of five years from January 1,
2008, and the enterprises which previously enjoy the tax rate of 24% shall be
subject to the tax rate of 25% in 2008, and (ii) in the case of preferential tax
exemption or reduction for a specified term, until the expiration of such term.
The New EIT Law and its Implementing Regulation have become effective on January
1, 2008. Therefore, we are subject to an applicable income tax rate of 12.5% in
2008, 2009 and 2010.


49




On April
14, 2008, the Ministry of Finance, the Ministry of Science and Technology and
the State Administration of Taxation jointly promulgated the Administration
Measures for Recognition of High and New Technology Enterprises, or the
Recognition Measures. Pursuant to the New EIT Law, the Implementing Regulation
and the Recognition Measures, enterprises which have been granted the high and
new technology enterprises status shall enjoy a preferential income tax rate of
15%. On October 21, 2008, Sunergy Nanjing obtained a high and new technology
enterprise certificate with a three-year validity term, showing that Sunergy
Nanjing has been granted the new and high technology enterprises status.
Therefore, Sunergy Nanjing is entitled to enjoy a preferential income tax rate
of 15%.




Pursuant
to the Circular, if an enterprise enjoying the tax preference treatment under
the income tax transition preference policy is also entitled to other tax
preference treatment under the New EIT Law, the enterprise shall choose to adopt
one of the tax preference treatments and may not simultaneously enjoy both
preference treatments. Therefore, Sunergy Nanjing is subject to an applicable
income tax rate of 12.5% in 2008, 2009 and 2010. From 2011, Sunergy Nanjing will
be subject to an applicable income tax rate of 15%, if the high and new
technology certificate is renewed.




We were
in a tax loss position under PRC tax law in 2004, 2005, 2007 and 2008, and thus
were not subject to any enterprise income tax during these periods.




Critical
Accounting Policies




We
prepare financial statements in accordance with U.S. GAAP, which requires us to
make judgments, estimates and assumptions that affect (a) the reported amounts
of our assets and liabilities, (b) the disclosure of our contingent assets and
liabilities at the end of each fiscal period and (c) the reported amounts of
revenues and expenses during each fiscal period. We continually evaluate these
estimates based on our own historical experience, knowledge and assessment of
current business and other conditions, our expectations regarding the future
based on available information and reasonable assumptions, which together form
our basis for making judgments about matters that are not readily apparent from
other sources. Since the use of estimates is an integral component of the
financial reporting process, our actual results could differ from those
estimates. Some of our accounting policies require a higher degree of judgment
than others in their application.




When
reviewing our financial statements, you should consider (a) our selection of
critical accounting policies, (b) the judgment and other uncertainties affecting
the application of such policies and (c) the sensitivity of reported results to
changes in conditions and assumptions. We believe the following accounting
policies involve the most significant judgment and estimates used in the
preparation of our financial statements.




Revenue
Recognition




We
recognize revenue for product sales when persuasive evidence of an arrangement
exists, delivery has occurred, the fee is fixed or determinable, and
collectibility is reasonably assured. A portion of our sales to customers
require the customers to prepay before delivery has occurred. Such prepayments
are recorded as advances from customers, in the consolidated balance sheets,
until delivery has occurred. Processing fees we receive under OEM arrangements
are subject to the same policy. A majority of our contracts with overseas
customers are written such that the customer takes title and assumes the risks
and rewards of ownership of the products upon shipment. Accordingly, with
respect to our overseas sales, we recognize revenue upon documentary evidence of
shipment, assuming all other criteria have been met.




Warranty
Costs




Historically,
some of our sales contracts with overseas customers provided for a 10- or
20-year warranty for the performance of our solar cells against declines in
certain technical specifications, primarily the minimum power generation
capacity specified at the time of delivery. We also sell our module products to
customers along with a warranty on the performance of solar module products at
certain levels of conversion efficiency for an extended period. Our solar
modules are typically sold with a 25-year warranty against specified declines in
the initial minimum power generation capacity at the time of sale. In addition,
we provided warranty for our solar modules against defects in materials and
workmanship for a period two years from the date of sale. We, therefore,
maintain warranty reserves (recorded as accrued warranty costs) to cover
potential liabilities that could arise from these warranties. We accrue the
estimated costs of warranties at 0.5% of our solar cell sales made with warranty
provisions and 1.0% of our solar module sales, respectively, and include that
amount in our selling expenses. Due to limited warranty claims to date, we
accrue the estimated costs of warranties based primarily on an assessment of our
competitors’ accrual history and industry practice. Although we conduct quality
testing and inspection of our solar cell products, our solar cell products have
not been tested in an environment simulating the up to 20-year warranty periods.
We have not experienced any material warranty claims to date in connection with
declines of the power generation capacity or other technical specifications of
our solar cells or solar modules. We will prospectively revise our actual rate
to the extent that actual warranty costs differ from the
estimates.


50




Valuation
of Share-based Compensation




We
account for share-based compensation to our employees based on SFAS No. 123R and
record compensation expense based on the fair value of the options and other
awards on the date of grant.




In 2006,
2007 and 2008, we granted share options and restricted shares to certain of our
employees. We incurred share-based compensation expenses of $0.1 million, $0.5
million and 3.2 $million for the years ended December 31, 2006, 2007 and 2008,
respectively. We used the binomial option-pricing method to determine the amount
of employee share-based compensation expenses. This approach requires us to make
assumptions on such variables as share price volatility, expected lives of
awards and discount rates.Changes in these
assumptions could significantly affect the amount of employee share-based
compensation expenses we recognize in our consolidated financial statements. See
Item 5, “—Overview of Financial Results—Share-based Compensation
Expenses.”




In
November 2007, we modified the exercise price of all the options granted in 2006
from $1.988 to $1.283 per ordinary share. The total incremental compensation
expense resulting from the modification was $139,600, which will be amortized
over the remaining requisite service period of 2.95 years.




Allowance for
Doubtful Accounts





We
conduct credit evaluations of customers and generally do not require collateral
or other security from them. We establish an allowance for doubtful accounts
primarily based upon the age of the receivables and factors surrounding the
credit risk of specific customers. We generally do not require collateral or
other security interests from our customers when we grant them credit. However,
we maintain a reserve for potential credit losses and such losses have
historically been within our expectations. We raise an allowance for doubtful
accounts primarily based on the age of the receivables or prepayments and other
factors like the length of time receivables are passing due, previous loss
history and the counterparty’s current ability to fulfill its
obligation.




With
respect to advances to suppliers, our suppliers are primarily suppliers of
silicon raw materials. We perform ongoing credit evaluations of our suppliers’
financial conditions. We generally do not require collateral or security against
advances to suppliers.




Inventories




Our
inventories are stated at the lower of cost or net realizable value. The
valuation of inventory requires us to estimate excess and slow moving inventory.
The determination of the value of excess and slow moving inventory is based upon
assumptions of future demands and market conditions. If actual market conditions
are less favorable than those projected by management, inventory write-downs may
be required. We routinely evaluate quantities and value of our inventories in
light of current market conditions and market trends, and record write-down
against the cost of inventories for a decline in net realizable value. Inventory
write-down charges establish a new cost basis for inventory. In estimating
obsolescence, we utilize our backlog information and project future demand.
Market conditions are subject to change and actual consumption of inventories
could differ from forecasted demand. Furthermore, the price of polysilicon, our
primary raw material, is subject to fluctuations based on global supply and
demand. If actual market conditions are less favorable or other factors arise
that are significantly different from those anticipated by management,
additional inventory write-downs or increases in obsolescence reserves may be
required. Our management continually monitors the changes in the purchase price
paid for polysilicon, including prepayments to suppliers. Our products have a
long life cycle and obsolescence has not historically been a significant factor
in the valuation of inventories.




In the
fourth quarter of 2008, in connection with rapidly declining spot prices of
polysilicon, we recorded a $10.6 million non-cash reserve charge on inventory.
If actual future demand or market conditions are less favorable than those
projected by our management, additional inventory write-downs may be
required.


51




Income
Taxes




As required by Statement of Financial
Accounting Standards, or SFAS, No. 109, “Accounting for Income Taxes,” we
periodically evaluate the likelihood of the realization of deferred tax assets,
and reduce the carrying amount of these deferred tax assets by a valuation
allowance to the extent we believe a portion will not be realized. We consider
many factors when assessing the likelihood of future realization of our deferred
tax assets, including our recent cumulative earnings experience by taxing
jurisdiction, expectations of future taxable income, the carry-forward periods
available to us for tax reporting purposes, and other relevant factors. Deferred
income taxes are recognized for temporary differences between the tax basis of
assets and liabilities and their reported amounts in the financial statements,
net operating loss carry forwards and credits by applying enacted statutory tax
rates applicable to future years. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Current
income taxes are provided for in accordance with the laws of the relevant taxing
authorities. The components of the deferred tax assets and liabilities are
individually classified as current and non-current based on the characteristics
of the underlying assets and liabilities, or the expected timing of their use
when they do not relate to a specific asset or liability.




Impairment
of Long-lived Assets




We evaluate our long-lived assets and
definite life intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. When these events occur, we measure impairment by comparing the
carrying amount of the assets to future undiscounted net cash flows expected to
result from the use of the assets and their eventual disposition. If the sum of
the expected undiscounted cash flow is less than the carrying amount of the
assets, we recognize an impairment loss based on the fair value of the assets.
The determination of fair value of the intangible and long lived assets acquired
involves certain judgments and estimates. These judgments can include, but are
not limited to, the cash flows that an asset is expected to generate in the
future. This analysis also relies on a number of factors, including changes in
strategic direction, business plans, regulatory developments, economic and
budget projections, technological improvements, and operating results. Any
write-downs would be treated as permanent reductions in the carrying amounts of
the assets and an operating loss would be recognized.




Derivative
Financial Instruments




Derivative
Liabilities Related to Foreign Currency Forward Contracts





During
the fourth quarter of 2008, we entered into certain foreign exchange forward
contracts with several commercial banks in China to protect against volatility
of future cash flows caused by the changes in foreign exchange rates associated
with sales contracts denominated in Euro or U.S. dollar. We account for the
forward contracts pursuant to SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities” (“SFAS 133”), as amended and
interpreted, and recognizes all derivative instruments as either assets or
liabilities at fair value in the consolidated balance sheets. The foreign
exchange hedge contracts do not qualify for hedge accounting and, as a result,
the changes in fair value of the foreign currency hedge contracts are recognized
in the statement of operations. We do not offset the carrying amounts of
derivatives with the same counterparty in accordance with FASB Interpretation
(“FIN”) No. 39, “Offsetting of Amounts Related to Certain Contracts —
an interpretation of APB Opinion No. 10 and FASB Statement No. 105”
(“FIN 39”) as amended. As of December 31, 2008, we had outstanding
foreign exchange hedge contracts with contract value of $46.6 million, and
recorded a change in fair value of derivative assets related to the forward
foreign currency exchange contracts of $2.3 million in the line item “Gain
(loss) on change in fair value of derivative” in the consolidated
statements of operations for the year ended December 31, 2008. We did not enter
into any foreign exchange hedge contracts before 2008.





Foreign
Currency Embedded Derivative in Supply Agreement





One of
our long-term supply contracts provided that the purchase price of the wafer to
be acquired was denominated in U.S. dollars, which was not the functional
currency of either of the contracting parties. Accordingly, the contract
contained an embedded foreign currency forward contract, which was required to
be bifurcated and accounted for at fair value in accordance with the provisions
of SFAS 133. Changes in fair value are recorded in the consolidated statements
of operations.


52





Because
of the monetary controls imposed by the PRC, the determination of the fair value
of a long-term foreign currency derivative requires the input of highly
subjective assumptions, including estimates of forward foreign exchange rates
between the U.S. dollar and Renminbi.





In calculating the fair value of the
embedded derivatives, we (i) estimated the monthly purchases and the
corresponding payments, based on historical usage rates, (ii) applied the
estimated exchange forward rates between the U.S. dollar and Renminbi associated
with each of the estimated monthly payment dates from (i) above, and
(iii) applied an appropriate discount rate to the amounts obtained in
(ii) above. We estimate the on-shore U.S. dollar / Renminbi forward
exchange rates based on the Tokyo Composite rates. The adopted discount rates
represent the yields of Renminbi PRC government bonds with comparable terms as
of December 31, 2008.




In 2008, we recorded a loss on the
change in fair value of the embedded derivatives related to the supply agreement
of $7.6 million which was included in the line item “Gain (loss) on change
in fair value of derivative” in the consolidated statements of
operations.




Results
of Operations




The
following table sets forth a summary, for the periods indicated, of our
consolidated results of operations, with each item expressed as a percentage of
our total net revenues. Our limited operating history makes the prediction of
future operating results very difficult. Period-to-period comparisons of our
operating results should not be relied upon as indicative of future performance.
Item 3 “Key Information—Risk Factors—Risks Related to Our Company and Our
Industry—Our limited operating history may not serve as an adequate measure of
our future prospects and results of operations.”




Year Ended December 31,2006
                  
                  
                  2007
                  
                  
                  2008(in thousands, except percentages)Net
      revenues
                  
                  $
                  149,521
                  
                  
                  
                  100.0
                  %
                  
                  $
                  234,908
                  
                  
                  
                  100.0
                  %
                  
                  $
                  350,920
                  
                  
                  
                  100.0
                  %Cost
      of revenues
                  
                  
                  (122,889
                  )
                  
                  
                  (82.2
                  )
                  
                  
                  (216,881
                  )
                  
                  
                  (92.3
                  )
                  
                  
                  (335,454
                  )
                  
                  
                  (95.6
                  )Gross
      profit
                  
                  
                  26,632
                  
                  
                  
                  17.8
                  
                  
                  
                  18,027
                  
                  
                  
                  7.7
                  
                  
                  
                  15,466
                  
                  
                  
                  4.4Operating
      expensesSelling
      expenses
                  
                  
                  (1,014
                  )
                  
                  
                  (0.7
                  )
                  
                  
                  (1,644
                  )
                  
                  
                  (0.7
                  )
                  
                  
                  (3,866
                  )
                  
                  
                  (1.1
                  )General
      and administrative expenses
                  
                  
                  (9,901
                  )
                  
                  
                  (6.6
                  )
                  
                  
                  (13,664
                  )
                  
                  
                  (5.8
                  )
                  
                  
                  (16,779
                  )
                  
                  
                  (4.8
                  )Research
      and development expenses
                  
                  
                  (546
                  )
                  
                  
                  (0.4
                  )
                  
                  
                  (2,555
                  )
                  
                  
                  (1.1
                  )
                  
                  
                  (1,871
                  )
                  
                  
                  (0.5
                  )Total
      operating expenses
                  
                  
                  (11,461
                  )
                  
                  
                  (7.7
                  )
                  
                  
                  (17,863
                  )
                  
                  
                  (7.6
                  )
                  
                  
                  (22,516
                  )
                  
                  
                  (6.4
                  )Income
      from operations
                  
                  
                  15,171
                  
                  
                  
                  10.1
                  
                  
                  
                  164
                  
                  
                  
                  0.1
                  
                  
                  
                  (7,050
                  )
                  
                  
                  (2.0
                  )Interest
      expense
                  
                  
                  (3,002
                  )
                  
                  
                  (2.0
                  )
                  
                  
                  (7,394
                  )
                  
                  
                  (3.2
                  )
                  
                  
                  (8,069
                  )
                  
                  
                  (2.3
                  )Interest
      income
                  
                  
                  420
                  
                  
                  
                  0.3
                  
                  
                  
                  1,577
                  
                  
                  
                  0.7
                  
                  
                  
                  1,665
                  
                  
                  
                  0.5Changes
      in fair value of derivatives
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (9,864
                  )
                  
                  
                  (2.8
                  )Other
      (expense) income
                  
                  
                  (845
                  )
                  
                  
                  (0.5
                  )
                  
                  
                  93
                  
                  
                  
                  0.0
                  
                  
                  
                  (2,268
                  )
                  
                  
                  (0.6
                  )(Loss)
      income before income taxes
                  
                  
                  11,744
                  
                  
                  
                  7.9
                  
                  
                  
                  (5,560
                  )
                  
                  
                  (2.4
                  )
                  
                  
                  (25,586
                  )
                  
                  
                  (7.3
                  )Tax
      benefit
                  
                  
                  70
                  
                  
                  
                  —
                  
                  
                  
                  705
                  
                  
                  
                  0.3
                  
                  
                  
                  2,648
                  
                  
                  
                  0.8Net
      (loss) income
                  
                  $
                  11,814
                  
                  
                  
                  7.9
                  
                  
                  $
                  (4,855
                  )
                  
                  
                  (2.1
                  )
                  
                  
                  (22,938
                  )
                  
                  
                  (6.5
                  )Dividend
      on Series A redeemable convertible preferred shares
                  
                  
                  (13,377
                  )
                  
                  
                  (8.9
                  )
                  
                  
                  (155
                  )
                  
                  
                  (0.1
                  )
                  
                  
                  —
                  
                  
                  
                  —Dividend
      on Series B redeemable convertible preferred shares
                  
                  
                  (28,552
                  )
                  
                  
                  (19.1
                  )
                  
                  
                  (330
                  )
                  
                  
                  (0.1
                  )
                  
                  
                  —
                  
                  
                  
                  —Dividend
      on Series C redeemable convertible preferred shares
                  
                  
                  (7,097
                  )
                  
                  
                  (4.7
                  )
                  
                  
                  (233
                  )
                  
                  
                  (0.1
                  )
                  
                  
                  —
                  
                  
                  
                  —Net
      loss attributable to holders of ordinary shares
                  
                  $
                  (37,212
                  )
                  
                  
                  (24.9
                  )%
                  
                  $
                  (5,573
                  )
                  
                  
                  (2.4
                  )%
                  
                  $
                  22,938
                  
                  
                  
                  (6.5
                  )
      %




53




Year
Ended December 31, 2008 Compared to Year Ended December 31, 2007




Net
Revenues. Our total net revenues increased by 49.4%, from $234.9 million
in 2007 to $350.9 million in 2008. Our net revenues increased primarily due to
an increase in the volume of the solar power products we sold.




In 2008,
we shipped 107.2  MW of solar power products, including 4.2 MW of
solar cells processed under OEM arrangements and 2.6 MW of solar modules,
compared to sales of 74.0 MW of solar power products, including 2.4 MW of solar
cells processed under OEM arrangements and 1.6 MW of solar modules in 2007. The
increase in our sales of solar power products was due to the expansion of our
manufacturing capacity and production output. Our average selling price
increased from $2.92 per watt in 2007 to $3.32 per watt in 2008 due primarily to
an increase in the average selling price of our solar cells in the first three
quarters of 2008, which was offset by a decrease in the average selling price of
our solar cells in the fourth quarter of 2008 as a result of weaken demand
caused by global economic downturn and credit market crisis.




Cost of
Revenues. Our cost of revenues increased by $118.6 million, from $216.9
million in 2007 to $335.5 million in 2008. Our cost of revenues increased
primarily due to increases in expenditures in silicon raw materials as a result
of the rapid expansion of production. The increase in our cost of revenues was
also impacted by the rising prices of silicon raw materials in the first eight
months of 2008 due to the industry-wide shortage of polysilicon, partially
offset by reduction in silicon raw material costs as a result of improved market
supply conditions in the fourth quarter of 2008. In the last quarter of 2008,
our cost of revenues decreased primarily due to significant reduction in silicon
raw material costs as a result of improved market supply conditions, offset by a
non-cash inventory provision of $10.6 million based on a revaluation of our
silicon inventory as a result of market price declines.




Silicon
raw materials, primarily silicon wafers, accounted for 90.2% of our cost of
revenue in 2008 compared to 89.9% in 2007. As a percentage of our total net
revenues, our cost of revenues increased from 92.3% in 2007 to 95.6% in
2008.


54




Gross
Profit. As a result of the foregoing, our gross profit in 2008 decreased
by $2.5 million to $15.5 million, from $18.0 million in 2007. Our gross margin
decreased from 7.7% in 2007 to 4.4% in 2008.




Operating
Expenses. Our operating expenses increased by $4.6 million, from $17.9
million in 2007 to $22.5 million in 2008. The increase in operating expenses was
due to increases in general and administrative expenses and selling expenses. As
a percentage of our total net revenues, operating expenses decreased from 7.6%
in 2007 to 6.4% in 2008.




General and administrative
expenses. Our general and administrative expenses increased by $3.1
million, from $13.7 million in 2007 to $16.8 million in 2008. The increase in
our general and administrative expenses was due primarily to increases in
share-based compensation expenses in connection with the grants of share options
and restricted shares to certain employees, and compliance related consulting
and professional fees, offset in part by a decrease in bad debt provision in
2008.




Selling expenses.Our selling
expenses increased by $2.3 million from $1.6 million in 2007 to $3.9 million in
2008, due primarily to compensation we made to certain customer in connection
with the quality deficiencies of our solar cells, as well as increases in sales
services expenses and advertising expenses associated with growing our solar
module business and increased marketing efforts and overseas expansion. With the
growth of our net revenues, selling expenses as a percentage of net revenues
increased from 0.7% in 2007 to 1.1% in 2008.




Research and development expenses.Research and development expenses decreased by $0.7 million from $2.6
million in 2007 to $1.9 million in 2008. The decrease in research and
development expenses was due primarily to a decrease in costs of raw materials
used in our research and development activities.




Interest Expense.Our interest expenses increased from $7.4 million in 2007 to $8.1 million
in 2008. The increase was due to the interests accrued on the convertible senior
notes offered in July 2008, the offering expenses of the convertible senior
notes offerings amortized in 2008, and the expenses associated with the open
market repurchases of the convertible senior notes during the fourth quarter of
2008, offset in part by the interest cost capitalized in respect of construction
of new facilities in 2008.




Interest
Income. Our interest income slightly increased from $1.6 million in 2007
to $1.7 million in 2008, due primarily to an increase in our cash balances after
the completion of our convertible senior notes offerings in July
2008.




Change in Fair
Value of Derivative.  In 2008, we had a loss on the change in
fair value of derivative of $9.9 million, compared to nil in
2007.  The loss reflects the change in the fair value of an embedded
foreign currency derivative in one of our long-term raw material supply
contracts,  and the change in fair value of our forward foreign
currency exchange contract entered into in the fourth quarter of 2008.
See“—Critical Accounting Policies—Derivative Financial Instruments” for more
details.




Net Other Income
(Expense). During the fourth quarter of 2008, we conducted open market
repurchases of the convertible senior notes, and through December 31, 2008, we
repurchased $6.5 million aggregate principal amount of the convertible senior
notes for a total cash consideration of $2.0 million. We recorded the gain of
$4.5 million from the repurchases as other income in our consolidated income
statement.




In 2008,
we recorded net other expense of $2.3 million, due primarily to the gain of $4.5
million from the repurchases of the convertible senior notes, which was offset
by the foreign exchange loss of $6.9 million in the same year as a result of
devaluation of Euro against Renminbi during 2008.




Net Income
(Loss). As a result of the foregoing, we incurred a net loss of $22.9
million in 2008, compared to net loss of $4.9 million in 2007.




Year
Ended December 31, 2007 Compared to Year Ended December 31, 2006




Net
Revenues. Our total net revenues increased by $85.4 million, from $149.5
million in 2006 to $234.9 million in 2007. Our net revenues increased primarily
due to an increase in the volume of the solar power products we
sold.




In 2007,
we shipped 74.0 MW of solar power products, including 2.4 MW of solar cells
processed under OEM arrangements and 1.6 MW of solar modules, compared to our
46.4 MW of solar cell sales in 2006. The increase in our sales of solar power
products was due to the expansion of our manufacturing capacity and production
output. Our average selling price decreased from $3.22 per watt in 2006 to $2.92
per watt in 2007 due primarily to lower selling prices for off-specification
cells and to decreases in subsidies or feed-in tariffs in major end-markets of
solar power products, such as Germany, as well as increased production around
the world.


55




Cost of
Revenues. Our cost of revenues increased by $94.0 million, from $122.9
million in 2006 to $216.9 million in 2007. Our cost of revenues increased
primarily due to the rapid expansion of our manufacturing capacity and output
and the rising prices of silicon raw materials due to the industry-wide shortage
of polysilicon.




Silicon
raw materials, primarily silicon wafers, accounted for 89.9% of our cost of
revenue in 2007 compared to 91.9% in 2006. As a percentage of our total net
revenues, our cost of revenues increased from 82.2% in 2006 to 92.3% in
2007.




Gross
Profit. Our gross profit in 2007 decreased by $8.6 million to $18.0
million, from $26.6 million in 2006. Our gross margin decreased from 17.8% in
2006 to 7.7% in 2007. The decrease was primarily attributable to a decrease in
our average selling prices of solar cells, partly as a result of lower selling
prices for off-specification cells, and the rising prices of silicon raw
materials.




Operating
Expenses. Our operating expenses increased by $6.4 million, from $11.5
million in 2006 to $17.9 million in 2007. The increase in operating expenses was
due to increases in general and administrative expenses, selling expenses and
research and development expenses. As a percentage of our total net revenues,
operating expenses stayed relatively flat at 7.6% in 2007, compared to 7.7% in
2006.




General and administrative
expenses. Our general and administrative expenses increased by $3.8
million, from $9.9 million in 2006 to $13.7 million in 2007. The increase in our
general and administrative expenses was due primarily to increases in salaries
and benefits for our administrative, finance and human resources personnel as we
hired more personnel to manage our growing business, and also due to an increase
in bad debt provision.




Selling expenses.Our selling
expenses increased by $0.6 million from $1.0 in 2006 to $1.6 million in 2007,
due primarily to increases in sales employee salaries, travel expenses and
freight expenses. With the growth of our net revenues, selling expenses as a
percentage of net revenues stayed relatively flat in 2007 compared to
2006.




Research and development expenses.Research and development expenses increased by $2.0 million from $0.5
million in 2006 to $2.5 million in 2007. The increase in research and
development expenses was due primarily to an increase in costs of raw materials
used in our research and development activities, our payment of service fees to
New South Innovations Pty Limited under a collaborative research agreement, an
increase in salaries and benefits for research and development personnel and
depreciation of equipment related to the design, development, testing and
enhancement of our products and manufacturing processes.




Interest Expense
and Interest Income. Our interest expenses increased from $3.0 million in
2006 to $7.4 million in 2007. The increase in our interest expenses was due to
an increase in our bank borrowings. Our interest income increased from $0.4
million in 2006 to $1.6 million in 2007, due primarily to an increase in our
cash balances after the completion of our initial public offering.




Net Income
(Loss). As a result of the foregoing, we incurred a net loss of $4.9
million in 2007, compared to net income of $11.8 million in 2006.




B.           Liquidity and Capital
Resources




Cash
Flows and Working Capital




To date,
we have financed our operations primarily through cash flows from equity
contributions by our shareholders, operations, short-term borrowings, and
proceeds from our convertible senior notes offering in July 2008.




In July
2008, we completed an offering of $54.5 million aggregate principal amount of
4.75% convertible senior notes. The notes are convertible at any time prior to
the close of business on the third business day immediately preceding the
maturity date, unless previously redeemed, at the option of the holders into our
ADSs at a conversion price of $12.30 per ADS, subject to certain adjustments. In
connection with the convertible senior notes offering, we also offered 4,431,000
ADSs in an ADS borrow facility.  During the fourth quarter of 2008, we
conducted open market repurchases of the convertible senior notes, and through
December 31, 2008, we repurchased $6.5 million aggregate principal amount of the
convertible senior notes for a total cash consideration of $2.0
million.


56




As of
December 31, 2006, 2007 and 2008, we had $14.7 million, $60.5 million and $94.8
million, respectively, in cash and cash equivalents, $77.9 million, $121.8
million and $97.3 million, respectively, in outstanding borrowings. Our cash and
cash equivalents primarily consist of cash on hand and demand deposits placed
with banks. As of December 31, 2006, 2007 and 2008, $77.9 million, $121.8
million and $97.3 million, respectively, of our outstanding borrowings were due
within one year. These borrowings expire at various times throughout the year.
Our short-term borrowings outstanding as of December 31, 2006, 2007 and 2008
bore an average interest rate of 5.93%, 6.27% and 7.42%, respectively. We did
not have any long-term borrowings as of December 31, 2006, 2007 and 2008. We
have historically been able to repay our borrowings as they became due from
capital contributions from our shareholders, proceeds from short-term and
long-term borrowings and note offering, and our operating cash flows. See Item
3, “Key Information—Risk Factors—Risks Related to Our Company and Our
Industry—We have significant outstanding bank borrowings, and we may not be able
to arrange adequate financing when they mature or may encounter other
difficulties in maintaining liquidity.”




As of
December 31, 2008, approximately $16.1 million and $8.8 million of the
short-term bank borrowings have been secured by the pledge of our raw materials
and the guarantee by Mr. Tingxiu Lu, and an off-shore standby letters of credit,
respectively. The remaining short-term borrowings have been guaranteed by CEEG
and Jiangsu CEEG Electrical Equipment Manufacturing Co., Ltd., both controlled
by Mr. Tingxiu Lu, our chairman. In an agreement between Sunergy Nanjing and
CEEG dated December 18, 2006, CEEG had undertaken to guarantee the bank
borrowings of Sunergy Nanjing for up to RMB1 billion, subject to adjustment in
the event of the material change of CEEG’s credit or operation status, for one
year after our initial public offering. In May 2008, Sunergy Nanjing and CEEG
signed an agreement to further extend the term of the above agreement to May 16,
2010.




We
historically used cash advances from related parties to meet some of our
temporary liquidity needs. We have fully repaid such cash advances as of
September 30, 2006, and we do not expect to borrow cash advances from related
parties in the future.




Historically,
we have significant working capital commitments because suppliers of silicon
wafers and other silicon-based raw materials require us to make prepayments in
advance of shipment. Due to the industry-wide shortage of silicon raw materials
in the past several years, working capital and access to financings for the
purchase of silicon raw materials were critical to growing our business. Our
advances to suppliers increased significantly from $26.3 million as of December
31, 2006 to $79.9 million as of December 31, 2007. However, due to the dramatic
change of the availability of polysilicon since the fourth quarter of 2008, the
prepayment as a percentage of the entire contract has been reducing. Our
advances to suppliers decreased significantly to $7.3 million as of December 31,
2008. Depending on the supply and demand situation, going forward, our purchases
of silicon raw materials may continue to require us to make significant working
capital commitments from time to time as we expand our production.




Inventories,
one of the principal components of our current assets, increased from $44.3
million as of December 31, 2006 to $56.1 million as of December 31, 2007 and
further increased to $59.1 million as of December 31, 2008, due to increased
production volume, partially offset by an inventory provision of $11.8 million
based on a revaluation of our silicon inventory as a result of market price
declines.




We
generally require customers to make prepayment before delivery. However,
depending on their credit history with us, we historically granted our large
customers credit terms of one month. Our accounts receivable significantly
decreased from $26.8 million as of December 31, 2007 to $8.9 million as of
December 31, 2008. The decrease in our accounts receivable was primarily due to
payment we received for deliveries previously made. Our accounts receivable
decreased from $43.0 million as of December 31, 2006 to $26.8 million as of
December 31, 2007, primarily due to payment we received for deliveries
previously made and the shorter credit term we granted to our customers in 2007
as compared to 2006.


57




The
following table sets forth a summary of our cash flows for the periods
indicated:




Year Ended December 31,2006
                  
                  
                  2007
                  
                  
                  2008(in thousands)Net
      cash used in or generated from operating activities
                  
                  $
                  (76,147
                  )
                  
                  $
                  (62,768
                  )
                  
                  $
                  91,954Net
      cash used in investing activities
                  
                  
                  (6,757
                  )
                  
                  
                  (35,272
                  )
                  
                  
                  (88,244
                  )Net
      cash provided by financing activities
                  
                  
                  92,123
                  
                  
                  
                  135,033
                  
                  
                  
                  15,899Net
      increase in cash and cash equivalents
                  
                  
                  11,984
                  
                  
                  
                  45,708
                  
                  
                  
                  34,342Cash
      and cash equivalents at the beginning of the year
                  
                  
                  2,765
                  
                  
                  
                  14,750
                  
                  
                  
                  60,458Cash
      and cash equivalents at the end of the year
                  
                  $
                  14,750
                  
                  
                  $
                  60,458
                  
                  
                  $
                  94,
      800




Operating
Activities




Operating activities during the year
ended December 31, 2008 provided $92.0 million of cash flow in 2008. Operating
cash inflows are largely attributable to revenues derived from the sales of our
solar power products. Operating cash outflows are largely attributable to
recurring expenditures for raw materials, labor, administration, marketing, and
other activities. Changes in the components of our working capital also impact
cash flow from operating activities. For the year ended December 31, 2008, our
growing business generated substantial cash inflow as we increased net revenues
by 49.4% from $234.9 million in 2007 to $350.9 million in 2008. Our cost of
revenues and operating expenses, after deducting non-cash operating items which
included inventory write-down of $11.8 million, increased by 48.5% from $227.1
million in 2007 to $337.2 million in 2008. We had a net cash inflow in working
capital of $88.0 million for the year ended December 31, 2008. The cash inflow
in working capital was primarily due to a significant decrease in advances to
suppliers as a result of improved silicon raw material supply conditions, a
decrease in accounts receivable as we received payment for deliveries previously
made, an increase in accounts payable due to increased payment periods in
connection with the purchases of silicon raw materials, partially offset by an
increase in inventories as a result of increased requirement for more silicon
raw materials in line with the expansion of production capacity, and a decrease
in advances from customers as we lowered the prepayment ratio and not requesting
prepayment under several sales contracts.





Net cash
used in operating activities amounted to $62.8 million in 2007. Net cash used in
operating activities in 2007 was mainly attributable to a significant increase
in advances to suppliers, an increase in prepaid value-added-tax expenses and an
increase in inventories primarily due to our expanded manufacturing capacity and
the resultant requirement for more silicon raw materials. However, our net cash
used in operating activities in 2007 was partly offset by a decrease in accounts
receivable due to payment we received for deliveries previously made and the
shorter credit term we granted to our customers in 2007 as compared to 2006. Net
cash used in operating activities in 2006 was mainly attributable to a
significant increase in accounts receivable primarily due to our granting
favorable credit terms for sales to our large customers, particularly our top
three customers, a significant increase in inventories and an increase in
advances to suppliers primarily due to our expanded manufacturing capacity and
the resultant requirement for more silicon raw materials, and a decrease in
advances from customers after we changed our prepayment requirement by lowering
the prepayment ratio and not requesting prepayment under several sales
contracts.


58




Investing
Activities




Net cash
used in investing activities in 2008 amounted to $88.2 million, as compared to
$35.3 million and $6.8 million in 2007 and 2006, respectively. Net cash used in
investing activities in 2008 was primarily attributable to our purchases of
property, plant and equipment in the amount of $44.1 million in connection with
the expansion of our solar cell manufacturing lines, as well as an increase in
restricted cash of $38.9 million in connection with deposit with banks for
securing letter of credit and promissory note facilities for procurement of
silicon raw materials. Net cash used in investing activities in 2007 was
primarily due to our purchases of property, plant and equipment in the amount of
$15.6 million in connection with the expansion of our solar cell manufacturing
lines, as well as an increase in restricted cash of $18.5 million in connection
with deposit of US dollars as security for our RMB loans. Net cash used in
investing activities in 2006 was primarily due to our purchases of property,
plant and equipment in the amount of $23.1 million in connection with the
expansion of our solar cell manufacturing lines, partly offset by a decrease in
restricted cash of $17.0 million due to decreases in our bank deposits for
securing letter of credit facilities for our imports of equipment and for
securing notes payable used in setting related party transactions.




Financing
Activities




Net cash
provided by financing activities was $15.9 million in 2008, primarily
attributable to proceeds from short-term borrowings in the amount of $142.5
million and proceeds from our issuance of convertible bond in the amount of
$54.5 million, partly offset by repayment of bank borrowing in the amount of
$175.1 million. Net cash provided by financing activities was $135.0 million in
2007, primarily attributable to proceeds from short-term borrowings in the
amount of $168.0 million and net proceeds of $95.9 million received from our
initial public offering. Net cash provided by financing activities was $92.1
million in 2006, consisting primarily of proceeds received from issuance of our
Series A, Series B and Series C preferred shares, short-term borrowings and
financing provided by related parties, partly offset by repayment of bank
borrowings and financing provided by related parties.




We
believe that our current cash, cash equivalents, short-term borrowings, proceeds
from our convertible senior notes offering in July 2008 and anticipated cash
flow from operations will be sufficient to meet our anticipated cash needs,
including our cash needs for working capital and capital expenditures for at
least the next 12 months. We may, however, require additional cash due to
changing business conditions or other future developments, including any
investments or acquisitions we may decide to pursue.  If our existing
cash is insufficient to meet our requirements, we may seek to sell additional
equity securities, debt securities or borrow from banks.  However, the
current financial downturn affecting the financial markets and banking system
may significantly restrict our ability to obtain financing in the capital
markets or from financial institutions.  Furthermore, we cannot assure
you that financing will be available in the amounts we need or on terms
acceptable to us, if at all. The sale of additional equity securities, including
convertible debt securities, would dilute our earnings per share. The incurrence
of debt would divert cash for working capital and capital expenditures to
service debt obligations and could result in operating and financial covenants
that restrict our operations and our ability to pay dividends to our
shareholders.




Capital
Expenditures




We
incurred capital expenditures of $24.9 million, $16.8 million and $49.3 million,
in 2006, 2007 and 2008, respectively. Our capital expenditures have been used
primarily to build our plant, and purchase equipment and land use right for our
solar cell manufacturing lines. We estimate that our capital expenditures will
be approximately $20 million to $25 million in 2009, and will be used primarily
to pay the outstanding balance of the expenses in connection with the expansion
of our solar cell manufacturing lines, modify our existing solar cell
manufacturing lines and fund the operation of Sunergy Shanghai.




C.           Research and
Development




Our
senior management team heads our research and development efforts and sets
strategic directions for the advancement of our products and manufacturing
processes. Dr. Jianhua Zhao, our vice chairman and chief technology officer, and
Dr. Aihua Wang, our vice president are all experienced solar power researchers.
Under their guidance, our research and development plans include the following
areas:




•
            Development
      of solar cell structures. We commenced commercial mass production of
      selective emitter cells, an improved version of P-type solar cells that
      most solar cell manufacturers produce, by using monocrystalline wafers in
      the fourth quarter of 2007. In December 2008, we installed four new solar
      cell lines for the production of selective emitter cells. In the first
      quarter of 2009, we successfully tested multicrystalline silicon wafers on
      one of our selective emitter solar cells manufacturing lines, which
      enabled us to produce selective emitter multicrystalline solar cells using
      multicrystalline silicon wafers as raw materials. Selective emitter
      multicrystalline solar cells generally have a higher conversion
      efficiencies than P-type multicrystalline solar cells that we and most
      other solar cell manufacturers produce. In addition, we are developing
      Matrix cells, for mass production in the
future.


59


•
            Development
      of the manufacturing process for N-type solar cells. We also focus our
      research and development efforts on the process technology of N-type solar
      cells. The conversion efficiencies of N-type cells may generally be higher
      than those of P-type solar cells. Based on Dr. Zhao and Dr. Wang’s
      previous experience working with N-type solar cells, including developing
      what were the most efficient N-type solar cells in the world, we have
      successfully conducted research and a large number of experiments on
      solving the technical problems associated with manufacturing N-type solar
      cells.




•
            Increase
      our solar cell manufacturing efficiency and reduce the manufacturing
      costs. We continuously strive for optimizing the processing parameters and
      conditions for each manufacturing step to improve the overall performance
      of our solar cells, streamline our manufacturing process and reduce the
      manufacturing costs. In the first quarter of 2009, three of the four HP
      solar cell manufacturing lines were refurnished, enabling multicrystalline
      wafers to be used in these lines. This provides us with more flexibility
      in both the procurement of raw materials and product offerings. We are
      also working collaboratively with metallic paste manufacturers to reduce
      the paste used for our manufacturing without affecting solar cell
      performance.




We
believe that the continual improvement of our technology is vital to maintaining
our long-term competitiveness. Therefore, we have established our own solar
power research center and have installed an experimental manufacturing line
dedicated to our research and development.




To
further leverage our internal advanced research and development capability, we
have established cooperative relationships with several universities and
institutions in China, including Nanjing University and Southeast University,
each a leading science and engineering university in China. We have also entered
into cooperation agreement with CEEG (Nanjing) Semiconductor Co., Ltd., an
entity controlled by our chairman, and Nanjing University of Aeronautics and
Astronautics, one of the leading science and engineering universities in China,
to jointly develop solar wafer cutting and texture technology. We believe our
collaborative efforts with these institutions have kept us apprised of the
latest industry trends and developments, helped implement our own innovation
initiatives and will continue to contribute to our technological
advancement.




In
addition, several government authorities in China, including State Development
and Reform Commission, Ministry of Science and Technology and Jiangsu Science
and Technology Department, have provided us or committed to provide us with
grants for our research in solar power technologies. Jiangsu Science and
Technology Department also recognized our research and development capability by
establishing the photovoltaic engineering technology research center in our
company. We have invited solar power experts from external research institutes
to form the expert commission for such research center.




Our gross
expenditures on research and development were $0.5 million, $2.6 million and
$1.9 million in 2006, 2007 and 2008, respectively.




D.
            Trend
      Information




Other
than as disclosed elsewhere in this annual report, we are not aware of any
trends, uncertainties, demands, commitments or events since January 1, 2008 that
are reasonably likely to have a material effect on our net revenues, income,
profitability, liquidity or capital resources, or that caused the disclosed
financial information to be not necessarily indicative of future operating
results or financial conditions.




E.
            Off-balance Sheet
      Commitments and Arrangements




We have
not entered into any financial guarantees or other commitments to guarantee the
payment obligations of third parties. We have not entered into any derivative
contracts that are indexed to our shares and classified as shareholder’s equity,
or that are not reflected in our consolidated financial statements. Furthermore,
we do not have any retained or contingent interest in assets transferred to an
unconsolidated entity that serves as credit, liquidity or market risk support to
such entity. We do not have any variable interest in any unconsolidated entity
that provides financing, liquidity, market risk or credit support to us or that
engages in leasing, hedging or research and development services with
us.


60




F.
            Contractual
      Obligations and Commercial
Commitments




The
following table sets forth our contractual obligations and commercial
commitments as of December 31, 2008:




Payment Due by
      PeriodTotal
                        
                        
                        Less than
                          1 Year
                        
                        
                        1-3 Years
                        
                        
                        3-5 Years
                        
                        
                        More than
                          5 Years(in
      thousands)Operating
      lease obligations
                        
                        $
                        479
                        
                        
                        $
                        162
                        
                        
                        $
                        74
                        
                        
                        $
                        57
                        
                        
                        $
                        186Purchase
      obligations(1)
                        
                        $
                        838,731
                        
                        
                        $
                        197,922
                        
                        
                        $
                        433,309
                        
                        
                        $
                        111,800
                        
                        
                        $
                        95,700Convertible
      senior notes(2)
                        
                        $
                        58,165
                        
                        
                        $
                        2,280
                        
                        
                        $
                        4,560
                        
                        
                        $
                        51,325
                        
                        
                        
                        -Total
                        
                        $
                        897,375
                        
                        
                        $
                        200,364
                        
                        
                        $
                        437,943
                        
                        
                        $
                        163,182
                        
                        
                        $
                        95,886





(1)
            Includes
      commitments to purchase production equipment in the amount of $10.0
      million and commitments to purchase silicon raw materials in the amount of
      $828.7 million. Other than the contractual obligations and commercial
      commitments set forth above, we did not have any other material long-term
      debt obligations, operating lease obligations, purchase obligations or
      other material long-term liabilities as of December 31, 2008. This table
      does not reflect our short-term debt obligations, which as of December 31,
      2008 totaled $97.3 million.




(2)
            Assumes
      redemption of $48.0 million aggregate principal amount of 4.75%
      convertible senior notes due June 2013. Assumes none of the convertible
      senior notes have been converted into ordinary shares. This figure also
      includes interest payable until June 15,
2013.




In June
2009, we repurchased $4.0 million aggregate principal amount of the convertible
senior notes in the open market, for a total cash consideration of $1.8 million.
We recorded a gain of $2.2 million from the repurchase.




G.
            Safe
      Harbor




This
annual report on Form 20-F contains statements of a forward-looking nature.
These statements relate to events involving known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from those expressed or implied by
the forward-looking statements. These statements are made under the “safe
harbor” provisions of the Section 27A of the Exchange Act. Whenever you read a
statement that is not simply a statement of historical fact (such as when we
describe what we “believe,” “expect” or “anticipate” will occur, and other
similar statements), you must remember that our expectations may not
materialize, even though we believe that they are reasonable.




Whether
actual results will conform with our expectations and predictions is subject to
a number of risks and uncertainties, many of which are beyond our control, and
reflect future business decisions that are subject to change. Some of the
assumptions, future results and levels of performance expressed or implied in
the forward-looking statements we make inevitably will not materialize, and
unanticipated events affecting our results may occur.




We
caution you not to place undue reliance on forward-looking statements. You
should read these statements in conjunction with the risk factors disclosed in
Item 3 of this annual report, “Key Information—Risk Factors.” We do not
undertake any obligation to update or revise the forward-looking statements
except as required under applicable law.


61




ITEM
6.                      DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES




A.
            Directors and Senior
      Management




Directors
and Executive Officers




The
following table sets forth information regarding our directors and executive
officers as of the date of this annual report.




Directors
      and Executive Officers
                          
                          Age
                          
                          PositionTingxiu
      Lu
                          
                          47
                          
                          ChairmanJianhua
      Zhao
                          
                          53
                          
                          Vice
      Chairman and Chief Technology OfficerRuennsheng
      Allen Wang
                          
                          54
                          
                          Director,
      Chief Executive OfficerShiliang
      Guo
                          
                          45
                          
                          Director,
      Acting Chief Financial OfficerMerry
      Tang
                          
                          49
                          
                          Independent
      DirectorXiaoqian
      Zhou
                          
                          68
                          
                          Independent
      DirectorJian
      Li
                          
                          55
                          
                          Independent
      DirectorSteve
      Morgan
                          
                          58
                          
                          Independent
      DirectorWenze
      Wang
                          
                          67
                          
                          Independent
      DirectorAihua
      Wang
                          
                          55
                          
                          Vice
      President and General Manager of Research and Development
      DivisionRichard
      Yumin Gu
                          
                          45
                          
                          Vice
      President and General Manager of Sales & Marketing
      DivisionFang
      Yang
                          
                          37
                          
                          Vice
      President and General Manager of Operation
  Division




62




Directors




Mr. Tingxiu Lu is chairman of
our board of directors and has been with our company since 2004. Since 2003, Mr.
Lu has served as the chairman of the board of directors of CEEG, a Chinese
company that mainly manufactures power transformers. He has been chairman and
general manager of Jiangsu CEEG Transformer Manufacturing Co., Ltd. since 2002,
and has been a member of the supervisory board of Jiangsu CEEG Electrical
Transmission and Distribution Equipment Co., Ltd. since 2003. Mr. Lu has been
chairman of Jiangsu Xinde Assets Management Co., Ltd. and Nanjing Xinde Assets
Management Co., Ltd., two investment management and investment holding
companies, since 2006. From 1991 to 2003, Mr. Lu was the general manager of
Jiangsu CEEG Electrical Equipment Manufacturing Co, Ltd, the predecessor of
CEEG. Mr. Lu was awarded the China Excellent Entrepreneur award by the China
Entrepreneur Confederation in 2005. He was also named as a 2005 Top Ten
Distinguished Youth Entrepreneur of Jiangsu Province in 2005 by Jiangsu Province
Development and Reform Commission and other government bodies. Mr. Lu graduated
from an executive business management program at Tsinghua University in
2006.




Dr. Jianhua Zhao is vice
chairman of our board of directors and chief technology officer of our company
and has been with our company since 2004. From 2002 to June 2006, he was an
associate professor of the Centre of Excellence for Advanced Silicon
Photovoltaics and Photonics, formerly known as the Photovoltaics Special
Research Centre, at the University of New South Wales in Australia, and also
served as its deputy director from 1999 to June 2006. At the Photovoltaics
Special Research Centre, he was a senior lecturer (senior research fellow) from
1991 to 2001. Dr. Zhao is a senior member of IEEE Electron Device Society, a
member of Australia and New Zealand Solar Energy Society and a member of Chinese
Renewable Energy Society. Dr. Zhao graduated from Nanjing Institute of
Technology in 1978 and received his master’s degree from the same university in
1982, and received a Ph.D. degree in electrical engineering from the University
of New South Wales in Australia in 1989. Dr. Zhao started solar research in 1979
and has published 111 papers in scientific journals, including one published in
Nature magazine, 107 papers in international scientific conferences, and 32
research reports. Dr. Zhao is the husband of Dr. Aihua Wang.




Mr. Ruennsheng Allen Wang has been our chief
executive officer since July 2007. Prior to joining us, Mr. Wang served as a
senior vice president and the general manager of Operation Division, NEC
Telecommunications (China) Co., Ltd. from 2004 to 2007. From 1996 to 2004, he
held various management positions with Motorola, first as the general manager of
Hangzhou Motorola Cellular Equipment Co., Ltd. from 1996 to 2001, subsequently
as a vice president of Motolora International Inc. in 2000, then as the general
manager of CPAD Asia, Motorola PCS from 2001 to 2003 and finally as general
manager of Motorola PCS ODM Taiwan Operations from 2003 to 2004. From 1993 to
1996, Mr. Wang served as a vice president of AT&T (China) Co., Ltd. Mr. Wang
graduated with a bachelor degree in mechanical engineering from Taiwan
University in 1977 and received his master’s degree in the same major from Yale
University in 1981. He also received his master’s degree in computer science
from Northwestern University in 1983. Mr. Wang received a Ph.D. degree from
Northwestern University and an MBA from the University of Chicago in 1985 and
1992, respectively.




Mr.
Shiliang Guo has been a director and acting chief financial officer of our
company after Kenneth Luk’s resignation in 2009. Mr. Guo once served as a
director of our company from May 2006 to July 2007. Mr. Guo has been the chief
financial officer of China Electronic Equipment Group Co., Ltd. since October
2004. From 1993 to 2004, Mr. Guo served as chief accountant with Yangzhou
Zhengxin Certified Public Accountant Co., Ltd., Yangzhou Xingda Certified Public
Accountant Co., Ltd. and Yangzhong Certified Public Accountant Co., Ltd.,
respectively. Mr. Guo received a bachelor's degree in finance from Suzhou
University in 1984. He obtained the qualification of PRC Certified Public
Accountant in 1993.




Independent
Directors




Ms Merry Tanghas been an
independent director of our company since June 2008. She is currently a
principal and managing partner of Merry Tang CPA, LLC. Ms. Tang served a
managing director at GTA International, LLC and Partner at Tang & Company,
PC – both U.S.-based CPA firms offering services in risk assessment, audit
engagements and Sarbanes-Oxley–related documentation to leading banks, financial
service providers and telecommunications firms from 2006 to 2008. Prior to that,
Ms. Tang gained “Big 4” experience at PricewaterhouseCoopers LLP where she
served as senior auditor and engaged in various high profile clients’ financial
and IT audits from 2004 to 2006. Ms. Tang also worked at Lucent Technologies,
Inc. as a finance manager from 1996 to 2004. Ms. Tang graduated from the Central
University of Finance & Banking, Beijing, China with a bachelor degree in
banking in 1983 and an master degree in Finance in 1986, before going on to
receive her master degree in accounting from the State University of New York at
Albany in 1993.




Mr. Xiaoqian Zhou has been an
independent director of our company since May 2007. Mr. Zhou is an independent
director of Xuji Electric Stock Co., Ltd. and Tebian Electric Appliance Stock
Co., Ltd. He is a vice director of Chinese Energy Research Society and chairman
of the Chinese Society for the Development of Power. Mr. Zhou has over 40 years
of experience in the power industry in China. He was a consultant to the State
Grid Corporation of China from 2001 to 2004, and was an assistant general
manager of the same company from 1998 to 2001. From 1996 to 1999, Mr. Zhou was
the general manager of China Grid Construction Co., Ltd. Mr. Zhou graduated from
Zhejiang University with a major in thermal power equipment in
1964.


63




Ms. Jian Li has been an
independent director of our company since May 2008. Ms. Li has worked in
education with the Central University of Finance and Economics since 1983. Ms.
Li is a professor, the head of department of finance, a doctoral supervisor and
a supervisor of postdoctoral research station of Central University of Finance
and Economics. She is also an independent director of Citic Securities Co.,
Ltd., a company listed on the Shanghai Stock Exchange. Ms. Li has been involved
in the publishing of a number of academic papers both in China and overseas
during the past ten years, mainly on finance and the capital markets. Ms. Li
received her bachelor’s degree in finance and doctor’s degree in economics from
the Central University of Finance and Economics and Xi’an Communication
University in 1983 and 1997, respectively.




Mr. Steve Morgan has been an
independent director of our company since May 2008. Mr. Morgan has been a senior
partner and foreign legal advisor for Zhonglun W&D Law Firm in Beijing since
2007. Mr. Morgan was a special advisor on a number of projects for the Carlyle
Group, Mitsubishi Corporation and Finmeccanica SpA. from 2004 to 2006, and was
appointed as a Visiting Professor of the Graduate Business School of Seoul
National University in 2007. From 2000 to 2004, he served as senior executive
vice president for Hyundai Motor Company in Seoul and served in other executive
positions in Hyundai group companies since 1998. Mr. Morgan graduated from
Fordham College, New York, with a bachelor degree in political science in 1973
and received his juris doctorate from Northwestern University School of Law in
1976.




Mr. Wenze Wang has been our
independent director since May 2008. Mr. Wang has been a executive vice chairman
of China Investment Association since 2000. Mr. Wang was the Commissioner of the
Finance and Economics Committee of the National People’s Congress from 2003 and
resigned from this role in March 2008. From 1994 to 2003, Mr. Wang served as
general manager of the State Development and Investment Corporation. Mr. Wang
graduated from Shandong Technical College with a bachelor’s degree in thermal
power in 1965.




Executive
Officers




Dr. Aihua Wang is a vice
president and general manager of our company in charge of research and
development and has been with our company since 2004. From 2000 to June 2006,
she was a research fellow at the Centre of Excellence for Advanced Silicon
Photovoltaics and Photonics, formerly known as the Photovoltaics Special
Research Centre, at the University of New South Wales in Australia. At the
Photovoltaics Special Research Centre, she was a project scientist from 1991 to
2000. She was an engineer at Applied Solar Energy, Inc. in California from 1990
to 1991. Dr. Wang published a number of research articles and papers on solar
cells. Dr. Wang graduated from Nanjing Institute of Technology in China in 1978
and received a Ph.D. degree in electronic engineering from the University of New
South Wales in Australia in 1992.




Mr. Richard Yumin Gu is a
vice president and general manager of our company in charge of sales and
marketing and has been with our company since January 2007. From 2001 to 2006,
Mr. Gu was the general manager of Shanghai Ever-rich Electric Equipment Co.
Ltd., a company engaging in the electric equipment business. From 1992 to 2001,
Mr. Gu worked with various subsidiaries and a joint venture of DuPont, a
multinational chemicals and health care conglomerate. From 1999 to 2001, he was
a regional business manager of DuPont China Limited, serving for its department
in charge of electrical insulation and advance fiber system business. From 1996
to 1999, he served as a technical consultant and marketing manager of DuPont
Teijin Paper Asia Limited. From 1992 to 1996, he served as an account manager of
DuPont China Holding Company Limited. Mr. Gu received his bachelor’s degree in
electrical engineering from Xi’an Jiao Tong University in China and completed
MBA correspondence courses with Auckland University of New Zealand in
1999.




Mr. Fang Yang has been our
vice president in charge of strategy and planning and special assistant to the
chief executive officer since August 2007 and later served as a general manager
of operation division since December 2008. Prior to joining us, Mr. Yang served
as a director of the business management department and operation division with
NEC Telecommunications (China) Co., Ltd. from 2004 to 2007. From 1995 to 2004,
Mr. Yang worked as a director of sales and business management with Lucent
Technologies (China) Co., Ltd., a communication equipment manufacturing company
in China. Mr. Yang received his bachelor’s degree in engineering, his master in
system engineering and MBA from Northwest Polytechnic University in Xi’an, China
in 1992, 1995 and 1995, respectively.


64




The
address of our directors and executive officers is c/o China Sunergy Co., Ltd.,
No. 123 Focheng West Road, Nanjing Jiangning Economic & Technical
Development Zone, Nanjing, Jiangsu Province 211100, People’s Republic of
China.




B.
            Compensation of
      Directors and Executive
Officers




For the
year ended December 31, 2008, the aggregate cash compensation that we paid to
our executive officers was approximately $1.2 million. There are no service
contracts between us and our directors, except for those directors who are also
our executive officers. For the year ended December 31, 2008, we paid an
aggregate of approximately $40,000 for pension and other social insurance
contribution for our senior executive officers. For option grants to our
officers and directors, see Item 6, “Directors, Senior Management and
Employees—Compensation of Directors and Executive Officers—Share Incentive
Plan.”




Employment
Agreements




We have
entered into employment agreements with each of our executive officers. Under
these agreements, each of our executive officers is employed for a specified
time period. We may terminate the employment for cause, at any time, without
remuneration, for certain acts of the employee, including but not limited to a
conviction or plea of guilty to a felony, willful dishonesty to us and willful
and continued failure to perform substantially all his agreed-to duties after a
reasonable opportunity to cure the failure. An executive officer may terminate
his employment at any time without penalty if there is any failure by us to
comply with any material provisions of the employment agreement, any change in
his duties or responsibilities in any material and adverse respect. Furthermore,
either party may terminate the employment at any time without cause upon advance
written notice to the other party. If we terminate the employment of an
executive officer without cause, the executive officer will be entitled to a
severance payment equal to a certain specified number of months of his or her
then base salary.




Each
executive officer has agreed to hold in confidence and not to use, except as
required in the performance of his duties in connection with the employment, any
confidential information relating to the business of our company, affiliates or
customers. The executive officers have also agreed to disclose to us all
inventions, designs and trade secrets which they conceive, develop or reduce to
practice during the employment and to assign all right, title and interest in
them to us.




Share
Incentive Plan




In
October 2006, our board of directors adopted a share incentive plan, or the
First Plan, later amended in April 2007 and May 2009, respectively, to link the
personal interests of our board members, employees and consultants to those of
our shareholders by providing them with an incentive to generate superior
returns for our shareholders, as well as to provide us with the flexibility to
motivate, attract and retain the services of these individuals upon whose
judgment, interest and special effort the successful conduct of our operations
is dependent. The First Plan provides for the grant of options, referred to as
“awards,” and we have reserved 2,500,000 shares for issuance under the First
Plan. We adopted a second share incentive plan, or the Second Plan, after
obtaining the approval by shareholders in February 2008. We have reserved
4,190,748 shares for issuance under the Second Plan. As of the date of this
annual report, our board of directors has granted certain of our officers,
employees and consultants an aggregate of 2,092,350 options and 2,996,896
restricted shares, excluding options and restricted shares forfeited pursuant to
the above plans.




Administration. Our share
incentive plans are administered by our compensation committee or, in its
absence, by our board of directors. Our compensation committee will determine
the provisions, terms and conditions of our awards.




Awards. Awards granted are
evidenced by an award agreement that sets forth the terms, conditions and
limitations for each award. Our First Plan only provides for awards in the form
of options. Options provide for the right to purchase our ordinary shares at a
specified price, and usually will become exercisable in installments after the
grant date. The option exercise price may be paid in cash, by check, by our
ordinary shares which have been held by the option holder for such time as may
be required to avoid adverse accounting treatment, by other property with value
equal to the exercise price, through a broker assisted cash-less exercise or by
such other methods as our compensation committee or board of directors may
approve from time to time.




The
following paragraphs briefly describe the principal features of the various
awards that may be granted under the Second Plan.


65




•
            Options. Options
      provide for the right to purchase our ordinary shares at a price and
      period determined by our compensation committee in one or more
      installments after the grant date.




•
            Restricted Shares. A
      restricted share award is the grant of our ordinary shares determined by
      our compensation committee. A restricted share is nontransferable, unless
      otherwise determined by our compensation committee at the time of award,
      and may be repurchased by us upon termination of employment or service
      during a restricted period. Our compensation committee shall also
      determine in the award agreement whether the participant will be entitled
      to vote the restricted shares or receive dividends on such
      shares.




•
            Restricted Share Units.
      Restricted share units represent the right to receive our ordinary shares
      at a specified date in the future, subject to forfeiture of such right. If
      the restricted share unit has not been forfeited, then on the date
      specified in the award agreement, we shall deliver to the holder
      unrestricted ordinary shares which will be freely
      transferable.




Termination of Plan. Unless
terminated earlier, our First Plan and Second Plan will expire in 2016 and 2018,
respectively. Our board of directors has the authority to amend or terminate our
share incentive plans subject to shareholder approval to the extent necessary to
comply with applicable law. However, no such action may impair the rights of any
recipient of the awards unless agreed by the recipient and the share incentive
plan administrator.




The
following table summarizes, as of March 31, 2009, the outstanding options and
restricted shares granted under our plans to several of our directors and
executive officers and to other individuals. We have two types of vesting
schedules for options. A substantial portion of options vest over a four-year
period beginning in October 2006, November 2006, April 2007 or January 2008.
Other options vest on the first anniversary of the grant date. These restricted
shares vest over a three-year period beginning July 2007 or December 2007. Up to
two thirds of the restricted shares granted to Mr. Ruennsheng Allen Wang will
immediately vest in case of termination within his first two years of employment
other than for cause.




Name
                                                          
                                                          Ordinary Shares
                                                            Underlying Options
                                                            Granted
                                                          
                                                          
                                                          Restricted
                                                            Shares
                                                          
                                                          
                                                          Exercise Price
                                                          
                                                          Grant
      Date
                                                          
                                                          Date of ExpirationRuennsheng
      Allen Wang
                                                          
                                                          
                                                          
                                                          
                                                          1,598,2011**
                                                          
                                                          
                                                          N/A
                                                          
                                                          February
      2008
                                                          
                                                          February
      2018Kenneth
      Luk (1)
                                                          
                                                          
                                                          
                                                          
                                                          *1
                                                          
                                                          
                                                          N/A
                                                          
                                                          February
      2008
                                                          
                                                          February
      2018Richard
      Yumin Gu
                                                          
                                                          *
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          $1.283
                                                          
                                                          January
      2008
                                                          
                                                          January
      2018Fang
      Yang
                                                          
                                                          *
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          $1.283
                                                          
                                                          January
      2008
                                                          
                                                          January
      2018Xiaoqian
      Zhou
                                                          
                                                          *
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          $1.283
                                                          
                                                          April
      2007
                                                          
                                                          April
      2017Other
      individuals as a group
                                                          
                                                          1,540,128
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          $1.283
                                                          
                                                          October
      2006, November 2006, April 2007 or January 2008
                                                          
                                                          October
      2016, November 2016, April 2017 or January 2018180,642
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          $0.70
                                                          
                                                          January
      2009
                                                          
                                                          January
      2019





1
              Restricted
      shares purchased at $0.001 per
share.




(1)
              Mr.
      Kenneth Luk resigned from the position of our chief financial officer in
      March 2009.




*
              Less
      than 1% of our outstanding ordinary
shares.




** In
addition to the above unvested restricted shares, 799,100 of restricted shares
granted to Mr. Ruennsheng Allen Wang were vested in July 2008.


66




C.
            Board
      Practices




Board
of Directors




Our board
of directors currently has nine directors, all designated by the holders of our
ordinary shares.As of the date
of this annual report, a majority of our directors meet the “independence”
definition under The Nasdaq Stock Market Marketplace Rules, or the Nasdaq
Rules.




Under our
amended and restated articles of association, which became effective in May
2007, our board of directors consists of at least two directors. Our directors
are elected by the holders of our ordinary shares.




A
director is not required to hold any shares in the company by way of
qualification. A director may vote with respect to any contract, proposed
contract or arrangement in which he is materially interested. A director may
exercise all the powers of the company to borrow money, mortgage its
undertakings, property and uncalled capital, and issue debentures or other
securities whenever money is borrowed or pledged as security for any obligation
of the company or of any third party. Upon the completion of our initial public
offering in May 2007, we established three committees under the board of
directors: the audit committee, the compensation committee and the nominating
committee. We have adopted a charter for each committee.




Committees
of the Board of Directors




We have
established three committees under the board of directors: the audit committee,
the compensation committee and the corporate governance and nominating
committee. We have adopted a charter for each of the three committees. Each
committee’s members and functions are described below.




Audit Committee. Our audit
committee consists of Ms. Merry Tang, Mr. Steve Morgan and Ms. Jian Li and is
chaired by Ms. Merry Tang. Ms. Tang, Mr. Morgan and Ms. Li satisfy the
independence requirements of Rule 10A-3 under the Exchange Act, as amended, and
Rule 5605 of the Nasdaq Rules. The audit committee oversees our accounting and
financial reporting processes and audits of the financial statements of our
company. The audit committee is responsible for, among other
things:




•
            selecting
      the independent auditors and pre-approving all auditing and non-auditing
      services permitted to be performed by the independent
      auditors;




•
            reviewing
      with the independent auditors any audit problems or difficulties and
      management’s response;




•
            reviewing
      and approving all proposed related party transactions, as defined in Item
      404 of Regulation S-K under the Securities
Act;




•
            discussing
      the annual audited financial statements with management and the
      independent auditors;




•
            reviewing
      major issues as to the adequacy of our internal controls and any special
      audit steps adopted in light of material control deficiencies;
      and




•
            meeting
      separately and periodically with management and the independent
      auditors.




Compensation Committee. Our
compensation committee consists of Ms. Jian Li, Mr. Wenze Wang and Mr. Xiaoqian
Zhou. Ms. Li, Mr. Wang and Mr. Zhou satisfy the independence requirements of
Rule 5605 of the Nasdaq Rules. The compensation committee assists the board in
reviewing and approving the compensation structure, including all forms of
compensation, relating to our directors and executive officers. Our chief
executive officer may not be present at any committee meeting during which his
compensation is deliberated. The compensation committee is responsible for,
among other things:




•
            reviewing
      and approving the total compensation package for our senior executives;
      and




•
            reviewing
      periodically and approving any long-term incentive compensation or equity
      plans, programs or similar arrangements, annual bonuses, employee pension
      and welfare benefit plans.




Corporate Governance and Nominating
Committee. Our corporate governance and nominating committee consists of
Mr. Wenze Wang,  Ms. Jian Li and Mr. Xiaoqian Zhou. Mr. Wang, Ms. Li
and Mr. Zhou satisfy the independence requirements of Rule 5605 of the Nasdaq
Rules. The corporate governance and nominating committee assists the board of
directors in selecting individuals qualified to become our directors and in
determining the composition of the board and its committees. The corporate
governance and nominating committee is responsible for, among other
things:


67




•
            identifying
      and recommending qualified candidates to the board for selection of
      directors nominees for election or re- election to the board of directors
      and committees of the board of directors, or for appointment to fill any
      vacancy;




•
            reviewing
      annually with the board of directors the current composition of the board
      of directors with regards to characteristics such as independence, age,
      skills, experience and availability of service to us;
  and




•
            advising
      the board of directors periodically with regard to significant
      developments in the law and practice of corporate governance as well as
      our compliance with applicable laws and regulations, and making
      recommendations to the board of directors on all matters of corporate
      governance and on any remedial actions to be
  taken.




Duties
of Directors




Under
Cayman Islands law, our directors have a statutory duty of loyalty to act
honestly in good faith with a view to our best interests. Our directors also
have a duty to exercise the skill they actually possess with the care and
diligence that a reasonably prudent person would exercise in comparable
circumstances. In fulfilling their duty of care to us, our directors must ensure
compliance with our amended and restate memorandum and articles of association.
A shareholder has the right to seek damages if a duty owed by our directors is
breached.




Terms
of Directors and Officers




Our
shareholders have designated our directors into three classes, namely Class A
directors, Class B directors and Class C directors, who shall retire from office
and be eligible for re-election at the first, second and third annual general
meeting after our initial public offering, respectively. Mr. Tingxiu Lu, Mr.
Ruennsheng Allen Wang and Ms. Jian Li have been designated as Class A directors.
Mr. Jianhua Zhao, Mr. Steve Morgan and Ms. Merry Tang have been designated as
Class B directors. Mr. Xiaoqian Zhou, Mr. Wenze Wang and Mr. Shiliang Guo have
been designated as Class C directors. At each subsequent annual general meeting
after the third annual general meeting, the directors of the class who have been
longest in office shall retire and shall be eligible for re-election. A director
may only be removed by the shareholders. Officers are elected by and serve at
the discretion of the board of directors.




D.
            Employees




We had
1,193  and 1,607 employees as of December 31, 2006 and 2007,
respectively. As of December 31, 2008, we had 1,799 full-time employees,
consisting of 1,222 in manufacturing, 74 in equipment maintenance, 147 in
quality assurance, 25 in purchasing, 63 in research and development, 26 in sales
and marketing and  242 in general and administrative. All of these
employees are located in our facilities in Nanjing, except for eight employees
located in our offices in Shanghai and Germany. Our employees are not covered by
any collective bargaining agreement. We consider our relations with our
employees to be good.




From time
to time, we also employ part-time employees and independent contractors to
support our manufacturing, research and development and sales and marketing
activities. We plan to hire additional employees as we expand.




E.
            Share
      Ownership




The
following table sets forth information, some of which has been obtained from
public filings, with respect to the beneficial ownership of our ordinary shares
as of May 28, 2009, by:




·
            each
      of our directors and executive officers who are also our shareholders;
      and




·
            each
      person known to us to own beneficially more than 5.0% of our ordinary
      shares.




68




Ordinary
      Shares
                    Beneficially OwnedNumber
      (1)
                
                
                %(2)Directors
      and Executive Officers:Tingxiu
      Lu (3)
                
                
                39,184,200
                
                
                
                14.6Jianhua
      Zhao (4)
                
                
                19,224,000
                
                
                
                7.2Aihua
      Wang (4)
                
                
                19,224,000
                
                
                
                7.2Ruennsheng
      Allen Wang (5)
                
                
                *
                
                
                
                *Xiaoqian
      Zhou (6)
                
                
                *
                
                
                
                *Richard
      Yumin Gu (7)
                
                
                *
                
                
                
                *Fang
      Yang (8)
                
                
                *
                
                
                
                *All
      Directors and Executive Officers as a Group
                
                
                60,824,581
                
                
                
                22.6Principal
      Shareholders:Elite
      Shine Group Limited (9)
                
                
                39,184,200
                
                
                
                14.6Credit
      Suisse (10)
                
                
                37,733,667
                
                
                
                15.9Exuberance
      Investment Limited (11)
                
                
                32,678,274
                
                
                
                12.2Smooth
      King Investments Limited (12)
                
                
                21,295,800
                
                
                
                8.0Brightest
      Power Holdings Limited (13)
                
                
                19,224,000
                
                
                
                7.2PraxCapital
      Fund II, L.P (14)
                
                
                16,043,934
                
                
                
                6.0







*Less
than 1%.




(1)
            Beneficial
      ownership is determined in accordance with the rules of the Securities and
      Exchange Commission, or SEC, and includes voting or investment power with
      respect to the securities.




(2)
            For
      each person and group included in this table, percentage ownership is
      calculated by dividing the number of shares beneficially owned by such
      person or group the number of ordinary shares outstanding as of as of the
      date of this annual report plus the number of ordinary shares underlying
      share options held by such person or group that are exercisable within 60
      days after the date of this annual
report.




(3)
            Includes
      39,184,200 ordinary shares ,beneficially owned by Elite Shine Group
      Limited, a British Virgin Islands company, which is 100% owned by Mr. Lu.
      The business address for Mr. Lu is No. 123 Focheng West Road, Nanjing
      Jiangning Economic & Technical Development Zone, Nanjing, Jiangsu
      Province 211100, People’s Republic of
China.




69




(4)
            Includes
      19,224,000 ordinary shares ,beneficially owned by Brightest Power Holdings
      Limited, a British Virgin Islands company, which is 100% owned by Dr. Zhao
      and Dr. Wang. Dr. Zhao and Dr. Wang are husband and wife, and their
      business address is No. 123 Focheng West Road, Nanjing Jiangning Economic
      & Technical Development Zone, Nanjing, Jiangsu Province 211100,
      People’s Republic of China.




(5)
            Represents
      ordinary shares and restricted shares held by Mr. Wang. Mr. Wang’s address
      is No. 123 Focheng West Road, Nanjing Jiangning Economic & Technical
      Development Zone, Nanjing, Jiangsu Province 211100, People’s Republic of
      China.




(6)
            Represents
      ordinary shares issued and issuable upon exercise of options held by Mr.
      Zhou. Mr. Zhou’s address is No. 123 Focheng West Road, Nanjing Jiangning
      Economic & Technical Development Zone, Nanjing, Jiangsu Province
      211100, People’s Republic of China.




(7)
            Represents
      ordinary shares underlying ADSs held by Ms. Jian Yue Xue, the wife of Mr.
      Gu and ordinary shares issuable upon exercise of options held by Mr. Gu.
      Mr. Gu’s address is No. 123 Focheng West Road, Nanjing Jiangning Economic
      & Technical Development Zone, Nanjing, Jiangsu Province 211100,
      People’s Republic of China.




(8)
            Represents
      ordinary shares issuable upon exercise of options held by Mr. Yang. Mr.
      Yang’s address is No. 123 Focheng West Road, Nanjing Jiangning Economic
      & Technical Development Zone, Nanjing, Jiangsu Province 211100,
      People’s Republic of China.




(9)
            Elite
      Shine Group Limited is 100% owned by Mr. Lu. The address of Elite Shine
      Group Limited is P.O. Box 957, Offshore Incorporation Centre, Road Town,
      Tortola, British Virgin Islands.




(10)
            Based
      on a Schedule 13G Amendment No. 1 filed by Credit Suisse on February 18,
      2009, this represents the shares that may be deemed to be beneficially
      owned by Credit Suisse and includes 32,678,274 shares that China Harvest
      Fund, L.P. beneficially owns because of Credit Suisse’s relationship to
      China Harvest Fund, L.P.. Credit Suisse disclaims beneficial ownership of
      these 32,678,274 shares. The ultimate parent company of Credit Suisse is
      Credit Suisse Group, a corporation formed under the laws of Switzerland.
      Credit Suisse Group disclaims beneficial ownership of shares beneficially
      owned by its direct or indirect subsidiaries, including Credit Suisse.
      Credit Suisse’s business address is Uetlibergstrasse 231, P.O. Box 900, CH
      8070 Zurich, Switzerland. See footnote 11 for additional discussion of
      these shares.




(11)
            Based
      on a Schedule 13G filed by Exuberance Investment Limited on February 14,
      2008, this represents 32,678,274 ordinary shares held by Exuberance
      Investment Limited, a British Virgin Islands company, with the registered
      address at P.O. Box 173, Kingston Chambers, Road Town, Tortola, British
      Virgin Islands. Exuberance Investment Limited is 97.83% owned by China
      Harvest Fund, L.P., a Cayman Islands exempted limited partnership, and
      2.17% owned by China Harvest Parallel Fund I, L.P., a Cayman Islands
      exempted limited partnership, each with the registered address at the
      offices of M&C Corporate Services Limited, P.O. Box 309GT, Ugland
      House, South Church Street, George Town, Grand Cayman, Cayman Islands. The
      general partner of China Harvest Fund, L.P. and China Harvest Parallel
      Fund I, L.P. is China Renaissance Capital Investment, L.P., a Cayman
      Islands exempted limited partnership. Voting and investment power of
      shares beneficially held by China Harvest Fund, L.P. is exercised by the
      investment committee of China Renaissance Capital Investment, L.P. which
      consists of Mark Qiu, Hung Shih, Li Zhenzhi, Charles Pieper and Nicole
      Arnaboldi. The address for these committee members is c/o China
      Renaissance Capital Investment, L.P., M&C Corporate Services Limited,
      P.O. Box 309GT, Ugland House, South Church Street, George Town, Grand
      Cayman, Cayman Islands.




(12)
            Smooth
      King Investments Limited is 100% owned by Ms. Yingchun Huang. The address
      of Smooth King Investments Limited is P.O. Box 957, Offshore Incorporation
      Centre, Road Town, Tortola, British Virgin
  Islands.




(13)
            Brightest
      Power Holdings Limited is 100% owned by Dr. Zhao and Dr. Wang. The address
      of Brightest Power Holdings Limited is P.O. Box 957, Offshore
      Incorporation Centre, Road Town, Tortola, British Virgin
      Islands.




70




(14)
            Based
      on a Schedule 13G Amendment No. 1 filed by PraxCapital Fund II, L.P. on
      February 13, 2009, this represents 16,043,934 ordinary shares held by
      PraxCapital Fund II, L.P., a Cayman Islands limited partnership, with the
      registered address at P.O. Box 309GT, Ugland House, South Church St.,
      George Town, Grand Cayman. The general partner of PraxCapital Fund II,
      L.P. is Prax Capital GP II, a Cayman Islands company. Prax Capital GP II
      is controlled by its board of directors, consisting of Jose Luis Artiga,
      Fernando R. Vila, Jeff Jie-Ping Yao and Lei Xu. The address of Jose Luis
      Artiga is Chalet Augusta No. 2, 3963 Crains-Sur-Sierre, Switzerland. The
      address of Fernando R. Vila is 1001 Brickell Bay Drive, Suite 2402, Miami,
      Florida, 33131. The address of each of Jeff Jie-Ping Yao and Xu Lei is 333
      Huai Hai Middle Road, Suite 1701, Shanghai, People’s Republic of China,
      200021.




None of
our shareholders has different voting rights from other shareholders. We are not
aware of any arrangement that may, at a subsequent date, result in a change of
control of our company.




ITEM
7.                      MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS




A.
            Major
      Shareholders




See Item
6, “Directors, Senior Management and Employees 3⁄4 Share
Ownership.”




B.
            Related Party
      Transactions




Restructuring




As
Sunergy Nanjing is a company incorporated in China, PraxCapital Fund II, L.P.,
or PraxCapital, incorporated Sunergy BVI in the British Virgin Islands in
January 2006 to facilitate its investment in our company offshore. PraxCapital
contributed $13.1 million to Sunergy BVI in January 2006 to facilitate the
subsequent restructuring steps, and Sunergy BVI issued one ordinary share to
PraxCapital in January 2006 to complete Sunergy BVI’s incorporation procedures.
Of the above $13.1 million contributed by PraxCapital, $10 million was further
lent to Sunergy Nanjing to finance its operations, and the remaining $3.1
million was lent to the foreign shareholders of Sunergy Nanjing, namely Dr.
Jianhua Zhao, Dr. Aihua Wang and Dr. Fengming Zhang, our former director and our
former vice president in charge of manufacturing technology, in March
2006.




Due to
PRC legal restrictions on the direct exchange of onshore equity interests for
offshore shares, Sunergy BVI, PraxCapital, Sunergy Nanjing and the shareholders
of Sunergy Nanjing entered into a warrant purchase agreement in March 2006 to
achieve the following goals: (a) Sunergy BVI would acquire all equity interests
in Sunergy Nanjing for nominal consideration; (b) the shareholders of Sunergy
Nanjing or their assignees would acquire ordinary shares of Sunergy BVI
according to such shareholders’ proportionate ownership in Sunergy Nanjing, but
the percentage of ordinary shares of Sunergy BVI to be owned by the foreign
shareholders, namely Dr. Jianhua Zhao, Dr. Aihua Wang and Dr. Fengming Zhang, or
their assignees, would be less than their original proportionate ownership in
Sunergy Nanjing, because these foreign shareholders intended to effectively
exchange a portion of the ordinary shares that they or their assignees would be
entitled to, representing 3.2% of their original equity interests in Sunergy
Nanjing, for the above $3.1 million lent to them, and (c) Sunergy BVI would
issue Series A preferred shares to PraxCapital in consideration of its above
contribution of $13.1 million.




As agreed
under the warrant purchase agreement, in April 2006, Sunergy BVI purchased all
of the outstanding equity interests in Sunergy Nanjing from the shareholders of
Sunergy Nanjing. The foreign shareholders of Sunergy Nanjing, namely Dr. Jianhua
Zhao, Dr. Aihua Wang and Dr. Fengming Zhang, have released Sunergy BVI from its
obligation to pay the purchase price of approximately $6.3 million. In
accordance with the common practice in China, the PRC shareholder, Nanjing Xinde
Assets Management Co., Ltd., or Xinde, an entity controlled by our chairman, Mr.
Tingxiu Lu, was paid not less than its investment cost in Sunergy Nanjing,
approximately $4.0 million. Under the above warrant purchase agreement, such
amount was then contributed back to Sunergy Nanjing by Xinde as a cash advance
to finance Sunergy Nanjing’s operations, and subsequently gifted to Sunergy
Nanjing by Xinde in September 2006.




In April
2006, after Sunergy BVI acquired all of the outstanding equity interests in
Sunergy Nanjing, pursuant to the above warrant purchase agreement, Sunergy BVI
issued warrants to purchase an aggregate of 1,045,440 ordinary shares at the
exercise price of $0.01 per share to the assignees of the original shareholders
of Sunergy Nanjing as follows:


71




Shareholders
      of
                                              Sunergy
      Nanjing
                                            
                                            Relationship
                                            
                                            Assignees
                                              Who
                                              Received
      the
                                              Warrant
                                            
                                            Number
      of
                                                Shares
                                                Underlying
                                                the
                                                Warrants
                                            
                                            RelationshipDr.
      Jianhua Zhao
                                            
                                            our
      vice chairman and chief technology officer
                                            
                                            Brightest
      Power Holdings Limited
                                            
                                            203,040
                                            
                                            controlled
      byDr.
      Jianhua Zhao and his wife, Dr. Aihua WangDr.
      Aihua Wang
                                            
                                            our
      vice president in charge of research and development
                                            
                                            Brightest
      Power Holdings Limited
                                            
                                            203,040
                                            
                                            controlled
      by Dr. Aihua Wang and her husband, Dr. Jianhua ZhaoDr.
      Fengming Zhang
                                            
                                            one
      of our former directors, and our former vice president in charge of
      manufacturing technology
                                            
                                            Luck
      Great Investments Limited
                                            
                                            97,200
                                            
                                            controlled
      byDr.
      Fengming ZhangDeutsche
      Bank AG acting through its London Branch
                                            
                                            54,000
                                            
                                            assigneeTalent
      Day Investments Limited
                                            
                                            86,400
                                            
                                            controlled
      by Mr. Chengrong Xu, our then vice president in charge of
      administration and human resourcesXinde
                                            
                                            jointly
      owned byMr.
      Tingxiu Lu, and Ms. Yingchun Huang
                                            
                                            Elite
      Shine Group Limited
                                            
                                            391,842
                                            
                                            controlled
      byMr.
      Tingxiu LuSmooth
      King Investments Limited
                                            
                                            212,958
                                            
                                            controlled
      by Ms. Yingchun
Huang




72


In April
2006, with the exception of Deutsche Bank AG acting through its London Branch,
or Deutsche Bank, the other assignees of the original shareholders of Sunergy
Nanjing, whose relationship with our company or our affiliates are listed in the
above table, requested Sunergy BVI to issue the ordinary shares underlying all
the warrants that they held. As a result, 991,440 ordinary shares were issued to
these assignees in April 2006, including 391,842 ordinary shares to Elite Shine
Group Limited, 212,958 ordinary shares to Smooth King Investments Limited,
203,040 ordinary shares to Brightest Power Holdings Limited, 97,200 ordinary
shares to Luck Great Investments Limited and 86,400 ordinary shares to Talent
Day Investments Limited. According to the terms of the warrants, each of the
above warrant holders should have paid the exercise price when the ordinary
shares were issued to them. These warrant holders actually paid the exercise
price of $0.01 per share in September 2006. In August 2006, 54,000 ordinary
shares were issued upon Deutsche Bank’s exercise of the warrant that it held by
paying Sunergy BVI the exercise price of $0.01 per share. These 1,045,440
ordinary shares in the aggregate issued upon the exercise of the warrants are
just the same shares exchanged for China Sunergy’s 1,045,440 ordinary shares in
August 2006, as discussed below.




After the
above transactions, the foreign shareholders of Sunergy Nanjing effectively
relinquished 3.2% of their equity interests in Sunergy Nanjing in consideration
of Sunergy BVI’s above loan of $3.1 million. If these foreign shareholders had
not relinquished such 3.2% equity interests, Sunergy BVI would have issued an
aggregate of 1,080,000 ordinary shares to the assignees of the original
shareholders of Sunergy Nanjing. The following table presents the number and
percentage of ordinary shares that the assignees of the original shareholders of
Sunergy Nanjing would be entitled to assuming there had not been the
relinquishment of the 3.2% equity interests in Sunergy Nanjing, and the number
of ordinary shares that these assignees actually received:




Shareholders of Sunergy Nanjing
              
              Percentage of
                Equity
                Interest in
                Sunergy
                Nanjing (%)
              
              
              Number of
                Ordinary
                Shares the
                Relevant
                Assignees
                Entitled to
                Assuming No
                Relinquishment
              
              
              Percentage of
                Ordinary
                Shares the
                Relevant
                Assignees
                Entitled to
                Assuming No
                Relinquishment
                  (%)
              
              
              Number of
                Ordinary
                Shares the
                Relevant
                Assignees
                Actually
                ReceivedDr.
      Jianhua Zhao and Dr. Aihua Wang
              
              
              20
              *
              
              
              216,000
              
              
              
              20
              
              
              
              203,040Dr.
      Fengming Zhang
              
              
              24
              
              
              
              259,200
              
              
              
              24
              
              
              
              237,600Xinde
              
              
              56
              
              
              
              604,800
              
              
              
              56
              
              
              
              604,800





*
              Representing
      15% equity interest in Sunergy Nanjing originally held by Dr. Jianhua
      Zhao, and 5% equity interest originally held by Dr. Aihua
      Wang.





As shown
above, due to the relinquishment of the 3.2% equity interests, the numbers of
ordinary shares that the assignee of Dr. Jianhua Zhao and Dr. Aihua Wang and the
assignees of Dr. Zhang actually received were reduced by 12,960 and 21,600,
respectively, or 1.2% and 2.0%, respectively, of the 1,080,000 ordinary share
that would have been issued assuming there had not been such
relinquishment.




Immediately
prior to the issuance of the above warrants, in April 2006, Sunergy BVI issued
128,473 Series A preferred shares to PraxCapital according to the above warrant
purchase agreement and the one ordinary share previously issued to PraxCapital
was cancelled.




Compensation
Charges




In March
2006, two shareholders of Sunergy Nanjing, namely Mr. Huaijin Yang and Mr. Ted
Szpitalak, transferred 10% equity interests in Sunergy Nanjing to two other
shareholders of Sunergy Nanjing, namely Dr. Jianhua Zhao and Xinde. The above
transfers were effected largely because Sunergy Nanjing’s joint venture contract
prohibited the transferor shareholders from investing in enterprises engaging in
business competitive with that of Sunergy Nanjing, and the transferor
shareholders intended to focus on the solar power business of another company
that they invested in. Except for Xinde’s contribution, to Sunergy Nanjing, of
Mr. Huaijin Yang’s unfunded capital subscription of $540,000, there was no other
consideration paid for the above equity transfers. We accounted for these
transfers as contributions of capital by the transferors, followed by a non-pro
rata dividend distribution to Sunergy Nanjing’s remaining shareholders. After
the equity transfers, Dr. Jianhua Zhao, our then president, received more
ownership interest than he would have received had the distribution been made on
a pro rata basis, partly to compensate him for his services to Sunergy Nanjing.
We recorded a compensation charge of approximately $3.7 million equal to the
fair value of the excess ownership interest he received.


73




According
to Sunergy Nanjing’s original articles of association, certain crystalline
silicon solar cell technology was to be contributed for $1.4 million of Sunergy
Nanjing’s capital. In November 2004, all the shareholders of Sunergy Nanjing
agreed that the above technology to be contributed by its foreign shareholders,
namely Dr. Jianhua Zhao, Dr. Aihua Wang, Dr. Fengming Zhang, Mr. Huaijin Yang
and Mr. Ted Szpitalak, who were then also our executive officers, was more
valuable than the originally subscribed capital. Therefore, all the shareholders
amended the articles of association of Sunergy Nanjing, and the contribution
method of $810,000 of Sunergy Nanjing’s capital subscribed by these foreign
shareholders was changed from cash or equipment to technology. In March 2006,
Sunergy Nanjing decided that it would need the thin-film solar cell technology
owned by its then foreign shareholders, namely Dr. Jianhua Zhao, Dr. Aihua Wang
and Dr. Fengming Zhang, who were then also our executive officers. Therefore,
all the shareholders amended the articles of association of Sunergy Nanjing, and
the contribution method of $540,000 of Sunergy Nanjing’s capital subscribed by
these foreign shareholders was changed from cash to technology. As the above
technologies contributed were developed by individuals and there was no historic
cost for such technologies, according to U.S. GAAP, we accounted for the above
amendments to change the contribution method as forgiveness of shareholder
loans. As the shareholders involved were also our executive officers, we
recorded compensation charges of $810,000 and $540,000,
respectively.




Issuance
and Sale of Preferred Shares




In May
2006, Sunergy BVI sold 239,051 Series B preferred shares in a private placement
for an aggregate consideration of $28.0 million. The investors in the Series B
preferred shares were Exuberance Investment Limited, which purchased 192,095
shares, Gersec Trust Reg., which purchased 21,344 shares, and China
Environmental Fund 2004, LP, which purchased 25,612 shares. This transaction was
approved by Sunergy BVI’s board of directors and shareholders.




In
September 2006, Sunergy sold 69,010 Series C preferred shares in a private
placement for an aggregate consideration of $20.0 million. The investors in the
Series C preferred shares were OZ Master Fund, Ltd., which purchased 18,517
shares, OZ Asia Master Fund, Ltd., which purchased 20,094 shares, OZ Global
Special Investments Master Fund, L.P., which purchased 2,795 shares, and Credit
Suisse Private Equity Partners Asia, L.P., which purchased 27,604 shares. This
transaction was approved by Sunergy’s board of directors and
shareholders.




The
holders of Series A, Series B and Series C preferred shares were entitled to
received dividends at an annual rate of 3%, which would accrue on a daily basis
from the date of issuance, whether or not declared. Accrued and unpaid dividends
would compound on a quarterly basis and be included in the calculation of the
conversion ratio when the preferred shares converted into ordinary shares. All
these preferred shares were convertible into our ordinary shares at any time and
automatically converted into our ordinary shares upon completion of our initial
public offering into the number of ordinary shares equal to the number of
preferred shares multiplied by the quotient of (a) the original subscription
price plus all accrued and unpaid dividends, divided by (b) the conversion
price, subject to adjustments in the case of certain dilution events. The
conversion prices previously equaled the original subscription prices, subject
to certain earnings-based adjustments, in the event our 2006 and 2007 net
earnings, as defined in our then amended and restated memorandum of association,
were less than a predefined amount.




In March
2007, our shareholders adopted a third amended and restated memorandum and
articles of association to (a) modify the conversion prices of our Series A,
Series B and Series C preferred shares, which were revised to $38.66, $44.37 and
$175.59, respectively, subject to adjustments in the case of certain dilution
events, and (b) replace the definition of “qualified IPO” or “QIPO” with the
definition of “IPO.” The purposes of these modifications were to (a) ensure that
there would be no preferred share outstanding after the completion of our
initial public offering, (b) fix the conversion prices of our Series A and
Series B preferred shares according to the earnings-based adjustments based on
our 2006 net earnings as provided in our previous memorandum and articles of
association, and (c) re-set the conversion price of our Series C preferred
shares and delete the provision on the adjustment of such conversion price based
on our 2007 net earnings, in order to avoid any dilution caused by the possible
earnings-based adjustment.


74




In March
2007, the conversion prices of our Series A and Series B preferred shares were
reduced according to the provision in our then effective memorandum and articles
of association on the conversion price adjustment based on our 2006 net income
of $11.8 million. As our 2006 net income was reduced by non-cash compensation
charges of $4.7 million and the conversion prices of our Series A and Series B
preferred shares were thus reduced, the ownership interests of our shareholders
other than holders of our Series A and Series B preferred shares were diluted,
which was previously not anticipated by our shareholders. Therefore, our
shareholders mutually agreed for holders of our Series A and Series B preferred
shares to sell a portion of their preferred shares to us for nominal
consideration. The number of Series A and Series B shares sold was determined
based on a calculation to offset the dilution impact of the adjustment of
conversion prices caused by the non-cash compensation charges of $4.7 million.
Accordingly, we purchased 48,238 Series A preferred Shares, 72,079 Series B
preferred shares, 8,009 Series B preferred shares and 9,610 Series B preferred
shares from PraxCapital, Exuberance Investment Limited, Gersec Trust Reg., and
China Environmental Fund 2004, LP, respectively, with nominal consideration.
According to Cayman Islands law, these Series A and Series B preferred shares
were automatically cancelled upon our purchase.




All of
our Series A, Series B and Series C preferred shares were converted into
ordinary shares upon completion of our initial public offering. Holders of
ordinary shares issued upon conversion of our Series A, Series B and Series C
preferred shares are also entitled to certain registration rights, including
demand registration, piggyback registration and Form F-3 or Form S-3
registration.




Share
Swap




As part
of our restructuring in anticipation of our initial public offering, in August
2006, we issued a total of 1,045,440 ordinary shares, 128,473 Series A preferred
shares and 239,051 Series B preferred shares to certain existing shareholders of
Sunergy BVI in exchange for all shares of equivalent classes that these
shareholders previously held in Sunergy BVI.




Share
Split




In April
2007, in anticipation of our initial offering, we effected a 100-for-one share
split, as a result of which each of our ordinary share, Series A preferred
share, Series B preferred share and Series C preferred share was subdivided into
100 ordinary shares, 100 Series A preferred shares, 100 Series B preferred
shares and 100 Series C preferred shares, respectively. The conversion prices of
our Series A, Series B and Series C preferred shares were correspondingly
modified to one-hundredth of the previous conversion prices.




Transactions
with Certain Directors, Shareholders and Affiliates




During
the year ended December 31, 2006, we made non-trade cash advances to related
parties with common ultimate investors to meet the temporary liquidity needs of
these related parties. As of December 31, 2006, non-trade amounts due from these
related parties were $0.4 million, including (a) cash advances to several
entities controlled by Mr. Tingxiu Lu, our chairman, namely Jiangsu CEEG
Transformer Manufacturing Co., Ltd., CEEG, Jiangsu CEEG Electrical Transmission
and Distribution Equipment Co., Ltd., CEEG Nanjing International Trade Co.,
Ltd., Jiangsu CEEG Electrical Equipment Manufacturing Co, Ltd and CEEG Nanjing
Electronic Technology Co., Ltd., and (b) cash advances to Jiangsu Tianhua
Photo-electronic Technology Co., Ltd., an entity controlled by Dr. Jianhua Zhao,
our vice chairman and chief technology officer.




Historically,
we received non-trade cash advances from related parties with common ultimate
investors for our temporary liquidity needs or for our bank deposits to secure
notes payable used for our related parties’ settlement purposes according to the
local banking practice. As of December 31, 2006, 2007 and 2008, amounts due to
these related parties were nil, nil and nil, respectively.




In August
2006, Sunergy Nanjing entered into an agreement to lease warehouse premises of
3,000 square meters from CEEG (Nanjing) Special Transformer Manufacturing Co.,
Ltd., an entity controlled by our chairman, for a term until September 2011. The
tenancy agreement provides for annual rental payments of $8,000. The rental
expense in the year ended December 31, 2006, 2007 and 2008 was approximately
$2,000, $8,000 and $8,000, respectively. As of December 31, 2008, we had a
rental payable balance of approximately $18,000 to CEEG (Nanjing) Special
Transformer Manufacturing Co., Ltd..




In 2006
and 2007, we purchased raw materials from CEEG Nanjing International Trade Co.,
Ltd. in the amount of $6.5 million and $1.2 million, respectively, and we also
sold solar cells to CEEG Nanjing International Trade Co., Ltd. in the amount of
$4.8 million and $3.2 million, respectively. In 2006, we also sold solar cells
to Jiangsu East China Micro-ware Equipment Co., Ltd., an entity controlled by
our chairman in the amounts of approximately $56,000.




75




In 2007
and 2008, we purchased raw materials from CEEG (Nanjing) Solar Research
Institute, an entity controlled by our chairman, in the amount of $0.2 million
and $11,000, respectively, and sold solar cells and solar modules to CEEG
(Nanjing) Solar Research Institute in the amount of $1.5 million and $1.3
million.




In 2007
and 2008, we purchased raw materials from CEEG (Nanjing) Semiconductor Co.,
Ltd., an entity controlled by our chairman, in the amount of $1.4 million and
$7.1 million, respectively, and sold off-specification wafers to CEEG (Nanjing)
Semiconductor Co., Ltd. in the amount of $0.6 million in 2007. In July 2008, we
issued a bank accepted note in the amount of approximately $14.7 million to CEEG
(Nanjing) Semiconductor Co., Ltd. in connection with a raw material purchase
contract entered into with this company in May 2008. As of December 31, 2008, we
recorded a receivable balance from CEEG (Nanjing) Semiconductor Co., Ltd. in the
amount of $11.5 million, which related to the prepayment we made (as evidenced
by the bank accepted note issued in July 2008) in respect of the raw materials
to be delivered by CEEG (Nanjing) Semiconductor Co., Ltd. In January 2009, we
terminated this raw material purchase contract with CEEG (Nanjing) Semiconductor
Co., Ltd. which subsequently returned our prepayment of $11.5
million.




In 2007,
we sold solar cells to CEEG (Shanghai) Solar Science and Technology Co., Ltd.,
an entity controlled by our chairman, in the amount of $5.2 million. In 2008, we
sold solar cells and solar wafers to CEEG (Shanghai) Solar Science and
Technology Co., Ltd. in the aggregate amount of $46.6 million. As of December
31, 2008, we had a receivable balance from CEEG (Shanghai) Solar Science and
Technology Co., Ltd. in the amount of $6.7 million, which related to the amounts
payable to us in respect of sales of solar cells. We also outsourced the
production of solar modules from our solar cells under processing arrangements
with CEEG (Shanghai) Solar Science and Technology Co., Ltd. and procured the
solar modules from it. CEEG (Shanghai) Solar Science and Technology Co., Ltd.
charged us processing fees in the amount of $0.7 million and $0.3 million in
2007 and 2008, respectively.




In
2007,  we sold solar cells to CEEG (Nanjing) New Energy Co., Ltd.,
another entity controlled by our chairman, in the amount of approximately
$42,000 We sold solar cells and solar wafers to CEEG (Nanjing) New Energy Co.,
Ltd. in the aggregate amount of approximately $7.2 million in 2008. As of
December 31, 2008, we had a payable balance to CEEG (Nanjing) New Energy Co.,
Ltd. in the amount of approximately $2,000, which related to prepayment we
received in respect of sales of solar cells.




In 2008,
we purchased raw materials from China Electric Equipment Group (Hong Kong)
Limited, another entity controlled by our chairman, in the amount of
approximately $77,000. As of December 31, 2008, we had a payable balance to
China Electric Equipment Group (Hong Kong) Limited in the amount of
approximately $77,000 in respect of purchase of raw materials.




In
January 2009, we entered into a purchase contract with Jiangxi Jingde
Semiconductor New Material Co., Ltd., an entity controlled by our chairman,
under which Jiangxi Jingde Semiconductor New Material Co., Ltd. agreed to supply
an aggregate of 220 tons of polysilicon to us from March 2009 to December 2009.
The contract provided a fixed price for the delivery in March 2009, and for the
subsequent monthly delivery, the prices shall be negotiated between the parties
before shipment and the prices shall be lower than the market price within
certain percentage. In connection with this contract, we issued a bank accepted
note in the amount of approximately $14.7 million to Jiangxi Jingde
Semiconductor New Material Co., Ltd.




We made
cash advances to directors in respect of travel expenses, amounting to
approximately $1,000, nil and nil as of December 31, 2006, 2007 and 2008,
respectively. Expense reimbursements payable to directors amounted to
approximately $4,000, nil and nil, respectively, as of December 31, 2006, 2007
and 2008, respectively. In 2008,
we withheld the individual income tax on behalf of our chief executive officer
and director in the amount of approximately $0.4 million in connection with
vested restricted shares granted to him, approximately $97,000 of which was
forgiven by us in June 2009 with the remainder of the amount withheld being
repaid by our chief executive officer in June 2009.




CEEG has
guaranteed most of our bank borrowings. As of December 31, 2006, we had $76.1
million in outstanding borrowings guaranteed by CEEG and Jiangsu CEEG Electrical
Transmission and Distribution Equipment Co., Ltd. As of December 31, 2007 and
2008, we had $63.0 million and $72.4 million, respectively, in outstanding
borrowing guaranteed by CEEG. In February 2008, Mr. Tingxiu Lu entered into an
agreement to guarantee approximately $4.4 million of our bank borrowings, which
was repaid in August 2008. As of December 31, 2008, approximately $16.1 million
of the short-term bank borrowings were jointly secured by the pledge of our raw
materials and the guarantee of Mr. Tingxiu Lu. In November 2008, Jiangsu CEEG
Equipment Co., Ltd. entered into agreements to jointly guarantee with
CEEG  a total of approximately $14.6 million of our bank borrowings,
which will become due in November 2009.


76




CEEG and
Sunergy Nanjing entered into an agreement on December 18, 2006, pursuant to
which CEEG has undertaken to guarantee bank borrowings of Sunergy Nanjing for up
to RMB1 billion, subject to adjustment in the event of the material change of
CEEG’s credit or operation status, for one year after our initial public
offering. CEEG agreed to provide such guarantee free of charge, or at a fee
according to the market standard for similar transactions, but not exceeding
0.1% of the principal borrowing amount. This agreement has expired, and the two
parties entered into another agreement under which CEEG agreed to guarantee free
of charge bank borrowings by Sunergy Nanjing of up to RMB1 billion. The new
agreement has a term of two years from May 17, 2008 to May 16,
2010.




CEEG and
Sunergy Nanjing also entered into an agreement on December 20, 2006, pursuant to
which CEEG granted Sunergy Nanjing an option to purchase, prior to December 31,
2007, the right to use a parcel of land of approximately 26,000 square meters at
a price of approximately $0.5 million, equivalent to the original cost for CEEG
to acquire such right. On July 23, 2007, CEEG and Sunergy Nanjing entered into
an land use right transfer agreement to purchase the land use right to the
forgoing parcel of land at a price of approximately $1.2 million, which was
equivalent to the valuation price. Sunergy Nanjing agreed to enhance the
purchase consideration to avoid that the land be compulsorily acquired by the
government due to the price being significantly lower than the valuation
price.




In
November 2007, Sunergy BVI and CEEG jointly incorporated China Sunergy
(Shanghai) Co., Ltd., or Sunergy Shanghai., in which we hold 95% interest, while
CEEG holds 5% interest. According to our current plan, Sunergy Shanghai will
primarily engage in solar power research and development activities. In
September 2008, CEEG transferred its 5% equity interest in Sunergy Shanghai to
Sunergy Hong Kong in consideration of approximately $0.3 million.




In
November 2007, we entered into a cooperation construction agreement with CEEG to
construct a transformer station located in CEEG Nanjing Science and Technology
Park in order to meet the increased electricity requirement resulting from our
expanded manufacturing capacity. The estimated expenses under the agreement are
approximately $4.8 million, 50% of which will be shared by the two parties
according to the proportion of electricity capacity they use, while the
remaining 50% of which will be borne by the Administrative Commission of Nanjing
Jiangning Economic & Technical Development Zone. In 2008, we purchased from
CEEG some accessories, including electric transformers, high-voltage switch
cabinet, power distribution boxes, switch cabinets and frequency converter
cabinet in the total amount of approximately $1.4 million. As of December 31,
2008, we had a payable balance to CEEG in the amount of approximately $150,000,
which related to amount payable in respect of purchase of the above
accessories.




In
October 2008, we entered into cooperation agreement with CEEG (Nanjing)
Semiconductor Co., Ltd. and Nanjing University of Aeronautics and Astronautics
to jointly develop cutting and texture technology. In October 2008, we assigned
to CEEG Nanjing International Trade Co., Ltd. our creditor’s rights towards one
of our suppliers in the amount of approximately $6.4 million. On December 30,
2008,  CEEG and CEEG Nanjing International Trade Co., Ltd. assigned to
CEEG (Nanjing) New Energy Co., Ltd. their credit’s rights towards us in the
amount of approximately $1.4 million and $0.3 million, respectively. The
creditor’s rights of CEEG (Nanjing) New Energy Co., Ltd. towards us in the
amount of approximately $1.7 million was subsequently offset by the
corresponding amount that CEEG (Nanjing) New Energy Co., Ltd. owed to us. In
April 2008, we also entered into an agreement to lease the land use right over a
plot of land of 360 square meters from CEEG (Nanjing) Special Transformer Co.,
Ltd. for a term until March 2013 to construct a nitrogen station. The tenancy
agreement provides for annual rental payments of approximately
$3,000.




Employment
Agreements




See
“Item 6. Directors, Senior Management and Employees—Management—Employment
Agreements.”




Share Incentive
Plan




See
“Item 6. Directors, Senior Management and Employees—Management—Share
Incentive Plan.”


77




Related Party Transaction
Policy




We
adopted an audit committee charter and a related party transaction policy, which
require that the audit committee review all related party transactions on an
ongoing basis and all such transactions be approved or ratified by the
committee.




C.
            Interests of Experts
      and Counsel




Not
applicable.




ITEM
8.                      FINANCIAL
INFORMATION




A.
            Consolidated
      Statements and Other Financial
  Information




We have
appended consolidated financial statements filed as part of this annual
report.




Legal
Proceedings




We are a
named defendant in three purported class actions currently pending in the United
States District Court for the Southern District of New York—Brown v. China
Sunergy Co., Ltd. et al., Case No. 07-CV-07895 (DAB), Sheshtawy v. China Sunergy
Co., Ltd. et al., Case No. 07-CV-08656 (DAB), and Giombetti v. China Sunergy
Co., Ltd. et al., Case No. 07-CV-09689 (DAB). On September 29, 2008, the
District Court appointed a lead plaintiff and consolidated the three cases. The
lead plaintiff filed a consolidated amended complaint on December 8,
2008.




The
consolidated amended complaint purports to state class action claims against us
in connection with our initial public offering and seeks unspecified damages.
Specifically, the lead plaintiff alleges that we made false and misleading
statements in our initial public offering registration statement and prospectus
regarding, among other things, the procurement of polysilicon.




Several
of our directors and officers, along with the investment banks that underwrote
our initial public offering, are also named defendants in the cases. On January
1, 2009, the defendants filed a motion to dismiss the consolidated amended
complaint.  Briefing on the motion was completed on May 1, 2009, the
court had not yet ruled on the motion to dismiss.  We believe the case
is without merit and intend to defend the actions vigorously.




In April
2008, the Nanjing Intermediate People’s Court issued a judgment in our favor for
the first instance trial of our claim against Wuxi Zhuriyi International Trade
Co., Ltd. Wuxi Zhuriyi International Trade Co., Ltd. was required to return our
prepayment, pay us two times of the deposit and liquidated damages for its
failure to perform its contractual obligations to deliver us silicon raw
materials. In addition, we filed civil litigation with the Nanjing Intermediate
People’s Court against Suzhou Shenlong PV Technology Co., Ltd. for its failure
to perform its contractual obligations to deliver us silicon wafers. We also
filed civil litigation with the Nanjing Intermediate People’s Court against
Changzhou Meijing Solar Material Co., Ltd. for its failure to perform its
contractual obligations to deliver us silicon wafers. These lawsuits were
subsequently settled.




Dividend
Policy




We have
never declared or paid any dividends, nor do we have any present plan to pay any
cash dividends on our ordinary shares in the foreseeable future. We currently
intend to retain most, if not all, of our available funds and any future
earnings to operate and expand our business.




We are a
holding company incorporated in the Cayman Islands. We rely on dividends paid by
our direct and indirect subsidiaries, Sunergy BVI, Sunergy Hong Kong and Sunergy
Nanjing, for our cash needs, including the payment of dividends to the holders
of our ADSs and debt service on any debt we may incur through our Cayman holding
company. The payment of dividends by entities organized in China is subject to
limitations. Regulations in the PRC currently permit payment of dividends only
out of accumulated profits as determined in accordance with PRC accounting
standards and regulations. Sunergy Nanjing is also required to set aside at
least 10% of its after-tax profit based on PRC accounting standards each year to
its general reserves until the cumulative amount of such reserves reaches 50% of
its registered capital. These reserves are not distributable as cash dividends.
Sunergy Nanjing is also required to allocate a portion of its after-tax profits,
as determined by its board of directors, to its staff welfare and bonus funds,
which may not be distributed to equity owners. In addition, if Sunergy Nanjing
or Sunergy BVI incurs debt on its own behalf in the future, the instruments
governing the debt may restrict its ability to pay dividends or make other
distributions to us.




Our board
of directors has complete discretion on whether to pay dividends, subject to the
approval of our shareholders. Even if our board of directors decides to pay
dividends, the form, frequency and amount will depend upon our future operations
and earnings, capital requirements and surplus, general financial condition,
contractual restrictions and other factors that the board of directors may deem
relevant. Any dividend we declare will be paid to the holders of ADSs, subject
to the terms of the deposit agreement, to the same extent as holders of our
ordinary shares, subject to the terms of the deposit agreement, including the
fees and expenses payable under. Cash dividends on our ordinary shares, if any,
will be paid in U.S. dollars.


78




B.
            Significant
      Changes




We have
not experienced any significant changes since the date of our audited
consolidated financial statements included in this annual report.




ITEM
9.                      THE
OFFER AND LISTING




A.
            Offering and Listing
      Details.




Our ADSs,
each representing six of our ordinary shares, have been listed on the Nasdaq
Global Market since May 17, 2007. Our ADSs trade under the symbol
“CSUN.”




Since May
17, 2007, the closing price of our ADSs on the Nasdaq Global Market has ranged
from $1.38 to $17.88 per ADS. For the year ended December 31, 2008, the closing
price ranged from $1.51 to $17.71 per ADS.




The
following table provides the high and low closing prices for our ADSs on the
Nasdaq Global Market for the period indicated.




Trading
      PriceHigh
                
                
                Low$
                
                
                $Annual
      High and Low2007
      (from May 17, 2007)
                
                
                17.88
                
                
                
                5.052008
                
                
                17.71
                
                
                
                1.51Quarterly
      High and LowSecond
      Quarter 2007 (from May 17, 2007)
                
                
                16.56
                
                
                
                10.89Third
      Quarter 2007
                
                
                13.97
                
                
                
                5.05Fourth
      Quarter 2007
                
                
                17.88
                
                
                
                6.81First
      Quarter 2008
                
                
                17.71
                
                
                
                6.49Second
      Quarter 2008
                
                
                14.29
                
                
                
                7.49Third
      Quarter 2008
                
                
                12.03
                
                
                
                6.80Fourth
      Quarter 2008
                
                
                7.54
                
                
                
                1.51First
      Quarter 2009
                
                
                5.40
                
                
                
                1.38Monthly
      Highs and LowsNovember
      2008
                
                
                5.40
                
                
                
                1.51December
      2008
                
                
                4.17
                
                
                
                3.08January
      2009
                
                
                4.36
                
                
                
                3.00February
      2009
                
                
                2.97
                
                
                
                1.69March
      2009
                
                
                3.35
                
                
                
                1.38April
      2009
                
                
                3.32
                
                
                
                2.51May
      2009
                
                
                3.99
                
                
                
                3.01June
      2009 (through June 23)
                
                
                6.08
                
                
                
                3.80




79


B.           Plan of
Distribution




Not
applicable.




C.           Markets




Our ADSs,
each representing six of ordinary shares, have been listed on the Nasdaq Global
Market since May 17, 2007 and have been trading under the symbol
“CSUN.”




D.           Selling
Shareholders




Not
applicable.




E.           Dilution




Not
applicable.




F.           Expenses of the
Issue




Not
applicable.




ITEM
10.               ADDITIONAL
INFORMATION




A.           Share
Capital




Not
applicable.




B.           Memorandum and Articles of
Association




We
incorporate by reference into this annual report the description of our amended
and restated memorandum of association contained in our F-1 registration
statement (File No. 333-142367) originally filed with the SEC on April 25, 2007,
as amended. Our shareholders adopted our amended and restated memorandum and
articles of association by a special resolution on April 24, 2007.




The
following are summaries of material provisions of our currently effective
amended and restated memorandum and articles of association, as well as the
Companies Law (2007 Revision) insofar as they relate to the material terms of
our ordinary shares.




Registered Office and
Objects




The
Registered Office of our company is at the offices ofthe offices of Codan Trust
Company (Cayman) Limited, Cricket Square, Hutchins Drive, PO Box 2681, Grand
Cayman, KY1-1111, Cayman Islands. The objects for which our company is
established are unrestricted and we have full power and authority to carry out
any object not prohibited by the Companies Law (2007 Revision), as amended from
time to time, or any other law of the Cayman Islands.




Board of
Directors




See “Item
6.C. Board Practices — Board of Directors”


80




Ordinary
Shares




General.All of our
outstanding ordinary shares are fully paid and non-assessable. Certificates
representing the ordinary shares are issued in registered form. Our shareholders
who are non-residents of the Cayman Islands may freely hold and vote their
shares.




Dividends.The holders of our
ordinary shares are entitled to such dividends as may be declared by our
shareholders or board of directors subject to the Companies Law.




Voting Rights.Each ordinary
share is entitled to one vote on all matters upon which the ordinary shares are
entitled to vote. Voting at any meeting of shareholders is by show of hands
unless a poll is demanded or required by the rules of the designated stock
exchange as described in our amended and restate articles of association. A poll
may be demanded by (a) the chairman of the meeting, (b) at least three
shareholders present in person or, in the case of a shareholder being a
corporation, by its duly authorized representative or by proxy for the time
being entitled to vote at the meeting, (c) any shareholder or shareholders
present in person or, in the case of a shareholder being a corporation, by its
duly authorized representative or by proxy and representing not less than
one-tenth of the total voting rights of all the shareholders having the right to
vote at the meeting, (d) a shareholder or shareholders present in person or, in
the case of a shareholder being a corporation, by its duly authorized
representative or by proxy and holding not less than one-tenth of the issued
share capital of our voting shares or (e) if required by the rules of the
designated stock exchange, by any director or directors who, individually or
collectively, hold proxies in respect of shares representing 5% or more of the
total voting rights at such meeting.




A quorum
required for a meeting of shareholders consists of at least two shareholders
present in person or by proxy or, if a corporation or other non-natural person,
by its duly authorized representative. Shareholders’ meetings are held annually
and may be convened by our board of directors on its own initiative. Advance
notice of at least ten days is required for the convening of our annual general
meeting and other shareholders’ meetings.




An
ordinary resolution to be passed by the shareholders requires the affirmative
vote of a simple majority of the votes attaching to the ordinary shares cast in
a general meeting, while a special resolution requires the affirmative vote of
no less than two-thirds of the votes cast attaching to the ordinary shares. A
special resolution is required for important matters such as a change of name or
an amendment to our memorandum or articles of association. Holders of the
ordinary shares may effect certain changes by ordinary resolution, including
alter the amount of our authorized share capital, consolidate and divide all or
any of our share capital into shares of larger amount than our existing share
capital, and cancel any unissued shares.




Transfer of Shares.Subject
to the restrictions of our amended and restated articles of association, as
applicable, any of our shareholders may transfer all or any of his or her
ordinary shares by an instrument of transfer in the usual or common form or a
form prescribed by the designated stock exchange or any other form approved by
our board.




Our board
of directors may, in its absolute discretion, decline to register any transfer
of any ordinary share which is not fully paid up or on which we have a lien. Our
directors may also decline to register any transfer of any ordinary share unless
(a) the instrument of transfer is lodged with us, accompanied by the certificate
for the ordinary shares to which it relates and such other evidence as our board
of directors may reasonably require to show the right of the transferor to make
the transfer; (b) the instrument of transfer is in respect of only one class of
ordinary shares; (c) the instrument of transfer is properly stamped, if
required; (d) in the case of a transfer to joint holders, the number of joint
holders to whom the ordinary share is to be transferred does not exceed four; or
(e) a fee of such maximum sum as the Nasdaq Global Market may determine to be
payable, or such lesser sum as our board of directors may from time to time
require, is paid to us in respect thereof.




If our
directors refuse to register a transfer they shall, within two months after the
date on which the instrument of transfer was lodged, send to each of the
transferor and the transferee notice of such refusal. The registration of
transfers may, on prior notice being given by advertisement in one or more
newspapers or by electronic means, be suspended and the register closed at such
times and for such periods as our board of directors may from time to time
determine, provided, however, that the registration of transfers shall not be
suspended nor the register closed for more than 30 days in any
year.




Liquidation.On a return of
capital on winding up or otherwise (other than on conversion, redemption or
purchase of shares), assets available for distribution among the holders of
ordinary shares shall be distributed among the holders of the ordinary shares on
a pro rata basis. If our assets available for distribution are insufficient to
repay all of the paid-up capital, the assets will be distributed so that the
losses are borne by our shareholders proportionately.


81




Calls on Shares and Forfeiture of
Shares.Our board of directors may from time to time make calls upon
shareholders for any amounts unpaid on their shares in a notice served to such
shareholders at least 14 days prior to the specified time and place of payment.
The shares that have been called upon and remain unpaid are subject to
forfeiture.




Redemption of Shares.Subject
to the provisions of the Companies Law, the rules of the designated stock
exchange, our amended and restated memorandum and articles of association and to
any special rights conferred on the holders of any shares or class of shares, we
may issue shares on terms that they are subject to redemption at our option or
at the option of the holders, on such terms and in such manner as may be
determined by our board of directors.




Variations of Rights of Shares.All or any of the special rights attached to any class of shares may,
subject to the provisions of the Companies Law, be varied with the sanction of a
special resolution passed at a general meeting of the holders of the shares of
that class.




Inspection of Register of Members.Pursuant to our amended and restated articles of association, our
register of members and branch register of members shall be open for inspection
by shareholders for such times and on such days as our board of directors shall
determine, without charge, or by any other person upon a maximum payment of
$2.50 or such other sum specified by the board, at the registered office or such
other place at which the register is kept in accordance with the Companies Law
or, upon a maximum payment of $1.00 or such other sum specified by the board, at
our registration office, unless the register is closed in accordance with our
amended and restated articles of association.




Inspection of Books and
Records. No holders of our ordinary shares who is not a director shall
have any right of inspecting any of our accounts, books or documents except as
conferred by the Companies Law or authorized by the directors or by us in
general meeting. However, we will make this annual report, which contains our
audited financial statements, available to shareholders and ADS holders. See
“Item 10.H. Documents on Display.”




C.           Material
Contracts




We have
not entered into any material contracts other than in the ordinary course of
business and other than those described in Item 4, “Information on the Company”
or elsewhere in this annual report on Form 20-F.




D.           Exchange
Controls




China’s
government imposes control over the convertibility of RMB into foreign
currencies. The conversion of RMB into foreign currencies, including U.S.
dollars, has been based on rates announced by the People’s Bank of China. On
July 21, 2005, the PRC government changed its decade-old policy of pegging the
value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is
permitted to fluctuate within a narrow and managed band against a basket of
certain foreign currencies. This change in policy has resulted in an
approximately 17.4 % appreciation of the RMB against the U.S. dollar between
July 21, 2005 and March 31, 2009. While the international reaction to the
RMB revaluation has generally been positive, there remains significant
international pressure on the PRC government to adopt an even more flexible
currency policy, which could result in a further and more significant
appreciation of the RMB against the U.S. dollar.




Pursuant
to the Foreign Exchange Administration Regulations issued by the State Council
on January 29, 1996, and effective as of April 1, 1996 (and amended on January
14, 1997 and August 5, 2008, respectively) and the the Administration Rules of
the Settlement, Sale and Payment of Foreign Exchange which came into effect on
July 1, 1996, or the Rules, conversion of RMB into foreign exchange by foreign
investment enterprises for current account items, including the distribution of
dividends and profits to foreign investors of joint ventures, is permissible.
Foreign investment enterprises are permitted to remit foreign exchange from
their foreign exchange bank account in China on the basis of, inter alia, the
terms of the relevant joint venture contracts and the board resolutions
declaring the distribution of the dividend and payment of profits. The State
Council amended the Foreign Exchange Administration Rules on January 14, 1997
and August 5, 2009, respectively, providing that, among other things, the State
Council amended the Foreign Exchange Control Regulations and added, among other
things, an important provision, as Article 5 provides that the State shall not
impose restrictions on recurring international current account payments and
transfers. Renminbi can be freely converted into foreign currencies for
international payment under capital accounts unless Chinese laws and regulations
require obtaining prior approval from SAFE. However, for the international
income under capital accounts, the conversion of foreign currencies into
Renminbi is still subject to the prior approval of SAFE.




82







Under the
Rules, foreign investment enterprises are required to open and maintain separate
foreign exchange accounts for capital account items (but not for other items).
In addition, foreign investment enterprises may only buy, sell and/or remit
foreign currencies at those banks authorized to conduct foreign exchange
business upon the production of valid commercial documents and, in the case of
certain capital account item transactions, document approval from
SAFE.




Currently,
foreign investment enterprises are required to apply to SAFE for “foreign
exchange registration certificates for foreign investment enterprises” (which
are granted to foreign investment enterprises, upon fulfilling specified
conditions and which are subject to review and renewal by SAFE on an annual
basis). With such foreign exchange registration certificates and required
underlying transaction documents,  or with approval documents from the
SAFE if the transactions are under capital account (which are obtained on a
transaction-by-transaction basis), foreign-invested enterprises may enter into
foreign exchange transactions at banks authorized to conduct foreign exchange
business to obtain foreign exchange for their needs.




E.          
Taxation




The
following summary of the material Cayman Islands, PRC and United States federal
income tax consequences of an investment in our ADSs or ordinary shares is based
upon laws and relevant interpretations thereof in effect as of the date of this
annual report on Form 20-F, all of which are subject to change. This summary
does not deal with all possible tax consequences relating to an investment in
our ADSs or ordinary shares, such as the tax consequences under state, local,
and other tax laws not addressed herein.




Cayman
Islands Taxation




The
Cayman Islands currently levies no taxes on individuals or corporations based
upon profits, income, gains or appreciation and there is no taxation in the
nature of inheritance tax or estate duty. There are no other taxes likely to be
material to the Company levied by the Government of the Cayman Islands except
for stamp duties which may be applicable on instruments executed in, or brought
within the jurisdiction of the Cayman Islands. The Cayman Islands is not party
to any double tax treaties. There are no exchange control regulations or
currency restrictions in the Cayman Islands.




We have
received an undertaking from the Governor in Cabinet of the Cayman Islands that,
in accordance with section 6 of the Tax Concessions Law (1999 Revision) of the
Cayman Islands, for a period of 20 years from August 22, 2006, no law which is
enacted thereafter in the Cayman Islands imposing any tax to be levied on
profits, income, gains or appreciations shall apply to us or our operations and,
in addition, that no tax to be levied on profits, income, gains or appreciations
or which is in the nature of estate duty or inheritance tax shall be payable (i)
on or in respect of the shares, debentures or other obligations of us or (ii) by
way of the withholding in whole or in part of a payment of dividend or other
distribution of income or capital by us to its members or a payment of principal
or interest or other sums due under a debenture or other obligation of
us.




People’s
Republic of China Taxation




Pursuant
to the New EIT Law and the Implementing Regulation, both of which became
effective on January 1, 2008, dividends generated after January 1, 2008 and
payable by a foreign-invested enterprise to its foreign investors will be
subject to a 10% withholding tax if the foreign investors are considered as
non-resident enterprises without any establishment or place of business within
China or if the dividends payable have no connection with the establishment or
place of business of the foreign investors within China, unless any such foreign
investor’s jurisdiction of incorporation has a tax treaty with China that
provides for a reduced withholding arrangement. The Cayman Islands, where we are
incorporated, does not have such a tax treaty with China. Sunergy Hong Kong, our
wholly owned subsidiary and the direct holder of 100% equity interest in Sunergy
Nanjing, is incorporated in Hong Kong. According to the Mainland and Hong Kong
Special Administrative Region Arrangement on Avoiding Double Taxation or Evasion
of Taxation on Income agreed between China and Hong Kong, dividends paid by a
foreign-invested enterprise in China to its direct holding company in Hong Kong
will be subject to withholding tax at a rate of no more than 5% (if the foreign
investor owns directly at least 25% of the shares of the foreign-invested
enterprise). Under the New EIT Law and the Implementing Regulation, if we and
Sunergy Hong Kong were regarded as a resident enterprise, the dividends payable
to Sunergy Hong Kong from Sunergy Nanjing would be exempt from the PRC income
tax. If Sunergy Hong Kong is regarded as a non-resident enterprise, and
therefore would be subject to a 5% withholding tax for any dividends payable to
it from Sunergy Nanjing, the amount of funds available to us to meet our cash
requirements, including the payment of dividends to our shareholders and debt
service on any debt we may incur through our Cayman holding company, could be
materially reduced.




83




In
addition, because there remains uncertainty regarding the interpretation and
implementation of the concept of “de facto management bodies” if we are regarded
as a PRC resident enterprise under the New EIT Law, any dividends to be
distributed by us to our non-PRC shareholders or holders of ADSs will be subject
to a withholding tax. Unless there are further rules announced by the Chinese
tax authorities, we may be required under the New EIT Law to withhold PRC income
tax on our dividends payable to our non-PRC shareholders or holders of ADSs, or
any gain realized by our non-PRC shareholders or holders of ADSs from transfer
of the shares or ADSs.




United
States Federal Income Taxation




The
following discussion describes the material U.S. federal income tax consequences
to U.S. Holders (defined below) under present law of an investment in the ADSs
or ordinary shares. This summary applies only to U.S. Holders that hold the ADSs
or ordinary shares as capital assets and that have the U.S. dollar as their
functional currency. This discussion is based on the tax laws of the United
States as in effect on the date of this report and on U.S. Treasury regulations
in effect or, in some cases, proposed, as of the date of this report, as well as
judicial and administrative interpretations thereof available on or before such
date. All of the foregoing authorities are subject to change, which change could
apply retroactively and could affect the tax consequences described
below.




The
following discussion does not deal with the tax consequences to any particular
investor or to persons in special tax situations such as:




·
            banks;




·
            insurance
      companies;




·
            broker-dealers;




·
            traders
      that elect to mark to market;




·
            tax-exempt
      entities;




·
            persons
      liable for alternative minimum tax;




·
            U.S.
      expatriates;




·
            regulated
      investment companies or real estate investment
  trusts;




·
            persons
      holding an ADS or ordinary share as part of a straddle, hedging,
      conversion or integrated
transaction;




·
            persons
      who acquired ADSs or ordinary shares pursuant to the exercise of any
      employee stock options or otherwise as
  compensation;




·
            persons
      that actually or constructively own 10% or more of the total combined
      voting power of all classes of our voting stock;
  or




·
            partnerships
      or other pass-through entities, or persons holding ADSs or ordinary shares
      through such entities.




INVESTORS
ARE URGED TO CONSULT THEIR TAX ADVISORS ABOUT THE APPLICATION OF THE U.S.
FEDERAL TAX RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE, LOCAL,
FOREIGN AND OTHER TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF ADSs OR ORDINARY SHARES.




The
discussion below of the U.S. federal income tax consequences to “U.S. Holders”
will apply if you are a beneficial owner of ADSs or ordinary shares and you are,
for U.S. federal income tax purposes,




·
            an
      individual who is a citizen or resident of the United
    States;




·
            a
      corporation (or other entity taxable as a corporation for U.S. federal
      income tax purposes) organized under the laws of the United States, any
      state thereof or the District of
Columbia;




84


·
            an
      estate, the income of which is subject to U.S. federal income taxation
      regardless of its source; or




·
            a
      trust that (1) is subject to the primary supervision of a court within the
      United States and the control of one or more U.S. persons for all
      substantial decisions or (2) has a valid election in effect under
      applicable U.S. Treasury regulations to be treated as a U.S.
      person.




If you
are a partner in a partnership (or other entity taxable as a partnership) that
holds ADSs or ordinary shares, your tax treatment generally will depend on your
status and the activities of the partnership.




The
discussion below assumes that the representations contained in the deposit
agreement are true and that the obligations in the deposit agreement and any
related agreement have been and will be complied with in accordance with their
terms. If you hold ADSs, you should be treated as the beneficial owner of the
underlying ordinary shares represented by those ADSs for U.S. federal income tax
purposes.




The U.S.
Treasury has expressed concerns that parties to whom ADSs are pre-released may
be taking actions that are inconsistent with the claiming, by U.S. Holders of
ADSs, of foreign tax credits for U.S. federal income tax purposes. Such actions
would also be inconsistent with the claiming of the reduced rate of tax
applicable to dividends received by certain non-corporate U.S. Holders, as
described below. Accordingly, the availability of the reduced tax rate for
dividends received by certain non-corporate U.S. Holders could be affected by
future actions that may be taken by the U.S. Treasury or parties to whom ADSs
are pre-released.




Taxation
of Dividends and Other Distributions on the ADSs or Ordinary Shares




Subject
to the passive foreign investment company rules discussed below, the gross
amount of distributions we make to you with respect to the ADSs or ordinary
shares (including the amount of any taxes withheld therefrom) generally will be
included in your gross income as dividend income on the date of actual or
constructive receipt by the depositary, in the case of ADSs, or by you, in the
case of ordinary shares, but only to the extent that the distribution is paid
out of our current or accumulated earnings and profits (as determined under U.S.
federal income tax principles). To the extent the amount of the distribution
exceeds our current and accumulated earnings and profits (as determined under
U.S. federal income tax principles), such excess amount will be treated first as
a tax-free return of your tax basis in your ADSs or ordinary shares, and then,
to the extent such excess amount exceeds your tax basis, as capital gain. We
currently do not, and we do not intend to, calculate our earnings and profits
under U.S. federal income tax principles. Therefore, a U.S. Holder should expect
that a distribution will generally be treated as a dividend even if that
distribution would otherwise be treated as a non-taxable return of capital or as
capital gain under the rules described above. Any dividends we pay will not be
eligible for the dividends-received deduction allowed to corporations in respect
of dividends received from other U.S. corporations.




With
respect to certain non-corporate U.S. Holders, including individual U.S.
Holders, for taxable years beginning before January 1, 2011, dividends will be
“qualified dividend income” that is taxed at the lower applicable capital gains
rate, provided that certain conditions are satisfied, including (1) the ADSs or
ordinary shares are readily tradable on an established securities market in the
United States or, in the event we are deemed to be a “resident enterprise” under
PRC tax law (see Item 10, “Additional Information—Taxation—People’s Republic of
China Taxation”), we are eligible for the benefits of the income tax treaty
between the United States and the PRC, (2) we are neither a passive foreign
investment company nor treated as such with respect to you (as discussed below)
for our taxable year in which the dividend is paid and the preceding taxable
year, and (3) certain holding period requirements are met. U.S. Treasury
guidance indicates that common or ordinary shares, or ADSs representing such
shares, are considered for the purpose of clause (1) above to be readily
tradable on an established securities market in the United States if they are
listed on the Nasdaq Global Market, as are our ADSs (but not our ordinary
shares). There can be no assurance that our ADSs will be considered readily
tradable on an established securities market in later years. You should consult
your tax advisors regarding the availability of the lower capital gains rate
applicable to qualified dividend income for dividends paid with respect to our
ADSs or ordinary shares and any possible change in law relating to the
availability of such lower rate for dividends paid by us.




Dividends
will constitute foreign source income for foreign tax credit limitation
purposes. If the dividends are qualified dividend income (as discussed above),
the amount of the dividend taken into account for purposes of calculating the
foreign tax credit limitation will in general be limited to the gross amount of
the dividend, multiplied by the reduced tax rate applicable to qualified
dividend income and divided by the highest tax rate normally applicable to
dividends. The limitation on foreign taxes eligible for credit is calculated
separately with respect to specific classes of income. For this purpose,
dividends distributed by us with respect to the ADSs or ordinary shares will be
“passive category income” or, in the case of certain U.S. Holders, “general
category income.” In addition, if PRC withholding taxes apply to dividends paid
to you with respect to the ADSs or ordinary shares (see Item 10, “Additional
Information—Taxation—People’s Republic of China Taxation”), subject to certain
conditions and limitations, such PRC withholding taxes may be treated as foreign
taxes eligible for credit against your U.S. federal income tax
liability.




85




Taxation
of Disposition of ADSs or Ordinary Shares




Subject
to the passive foreign investment company rules discussed below, you will
recognize taxable gain or loss on any sale, exchange or other taxable
disposition of an ADS or ordinary share equal to the difference between the
amount realized (in U.S. dollars) for the ADS or ordinary share and your tax
basis (in U.S. dollars) in the ADS or ordinary share. The gain or loss generally
will be capital gain or loss. If you are a non-corporate U.S. Holder, including
an individual U.S. Holder, who has held the ADS or ordinary share for more than
one year, you will be eligible for reduced tax rates. The deductibility of
capital losses is subject to limitations.




Any such
gain or loss that you recognize will generally be treated as U.S. source income
or loss for foreign tax credit limitation purposes. However, in the event we are
deemed to be a “resident enterprise” under PRC tax law, we may be eligible for
the benefits of the income tax treaty between the United States and the PRC. In
such event, if PRC tax were to be imposed on any gain from the disposition of
the ADSs or ordinary shares (see Item 10, “Additional
Information—Taxation—People’s Republic of China Taxation”), a U.S. Holder that
is eligible for the benefits of the treaty may elect to treat such gain as PRC
source income. You should consult your tax advisor regarding the proper
treatment of gain or loss in your particular circumstances.




Passive
Foreign Investment Company




Based on
the market price of our ADSs, the value of our assets, and the composition of
our income and assets, we do not believe we were a “passive foreign investment
company,” or PFIC, for U.S. federal income tax purposes for our taxable year
ended December 31, 2008.  A non-U.S. corporation will be a PFIC for
any taxable year if either:




·
            at
      least 75% of its gross income for such year is passive income;
      or




·
            at
      least 50% of the value of its assets (based on an average of the quarterly
      values of the assets) during such year is attributable to assets that
      produce passive income or are held for the production of passive income
      (the “asset test”).




We will
be treated as owning our proportionate share of the assets and earning our
proportionate share of the income of any other corporation in which we own,
directly or indirectly, at least 25% (by value) of the stock.




We must
make a separate determination after the close of each taxable year as to whether
we were a PFIC for that year. Accordingly, we cannot assure you that we will not
be a PFIC for our current taxable year ending December 31, 2009 or any future
taxable year. The composition of our income and assets will be affected by how,
and how quickly, we use the cash we generate from our operations and raise in
any offering. Because the value of our assets for purposes of the asset test
will generally be determined by reference to the market price of our ADSs and
ordinary shares, fluctuations in the market price of the ADSs and ordinary
shares may cause us to become a PFIC. If we are a PFIC for any taxable year
during which you hold ADSs or ordinary shares, we generally will continue to be
treated as a PFIC with respect to you for all succeeding years during which you
hold ADSs or ordinary shares, unless we cease to be a PFIC and you make a
“deemed sale” election with respect to the ADSs or ordinary shares, as
applicable. If such election is made, you will be deemed to have sold the ADSs
or ordinary shares you hold at their fair market value and any gain from such
deemed sale would be subject to the consequences described below. After the
deemed sale election, your ADSs or ordinary shares with respect to which such
election was made will not be treated as shares in a PFIC unless we subsequently
become a PFIC.




For each
taxable year that we are treated as a PFIC with respect to you, you will be
subject to special tax rules with respect to any “excess distribution” that you
receive and any gain you realize from a sale or other disposition (including a
pledge) of the ADSs or ordinary shares, unless you make a “mark-to-market”
election as discussed below. Distributions you receive in a taxable year that
are greater than 125% of the average annual distributions you received during
the shorter of the three preceding taxable years or your holding period for the
ADSs or ordinary shares will be treated as an excess distribution. Under these
special tax rules:




86




·
            the
      excess distribution or gain will be allocated ratably over your holding
      period for the ADSs or ordinary
shares,




·
            the
      amount allocated to the current taxable year, and any taxable years in
      your holding period prior to the first taxable year in which we were a
      PFIC, will be treated as ordinary income,
and




·
            the
      amount allocated to each other year will be subject to the highest tax
      rate in effect for individuals or corporations, as applicable, for each
      such year and the interest charge generally applicable to underpayments of
      tax will be imposed on the resulting tax attributable to each such
      year.




The tax
liability for amounts allocated to years prior to the year of disposition or
excess distribution cannot be offset by any net operating losses for such years,
and gains (but not losses) realized on the sale of the ADSs or ordinary shares
cannot be treated as capital, even if you hold the ADSs or ordinary shares as
capital assets.




If we are
treated as a PFIC with respect to you for any taxable year, to the extent any of
our subsidiaries are also PFICs or we make direct or indirect equity investments
in other entities that are PFICs, you will be deemed to own shares in such
lower-tier PFICs that are directly or indirectly owned by us in that proportion
that the value of the ADSs or ordinary shares you own bears to the value of all
of our ADSs and ordinary shares, and you may be subject to the adverse tax
consequences described above with respect to the shares of such lower-tier PFICs
that you would be deemed to own. You should consult your tax advisors regarding
the application of the PFIC rules to any of our subsidiaries.




A U.S.
Holder of “marketable stock” (as defined below) of a PFIC may make a
mark-to-market election for such stock to elect out of the tax treatment
discussed above. If you make a mark-to-market election for the ADSs or ordinary
shares, you will include in income for each year that we are treated as a PFIC
with respect to you an amount equal to the excess, if any, of the fair market
value of the ADSs or ordinary shares as of the close of your taxable year over
your adjusted basis in such ADSs or ordinary shares. You will be allowed a
deduction for the excess, if any, of the adjusted basis of the ADSs or ordinary
shares over their fair market value as of the close of the taxable year.
However, deductions will be allowable only to the extent of any net
mark-to-market gains on the ADSs or ordinary shares included in your income for
prior taxable years. Amounts included in your income under a mark-to-market
election, as well as gain on the actual sale or other disposition of the ADSs or
ordinary shares, will be treated as ordinary income. Ordinary loss treatment
will apply to the deductible portion of any mark-to-market loss on the ADSs or
ordinary shares, as well as to any loss realized on the actual sale or
disposition of the ADSs or ordinary shares, to the extent that the amount of
such loss does not exceed the net mark-to-market gains previously included for
such ADSs or ordinary shares. Your basis in the ADSs or ordinary shares will be
adjusted to reflect any such income or loss amounts. If you make a valid
mark-to-market election, the tax rules that apply to distributions by
corporations which are not PFICs would apply to distributions by us, except that
the lower capital gains rate applicable to qualified dividend income (discussed
above under “—Taxation of Dividends and Other Distributions on the ADSs or
Ordinary Shares”) would not apply.




The
mark-to-market election is available only for “marketable stock,” which is stock
that is traded in other than de minimis quantities on at
least 15 days during each calendar quarter (“regularly traded”) on a qualified
exchange or other market, as defined in applicable U.S. Treasury regulations.
Our ADSs are listed on the Nasdaq Global Market, which is a qualified exchange
or other market for these purposes. Consequently, if the ADSs continue to be
listed on the Nasdaq Global Market and are regularly traded, and you are a
holder of ADSs, we expect that the mark-to-market election would be available to
you if we become a PFIC. Because a mark-to-market election cannot be made for
equity interests in any lower-tier PFICs that we own, a U.S. Holder may continue
to be subject to the PFIC rules with respect to its indirect interest in any
investments held by us that are treated as an equity interest in a PFIC for U.S.
federal income tax purposes.




Alternatively,
a U.S. Holder of stock in a PFIC may make a “qualified electing fund” election
with respect to such PFIC to elect out of the tax treatment discussed
above.  A U.S. Holder that makes a valid qualified electing fund
election with respect to a PFIC will generally include in gross income for a
taxable year such holder’s pro
rata share of the corporation’s earnings and profits for the taxable
year.  However, the qualified electing fund election is available only
if the PFIC provides such U.S. Holder with certain information regarding its
earnings and profits as required under applicable U.S. Treasury
regulations.  We do not intend to prepare or provide the information
that would enable you to make a qualified electing fund election.




87




If you
hold ADSs or ordinary shares in any year in which we are treated as a PFIC with
respect to you, you will be required to file Internal Revenue Service Form 8621
regarding distributions received on the ADSs or ordinary shares and any gain
realized on the disposition of the ADSs or ordinary shares.




You are
urged to consult your tax advisor regarding the application of the PFIC rules to
your investment in ADSs or ordinary shares.




Information
Reporting and Backup Withholding




Dividend
payments with respect to ADSs or ordinary shares and proceeds from the sale,
exchange or redemption of ADSs or ordinary shares may be subject to information
reporting to the Internal Revenue Service and possible U.S. backup withholding
at a current rate of 28%, unless the conditions of an applicable exception are
satisfied. Backup withholding will not apply to a U.S. Holder that furnishes a
correct taxpayer identification number and makes any other required
certification or that is otherwise exempt from backup withholding. U.S. Holders
that are required to establish their exempt status generally must provide such
certification on Internal Revenue Service Form W-9. U.S. Holders should consult
their tax advisors regarding the application of the U.S. information reporting
and backup withholding rules.




Backup
withholding is not an additional tax. Amounts withheld as backup withholding may
be credited against your U.S. federal income tax liability, and you may obtain a
refund of any excess amounts withheld under the backup withholding rules by
filing the appropriate claim for refund with the Internal Revenue Service and
furnishing any required information in a timely manner.




F.
            Dividends and Paying
      Agents




Not
Applicable.




G.
            Statement by
      Experts




Not
Applicable.




H.
            Documents on
      Display




We
previously filed with the SEC our registration statement on Form F-1
(Registration No. 333-144282, as amended) and the prospectus under the
Securities Act of 1933, with respect to our ordinary shares. We have also filed
with the SEC a related registration statement on F-6 (Registration No.
333-142574) to register the ADSs. We also filed with the SEC a registration
statement on Form S-8 (File Number 333-148125, as amended) with respect to our
securities to be issued under our First Plan.




We are
subject to periodic reporting and other informational requirements of the
Exchange Act as applicable to foreign private issuers. Accordingly, we will be
required to file reports and other information with the SEC. Specifically, we
are required to file annually a Form 20-F no later than: (1) within six months
after the end of each fiscal year, which is December 31, for fiscal years ending
before December 15, 2011; and (2) within four months after the end of each
fiscal year for fiscal years ending on or after December 15, 2011. As a foreign
private issuer, we are exempt from the rules of the Exchange Act prescribing the
furnishing and content of proxy statements to shareholders. All information
filed with the SEC can be inspected and copied at the public reference
facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549.
You can request copies of these documents, upon payment of a duplicating fee, by
writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. You may also obtain
additional information over the Internet at the SEC’s website at www.sec.gov.




Our
financial statements have been prepared in accordance with U.S.
GAAP.




We will
furnish our shareholders with annual reports, which will include a review of
operations and annual audited consolidated financial statements prepared in
conformity with U.S. GAAP.




In
accordance with Nasdaq Stock Market Marketplace Rules 4350(b), we will post
this annual report on Form 20-F on our website at
http://www.chinasunergy.com.




I.           
 Subsidiary
Information




For a
listing of our subsidiaries, see Item 4, “Information on the
Company—Organizational Structure.”


88




ITEM
11.               QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




Inflation




Since our
inception, inflation in China has not materially impacted our results of
operations. According to the National Bureau of Statistics of China, the change
of consumer price index in China was 3.9%, 1.8%, 1.5%, 4.8% and 5.9% in 2004,
2005, 2006, 2007 and 2008, respectively.




Foreign
Exchange Risk




A major
portion of our sales are denominated in Renminbi and Euros, with the remainder
in U.S. dollars, while a substantial portion of our costs and expenses is
denominated in U.S. dollars and Renminbi, with the remainder in Euros.
Therefore, fluctuations in currency exchange rates could have a significant
impact on our financial stability due to a mismatch among various foreign
currency-denominated sales and costs. Fluctuations in exchange rates,
particularly among the U.S. dollar, Renminbi and Euro, affect our gross and net
profit margins and could result in foreign exchange and operating
losses.




Our exposure to foreign exchange risk
primarily relates to currency gains or losses resulting from timing differences
between signing of sales contracts and settling of these contracts. As of
December 31, 2008, we had a Renminbi denominated cash balance of RMB546.5
million and a U.S. dollar denominated cash balance of $9.5 million. Assuming we
had converted the U.S. dollar denominated cash balance of $9.5 million as of
December 31, 2008 into Renminbi at the exchange rate of $1.00 for RMB6.8225 as
of December 31, 2008, this cash balance would have been RMB64.8 million.
Assuming a further 1% appreciation of the Renminbi against the U.S. dollar, this
cash balance would have decreased to RMB64.2 million as of December 31, 2008.
Conversely, if we decide to convert our Renminbi into U.S. dollars for the
purpose of making payments for dividends on our ordinary shares or ADSs or for
other business purposes, appreciation of the U.S. dollar against the Renminbi
would have a negative effect on the U.S. dollar amount available to
us.




We are
also subject to foreign currency translation risk.  Our financial
statements are expressed in U.S. dollars but the functional currency of our
operating subsidiary is Renminbi. We translate monetary assets and liabilities
denominated in other currencies into Renminbi at the rates of exchange in effect
at each balance sheet date. Depending on movements in foreign exchange rates,
the foreign currency translation may have an adverse impact on our consolidated
financial statements. We recorded these exchange gains and losses in the
statements of operations. We recorded net foreign currency losses of $1.3
million, $1.2 million and $6.9 million in 2006, 2007 and 2008,
respectively.




In 2008,
our exposure to foreign currency risk was also impacted by an embedded foreign
currency forward contract.  One of our supply contracts provided that
the purchase price of the silicon raw materials to be acquired was denominated
in U.S. dollars, which is not the functional currency of either of the
contracting parties.  Accordingly, the contract contains an embedded
foreign currency forward contract, which is required to be bifurcated and
accounted for at fair value in accordance with the provisions of FASB Statement
No. 133, “Accounting for Derivative Instruments and Hedging Activities.”
Fluctuations in forward foreign exchange rates have impacted our assessment in
determining the fair value of our embedded derivative.  In 2008, we
recorded a loss on the change in fair value of the embedded derivative of $7.6
million which was included in the line item “Change in fair value of derivative”
in the consolidated statements of operations.




In 2008,
we entered into a series of foreign currency forward contracts with certain
banks to hedge our exposure to foreign currency exchange risk.  As of
December 31, 2008, we had foreign currency forward contracts with a total
contract value of approximately EUR33.0 million. As with all hedging
instruments, there are risks associated with the use of foreign currency forward
contracts.  As at December 31, 2008, we recorded change in fair value
of derivatives related to the forward foreign currency exchange contracts of
$2.3 million, which was included in the line item “Change in fair value of
derivative” in the consolidated statements of operations. While the use of such
foreign currency forward contracts provides us with protection from certain
fluctuations in foreign currency exchange, we potentially forgo the benefits
that might result from favorable fluctuations in foreign currency exchange. In
addition, any default by the counterparties to these transactions could
adversely affect our financial condition and results of operations.




Counterparty
Risk




Outstanding financial derivative
instruments expose us to credit loss in the event of non-performance by the
counterparties to the agreements. On a periodic basis, we review the credit
ratings of our counterparties and adjust our exposure as deemed appropriate. The
counterparty risk has been considered in the fair value measurement of
derivative instruments.


89





Interest
Rate Risk




Our
exposure to interest rate risk primarily relates to interest expenses incurred
by our short-term borrowings, as well as interest income generated by excess
cash invested in demand deposits with original maturities of three months or
less. Such interest-earning instruments carry a degree of interest rate risk. We
have not used any derivative financial instruments to manage our interest rate
risk exposure. We have not been exposed nor do we anticipate being exposed to
material risks due to changes in interest rates, because most of our borrowings
bear fixed interest rates.However,
our future interest expense may increase due to changes in market interest
rates.




ITEM
12.               DESCRIPTION
OF SECURITIES OTHER THAN EQUITY SECURITIES




Not
Applicable.




II.
            PART
      II




ITEM
13.               DEFAULTS,
DIVIDEND ARREARAGES AND DELINQUENCIES




None.




ITEM
14.               MATERIAL
MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS




The
following “Use of Proceeds” information relates to:




·
            the
      registration statement on Form F-1 (File number: 333-142367), or the IPO
      Registration Statement for our initial public offering of 9,775,000
      American depositary shares, which IPO Registration Statement was declared
      effective by the SEC on May 16, 2007;
and




·
            the registration statement on
      Form F-3 (File number: 333-151518), or the Shelf Registration Statement
      for our registration of convertible senior notes, which Shelf Registration
      Statement was declared effective by the SEC on June 19,
      2008.




We
received net proceeds after expenses of approximately $95.9 million from our
initial public offering and net proceeds of approximately $50.2 million
from the sale of our convertible senior notes.




The net
proceeds from our public offering on NASDAQ were allocated as
follows:




·
            approximately
      $60 million for purchasing raw materials and other working capital
      requirements; and




·
            approximately
      $20 million for modifying our existing solar cell manufacturing lines and
      expanding our solar cell manufacturing
  facilities.




Among the
remaining amount of the net proceeds, approximately $11 million has been pledged
to procure RMB bank loans for our working capital requirements.




Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Cowen and Company, LLC and
Jefferies & Company, Inc. the underwriters for our initial public
offering.




We used
the net proceeds from the sale of our convertible senior notes as
follows:




·
            approximately
      $30 million for expansion of production
  capacity;




·
            approximately
      $10 million for enhancement of research and development;
    and




·
            the
      reminder for development, and general corporate
  purposes




Credit
Suisse Securities (USA) LLC served as the initial purchaser for the sale of
our convertible senior notes.


90




As of
December 31, 2008, our cash resources amount to $94.8 million, comprised of cash
on hand and demand deposits.




See “Item 10. Additional Information”
for a description of the rights of securities holders, which remain
unchanged.




ITEM
15.               CONTROLS
AND PROCEDURES




Evaluation
of Disclosure Controls and Procedures




Our
management, with the participation of our chief executive officer and chief
financial officer, has performed an evaluation of the effectiveness of our
disclosure controls and procedures within the meaning of Rules 13a-15(e) and
15d-15(e) of the Exchange Act as of the end of the period covered by this
report. Based on such evaluation, our management has concluded that, as of the
end of the period covered by this annual report, our disclosure controls and
procedures were effective.




Internal
Control over Financial Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rules 13a-15(f) under the
Exchange Act. Internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of consolidated financial statements in accordance with
generally accepted accounting principles and includes those policies and
procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of a company’s assets, (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of consolidated
financial statements in accordance with generally accepted accounting
principles, and that a company’s receipts and expenditures are being made only
in accordance with authorizations of a company’s management and directors, and
(3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of a company’s assets that
could have a material effect on the consolidated financial
statements.




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




As
required by Section 404 of the Sarbanes-Oxley Act and related rules as
promulgated by the SEC, management assessed the effectiveness of the our
internal control over financial reporting as of December 31, 2008 using criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.




Based
on this assessment, management concluded that the our internal control over
financial reporting was effective as of December 31, 2008 based on the criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.




Our independent registered public
accounting firm, Deloitte Touche Tohmatsu CPA Ltd., has audited the financial
statements included in this annual report on Form 20-F.




Attestation
Report of the Independent Registered Public Accounting Firm




To the
Board of Directors and Shareholders of




CHINA
SUNERGY CO., LTD.:




We
have audited internal control over financial reporting China Sunergy Co., Ltd
and subsidiaries (the "Company") as of December 31, 2008, based on the criteria
established in Internal Control — Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission.  The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management's
Report on Internal Control over Financial Reporting.  Our
responsibility is to express an opinion on the Company's internal control over
financial reporting based on our audit.


91




We
conducted our audit 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
effective internal control over financial reporting was maintained in all
material respects.  Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on that risk, and performing such other procedures as
we considered necessary in the circumstances.  We believe that our
audit provides a reasonable basis for our opinion.




A
company's internal control over financial reporting is a process designed by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles.  A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.




Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis.  Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.




In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on the criteria
established in Internal Control — Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission.




We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements and the
related financial statement schedule as of and for the year ended December 31,
2008, of the Company and our report dated June 26, 2009 expressed an unqualified
opinion on those financial statements and financial statement
schedule.




/s/DELOITTE  TOUCHE
TOHMATSU CPA LTD.




Shanghai,
China




June 26,
2009




Changes
in Internal Control




No change
in our internal control over financial reporting occurred during the year ended
December 31, 2008 that materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.




ITEM
16A.            AUDIT
COMMITTEE FINANCIAL EXPERT




Our board
of directors has determined that Merry Tang, an independent director and member
of our audit committee, is an audit committee financial expert.




ITEM
16B.            CODE
OF ETHICS




Our board
of directors has adopted a code of ethics that applies to our directors,
officers, employees and agents, including certain provisions that specifically
apply to our chief executive officer, chief financial officer, senior finance
officer, controller, vice presidents and any other persons who perform similar
functions for us. We hereby undertake to provide to any person without charge, a
copy of our code of business conduct and ethics within ten working days after we
receive such person’s written request.


92




ITEM
16C.            PRINCIPAL
ACCOUNTANT FEES AND SERVICES




The
following table sets forth the aggregate fees by categories specified below in
connection with certain professional services rendered by Deloitte Touche
Tohmatsu CPA Ltd., our principal external auditors, for the periods indicated.
We did not pay any tax related or other fees to our auditors during the periods
indicated below.




2007
                
                
                2008Audit
      fees(1)
                
                $
                480,000
                
                
                $
                1,140,516Audit-related
      fees(2)
                
                $
                300,000
                
                
                $
                393,384Tax
      fees
                
                
                —
                
                
                
                —All
      other fees
                
                
                —
                
                
                
                —




(1)
            “Audit
      fees” means the aggregate fees billed in each of the fiscal years listed
      for professional services rendered by our principal auditors for the audit
      of our annual financial statements.




(2)
            “Audit-related
      fees” means the aggregate fees billed in each of the fiscal years listed
      for assurance and related services by our principal auditors that are
      reasonably related to the performance of the audit or review of our
      financial statements and are not reported under “Audit fees.” Services
      comprising the fees disclosed under the category of “Audit-related fees”
      involve principally the issue of comfort letter, rendering of listing
      advice, and other audit-related services for the years ended December 31,
      2007 and December 31, 2008.




We
engaged Deloitte Touche Tohmatsu CPA Ltd. in 2006. Total service fees billed to
2006 related to these professional services in  2007 and 2008 amounted
to $780,000 and $1,533,900, respectively.




The
policy of our audit committee is to pre-approve all audit and non-audit services
provided by Deloitte Touche Tohmatsu CPA Ltd., including audit services,
audit-related services, tax services and other services as described above,
other than those for de minimus services which are approved by the Audit
Committee prior to the completion of the audit.




ITEM
      16D.
            EXEMPTIONS
      FROM THE LISTING STANDARDS FOR AUDIT
COMMITTEES




We are in
compliance with the Nasdaq corporate governance rules with respect to the audit
committee.




ITEM
      16E.
            PURCHASES
      OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
    PURCHASERS.




None.




ITEM
16F.
            CHANGE IN REGISTRANT’S CERTIFYING
      ACCOUNTANT




Not applicable.




ITEM
      16G.
            CORPORATE
      GOVERNANCE




Rule 5635(c) of the Nasdaq Rules
requires a Nasdaq listed company to obtain its shareholders’ approval of stock
option plans or other equity compensation arrangements, and any material
amendments to such plans or arrangements. Rule 5615 of the Nasdaq Rules permits
a foreign private issuer like our company to follow home country practice in
certain corporate governance matters. Upon board approval in May 2009, we
effected amendments to our First Plan. We believe that some of the amendments
are material changes to the then existing plan.  Our Cayman Islands
counsel has provided a letter to Nasdaq dated May 14, 2009, confirming that
under the existing Cayman Islands law, we are not required to obtain
shareholders’ approval for amendments to our existing equity incentive plan.
Nasdaq has acknowledged the receipt of such letter and our home country practice
with respect to approval for amendments to our equity incentive
plan.


93




Other than the home country practice
described above, we are not aware of any significant ways in which our corporate
governance practices differ from those followed by U.S. domestic companies under
the Nasdaq Rules.




III.
            PART
      III




ITEM
      17.
            FINANCIAL
      STATEMENTS




We have
elected to provide financial statements pursuant to Item 18.




ITEM
      18.
            FINANCIAL
      STATEMENTS




The
consolidated financial statements of China Sunergy and its subsidiaries are
included at the end of this annual report.




ITEM
      19.
            EXHIBITS




Exhibit
                      Number
                    
                    Description of Document1.1
                    
                    Amended
      and Restated Memorandum and Articles of Association of the Registrant
      (incorporated by reference to Exhibit 3.2 from our Registration Statement
      on Form F-1 (file no. 333-142367) filed with the Securities and Exchange
      Commission on April 25, 2007).2.1
                    
                    Registrant’s
      Specimen American Depositary Receipt (included in Exhibit
      2.3).2.2
                    
                    Registrant’s
      Specimen Certificate for Ordinary shares (incorporated by reference to
      Exhibit 4.2 from our Registration Statement on Form F-1 (file no.
      333-142367) filed with the Securities and Exchange Commission on April 25,
      2007).2.3
                    
                    Form
      of Deposit Agreement among the Registrant, JPMorgan Chase Bank, N.A. as
      depositary, and holders of the American Depositary Receipts (incorporated
      by reference to Exhibit 4.3 from our Registration Statement on Form F-1
      Amendment No. 2 (file no. 333-142367) filed with the Securities and
      Exchange Commission on April 25, 2007).2.4
                    
                    Indenture
      dated as of July 1, 2008 between Wilmington Trust Company and the
      Registrant (incorporated by reference to Exhibit 4.8 of the Report of
      Foreign Private Issuer on Form 6-K filed by China Sunergy Co., Ltd. on
      July 2, 2008).4.1
                    
                    Subscription
      Agreement among the Registrant and other parties therein dated as of
      September 17, 2006 (incorporated by reference to Exhibit 4.4 from our
      Registration Statement on Form F-1 (file no. 333-142367) filed with the
      Securities and Exchange Commission on April 25, 2007).4.2
                    
                    Shareholders
      Agreement among the Registrant and other parties therein dated as of
      September 26, 2006, amended as of October 24, 2006, March 22, 2007 and
      April 24, 2007 (incorporated by reference to Exhibit 4.5 from our
      Registration Statement on Form F-1 (file no. 333-142367) filed with the
      Securities and Exchange Commission on April 25, 2007).4.3
                    
                    Registration
      Rights Agreement among the Registrant and other parties therein dated as
      of September 26, 2006 (incorporated by reference to Exhibit 4.6 from
      our Registration Statement on Form F-1 (file no. 333-142367) filed with
      the Securities and Exchange Commission on April 25,
  2007).4.4
                    
                    Sale
      and Purchase Agreement among the Registrant, Sunergy BVI and other parties
      therein dated as of August 29, 2006 (incorporated by reference to Exhibit
      4.7 from our Registration Statement on Form F-1 (file no. 333-142367)
      filed with the Securities and Exchange Commission on April 25,
      2007).4.5
                    
                    Agreement
      for the Transfer and Assumption of Obligations among the Registrant,
      Sunergy BVI and other parties therein dated as of August 29,
      2006(incorporated by reference to Exhibit 4.8 from our Registration
      Statement on Form F-1 (file no. 333-142367) filed with the Securities and
      Exchange Commission on April 25, 2007).4.6
                    
                    Subscription
      Agreement among the Sunergy BVI, Sunergy Nanjing and other parties therein
      dated as of April 4, 2006(incorporated by reference to Exhibit 4.9 from
      our Registration Statement on Form F-1 (file no. 333-142367) filed with
      the Securities and Exchange Commission on April 25,
  2007)
  94
 
 Exhibit
                    Number
                  
                  Description of Document4.7
                  
                  Warrant
      Purchase Agreement among the Sunergy BVI, Sunergy Nanjing and other
      parties therein dated as of March 8, 2006(incorporated by reference to
      Exhibit 4.10 from our Registration Statement on Form F-1 (file no.
      333-142367) filed with the Securities and Exchange Commission on April 25,
      2007).4.8
                  
                  Amended
      and Restated Share Incentive Plan (incorporated by reference to Exhibit
      4.1 from our Post-Effective Amendment No. 1 to Registration Statement on
      Form S-8 (File No. 333-148125), as amended, filed with the Commission on
      June 22, 2009).4.9
                  
                  Second
      Share Incentive Plan, including form of Restricted Share Award
      Agreement.4.10
                  
                  Form
      of Indemnification Agreement between the Registrant and its directors
      (incorporated by reference to Exhibit 10.2 from our Registration Statement
      on Form F-1 (file no. 333-142367) filed with the Securities and Exchange
      Commission on April 25, 2007).4.11*
                  
                  Form
      of Employment Agreement between the Registrant and a Senior Executive
      Officer of the Registrant.4.12
                  
                  Form
      of Director Agreement between the Registrant and certain independent
      directors.4.13
                  
                  English
      Translation of Authorization License for Usage of Trademark between China
      Electric Equipment Group Co., Ltd. and Sunergy Nanjing dated as of June 7,
      2006(incorporated by reference to Exhibit 10.4 from our Registration
      Statement on Form F-1 (file no. 333-142367) filed with the Securities and
      Exchange Commission on April 25, 2007).4.14
                  
                  English
      Translation of Trademark License Agreement between China Electric
      Equipment Group Co., Ltd. and Sunergy Nanjing dated as of March 15,
      2006(incorporated by reference to Exhibit 10.5 from our Registration
      Statement on Form F-1 (file no. 333-142367) filed with the Securities and
      Exchange Commission on April 25, 2007).4.15
                  
                  English
      Translation of License Authorization for Usage of Trademark between China
      Electric Equipment Group Co., Ltd. and Sunergy Nanjing dated as of
      February 9, 2006(incorporated by reference to Exhibit 10.6 from our
      Registration Statement on Form F-1 (file no. 333-142367) filed with the
      Securities and Exchange Commission on April 25, 2007).4.16
                  
                  English
      Translation of Purchase Contract between Jiangsu Zhongneng and Sunergy
      Nanjing  dated as of March 1, 2007 (incorporated by reference to
      Exhibit 10.24 from our Registration Statement on Form F-1 (file no.
      333-142367) filed with the Securities and Exchange Commission on April 25,
      2007).4.17
                  
                  English
      Translation of Guarantee Contract between China Electric Equipment Group
      Co., Ltd. and Bank of Communications dated as of November 30, 2006
      (incorporated by reference to Exhibit 10.31 from our Registration
      Statement on Form F-1 (file no. 333-142367) filed with the Securities and
      Exchange Commission on April 25, 2007).4.18
                  
                  English
      Translation of Property Lease Contract between CEEG (Nanjing) Special
      Transformers Co., Ltd. and Sunergy Nanjing dated as of August 29, 2006
      (incorporated by reference to Exhibit 10.37 from our Registration
      Statement on Form F-1 (file no. 333-142367) filed with the Securities and
      Exchange Commission on April 25, 2007).4.19
                  
                  Series
      A and Series B Preferred Shares Sale and Purchase Agreement dated as of
      March 22, 2007 (incorporated by reference to Exhibit 10.39 from our
      Registration Statement on Form F-1 (file no. 333-142367) filed with the
      Securities and Exchange Commission on April 25, 2007).4.20
                  
                  English
      Translation of Joint Venture Contract between Sunergy BVI and CEEG in 2007
      (incorporated by reference to Exhibit 4.50 from our Annual Report on Form
      20-F filed with the Securities and Exchange Commission on June 9,
      2008).4.21
                  
                  English
      Translation of Land Use Right Transfer Agreement between China Electric
      Equipment Group Co., Ltd. and Sunergy Nanjing  dated as of July
      23, 2007 (incorporated by reference to Exhibit 4.51 from our Annual Report
      on Form 20-F filed with the Securities and Exchange Commission on June 9,
      2008).4.22
                  
                  English
      Translation of Form of Equipment Purchase Contract between China Electric
      Equipment Group Co., Ltd and Sunergy Nanjing (incorporated by reference to
      Exhibit 4.52 from our Annual Report on Form 20-F filed with the Securities
      and Exchange Commission on June 9, 2008).4.23
                  
                  English
      Translation of Form of Guarantee Contract between China Electric Equipment
      Group Co., Ltd. and Bank of Communications (incorporated by reference to
      Exhibit 4.53 from our Annual Report on Form 20-F filed with the Securities
      and Exchange Commission on June 9,
2008).
  95
 
 Exhibit
                    Number
                  
                  Description of Document4.24
                  
                  English
      Translation of Comprehensive Credit Granting Contract between Sunergy
      Nanjing and China Citic Bank dated as of January 9, 2008 (incorporated by
      reference to Exhibit 4.54 from our Annual Report on Form 20-F filed with
      the Securities and Exchange Commission on June 9,
2008).4.25
                  
                  English
      Translation of Maximum Guarantee Contract between China Electric Equipment
      Group Co., Ltd. and China Citic Bank dated as of January 9, 2008
      (incorporated by reference to Exhibit 4.55 from our Annual Report on Form
      20-F filed with the Securities and Exchange Commission on June 9,
      2008).4.26
                  
                  English
      Translation of Maximun Guarantee Contract between China Electric Equipment
      Group Co., Ltd. and Huaxia Bank dated as of May 31, 2007(incorporated by
      reference to Exhibit 4.56 from our Annual Report on Form 20-F filed with
      the Securities and Exchange Commission on June 9,
2008).4.27
                  
                  English
      Translation of Form of Guarantee Contract between China Electric Equipment
      Group Co., Ltd. and Industrial and Commercial Bank of China (incorporated
      by reference to Exhibit 4.57 from our Annual Report on Form 20-F filed
      with the Securities and Exchange Commission on June 9,
    2008).4.28
                  
                  English
      Translation of Maximum Guarantee Contract between China Electric Equipment
      Group Co., Ltd. and Evergrowing Bank dated as of November 1, 2007
      (incorporated by reference to Exhibit 4.58 from our Annual Report on Form
      20-F filed with the Securities and Exchange Commission on June 9,
      2008).4.29
                  
                  English
      Translation of Guarantee Contract among China Electric Equipment Group,
      Tingxiu Lu and  Agriculture Bank of China dated as of December
      27, 2007 (incorporated by reference to Exhibit 4.59 from our Annual Report
      on Form 20-F filed with the Securities and Exchange Commission on June 9,
      2008).4.30
                  
                  English
      Translation of Guarantee Contract between China Electric Equipment Group
      Co., Ltd. and  Nanjing Jiangning Rural Credit Cooperative dated
      as of January 24, 2008 (incorporated by reference to Exhibit 4.60 from our
      Annual Report on Form 20-F filed with the Securities and Exchange
      Commission on June 9, 2008).4.31
                  
                  English
      Translation of Guarantee Contract between China Construction Bank and
      China Electric Equipment Group Co., Ltd. dated as of November 15,2007
      (incorporated by reference to Exhibit 4.61 from our Annual Report on Form
      20-F filed with the Securities and Exchange Commission on June 9,
      2008)4.32
                  
                  English
      Translation of Guarantee Contract between Tingxiu Lu and  Bank
      of Shanghai dated as of February 2, 2008 (incorporated by reference to
      Exhibit 4.62 from our Annual Report on Form 20-F filed with the Securities
      and Exchange Commission on June 9, 2008).4.33
                  
                  English
      Translation of Guarantee Contract between China Electric Equipment Group
      Co., Ltd. and Bank of Shanghai dated as of February 2, 2008 (incorporated
      by reference to Exhibit 4.63 from our Annual Report on Form 20-F filed
      with the Securities and Exchange Commission on June 9,
    2008).4.34
                  
                  English
      Translation of Credit Granting Contract between Sunergy Nanjing and China
      Merchant Bank dated as of January 18, 2008 (incorporated by reference to
      Exhibit 4.64 from our Annual Report on Form 20-F (file no .001-33433)
      filed with the Securities and Exchange Commission on June 9,
      2008).4.35
                  
                  English
      Translation of Agreement on Co-Construction Transformer Substation between
      China Electric Equipment Group Co., Ltd. dated as of November 2, 2007
      (incorporated by reference to Exhibit 4.65 from our Annual Report on Form
      20-F filed with the Securities and Exchange Commission on June 9,
      2008).4.36
      †
                  
                  Sales
      Contract between Aleo Solar AG and Sunergy Nanjing dated as of October 4,
      2007 as well as Supplementary Contract dated as of January 21, 2008
      (incorporated by reference to Exhibit 4.66 from our  Annual
      Report on Form 20-F filed with the Securities and Exchange Commission on
      June 9, 2008).
  96
 
 Exhibit
                    Number
                  
                  Description of Document4.37
                  
                  English
      Translation of Sales Contract between CEEG Nanjing International Trade
      Co., Ltd. and Sunergy Nanjing dated as of October 15, 2007. (incorporated
      by reference to Exhibit 4.67 from our Annual Report on Form 20-F filed
      with the Securities and Exchange Commission on June 9,
    2008).4.38
                  
                  English
      Translation of Purchase Contract between CEEG (Nanjing) Semiconductor
      Material Co., Ltd. and Sunergy Nanjing dated as of December 11, 2007.
      (incorporated by reference to Exhibit 4.68 from our Annual Report on Form
      20-F filed with the Securities and Exchange Commission on June 9,
      2008).4.39
                  
                  English
      Translation of Form of Purchase Contract between CEEG (Nanjing)
      Semiconductor Material Co., Ltd. and Sunergy Nanjing. (incorporated by
      reference to Exhibit 4.69 from our Annual Report on Form 20-F filed with
      the Securities and Exchange Commission on June 9,
2008).4.40
                  
                  English
      Translation of Purchase Contract between CEEG (Nanjing) Semiconductor
      Material Co., Ltd. and Sunergy Nanjing dated as of December 29, 2007.
      (incorporated by reference to Exhibit 4.70 from our Annual Report on Form
      20-F filed with the Securities and Exchange Commission on June 9,
      2008).4.41
                  
                  English
      Translation of Sales Contract between CEEG (Nanjing) Semiconductor
      Material Co., Ltd. and Sunergy Nanjing dated as of November 20, 2007.
      (incorporated by reference to Exhibit 4.71 from our Annual Report on Form
      20-F filed with the Securities and Exchange Commission on June 9,
      2008).4.42
                  
                  English
      Translation of Purchase Contract between CEEG (Nanjing) Solar Research
      Institute and Sunergy Nanjing dated as of November 28, 2007. (incorporated
      by reference to Exhibit 4.72 from our Annual Report on Form 20-F filed
      with the Securities and Exchange Commission on June 9,
    2008).4.43
                  
                  English
      Translation of Form of Sales Contract between CEEG (Shanghai) Solar
      Science and Technology Co., Ltd. and Sunergy Nanjing (incorporated by
      reference to Exhibit 4.73 from our Annual Report on Form 20-F filed with
      the Securities and Exchange Commission on June 9,
2008).4.44
                  
                  English
      Translation of Long-term Sales Contract between CEEG (Shanghai) Solar
      Science and Technology Co., Ltd. and Sunergy Nanjing dated as of January
      10, 2008 (incorporated by reference to Exhibit 4.74 from our Annual Report
      on Form 20-F filed with the Securities and Exchange Commission on June 9,
      2008)4.45
                  
                  English
      Translation of Purchase Contract between CEEG (Shanghai) Solar Science and
      Technology Co., Ltd. and Sunergy Nanjing dated as of November 28, 2007
      (incorporated by reference to Exhibit 4.75 from our Annual Report on Form
      20-F filed with the Securities and Exchange Commission on June 9,
      2008).4.46
                  
                  English
      Translation of Module Processing Contract between CEEG (Shanghai) Solar
      Science and Technology Co., Ltd. and Sunergy Nanjing dated as of December
      19, 2007 (incorporated by reference to Exhibit 4.76 from our Annual Report
      on Form 20-F filed with the Securities and Exchange Commission on June 9,
      2008).4.47
                  
                  English
      Translation of Security Agreement between China Electric Equipment Group
      Co., Ltd. and Sunergy Nanjing (incorporated by reference to Exhibit 4.77
      from our Annual Report on Form 20-F filed with the Securities and Exchange
      Commission on June 9, 2008).4.48*
                  
                  English
      Translation of Purchase Contract between CEEG (Nanjing) Semiconductor
      Material Co., Ltd. and Sunergy Nanjing dated as of June 16, 2008 and its
      supplemental agreement dated as of July 29, 2008.4.49*
                  
                  English
      Translation of Sales Contract between China Electric Equipment Group (Hong
      Kong) Limited and Sunergy Nanjing dated as of June 3,
  2008.4.50*
                  
                  English
      Translation of Purchase Contract between Jiangxi Jingde Semiconductor New
      Material Co., Ltd. and Sunergy Nanjing dated as of January 19,
      2009.4.51*
                  
                  English
      Translation of Sales Contract between CEEG (Shanghai) Solar Science and
      Technology Co., Ltd. and Sunergy Nanjing dated as of April 7,
      2008.
 
  97
  
 Exhibit
                      Number
                    
                    Description of Document4.52*
                    
                    English
      Translation of Form of Sales Contract between CEEG (Shanghai) Solar
      Science and Technology Co., Ltd. and Sunergy Nanjing.4.53*
                    
                    English
      Translation of  Long-term Sales Contract between CEEG (Shanghai)
      Solar Science and Technology Co., Ltd. and Sunergy Nanjing dated as of
      January 10, 2008.4.54*
                    
                    English
      Translation of  Sales Contract between CEEG (Shanghai) Solar
      Science and Technology Co., Ltd. and Sunergy Nanjing dated as of July 2,
      2008.4.55*
                    
                    English
      Translation of  Sales Contract between CEEG (Shanghai) Solar
      Science and Technology Co., Ltd. and Sunergy Nanjing dated as of August
      20, 2008.4.56*
                    
                    English
      Translation of  Sales Contract between CEEG (Nanjing) New Energy
      Co., Ltd. and Sunergy Nanjing dated as of September 8,
    2008.4.57*
                    
                    English
      Translation of  Form of Sales Contract between CEEG (Shanghai)
      Solar Science and Technology Co., Ltd. and Sunergy Nanjing and its
      supplementary contract.4.58*
                    
                    English
      Translation of  Creditor’s Rights Transfer Contract between CEEG
      (Nanjing) International Trading Co., Ltd. and Sunergy Nanjing dated as of
      October 14, 2008.4.59*
                    
                    English
      Translation of Agreement among CEEG, CEEG (Nanjing) New Energy Co., Ltd.
      and Sunergy Nanjing dated as of December 30, 2008.4.60*
                    
                    English
      Translation of Agreement among CEEG, CEEG (Nanjing) International Trade
      Co., Ltd. and Sunergy Nanjing dated as of December 31,
    2008.4.61*
                    
                    English
      Translation of Equity Interest Transfer Agreement regarding the transfer
      of equity interest in China Sunergy (Shanghai) Co., Ltd. between China
      Electric Equipment Group Co., Ltd. and China Sunergy (Hong Kong) Co., Ltd.
      dated as of September 1, 20084.62
                    
                    ADS
      Lending Agreement, dated June 25, 2008, among Credit Suisse Securities
      (Europe) Limited, Credit Suisse, London Branch, and the Registrant
      (incorporated by reference to Exhibit 99.1 of the Report of Foreign
      Private Issuer on Form 6-K filed by China Sunergy Co., Ltd. on July 2,
      2008).8.1
                    
                    Subsidiaries
      of the Registrant (incorporated by reference to Exhibit 8.1 our Annual
      Report on Form 20-F filed with the Securities and Exchange Commission on
      June 9, 2008).11.1
                    
                    Code
      of Business Conduct and Ethics of the Registrant (incorporated by
      reference to Exhibit 99.1 from Registration Statement on Form F-1 (file
      no. 333-142367) filed with the Securities and Exchange Commission on April
      25, 2007).12.1*
                    
                    CEO
      Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.12.2*
                    
                    CFO
      Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.13.1*
                    
                    CEO
      Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.13.2*
                    
                    CFO
      Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.15.1*
                    
                    Consent
      of Conyers Dill & Pearman.15.2*
                    
                    Consent
      of Jun He Law Offices.15.3*
                    
                    Consent
      of Deloitte Touche Tohmatsu, Independent Registered Public Accounting
      Firm.
 
 *    Filed
with this Annual Report on Form 20-F.
 
 †   Confidential
treatment has been granted with respect to portions of this exhibit and such
confidential treatment portions have been deleted and replaced with “****” and
filed separately with the Securities and Exchange Commission pursuant to Rule
406 under the Securities Act of 1933.
  98




SIGNATURES




The
registrant hereby certifies that it meets all of the requirements for filing its
annual report on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.




CHINA
      SUNERGY CO., LTD.By
                    /S/ RUENNSHENG ALLEN
WANGName:
                    Ruennsheng
      Allen WangTitle:
                    Chief
      Executive
Officer





Date:
June 26, 2009




99




CHINA
SUNERGY CO., LTD.





INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS





Report
      of Independent Registered Public Accounting Firm
                F-2Consolidated
      Balance Sheets as of December 31, 2006, 2007 and 2008
                F-3Consolidated
      Statements of Operations for the years ended December 31, 2006, 2007 and
      2008
                F-5Consolidated
      Statements of Shareholders’ Equity and  comprehensive income (loss)
      for the years ended December 31, 2006, 2007 and 2008
                F-6Consolidated
      Statements of Cash Flows for the years ended December 31, 2006, 2007 and
      2008
                F-7Notes
      to the Consolidated Financial Statements
                F-9Additional
      Information - Financial Statements Schedule I
                F-47








REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholders of China Sunergy Co., Ltd.





We have
audited the accompanying consolidated balance sheets of China Sunergy Co., Ltd.
(the "Company") and subsidiaries (collectively referred to as the "Group”) as of
December 31, 2006, 2007 and 2008, and the related consolidated statements of
operations, shareholders' equity and comprehensive income (loss), and cash flows
for each of the three years in the period ended December 31, 2008 and the
related financial statement schedule included in Schedule I. These financial
statements and financial statement schedule are the responsibility of the
Group's management. Our responsibility is to express an opinion on the financial
statements and financial statement schedule 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 financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes 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, such consolidated financial statements present fairly, in all material
respects, the financial position of China Sunergy Co., Ltd. and subsidiaries as
of December 31, 2006, 2007 and 2008, and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
2008, in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.





We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Group's internal control over financial
reporting as of December 31, 2008, based on the criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated June 26, 2009 expressed an unqualified
opinion on the Company's internal control over financial reporting.





/s/
DELOITTE TOUCHE TOHMATSU CPA LTD.





Shanghai,
China


June 26,
2009


F-2





CHINA
SUNERGY CO., LTD.





CONSOLIDATED
BALANCE SHEETS


(In
U.S. dollars)





December 31,2006
                        
                        
                        2007
                        
                        
                        2008$
                        
                        
                        $
                        
                        
                        $ASSETSCurrent
      assets:Cash
      and cash equivalents
                        
                        
                        14,749,575
                        
                        
                        
                        60,457,666
                        
                        
                        
                        94,799,699Restricted
      cash
                        
                        
                        4,952,473
                        
                        
                        
                        23,473,400
                        
                        
                        
                        62,399,835Inventories,
      net
                        
                        
                        44,331,156
                        
                        
                        
                        56,091,909
                        
                        
                        
                        59,124,619Accounts
      receivable, net of allowance for doubtful accounts of, $nil, $nil and $349
      in 2006, 2007 and 2008, respectively
                        
                        
                        43,048,151
                        
                        
                        
                        26,817,355
                        
                        
                        
                        8,905,979Advances
      to suppliers, net of allowance for doubtful accounts of $nil, $1,109,602
      and $1,105,384 in 2006, 2007 and 2008, respectively
                        
                        
                        26,281,257
                        
                        
                        
                        79,912,181
                        
                        
                        
                        7,319,946Amounts
      due from related parties
                        
                        
                        1,976,410
                        
                        
                        
                        2,111,890
                        
                        
                        
                        18,583,319Current
      deferred tax assets
                        
                        
                        -
                        
                        
                        
                        527,361
                        
                        
                        
                        1,992,759Prepaid
      expenses and other current assets
                        
                        
                        1,081,935
                        
                        
                        
                        16,315,963
                        
                        
                        
                        11,531,250Total
      current assets
                        
                        
                        136,420,957
                        
                        
                        
                        265,707,725
                        
                        
                        
                        264,657,406Prepayments
      for equipment
                        
                        
                        7,271,178
                        
                        
                        
                        7,535,411
                        
                        
                        
                        173,208Property,
      plant and equipment, net
                        
                        
                        31,458,453
                        
                        
                        
                        45,393,354
                        
                        
                        
                        102,608,619Prepaid
      land use rights
                        
                        
                        1,026,447
                        
                        
                        
                        2,179,486
                        
                        
                        
                        6,441,567Non-current
      deferred tax assets
                        
                        
                        150,431
                        
                        
                        
                        328,574
                        
                        
                        
                        1,511,797Restricted
      cash- Collateral account
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        17,502,450Convertible
      bond issuance cost
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        3,450,859Other
      long-term assets
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,378,659TOTAL
      ASSETS
                        
                        
                        176,327,466
                        
                        
                        
                        321,144,550
                        
                        
                        
                        397,724,565





(Continued)


F-3


CHINA
SUNERGY CO., LTD.





CONSOLIDATED
BALANCE SHEETS


(In
U.S. dollars)





December 31,2006
                        
                        
                        2007
                        
                        
                        2008$
                        
                        
                        $
                        
                        
                        $LIABILITIES,
      MEZZANINE EQUITY AND SHAREHOLDERS’ EQUITYCurrent
      liabilities:Short-term
      bank borrowings
                        
                        
                        69,262,771
                        
                        
                        
                        121,841,022
                        
                        
                        
                        97,299,027Current
      portion of long-term borrowings
                        
                        
                        8,673,886
                        
                        
                        
                        -
                        
                        
                        
                        -Accounts
      payable- Trade
                        
                        
                        7,123,668
                        
                        
                        
                        3,477,132
                        
                        
                        
                        18,033,583Accounts
      payable- non-Trade
                        
                        
                        4,721,828
                        
                        
                        
                        3,679,981
                        
                        
                        
                        11,065,565Notes
      payable
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        14,631,434Accrued
      expenses and other current liabilities
                        
                        
                        1,368,368
                        
                        
                        
                        2,344,176
                        
                        
                        
                        4,639,648Advances
      from customers
                        
                        
                        949,915
                        
                        
                        
                        4,892,450
                        
                        
                        
                        706,055Amounts
      due to related parties
                        
                        
                        3,742
                        
                        
                        
                        8,214
                        
                        
                        
                        246,465Total
      current liabilities
                        
                        
                        92,104,178
                        
                        
                        
                        136,242,975
                        
                        
                        
                        146,621,777Collateral
      account payable
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        17,502,450Derivative
      liabilities
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        9,058,340Convertible
      bond payable
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        48,098,364Other
      liabilities
                        
                        
                        157,595
                        
                        
                        
                        1,053,482
                        
                        
                        
                        1,187,233Total
      liabilities
                        
                        
                        92,261,773
                        
                        
                        
                        137,296,457
                        
                        
                        
                        222,468,164Commitments
      and contingencies (Note 19)Minority
      Interest
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        299,020Mezzanine
      equity:Series
      A redeemable convertible preferred shares ($0.0001 par value; 12,847,300
      shares authorized, 12,847,340, nil and nil shares issued and outstanding
      as of December 31, 2006 2007 and 2008, respectively)
                        
                        
                        13,227,862
                        
                        
                        
                        -
                        
                        
                        
                        -Series
      B redeemable convertible preferred shares ($0.0001 par value; 23,905,100
      shares authorized, 23,905,100, nil and nil shares issued and outstanding
      as of December 31, 2006 2007 and 2008, respectively)
                        
                        
                        28,501,788
                        
                        
                        
                        -
                        
                        
                        
                        -Series
      C redeemable convertible preferred shares ($0.0001 par value; 6,901,000
      shares authorized, 6,901,000, nil and nil shares issued and outstanding as
      of December 31, 2006 2007 and 2008, respectively)
                        
                        
                        20,056,093
                        
                        
                        
                        -
                        
                        
                        
                        -Shareholders'
      equity:Ordinary
      shares (par value $0.0001; 463,247,600 shares authorized, 104,544,000,
      237,332,777 and 267,766,443 shares issued and outstanding as of December
      31, 2006, 2007 and 2008, respectively)
                        
                        
                        10,454
                        
                        
                        
                        23,733
                        
                        
                        
                        26,777Additional
      paid-in capital
                        
                        
                        20,144,945
                        
                        
                        
                        178,361,461
                        
                        
                        
                        182,070,348Subscription
      receivable
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (405,313
                        )Accumulated
      deficit
                        
                        
                        -
                        
                        
                        
                        (4,854,650
                        )
                        
                        
                        (27,792,246
                        )Accumulated
      other comprehensive income
                        
                        
                        2,124,551
                        
                        
                        
                        10,317,549
                        
                        
                        
                        21,057,815Total
      shareholders’ equity
                        
                        
                        22,279,950
                        
                        
                        
                        183,848,093
                        
                        
                        
                        174,957,381TOTAL
      LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS’ EQUITY
                        
                        
                        176,327,466
                        
                        
                        
                        321,144,550
                        
                        
                        
                        397,724,565





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


F-4


CHINA
SUNERGY CO., LTD.





CONSOLIDATED
STATEMENTS OF OPERATIONS


(In
U.S. dollars, except share data)





Years ended December 31,2006
                        
                        
                        2007
                        
                        
                        2008$
                        
                        
                        $
                        
                        
                        $Sales
      to third parties
                        
                        
                        144,692,707
                        
                        
                        
                        224,315,485
                        
                        
                        
                        295,919,243Sales
      to related parties
                        
                        
                        4,828,237
                        
                        
                        
                        10,592,416
                        
                        
                        
                        55,000,718Total
      revenues
                        
                        
                        149,520,944
                        
                        
                        
                        234,907,901
                        
                        
                        
                        350,919,961Cost
      of sales to third parties
                        
                        
                        (118,597,234
                        )
                        
                        
                        (206,032,155
                        )
                        
                        
                        (284,311,888
                        )Cost
      of sales to related parties
                        
                        
                        (4,292,012
                        )
                        
                        
                        (10,848,766
                        )
                        
                        
                        (51,142,106
                        )Cost
      of revenues
                        
                        
                        (122,889,246
                        )
                        
                        
                        (216,880,921
                        )
                        
                        
                        (335,453,994
                        )Gross
      profit
                        
                        
                        26,631,698
                        
                        
                        
                        18,026,980
                        
                        
                        
                        15,465,967Selling
      expenses
                        
                        
                        (1,014,442
                        )
                        
                        
                        (1,644,234
                        )
                        
                        
                        (3,866,300
                        )General
      and administrative expenses
                        
                        
                        (9,900,617
                        )
                        
                        
                        (13,664,204
                        )
                        
                        
                        (16,778,970
                        )Research
      and development expenses
                        
                        
                        (545,783
                        )
                        
                        
                        (2,555,073
                        )
                        
                        
                        (1,870,882
                        )Total
      operating expenses
                        
                        
                        (11,460,842
                        )
                        
                        
                        (17,863,511
                        )
                        
                        
                        (22,516,152
                        )Income
      (loss) from operations
                        
                        
                        15,170,856
                        
                        
                        
                        163,469
                        
                        
                        
                        (7,050,185
                        )Interest
      expense
                        
                        
                        (3,002,054
                        )
                        
                        
                        (7,394,229
                        )
                        
                        
                        (8,069,073
                        )Interest
      income
                        
                        
                        419,720
                        
                        
                        
                        1,577,194
                        
                        
                        
                        1,664,683Changes
      in fair value of derivatives
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (9,864,075
                        )Other
      (expense) income, net
                        
                        
                        (844,814
                        )
                        
                        
                        93,412
                        
                        
                        
                        (2,267,567
                        )Income
      (loss) before income taxes
                        
                        
                        11,743,708
                        
                        
                        
                        (5,560,154
                        )
                        
                        
                        (25,586,217
                        )Tax
      benefit
                        
                        
                        70,674
                        
                        
                        
                        705,504
                        
                        
                        
                        2,648,621Net
      income (loss)
                        
                        
                        11,814,382
                        
                        
                        
                        (4,854,650
                        )
                        
                        
                        (22,937,596
                        )Dividend
      on Series A redeemable convertible preferred shares
                        
                        
                        (13,377,452
                        )
                        
                        
                        (154,723
                        )
                        
                        
                        -Dividend
      on Series B redeemable convertible preferred shares
                        
                        
                        (28,551,788
                        )
                        
                        
                        (330,229
                        )
                        
                        
                        -Dividend
      on Series C redeemable convertible preferred shares
                        
                        
                        (7,097,263
                        )
                        
                        
                        (233,125
                        )
                        
                        
                        -Net
      loss attributable to holders of ordinary shares
                        
                        
                        (37,212,121
                        )
                        
                        
                        (5,572,727
                        )
                        
                        
                        (22,937,596
                        )Net
      loss per share:Basic
                        
                        $
                        (0.36
                        )
                        
                        $
                        (0.04
                        )
                        
                        $
                        (0.10
                        )Diluted
                        
                        $
                        (0.36
                        )
                        
                        $
                        (0.04
                        )
                        
                        $
                        (0.10
                        )Shares used in
      computation:Basic
                        
                        
                        103,583,178
                        
                        
                        
                        185,165,757
                        
                        
                        
                        238,079,890Diluted
                        
                        
                        103,583,178
                        
                        
                        
                        185,165,757
                        
                        
                        
                        238,079,890





The
accompany notes are an integral part of these consolidated financial
statements.


F-5


CHINA
SUNERGY CO., LTD.





CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY


AND
COMPREHENSIVE INCOME (LOSS)


(In
U.S. dollars, except share data)





AccumulatedAdditional
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    otherpaid-in
                                    
                                    
                                    Subscription
                                    
                                    
                                    Accumulated
                                    
                                    
                                    comprehensive
                                    
                                    
                                    
                                    
                                    
                                    ComprehensiveOrdinary shares
                                    
                                    
                                    capital
                                    
                                    
                                    receivable
                                    
                                    
                                    (deficit)
                                    
                                    
                                    income
                                    
                                    
                                    Total
                                    
                                    
                                    (loss) incomeNumber
                                    
                                    
                                    $
                                    
                                    
                                    $
                                    
                                    
                                    $
                                    
                                    
                                    $
                                    
                                    
                                    $
                                    
                                    
                                    $
                                    
                                    
                                    $Balance
      at January 1, 2006
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    9,450,000
                                    
                                    
                                    
                                    (3,052,020
                                    )
                                    
                                    
                                    (1,266,067
                                    )
                                    
                                    
                                    108,024
                                    
                                    
                                    
                                    5,239,937ReorganizationContribution
      from shareholders
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    2,512,020
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    2,512,020Excess
      of prorata distribution to shareholders
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    3,708,844
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    3,708,844Forgiveness
      of shareholder receivable
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    540,000
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    540,000Purchase
      and retirement of treasury shares
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (2,701,792
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (2,701,792
                                    )Distribution
      on reorganization
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (4,046,811
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (4,046,811
                                    )Issuance
      of ordinary shares
                                    
                                    
                                    99,144,000
                                    
                                    
                                    
                                    9,914
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    9,914Exercise
      of warrant
                                    
                                    
                                    5,400,000
                                    
                                    
                                    
                                    540
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    540Return
      of distribution on reorganization
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    4,046,811
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    4,046,811Series
      A beneficial conversionFeature
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    13,110,400
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    13,110,400Series
      B beneficial conversionFeature
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    27,999,948
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    27,999,948Series
      C beneficial conversionFeature
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    6,941,170
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    6,941,170Dividend
      on Series A redeemable convertible preferred shares
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (2,829,137
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (10,548,315
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (13,377,452
                                    )Dividend
      on Series B redeemable convertible preferred shares
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (28,551,788
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (28,551,788
                                    )Dividend
      on Series C redeemable convertible preferred shares
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (7,097,263
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (7,097,263
                                    )Share-based
      compensation
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    114,563
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    114,563Net
      income
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    11,814,382
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    11,814,382
                                    
                                    
                                    
                                    11,814,382Foreign
      currency translation adjustments
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    2,016,527
                                    
                                    
                                    
                                    2,016,527
                                    
                                    
                                    
                                    2,016,527Balance
      at December 31, 2006
                                    
                                    
                                    104,544,000
                                    
                                    
                                    
                                    10,454
                                    
                                    
                                    
                                    20,144,945
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    2,124,551
                                    
                                    
                                    
                                    22,279,950
                                    
                                    
                                    
                                    13,830,909Issuance
      of ordinary shares upon initial public offering net of issuance cost of
      $11,616,804
                                    
                                    
                                    58,650,000
                                    
                                    
                                    
                                    5,865
                                    
                                    
                                    
                                    95,902,331
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    95,908,196Dividend
      on Series A redeemable convertible preferred shares
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (154,723
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (154,723
                                    )Dividend
      on Series B redeemable convertible preferred shares
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (330,229
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (330,229
                                    )Dividend
      on Series C redeemable convertible preferred shares
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (233,125
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (233,125
                                    )Conversion
      of Series A, B and C redeemable convertible preferred shares into ordinary
      shares
                                    
                                    
                                    74,138,777
                                    
                                    
                                    
                                    7,414
                                    
                                    
                                    
                                    62,496,406
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    62,503,820Share-based
      compensation
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    535,856
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    535,856Net
      loss
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (4,854,650
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (4,854,650
                                    )
                                    
                                    
                                    (4,854,650
                                    )Foreign
      currency translation adjustments
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    8,192,998
                                    
                                    
                                    
                                    8,192,998
                                    
                                    
                                    
                                    8,192,998Balance
      at December 31, 2007
                                    
                                    
                                    237,332,777
                                    
                                    
                                    
                                    23,733
                                    
                                    
                                    
                                    178,361,461
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (4,854,650
                                    )
                                    
                                    
                                    10,317,549
                                    
                                    
                                    
                                    183,848,093
                                    
                                    
                                    
                                    3,338,348Issuance
      of restricted shares
                                    
                                    
                                    3,476,086
                                    
                                    
                                    
                                    348
                                    
                                    
                                    
                                    3,128
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    3,476Exercise
      of share options
                                    
                                    
                                    371,580
                                    
                                    
                                    
                                    37
                                    
                                    
                                    
                                    476,824
                                    
                                    
                                    
                                    (405,313
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    71,548Issuance
      of ordinary shares under share lending facility
                                    
                                    
                                    26,586,000
                                    
                                    
                                    
                                    2,659
                                    
                                    
                                    
                                    (2,659
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Share-based
      compensation
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    3,231,594
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    3,231,594Net
      loss
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    (22,937,596
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    (22,937,596
                                    )
                                    
                                    (22,937,596
                                    )Foreign
      currency translation adjustments
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    10,740,266
                                    
                                    
                                    
                                    10,740,266
                                    
                                    
                                    
                                    10,740,266Balance
      at December 31, 2008
                                    
                                    
                                    267,766,443
                                    
                                    
                                    
                                    26,777
                                    
                                    
                                    
                                    182,070,348
                                    
                                    
                                    
                                    (405,313
                                    )
                                    
                                    
                                    (27,792,246
                                    )
                                    
                                    
                                    21,057,815
                                    
                                    
                                    
                                    174,957,381
                                    
                                    
                                    
                                    (12,197,330
                                    )





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


F-6


CHINA
SUNERGY CO., LTD.





CONSOLIDATED
STATEMENTS OF CASH FLOWS


(In
U.S. dollars)





Years ended December 31,2006
                          
                          
                          2007
                          
                          
                          2008$
                          
                          
                          $
                          
                          
                          $Operating
      activities:Net
      loss attributable to holders of ordinary shares
                          
                          
                          (37,212,121
                          )
                          
                          
                          (5,572,727
                          )
                          
                          
                          (22,937,596
                          )Dividend
      on Series A redeemable convertible preferred shares
                          
                          
                          13,377,452
                          
                          
                          
                          154,723
                          
                          
                          
                          -Dividend
      on Series B redeemable convertible preferred shares
                          
                          
                          28,551,788
                          
                          
                          
                          330,229
                          
                          
                          
                          -Dividend
      on Series C redeemable convertible preferred shares
                          
                          
                          7,097,263
                          
                          
                          
                          233,125
                          
                          
                          
                          -Net
      income (loss)
                          
                          
                          11,814,382
                          
                          
                          
                          (4,854,650
                          )
                          
                          
                          (22,937,596
                          )Adjustments
      to reconcile net (loss) income to net cash (used in) provided by operating
      activities:Depreciation
      and amortization
                          
                          
                          1,798,331
                          
                          
                          
                          4,315,613
                          
                          
                          
                          5,814,348Bad
      debt provision (recoveries)
                          
                          
                          -
                          
                          
                          
                          1,134,926
                          
                          
                          
                          (76,384
                          )Inventory
      write-down
                          
                          
                          -
                          
                          
                          
                          1,661,594
                          
                          
                          
                          11,769,435Share-based
      compensation
                          
                          
                          114,563
                          
                          
                          
                          535,856
                          
                          
                          
                          3,231,594Forgiveness
      of shareholder receivable
                          
                          
                          540,000
                          
                          
                          
                          -
                          
                          
                          
                          -Excess
      of prorata distribution to shareholders
                          
                          
                          3,708,844
                          
                          
                          
                          -
                          
                          
                          
                          -Purchase
      and retirement of treasury shares
                          
                          
                          408,608
                          
                          
                          
                          -
                          
                          
                          
                          -Loss
      from disposal of property, plant and equipment
                          
                          
                          61,677
                          
                          
                          
                          54,397
                          
                          
                          
                          78,563Loss
      on changes in fair value of derivatives
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          9,864,075Gain
      on repurchase of convertible notes
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (4,525,625
                          )Amortization
      of convertible bonds issuance cost
                          
                          
                          
                          
                          
                          
                          -
                          
                          
                          
                          886,715Others
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (173,658
                          )Changes
      in operating assets and liabilities:Inventories
                          
                          
                          (37,684,121
                          )
                          
                          
                          (13,422,347
                          )
                          
                          
                          (14,651,994
                          )Accounts
      receivable
                          
                          
                          (41,342,761
                          )
                          
                          
                          16,230,796
                          
                          
                          
                          17,911,376Advances
      to suppliers
                          
                          
                          (8,872,960
                          )
                          
                          
                          (54,740,526
                          )
                          
                          
                          72,359,945Prepaid
      expenses and other current assets
                          
                          
                          (801,077
                          )
                          
                          
                          (15,259,352
                          )
                          
                          
                          5,602,661Amounts
      due from related parties
                          
                          
                          (1,925,286
                          )
                          
                          
                          (135,480
                          )
                          
                          
                          (1,805,017
                          )Accounts
      payable
                          
                          
                          5,495,031
                          
                          
                          
                          (3,402,165
                          )
                          
                          
                          13,827,681Accrued
      expenses and other current liabilities
                          
                          
                          560,976
                          
                          
                          
                          917,413
                          
                          
                          
                          2,135,799Accrued
      warranty costs
                          
                          
                          157,595
                          
                          
                          
                          80,505
                          
                          
                          
                          125,564Advances
      from customers
                          
                          
                          (10,181,955
                          )
                          
                          
                          3,942,535
                          
                          
                          
                          (4,186,395
                          )Amount
      due to related parties
                          
                          
                          -
                          
                          
                          
                          4,472
                          
                          
                          
                          238,251Deferred
      other income
                          
                          
                          -
                          
                          
                          
                          815,382
                          
                          
                          
                          254,854Accrued
      interest expense
                          
                          
                          71,773
                          
                          
                          
                          58,395
                          
                          
                          
                          108,891Income
      tax payable
                          
                          
                          
                          
                          
                          
                          -
                          
                          
                          
                          (1,250,477
                          )Deferred
      tax assets
                          
                          
                          (70,674
                          )
                          
                          
                          (705,504
                          )
                          
                          
                          (2,648,621
                          )Net
      cash (used in) provided by operating activities
                          
                          
                          (76,147,054
                          )
                          
                          
                          (62,768,140
                          )
                          
                          
                          91,953,985Investing
      activities:Purchases
      of property, plant and equipment
                          
                          
                          (23,143,893
                          )
                          
                          
                          (15,568,560
                          )
                          
                          
                          (44,080,514
                          )Proceeds
      from disposal of property, plant and equipment
                          
                          
                          2,505
                          
                          
                          
                          110
                          
                          
                          
                          5,661Purchase
      of land use rights
                          
                          
                          (1,727,780
                          )
                          
                          
                          (1,182,432
                          )
                          
                          
                          (4,330,930
                          )Purchase
      of long-term assets
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (936,817
                          )Proceeds
      from government grant
                          
                          
                          1,105,538
                          
                          
                          
                          -
                          
                          
                          
                          24,566Change
      in restricted cash
                          
                          
                          17,006,193
                          
                          
                          
                          (18,520,927
                          )
                          
                          
                          (38,926,435
                          )Net
      cash used in investing activities
                          
                          
                          (6,757,437
                          )
                          
                          
                          (35,271,809
                          )
                          
                          
                          (88,244,469
                          )


F-7





CHINA
SUNERGY CO., LTD.





CONSOLIDATED
STATEMENTS OF CASH FLOWS


(In
U.S. dollars)





Years ended December 31,2006
                      
                      
                      2007
                      
                      
                      2008$
                      
                      
                      $
                      
                      
                      $Financing
      activities:Proceeds
      from investor upon formation of the Company
                      
                      
                      13,110,400
                      
                      
                      
                      -
                      
                      
                      
                      -Issuance
      cost of Series A redeemable convertible preference shares
                      
                      
                      (99,590
                      )
                      
                      
                      -
                      
                      
                      
                      -Proceeds
      from issuance of Series B redeemable convertible preference
      shares
                      
                      
                      27,999,948
                      
                      
                      
                      -
                      
                      
                      
                      -Proceeds
      from issuance of Series C redeemable convertible preference
      shares
                      
                      
                      20,000,000
                      
                      
                      
                      -
                      
                      
                      
                      -Proceeds
      from issuance of ordinary shares
                      
                      
                      10,454
                      
                      
                      
                      107,525,000
                      
                      
                      
                      -Issuance
      cost of ordinary shares
                      
                      
                      -
                      
                      
                      
                      (11,616,804
                      )
                      
                      
                      -Proceeds
      from issuance of convertible senior notes
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      54,500,000Issuance
      cost of convertible senior notes
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (4,337,573
                      )Payment
      of convertible senior notes repurchase
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,974,375
                      )Proceeds
      received from exercise of options
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      71,548Cash
      contributions received from shareholders
                      
                      
                      2,512,020
                      
                      
                      
                      -
                      
                      
                      
                      -Cash
      contributions received from minority shareholder
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      299,020Distribution
      on reorganisation
                      
                      
                      (4,046,811
                      )
                      
                      
                      -
                      
                      
                      
                      -Return
      of distribution on reorganisation
                      
                      
                      4,046,811
                      
                      
                      
                      -
                      
                      
                      
                      -Purchase
      and retirement of treasury share
                      
                      
                      (3,110,400
                      )
                      
                      
                      -
                      
                      
                      
                      -Amounts
      due from related parties
                      
                      
                      14,053,159
                      
                      
                      
                      -
                      
                      
                      
                      -Amounts
      due to related parties
                      
                      
                      (28,433,126
                      )
                      
                      
                      -
                      
                      
                      
                      -Proceeds
      from short-term bank borrowings
                      
                      
                      80,087,689
                      
                      
                      
                      168,006,462
                      
                      
                      
                      142,450,312Repayment
      of bank borrowings
                      
                      
                      (34,007,393
                      )
                      
                      
                      (128,882,001
                      )
                      
                      
                      (175,109,760
                      )Net
      cash provided by financing activities
                      
                      
                      92,123,161
                      
                      
                      
                      135,032,657
                      
                      
                      
                      15,899,172Effect
      of exchange rate changes on cash and cash equivalents
                      
                      
                      2,765,518
                      
                      
                      
                      8,715,383
                      
                      
                      
                      14,733,345Net
      increase in cash and cash equivalents
                      
                      
                      11,984,188
                      
                      
                      
                      45,708,091
                      
                      
                      
                      34,342,033Cash
      and cash equivalents at the beginning of the year
                      
                      
                      2,765,387
                      
                      
                      
                      14,749,575
                      
                      
                      
                      60,457,666Cash
      and cash equivalents at the end of the year
                      
                      
                      14,749,575
                      
                      
                      
                      60,457,666
                      
                      
                      
                      94,799,699Supplemental
      disclosure of cash flow information:Interest
      paid
                      
                      
                      3,002,054
                      
                      
                      
                      7,210,061
                      
                      
                      
                      7,083,994Income
      taxes paid
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,250,477Supplemental
      disclosure of non-cash investing activities:Purchase
      of property, plant and equipment included in accounts
    payable
                      
                      
                      4,721,828
                      
                      
                      
                      1,286,218
                      
                      
                      
                      8,114,354Supplemental
      disclosure of non-cash financing activities:Exchange
      of investor contribution for Series A redeemable convertible preference
      shares
                      
                      
                      13,010,810
                      
                      
                      
                      -
                      
                      
                      
                      -Redeemable
      convertible preference shares issuance costs included in accrued expenses
      and other current liabilities
                      
                      
                      200,000
                      
                      
                      
                      -
                      
                      
                      
                      -





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


F-8





1.
            ORGANIZATION
      AND PRINCIPAL ACTIVITIES





China
Sunergy Co., Ltd. (the “Company”) was incorporated under the laws of the Cayman
Islands on August 4, 2006.





The
Company entered into an agreement with the equity owners of China Sunergy Co.,
Ltd., a company incorporated under the laws of the British Virgin Islands,
(“China Sunergy BVI”) to initiate a restructuring process, whereby the Company
acquired a 100% interest in China Sunergy BVI. The restructuring process was
completed on August 30, 2006. This transaction has been accounted for as a legal
reorganization as there was no change in the ownership structure between the
Company and China Sunergy BVI.





On April
26, 2006, China Sunergy BVI issued 1,045,440 warrants on a pro rata basis to the
shareholders, or their assignees, that owned 100% of China Sunergy (Nanjing)
Co., Ltd. (“Sunergy Nanjing”) in exchange for their equity interests (see Note
10). This transaction has been accounted for as a legal reorganization with all
shares and per share data being restated to give retroactive effect to this
transaction. Of the 1,045,440 warrants, 991,440 warrants were exercised
immediately into ordinary shares, and the remaining 54,000 warrants were
exercised in August 2006.





In April
2007, the Company effected a 100-for-one share split, as a result of which each
of the ordinary share, Series A preferred share, Series B preferred share and
Series C preferred share was subdivided into 100 ordinary shares, 100 Series A
preferred shares, 100 Series B preferred shares and 100 Series C preferred
shares, respectively. This share split has been retroactively reflected for all
periods presented.





On
December 7, 2007, China Sunergy Hong Kong Co., Ltd. (“Sunergy Hong Kong”) was
incorporated in Hong Kong under China Sunergy BVI. In the same month, China
Sunergy BVI swapped all of the equity interests in Sunergy Nanjing to Sunergy
Hong Kong, who became Sunergy Nanjing’s direct holding company.





The
Company and its subsidiaries (collectively referred to as the "Group”) are
principally engaged in the design, development, manufacturing and marketing of
solar cells in the People’s Republic of China (the “PRC”) and overseas markets.
During the periods covered by the consolidated financial statements,
substantially all of the Group's business was conducted through Sunergy
Nanjing.





As of
December 31, 2008, the Company’s subsidiaries include the following
entities:





Date of
                                    
                                    Percentage ofSubsidiaries' Name
                                    
                                    Principal Activities
                                    
                                    Incorporation
                                    
                                    Ownership
                                    
                                    Place of IncorporationChina
      Sunergy Co., Ltd.
                                    
                                    Investment Holding
                                    
                                    January 27, 2006
                                    
                                    100%
                                    
                                    British Virgin IslandsChina
      Sunergy (Hong Kong) Co., Limited
                                    
                                    Investment Holding
                                    
                                    December 7, 2007
                                    
                                    100%
                                    
                                    Hong KongChina
      Sunergy Europe Gmbh
                                    
                                    Marketing Service
                                    
                                    November 27, 2007
                                    
                                    100%
                                    
                                    GermanyChina
      Sunergy (Nanjing) Co., Ltd. (previously named as CEEG (Nanjing) PV-Tech
      Co., Ltd)
                                    
                                    Solar cells manufacturing
                                    
                                    August 2, 2004
                                    
                                    100%
                                    
                                    PRCChina
      Sunergy (Shanghai) Co., Ltd. (previously named as CEEG (Shanghai) PV-Tech
      Co., Ltd)
                                    
                                    Solar cells manufacturing
                                    
                                    November 1, 2007
                                    
                                    95% (Note)
                                    
                                    PRC





Note:
China Sunergy (Shanghai) Co. Ltd. does not commence operation as of December 31,
2008.


F-9





2.
            SUMMARY
      OF PRINCIPAL ACCOUNTING POLICIES





(a)
            Basis
      of presentation





The
consolidated financial statements of the Group have been prepared in accordance
with accounting principles generally accepted in the United States of America
(“US GAAP”).





(b)
            Basis
      of consolidation





The
consolidated financial statements include the assets, liabilities, revenues and
expenses of the Group. All significant intercompany transactions and balances
have been eliminated on consolidation.





(c)
            Use
      of estimates





The
preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amount of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The Group bases its estimates on historical experience and various
other factors believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Significant
accounting estimates reflected in the consolidated financial statements include
inventory valuation, purchase commitment, allowance on accounts receivable and
supplier advances, provision of warranty costs, assumptions used in embedded
derivative evaluation of long-term purchase contract, forfeiture rate of
options, capitalized interest and the useful lives of and impairment for
property, plant and equipment, prepaid land use rights and other long-term
assets.





(d)
            Cash
      and cash equivalents and restricted
cash





Cash and
cash equivalents consist of cash on hand and demand deposits, which are
unrestricted as to withdrawal and use, and which have original maturities of
three months or less.





Restricted
cash represents bank deposits for securing letter of credit, bank promissory
note and bank guarantee that are not available for use in
operations.





(e)
            Fair
      value of financial instruments





The
Group’s financial instruments consist of cash and cash equivalents, restricted
cash, accounts receivable, certain amounts due from related parties, short-term
borrowings, accounts payable, notes payable, convertible senior notes and
derivative liabilities. For cash and cash equivalents, restricted cash, accounts
receivable, certain amounts due from related parties, short-term borrowings,
accounts payable, notes payable, the carrying amounts of these financial
instruments as of December 31, 2007 and 2008 were considered representative of
their fair values due to their short terms in nature. For convertible senior
notes, the fair value is measured based on observable market quotes. For fair
value of derivative instruments, the Group uses the observable rates or when
observable rates are not readily available, uses discounted cash flow technique
involving management's estimation. Refer to Note 8 for fair value
measurement.


F-10





2.
            SUMMARY
      OF PRINCIPAL ACCOUNTING POLICIES -
continued





(f)
            Inventories





Inventories
are stated at the lower of cost or market value. Cost is determined using the
weighted-average method.





The Group
estimates excess and slow moving inventory based upon assumptions of future
demands and market conditions. If actual market conditions are less favorable
than projected by management, additional inventory write-downs may be
required.





The Group
outsourced portions of its manufacturing process, including transforming
polysilicon to ingots, cutting ingots into wafers, and assembling cells into
modules. These outsourcing arrangements do not include transfer of title of the
inventory (silicon, ingots or cells) to the outside manufacturers. Such
polysilicon and ingots are recorded as raw material inventory when purchased
from suppliers and while in the possession of the outsourced manufacturers. Upon
receipt of the processed polysilicon, ingots and cells, it is recorded as raw
material and finished goods respectively, and the processing fee is paid to the
manufacturers and capitalized as cost of inventory.





(g)
            Property,
      plant and equipment





Property,
plant and equipment are recorded at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided on a straight-line
basis over the following estimated useful lives:





Buildings
              20 yearsMachinery
              10 yearsFurniture, fixtures and equipment
              5 yearsMotor
      vehicles
              5 years





Costs
incurred in constructing new facilities, including progress payments and other
costs related to construction, are capitalizedand transferred to
property, plant and equipment on completion, at which time depreciation
commences. Interest cost incurred and capitalized in respect of construction of
new facilities amounted to $nil, $nil and $2,492,328 for the years ended
December 31, 2006, 2007 and 2008, respectively.





(h)
            Prepaid
      land use rights





Prepaid
land use rights are recorded at cost less accumulated amortization. Amortization
is provided on a straight-line basis over 50 years based on the terms of the
land use right agreements.





(i)
            Impairment
      of long-lived assets





The Group
evaluates its long-lived assets and finite lived intangibles for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. When these events occur, the Group measures
impairment by comparing the carrying amount of the assets to future undiscounted
net cash flows expected to result from the use of the assets and their eventual
disposition. If the sum of the expected undiscounted cash flows is less than the
carrying amount of the assets, the Group would recognize an impairment loss
equal to the excess of the carrying amount over the fair value of the
assets.


F-11





2.
            SUMMARY
      OF PRINCIPAL ACCOUNTING POLICIES -
continued





(j)
            Derivative
      financial instruments





The Group
entered into certain foreign exchange forward contracts to protect against
volatility of future cash flows caused by the changes in foreign exchange rates
associated with sales contracts denominated in Euro or U.S. dollar. The
Group also has a supply agreement containing embedded foreign currency
derivative. The Group accounts for the forward contracts as well as the embedded
derivative pursuant to SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities” (“SFAS 133”), as amended and
interpreted, and recognizes all derivative instruments as either assets or
liabilities at fair value in the consolidated balance sheets. The derivatives do
not qualify for hedge accounting and, as a result, the changes in fair value of
the derivatives are recognized in the statement of operations.





(k)
            Income
      taxes





Deferred
income taxes are recognized for temporary differences between the tax basis of
assets and liabilities and their reported amounts in the financial statements,
net operating loss carryforwards and credits by applying enacted statutory tax
rates applicable to future years. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Current
income taxes are provided for in accordance with the laws of the relevant taxing
authorities. The components of the deferred tax assets and liabilities are
individually classified as current and non-current based on the characteristics
of the underlying assets and liabilities, or the expected timing of their use
when they do not relate to a specific asset or liability.





(l)
            Revenue
      recognition





Sales of
solar cells and modules are recorded when persuasive evidence of an arrangement
exists, delivery has occurred, the fee is fixed or determinable, and
collectability is reasonably assured. Customers do not have any rights of
return. A portion of the Group's sales to domestic customers require the
customers to prepay before delivery has occurred. Such prepayments are recorded
as advances from customers in the consolidated balance sheets until delivery has
occurred. A majority of the Group’s contracts with overseas customers are
written such that the customer takes title and assumes the risks and rewards of
ownership of the products upon shipment. Accordingly, the Group recognizes
revenue upon documentary evidence of shipment, assuming all other criteria have
been met.





(m)
            Buy-and-sell
      arrangements





The Group
has buy-and-sell arrangement with certain raw material vendors wherein the Group
sells finished goods, comprised of solar cells, and acquires raw materials in
the form of silicon wafers. These arrangements are with counterparties in the
same line of business as the Group and are executed as a means of securing a
consistent supply of silicon wafer raw materials. The Group records such
transactions at fair value.





During
the years ended December 31, 2006, 2007 and 2008, the Group purchased
$35,538,653, $15,173,393 and $1,504,018 of raw materials and sold $47,157,841,
$10,517,112 and $1,529,131 of finished goods, respectively, under these
buy-and-sell arrangements.


F-12





(n)
            Cost
      of revenue





Cost of
revenue includes production and indirect costs, as well as shipping and handling
costs for products sold and warranty costs.





(o)
            Research
      and development





Research
and development costs are expensed when incurred.





(p)
            Advertising
      expenses





Advertising
expenses are charged to the statements of operations in the period incurred. The
Group incurred advertising expenses amounting to $231,514, $363,237 and $495,162
for the years ended December 31, 2006, 2007 and 2008, respectively.





(q)
            Warranty
      cost





For solar
cells, the Group warrants its products against specified declines in the initial
minimum power generation capacity for up to 20 years after sales have taken
place. The Group has the right to repair or replace the solar cells based on the
specific nature of the defect claims under the terms of the warranty policy. The
Group maintains warranty reserves to cover potential liabilities that could
arise under these warranties. Due to limited warranty claims to date, the Group
accrues the estimated costs of warranties at 0.5% of solar cell sales. Since the
beginning of 2007, however, the Group has aborted such warranty terms in solar
cell sales contracts signed in 2007.





Beginning
in 2007, the Group began selling modules. Generally, the warranty is for a
period of between 20 to 25 years and covers the modules sold by the Group. The
Group estimates and accrues the costs of warranties at 1% of module
sales.





Due to
very limited claims occurred to date, the warranty provisions for cells and
modules are mainly based on an assessment competitors’ accrual history and
industry practice. Actual warranty costs are accumulated and charged against the
accrued warranty liability. To the extent that accrual warranty costs differ
from the estimates, the Group will prospectively revise its accrual
rate.





(r)
            Government
      grants





Government
grants are recognized when received and all the conditions for their receipt
have been met. Government grants are recognized as income in the period in which
the related expenditures are recorded. Capital grants for the acquisition of
equipment are recorded as a liability until earned and then offset against the
related capital assets.





(s)
            Foreign
      currency translation





The
functional and reporting currency of the Company is the United States dollar
(“US dollar”). Monetary assets and liabilities denominated in other currencies
other than the US dollar are translated into US dollar at the rates of exchange
in effect at the balance sheet dates. Transactions dominated in currencies other
than the US dollar during the year are converted into US dollar at the
applicable rates of exchange prevailing when the transactions occur. Transaction
gains and losses are recorded in the statements of operations.





The
financial records of the Group’s subsidiaries are maintained in their local
currencies. Assets and liabilities are translated at the exchange rates at the
balance sheet date, equity accounts are translated at historical exchange rates
and revenue, expenses, gains and losses are translated at the average rate for
the period. Translation adjustments are reported as cumulative translation
adjustments and are shown as a separate component of other comprehensive income
in the statements of shareholders’ equity.


F-13





2.
            SUMMARY
      OF PRINCIPAL ACCOUNTING POLICIES -
continued





(t)
            Comprehensive
      income (loss)





Comprehensive
income (loss) includes all changes in equity except those resulting from
investments by owners and distributions to owners and is comprised of net income
(loss) and foreign currency translation adjustments.





(u)
            Foreign
      currency risk





The
functional currency of the Group’s subsidiaries which operate in the PRC is
Renminbi (“RMB”). The RMB is not a freely convertible currency. The PRC State
Administration for Foreign Exchange, under the authority of the People’s Bank of
China, controls the conversion of RMB into foreign currencies. The value of the
RMB is subject to changes in central government policies and to international
economic and political developments affecting supply and demand in the China
foreign exchange trading system market. The Group's aggregate amount of cash and
cash equivalents and restricted cash denominated in RMB amounted to $5,420,911,
$41,036,439 and $113,448,504 at December 31, 2006, 2007 and 2008,
respectively.





(v)
            Concentration
      of credit risk





Financial
instruments that potentially expose the Group to significant concentrations of
credit risk consist principally of cash and cash equivalents, accounts
receivable and advance to suppliers. The Group places its cash and cash
equivalents with financial institutions with high-credit ratings and
quality.





The Group
performs ongoing credit evaluations of customers and suppliers and generally
does not require collateral or other security from its customers. The Group
establishes an allowance for doubtful accounts primarily based upon the age of
the receivables and advances and factors surrounding the credit risk of specific
customers and suppliers.





The Group
recognized bad debt provision of $nil and $1,134,926 for the year ended December
31, 2006, 2007, and reversed $76,384 for the year ended December 31, 2008
related to a provision against an advance to a supplier which was
recovered.





(w)
            Net
      loss per share





Basic
loss per share is computed by dividing loss attributable to holders of ordinary
shares by the weighted-average number of ordinary shares outstanding during the
year. Diluted loss per ordinary share reflects the potential dilution that could
occur if securities or other contracts to issue ordinary shares were exercised
or converted into ordinary shares. Generally, ordinary share equivalents are
excluded from the computation in loss periods as their effects would be
anti-dilutive.


F-14





2.
            SUMMARY
      OF PRINCIPAL ACCOUNTING POLICIES -
continued





(w)
            Net
      loss per share - continued





For the
year ended December 31, 2006, the series A, series B and series C redeemable
convertible preference shares of 12,847,300, 23,905,100 and 6,901,000,
respectively, as well as 54,000 warrants and 1,467,200 share options were
excluded from the calculation of dilutive EPS as their effects would have been
anti-dilutive. For the year ended December 31, 2007 and 2008, 1,586,900 share
options and 2,317,391 non-vested restricted shares were excluded from the
calculation of dilutive EPS as their effects would have been
anti-dilutive.





The terms
of the series A, series B and series C preferred share subscription agreements
allow for the preferred shareholders to participate equally with the common
shareholders with regards to any dividends declared and payable, after the
payment of preferred shares dividends. The subscription agreements do not
require the preferred shareholders to participate in losses of the Company.
Accordingly, the Company presents earnings per share using the two-class method
when the operations of the company result in earnings, and not losses, for any
given period.





Upon the
consummation of the Group's initial public offering on May 22, 2007, the series
A, series B and series C redeemable convertible preference shares were
automatically converted into ordinary shares. The two class method of computing
earnings per share ceased to apply on the conversion date.





The call
option on the Loaned Shares (see Note 9) has been excluded in the computation of
basic EPS as the Company has concluded that the Loaned Shares are not regarded
as issued for accounting purposes as existing shareholders are not expected to
be impacted by the issuance due to (a) the existence of the collateral
arrangement and (b) the requirement that the holders of the Loaned Shares return
any dividends received. The call option on the Loaned Shares would be considered
in the computation of diluted EPS using the treasury stock method with the fair
value of the collateral representing the assumed proceeds for the issuance of
the underlying shares. For the year ended December 31, 2008, there were no
incremental shares included in the diluted EPS computation as the effect would
be anti-dilutive.





F-15





2.
            SUMMARY
      OF PRINCIPAL ACCOUNTING POLICIES -
continued





(w)
            Net
      loss per share - continued





The
following table sets forth the computation of basic and diluted income per share
for the periods indicated:





Years ended December 31,2006
                                    
                                    
                                    2007
                                    
                                    
                                    2008$
                                    
                                    
                                    $
                                    
                                    
                                    $Net
      loss attributable to ordinary shareholders-basic and
    diluted
                                    
                                    $
                                    (37,212,121
                                    )
                                    
                                    $
                                    (5,572,727
                                    )
                                    
                                    $
                                    (22,937,596
                                    )Allocation
      of undistributed earnings to preferred shares for participating rights to
      dividends *
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    950,009
                                    
                                    
                                    $
                                    -Net
      loss attributable to ordinary shareholders
                                    
                                    $
                                    (37,212,121
                                    )
                                    
                                    $
                                    (6,522,736
                                    )
                                    
                                    $
                                    (22,937,596
                                    )Weighted–average
      ordinary shares outstanding-basic
                                    
                                    
                                    103,583,178
                                    
                                    
                                    
                                    185,165,757
                                    
                                    
                                    
                                    238,079,890Weighted-average
      ordinary shares outstanding-diluted
                                    
                                    
                                    103,583,178
                                    
                                    
                                    
                                    185,165,757
                                    
                                    
                                    
                                    238,079,890Net
      loss per share:Basic
                                    
                                    $
                                    (0.36
                                    )
                                    
                                    $
                                    (0.04
                                    )
                                    
                                    $
                                    (0.10
                                    )Diluted
                                    
                                    $
                                    (0.36
                                    )
                                    
                                    $
                                    (0.04
                                    )
                                    
                                    $
                                    (0.10
                                    )





*
            Reflects
      the allocation of net income of $1,826,535 for the period from January 1,
      2007 to May 22, 2007, the date on which the preference shares were
      converted into ordinary shares.





(x)
            Share-based
      compensation





The Group
adopted SFAS No. 123(R), “Share-Based Payment” (SFAS 123R),
effective January 1, 2006 using the modified prospective basis in
accounting for stock based compensation. The Group recognizes the services
received in exchange for awards of equity instruments based on the grant-date
fair value of the award as determined by the Binomial option pricing model, net
of estimated forfeitures. The estimated compensation cost is recognized using
straight line method over the period the granter is required to provide services
per the conditions of the award. See Note 17, “Share Based Compensation”,
for further details.


F-16





2.
            SUMMARY
      OF PRINCIPAL ACCOUNTING POLICIES -
continued





(y)
            Recently
      issued accounting pronouncements





In
December 2007, the FASB issued SFAS No. 141, “Business Combinations:
(Revised 2007)” (“SFAS 141R”). SFAS 141R is relevant to all
transactions or events in which one entity obtains control over one or more
other businesses. SFAS 141R requires an acquirer to recognize any assets
and non-controlling interest acquired and liabilities assumed to be measured at
fair value as of the acquisition date. Liabilities related to contingent
consideration are recognized and measured at fair value on the date of
acquisition rather than at a later date when the amount of the consideration may
be resolved beyond a reasonable doubt. This revised approach replaces
SFAS 141, “Business Combinations” (“SFAS 141”) cost allocation process
in which the cost of an acquisition was allocated to the individual assets
acquired and liabilities assumed based on their respective fair value.
SFAS 141R requires any acquisition-related costs and restructuring costs to
be expensed as incurred as opposed to allocating such costs to the assets
acquired and liabilities assumed as previously required by SFAS 141. Under
SFAS 141R, an acquirer recognizes liabilities for a restructuring plan in
purchase accounting only if the requirements of SFAS No. 146,
“Accounting for Costs Associated with Exit or Disposal Activities”, are met.
SFAS 141R allows for the recognition of pre-acquisition contingencies at
fair value only if these contingencies are likely to materialize. If this
criterion is not met at the acquisition date, then the acquirer accounts for the
non-contractual contingency in accordance with recognition criteria set forth
under SFAS No. 5, “Accounting for Contingencies”, in which case no
amount should be recognized in purchase accounting. SFAS 141R is effective
as of the beginning of an entity’s first fiscal year that begins after
December 15, 2008 with the exception of the accounting for valuation
allowances on deferred taxes and acquired tax contingencies. SFAS 141R
amends SFAS 109, “Accounting for Income Taxes,” such that adjustments made
to valuation allowances on deferred taxes and acquired tax contingencies
associated with acquisitions that closed prior to the effective date of
SFAS 141R would also apply the provisions of FAS 141R. An entity may not
apply it before that date. The adoption of FAS 141R will change the Group's
accounting treatment for business combinations on a prospective basis beginning
on January 1, 2009.


F-17





2.
            SUMMARY
      OF PRINCIPAL ACCOUNTING POLICIES -
continued





(y)
            Recently
      issued accounting pronouncements -
continued





In
December 2007, the FASB released FAS No. 160, "Non-controlling Interests in
Consolidated Financial Statements an amendment of ARB No. 51" (“FAS 160”). FAS
160 applies to all entities that prepare consolidated financial statements,
except not-for-profit organizations, but will affect only those entities that
have an outstanding non-controlling interest in one or more subsidiaries or that
deconsolidate a subsidiary. FAS 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008 (that
is, January 1, 2009, for entities with calendar year-ends). Earlier adoption is
prohibited. The Group does not expect that the adoption of FAS 160 will have an
impact on the consolidated financial statements.





In
February 2008, the FASB issued FASB Staff Position No. SFAS 157-2,
“Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”). FSP
FAS 157-2 defers the effective date of SFAS 157 for nonfinancial
assets and nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually), to fiscal years, and interim periods within those fiscal years,
beginning after November 15, 2008. The Group does not expect a material
impact on its consolidated financial statements.





In March
2008, the FASB issued FAS No. 161, "Disclosures About Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No.133" ("FAS 161"). The new
standard requires enhanced disclosures to help investors better understand the
effect of an entity's derivative instruments and related hedging activities on
its financial position, financial performance, and cash flows. FAS 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application encouraged. FAS 161
does not change the accounting treatment for derivative instruments but will
impact the Group's disclosures related to derivative instruments and hedging
activities effective January 1, 2009.





In April
2008, the FASB issued FASB Staff Position No. 142-3, "Determining the Useful
Life of Intangible Assets" ("FSP 142-3"). FSP 142-3 amends the factors to be
considered in determining the useful life of intangible assets. Its intent is to
improve the consistency between the useful life of an intangible asset and the
period of expected cash flows used to measure such asset's fair value. FSP 142-3
is effective for fiscal years beginning after December 15, 2008. The Group does
not expect that the adoption of FSP 142-3 will have a material impact on the
consolidated financial statements.


F-18





2.
            SUMMARY
      OF PRINCIPAL ACCOUNTING POLICIES -
continued





(y)
            Recently
      issued accounting pronouncements -
continued





At its
June 25, 2008 meeting, the FASB ratified the consensus reached in EITF Issue No.
07-5, "Determining Whether an Instrument (or Embedded Feature) Is Indexed to an
Entity’s Own Stock" (“EITF 07-5”). EITF 07-5 is effective for fiscal years and
interim periods beginning after December 15, 2008. This Issue’s
“fixed-for-fixed, plus fair value inputs” model is largely consistent with
current interpretations of the phrase “indexed to an entity’s own stock.”
However, in certain circumstances, Issue 07-5 may result in changes to those
accounting conclusions and may have impact on issuers of equity-linked financial
instruments (e.g., options or forward contracts) or instruments containing
embedded features (e.g., embedded conversion options in a convertible
instrument) that have (1) exercise or settlement contingency provisions, (2) a
strike price that is subject to adjustment, or (3) a strike price that is
denominated in a currency other than the entity’s functional currency. The Group
does not expect that the adoption of EITF 07-5 will have a material impact on
the consolidated financial statements.





In
October 2008, the FASB issued FSP FAS 157-3, "Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active"("FSP 157-3"). FSP
157-3 clarifies the application of SFAS 157 in a market that is not active, and
addresses application issues such as the use of internal assumptions when
relevant observable data does not exist, the use of observable market
information when the market is not active, and the use of market quotes when
assessing the relevance of observable and unobservable data. FSP 157-3 is
effective for all periods presented in accordance with FAS 157. The Group does
not expect the adoption of FSP 157-3 to have a material impact on its
consolidated financial statements or the fair values of its financial assets and
liabilities.





In
November 2008, the FASB ratified the Emerging Issues Task Force (EITF) Issue
08-7, “Accounting for Defensive Intangible Assets.” A defensive intangible asset
is an asset acquired in a business combination or in an asset acquisition that
an entity does not intend to actively use. According to the guidance, defensive
intangible assets are considered to be a separate unit of account and valued
based on their highest and best use from the perspective of an external market
participant. EITF 08-7 is effective January 1, 2009. The adoption of this EITF
issue is not expected to have an impact on the Consolidated Financial
Statements.





On
April 9, 2009, the FASB issued three Staff Positions (“FSPs”): (1) FSP
FAS 157-4, which provides guidance on determining fair value when market
activity has decreased; (2) FSP FAS 115-2 and FAS 124-2, which
addresses other-than-temporary impairments for debt securities; and (3) FSP
FAS 107-1 and APB 28-1, which discusses fair value disclosures for
financial instruments in interim periods. These FSPs are effective for interim
and annual periods ending after June 15, 2009, with early adoption
permitted. The Group is currently evaluating the impact, if any, of these FSPs
on its consolidated financial statements.





In May
2009, the FASB issued Statement No. 165, Subsequent Events. This statement
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued.
An entity should apply the requirements of this statement to interim or annual
financial period ending after June 15, 2009. The Group is currently evaluating
the impact on its consolidated financial statements.


F-19





On June
12, 2009, the Financial Accounting Standards Board (FASB) issued FASB Statements
No. 166, Accounting for Transfers of Financial Assets. Statement 166 is a
revision to FASB Statement No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, and will require more
information about transfers of financial assets, including securitization
transactions, and where entities have continuing exposure to the risks related
to transferred financial assets. It eliminates the concept of a “qualifying
special-purpose entity,” changes the requirements for derecognizing financial
assets, and requires additional disclosures. Statement 166 enhances information
reported to users of financial statements by providing greater transparency
about transfers of financial assets and an entity’s continuing involvement in
transferred financial assets. Statements 166 will be effective at the start of a
reporting entity’s first fiscal year beginning after November 15, 2009, or
January 1, 2010, for a calendar year-end entity. The Group is currently
evaluating the impact on its consolidated financial statements.





On June
12, 2009, the Financial Accounting Standards Board (FASB) also issued FASB
Statements No. 167, Amendments to FASB Interpretation No. 46(R). Statement 167
is a revision to FASB Interpretation No. 46 (Revised December 2003),
Consolidation of Variable Interest Entities, and changes how a reporting entity
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. The
determination of whether a reporting entity is required to consolidate another
entity is based on, among other things, the other entity’s purpose and design
and the reporting entity’s ability to direct the activities of the other entity
that most significantly impact the other entity’s economic performance.
Statement 167 will require a reporting entity to provide additional disclosures
about its involvement with variable interest entities and any significant
changes in risk exposure due to that involvement. A reporting entity will be
required to disclose how its involvement with a variable interest entity affects
the reporting entity’s financial statements. Statements 167 will be effective at
the start of a reporting entity’s first fiscal year beginning after November 15,
2009, or January 1, 2010, for a calendar year-end entity. The Group is currently
evaluating the impact on its consolidated financial statements.


F-20





3.
            INVENTORIES,
      NET





Inventories
consist of the following:





At December 31,2006
                          
                          
                          2007
                          
                          
                          2008$
                          
                          
                          $
                          
                          
                          $Raw
      materials
                          
                          
                          37,579,053
                          
                          
                          
                          33,659,206
                          
                          
                          
                          36,475,120Work-in-process
                          
                          
                          472,173
                          
                          
                          
                          117,437
                          
                          
                          
                          3,829Finished
      goods
                          
                          
                          6,279,930
                          
                          
                          
                          22,315,266
                          
                          
                          
                          22,645,670Inventories
                          
                          
                          44,331,156
                          
                          
                          
                          56,091,909
                          
                          
                          
                          59,124,619





The Group
recorded lower of cost or market provisions for inventories of $nil, $1,661,594
and $11,769,435 during the years ended December 31, 2006, 2007 and 2008
respectively.





4.
            PROPERTY,
      PLANT AND EQUIPMENT, NET





Property,
plant and equipment, net consist of the following:





At December 31,2006
                        
                        
                        2007
                        
                        
                        2008$
                        
                        
                        $
                        
                        
                        $Buildings
                        
                        
                        6,434,679
                        
                        
                        
                        6,779,011
                        
                        
                        
                        12,458,528Plant
      and machinery
                        
                        
                        33,046,676
                        
                        
                        
                        40,871,028
                        
                        
                        
                        62,532,676Furniture,
      fixtures and equipment
                        
                        
                        889,649
                        
                        
                        
                        1,881,422
                        
                        
                        
                        2,988,805Motor
      vehicles
                        
                        
                        212,359
                        
                        
                        
                        393,571
                        
                        
                        
                        421,07040,583,363
                        
                        
                        
                        49,925,032
                        
                        
                        
                        78,401,079Less:
      Accumulated depreciation
                        
                        
                        (2,108,022
                        )
                        
                        
                        (6,622,316
                        )
                        
                        
                        (12,817,495
                        )38,475,341
                        
                        
                        
                        43,302,716
                        
                        
                        
                        65,583,584Construction
      in process
                        
                        
                        254,290
                        
                        
                        
                        9,626,049
                        
                        
                        
                        37,025,035Property,
      plant and equipment, net
                        
                        
                        38,729,631
                        
                        
                        
                        52,928,765
                        
                        
                        
                        102,608,619





Depreciation
expense was $1,773,603, $4,286,220 and $5,695,363 for the years ended December
31, 2006, 2007 and 2008, respectively.





The
construction in process primarily relates to the construction of four selective
emitter solar cell production lines.


F-21





5.
            PREPAID
      LAND USE RIGHTS, NET





Amortized
prepaid land use rights, net consist of the following:





At December 31,2006
                        
                        
                        2007
                        
                        
                        2008$
                        
                        
                        $
                        
                        
                        $Cost
                        
                        
                        1,074,093
                        
                        
                        
                        2,256,525
                        
                        
                        
                        6,587,430Less:
      Accumulated amortization
                        
                        
                        (47,646
                        )
                        
                        
                        (77,039
                        )
                        
                        
                        (145,863
                        )Prepaid
      land use rights, net
                        
                        
                        1,026,447
                        
                        
                        
                        2,179,486
                        
                        
                        
                        6,441,567





The
prepaid land use rights at December 31, 2006 represent rights to usage of land
in the PRC for a period of 50 years, effective from November 12, 2004. Sunergy
Nanjing paid $483,296 in 2004 and $1,727,780 in 2006, in respect of the rights,
and subsequently received a government grant of $1,105,538 in 2006 as an
incentive for local capital investment.  The Group has presented the
cost of the rights paid, net of the grants received.





In
addition, Sunergy Nanjing purchased a right to use a parcel of land,
approximately 26,000 square meters, from a related party, China Electric
Equipment Group Co., Ltd, or CEEG, in August 2007, at a consideration
approximately $1.2 million. The land use right represents rights to usage of
land in the PRC for a period of 46 years, effective from August 21,
2007.





In 2008,
Sunergy Shanghai purchased a right to use a parcel of land, approximately
100,000 square meters at a consideration approximately $4.3 million. The land
use right represents rights to usage of land in the PRC for a period about 50
years.





Amortization
expense was $24,728, $29,393 and $68,824 for the year ended December 31, 2006,
2007 and 2008.





For 2009,
2010, 2011, 2012 and 2013, the Group will record annual amortization expense of
approximately $134,564.





6.
            BANK
      BORROWINGS





At December 31,2006
                        
                        
                        2007
                        
                        
                        2008$
                        
                        
                        $
                        
                        
                        $Short-term
      bank borrowings
                        
                        
                        69,262,771
                        
                        
                        
                        121,841,022
                        
                        
                        
                        97,299,027Current
      portion of long-term borrowings
                        
                        
                        8,673,886
                        
                        
                        
                        -
                        
                        
                        
                        -Total
                        
                        
                        77,936,657
                        
                        
                        
                        121,841,022
                        
                        
                        
                        97,299,027





The
short-term bank borrowings outstanding as of December 31, 2006, 2007 and 2008
bore an average interest rate of 5.93%, 6.27% and 7.42% per annum, respectively.
These loans represent borrowings of Sunergy Nanjing from various financial
institutions and represent the maximum amount available under each
facility.  Each of these borrowings has a term of one year, and
expires at various times throughout the year.


F-22





6.
            BANK
      BORROWINGS - continued





On
October 31, 2005, Sunergy Nanjing entered into an unsecured loan agreement with
Bank of Communications for an amount of $2,524,583, due in October 2007. The
loan is subject to interest at a rate of 6.34% per annum.





At
December 31, 2007, approximately $28.7 million and $16.4 million of the
short-term bank borrowings are secured by raw materials and a standby letter of
credit from an off-shore bank, respectively.  The remaining short-term
borrowings are guaranteed by China Electric Equipment Group Co., Ltd., which is
a related party, and Wuxi Guofei Green Energy Co., Ltd.





At
December 31, 2008, approximately $72.4 million of the short-term bank borrowings
are guaranteed by China Electric Equipment Group Co., Ltd. and Jiangsu CEEG
Electrical Equipment Manufacturing Co., Ltd., which are related parties.
Approximately $16.1 million of the short-term bank borrowings are secured by raw
materials and chairman Mr. Tingxiou Lu, and $8.8 million of the short-term bank
borrowings are secured by a standby letter of credit issued by Sunergy Hong kong
from off-shore account, respectively.





Sunergy
Nanjing has a short-term credit facility with China Merchants Bank. The credit
facility is restricted for operating activities. The maximum borrowing amount of
the credit facility is $8.8 million (RMB60 million), all of which was
drawn on November 11, 2008. The credit facility bears an interest rate of 5.73%
per annum. The credit facility does not contain any financial covenants or
restrictions.  The credit facility will expire at May 4,
2009





Sunergy
Nanjing also has the short-term credit facilities with China CITIC Bank and
China Minsheng Bank. The maximum borrowing amount of the credit facility is
$21.9 million (RMB150 million) and $14.6 million (RMB100million)
respectively for China CITIC Bank and China Minsheng Bank, all of which
$7.3 million (RMB50 million) and $7.3 million
(RMB50 million) were drawn on January 9, 2008 and May 16, 2008 with an
interest rate of 5.86% and 7.32% per annum respectively. Those credit facilities
do not contain any financial covenants or restrictions.  The credit
facilities will expire at January 9, 2009 and May 16, 2009
respectively.





7.
            DERIVATIVES
      FINANCIAL INSTRUMENTS




During
2008, the Group entered into a long-term silicon supply contract that the
purchase price of the silicon to be acquired was denominated in U.S. dollars,
which is not the functional currency of either of the contracting parties.
Accordingly, the contract contains an embedded foreign currency forward
contract, which is required to be bifurcated and accounted for at fair value in
accordance with the provisions of FASB Statement No. 133, “Accounting for
Derivative Instruments and Hedging Activities.” Changes in fair value are
recorded in the consolidated statements of operations.




As of
December 31, 2008, the fair value of embedded foreign currency derivatives
related to the purchase contract amounted to $7,603,956 and are recorded as
derivative liability. The loss arising from the embedded foreign currency
derivative instruments amounted to $7,611,513 for the year ended
December 31, 2008 has been recorded as “Change in fair value of
derivatives” in the consolidated statements of operations.




The Group
recorded foreign-currency forward exchange loss not under hedge accounting in
earnings for the years ended December 31, 2008 at $2.3 million, with
$0.8 million realized loss and $1.5 million unrealized. The unrealized
loss would be realized at exercise date. As of December 31, 2008, the Group had
outstanding foreign exchange hedge contracts with notional amount of $ 46.6
million and estimated fair value of $1.5 million.


F-23





8.
            FAIR
      VALUE MEASUREMENT




On
January 1, 2008, the Group adopted FAS 157, Fair Value Measurements. FAS 157
defines fair value, establishes a framework for measuring fair value in
accordance with generally accepted accounting principles and expands financial
statement disclosure requirements for fair value measurements. The Group's
adoption of FAS 157 was limited to its financial assets and financial
liabilities, as permitted by FSP 157-2. The Group does not have any nonfinancial
assets or nonfinancial liabilities that it recognizes or discloses at fair value
in its financial statements on a recurring basis. The implementation of the fair
value measurement guidance of FAS 157 did not result in any material changes to
the carrying values of the Group's financial instruments on its opening balance
sheet on January 1, 2008.




FAS 157
defines fair value as the price that would be received from the sale of an asset
or paid to transfer a liability (an exit price) on the measurement date in an
orderly transaction between market participants in the principal or most
advantageous market for the asset or liability. FAS 157 specifies a hierarchy of
valuation techniques, which is based on whether the inputs into the valuation
technique are observable or unobservable. The hierarchy is as
follows:





•   Level
1 — Valuation techniques in which all significant inputs are unadjusted quoted
prices from active markets for assets or liabilities that are identical to the
assets or liabilities being measured.




•   Level
2 — Valuation techniques in which significant inputs include quoted prices from
active markets for assets or liabilities that are similar to the assets or
liabilities being measured and/or quoted prices for assets or liabilities that
are identical or similar to the assets or liabilities being measured from
markets that are not active. Also, model-derived valuations in which all
significant inputs and significant value drivers are observable in active
markets are Level 2 valuation techniques.




•   Level
3 — Valuation techniques in which one or more significant inputs or significant
value drivers are unobservable. Unobservable inputs are valuation technique
inputs that reflect the Group's own assumptions about the assumptions that
market participants would use in pricing an asset or liability.




When
available, the Group uses quoted market prices to determine the fair value of an
asset or liability. If quoted market prices are not available, the Group
measures fair value using valuation techniques that use, when possible, current
market-based or independently-sourced market parameters, such as interest rates
and currency rates.




As of
December 31, 2008, information about inputs into the fair value measurements of
the Group's assets and liabilities that are measured at fair value on a
recurring basis in periods subsequent to their initial recognition is as
follows:


F-24





8.
            FAIR
      VALUE MEASUREMENT - continued





Fair Value Measurements at ReportingDate UsingQuoted PricesTotal Fair
                              
                              in Active
                              
                              SignificantValue and
                              
                              Markets for
                              
                              Other
                              
                              
                              SignificantCarrying
                              
                              Identical
                              
                              Observable
                              
                              
                              UnobservableValue on the
                              
                              Assets
                              
                              Inputs
                              
                              
                              InputsBalance Sheet
                              
                              (Level 1)
                              
                              (Level 2)
                              
                              
                              (Level 3)Liabilities:Foreign
      exchange forward contract
                              
                              $
                              1,454,383
                              
                              
                              
                              $
                              1,454,383
                              
                              
                              
                              —Embedded
      derivatives for long-term
      purchase contract
                              
                              $
                              7,603,956
                              
                              
                              
                              
                              
                              
                              
                              $
                              7,603,956Total
      liabilities
                              
                              $
                              9,058,340
                              
                              
                              
                              $
                              1,454,383
                              
                              
                              $
                              7,603,956—


Fair Value Measurements UsingSignificant Unobservable Inputs(Level 3)Embedded Derivative for Long-termPurchase ContractBeginning
      balanceTotal
      gains and losses (realized/unrealized)Included
      in earnings (or change in net assets)
                          
                          $
                          7,603,956Included
      in other comprehensive incomePurchases,
      issuances, and settlementsTransfers
      in and/or out of Level 3Ending
      balance
                          
                          $
                          7,603,956The
      amount of total gains or losses forthe
      period included in earnings (orchanges
      in net assets) attributable tothe
      change in unrealized gains or lossesrelating
      to assets still held at the reporting date
                          
                          $
                          7,603,956
 F-25


8.
            FAIR
      VALUE MEASUREMENT - continued





The
foreign exchange forward contract and embedded derivatives for long-term
purchase contract were recorded under "Derivative liability" in the consolidated
financial statements as of December 31, 2008. The changes in the fair value of
those derivatives were charged into "Changes in fair value of derivatives" in
the consolidated statements of operations.  There was no any
derivative during the year ended December 31, 2006 and 2007.





The
following is a description of the fair value techniques used for instruments
measured at fair value under SFAS 157 as well as the general classification
of such instruments pursuant to the valuation hierarchy described above under
SFAS 157.





Foreign
Exchange Forward Contract: Quoted prices in active markets for identical assets
are not available. The term of the forward contracts held by Sunergy Nanjing is
less than one year. Main inputs for these short-term forward contracts include
foreign exchange rates, which are observable and can be obtained from third
party professional pricing sources.  These fair value measurements are
classified as level 2.





Embedded
Derivatives for long-term purchase contract: The fair value measurement is
performed using a discounted cash flow model, using observable USD/RMB forward
rates and unobservable inputs mainly including Group’s estimation about silicon
wafers to be purchased under the contract, expected future cash flows based on
monthly delivery of silicon wafer, degree of liquidity in the current credit
markets, and discount rate. This fair value measurement is classified as level
3.





The Group
is also required by SFAS 107, "Disclosures about Fair Value of Financial
Instrument", to disclose fair value of financial instruments that are not
carried at fair value on the consolidated balance sheet.





As of
December 31, 2008, the carrying amounts of accounts receivable, certain amounts
due from related parties, short-term borrowings, accounts payable and notes
payable, approximate their fair values due to their short-term
nature.





The
carrying amount of the Group's outstanding convertible notes was US$48 million
and the estimated fair value of this debt was approximately US$19 million as of
December 31, 2008. The fair value was estimated using market quotes as of
December 31, 2008.





The fair
value estimates presented above are based on pertinent information available to
management as of December 31, 2007 and 2008, respectively. Although
management is not aware of any factors that would significantly affect these
fair value estimates, such amounts have not been comprehensively revalued for
purposes of these financial statements since those dates, and current estimates
of fair value may differ significantly from the amounts
presented.


F-26





9.
            CONVERTIBLE
      SENIOR NOTES





On July
1, 2008, the Company issued US$54.5 million aggregate principal amount
(includes USD 4.5 million from exercise of over-allotment option in full) of
Convertible Senior Notes (“Convertible Notes” or “Notes”) due June 15, 2013,
with an interest rate of 4.75% per annum, payable in arrears semi-annually on
June 15 and December 15, beginning December 15, 2008.





Conversion.





Each
$1,000 principal amount of the Notes will initially be convertible into 81.30
American Depository Shares, or ADSs, par value $.0001 per share at a conversion
price of $12.3, subject to adjustment. The Notes are convertible into a number
of ADSs equal to the conversion rate, at any time prior to the close of business
on the third business day immediately preceding the maturity date. Securities
may be converted only in denominations of USD 1,000 principal amount and
integral multiples thereof.





If Notes
are converted in connection with a Fundamental Change, then the conversion rate
of the Notes being converted shall be increased by an additional number of ADSs.
The conversion rate, including any additional ADSs added to the conversion rate
in connection with a Fundamental Change, will not exceed 97.56 ADSs (equal to a
conversion price of USD10.25 per ADS). Such maximum conversion rate will be
appropriately adjusted for anti-dilution conversion rate
adjustments.





Redemption





In the event of a Fundamental Change,
holders have the option to require the Company to repurchase the entire
principal amount of this Notes, or the portion thereof (which is $1,000 or an
integral multiple thereof), at the Fundamental Change Repurchase Price, together
with accrued interest to, but excluding the repurchase date.





In the
Event of Default, the Trustee by notice to the Company or the Holders of at
least 25% in principal amount of the Notes then outstanding by notice to the
Company and the Trustee, may declare the Notes to be due and payable. Upon such
declaration, the principal of, and accrued and unpaid interest (including any
additional amounts) on all Notes shall be due and payable
immediately.





Offering
expenses incurred for issuing of Convertible Notes amounted to
$4.3 million, and are being amortized through interest expense over the
beneficiary period from July 2008 to June 2013,
using the effective interest rate method. These capitalized costs are reported
as deferred assets in Convertible bond issuance cost, and $0.9 million was
amortized for the year ended December 31, 2008.


F-27





9.
            CONVERTIBLE
      SENIOR NOTES - continued





Share
Lending Agreement





Concurrent
with this offering, 4,431,000 ADSs were borrowed by an affiliate of the initial
purchaser of the notes pursuant to an ADS lending agreement, and offered in a
transaction registered under the Securities Act. This is designed to facilitate
short sales and/or privately negotiated derivative transactions by which
investors may elect to hedge their investments in the Convertible
Notes.





The
Loaned Shares must be returned to the Group by the earliest of (a) the maturity
date of the Notes, June 15, 2013, (b) upon the Group's election to terminate the
Share Lending Agreement at any time after the later of (x) the date on which the
entire principal amount of the Notes ceases to be outstanding, and (y) the date
on which the entire principal amount of any additional convertible securities
that the Group has in writing consented to permit the ADS Borrower to hedge
under the Share Lending Agreement ceases to be outstanding, in each case,
whether as a result of conversion, redemption, repurchase, cancellation or
otherwise; and (c) the termination of the Share Lending
Agreement.  The Group is not required to make any payment to the
Underwriter or ADS Borrower upon the return of the Loaned Shares.





The
Underwriter has agreed to post collateral in cash, having a market value equal
to at least 100% of the market value of the Loaned Shares during the term of the
Share Lending Agreement. Otherwise, the Group can demand that the Underwriter
transfer to the Collateral Agent, a deposit equal to 100% of the market value of
the Loaned Shares to the Collateral Account, no later than the second following
business day. The Collateral Agent will promptly give the Group a statement
setting forth the Market Value of all Collateral upon the Group’s reasonable
request and the Group has the right to audit the Market Value of all
Collateral.





The
Collateral Agent is required to deliver to the Group any interest, distributions
or dividends on the date of such interest, distribution or dividends are
received.  The Underwriter has agreed not to vote the Loaned Shares to
the extent it is the shareholder of record.  An ADS Borrower has the
ability to vote without restriction.





A nominal
lending fee of US$0.0006 per ADS was received from the ADS borrower for the use
of the borrowed ADSs. The ADS Borrower will be required to return the borrowed
ADSs pursuant to the ADS lending agreement by the scheduled maturity date of the
notes in June 2013. The loaned ADS were accounted for as being reflected at
their par value in the common stock line item of the Group’s balance sheet, with
an offsetting reduction of additional paid in capital.





The Group
used the proceeds from the issuance of the Convertible Notes for expansion of
production capacity, for enhancement of research and development, and for
general corporate purposes.


F-28





9.
            CONVERTIBLE
      SENIOR NOTES - continued





The Group
has accounted for the Share Lending Agreement as the issuance of a written call
option to the ADS Borrower for the fair value of the associated
ADSs.  The Group has recorded the call option at fair value in
accordance with EITF Issue No. 00-6, "Accounting for Freestanding Derivative
Financial Instruments Indexed to, and Potentially Settled in, the Stock of a
Consolidated Subsidiary," given the Group has no economic benefit associated
with the issuance of the call option. The fair value of the call option upon
issuance and subsequently is immaterial.





Although
legally issued, the Group has not considered the Loaned Shares issued for
accounting purposes.  As a result, any cash collateral, to the extent
posted by the ADS Borrower, is not considered attributable to the issuance of
shares.  To the extent cash collateral is posted, the Group recorded
the cash as an asset on its balance sheet with an offsetting liability recorded
to reflect the collateral receipt as the proceeds of a borrowing.  The
cash collateral posted as of December 31, 2008 is $17,502,450 which is recorded
as a long term asset under Restricted Cash Collateral Account with an offsetting
long term liability recorded in Collateral accounts payable as of December 31,
2008.





During
the fourth quarter of 2008, the Group conducted open market repurchase of its
Convertible Notes. Through December 31, 2008, the Group repurchased US$6.5
million aggregate principal amount of the Convertible Notes for a total cash
consideration of US$2.0 million. As a result, the Group realized a net
gain of US$4.5 million and recorded as other income.





10.
            RESTRUCTURING





In April
2006, China Sunergy BVI underwent a legal reorganization as discussed in Note
1.  To effect the reorganization, the following occurred either at or
near the date of reorganization:





·
            China
      Sunergy BVI was formed by a single shareholder who contributed $13.1
      million in cash in exchange for one common share of China Sunergy
      BVI.





·
            China
      Sunergy BVI issued loans to Sunergy Nanjing and three of its founding
      shareholders (the “Loans”) for $10 million and $3.1 million,
      respectively.  Approximately $2.0 million of the $3.1 million
      received by the founding shareholders was immediately contributed to
      Sunergy Nanjing in satisfaction of outstanding capital contribution
      requirements.





·
            Two
      shareholders (the “Transferors”) transferred 10% of their ownership
      interest in Sunergy Nanjing to two of the remaining three beneficial
      shareholders of Sunergy Nanjing (the “Transferees”), who were directors
      and officers of Sunergy Nanjing , one of which assumed the Transferors
      unfunded capital contribution requirement of $540,000.  China
      Sunergy accounted for this transaction as a contribution of capital by the
      Transferors followed by a non prorata dividend distribution to the
      Transferees.  As a result,  China Sunergy BVI recorded
      a compensation charge of approximately $3.7 million, equal to the fair
      value of the interest received by one of the Transferees in excess of what
      that Transferee would have received had the distribution been made on a
      prorata basis.


F-29





10.
            RESTRUCTURING
      - continued





·
            The
      Loans were effectively converted into 12,847,300 shares of Series A
      redeemable convertible preference shares (“Series A
      Shares”).  This resulted in the three founding shareholders
      relinquishing a 3.2% ownership interest in Sunergy Nanjing (3,456,000
      common shares of China Sunergy BVI on a post-restructuring basis), in
      exchange for the $3.1 million in loans outstanding.  The fair
      value of the 3.2% ownership interest has been recorded as a reduction in
      additional paid-in capital.  The excess of the $3.1 million in
      loans outstanding over the fair value of the 3.2% ownership interest
      received of $408,608 has been recorded as compensation
      expense.  China Sunergy BVI effectively reclassified the
      carrying value of the Loans to Series A
Shares.





·
            China
      Sunergy BVI acquired all of Sunergy Nanjing’s ownership interests for
      approximately $4.04 million.  Substantially all of this was paid
      to Sunergy Nanjing ’s Chinese shareholder in order to comply with
      established regulatory practice, which requires that Chinese shareholders
      be paid not less than net asset value or investment cost for their equity
      interest in Sunergy Nanjing.  A nominal amount was paid to the
      remaining shareholders.  Under agreement, the Chinese
      shareholder remitted the $4.04 million to Sunergy Nanjing in August
      2006.  As a result, China Sunergy BVI will have paid nominal
      consideration to all Sunergy Nanjing shareholders for all of their equity
      interests in Sunergy Nanjing.





·
            China
      Sunergy BVI issued 1,045,440 warrants (the “Warrants”), exercisable into
      104,544,000 ordinary shares to the shareholders of Sunergy Nanjing to
      purchase China Sunergy BVI’s common shares at a nominal exercise
      price.  The Warrants do not confer any voting rights or rights
      to dividends to the holders
thereof.





·
            The
      Transferors effectively sold 54,000 Warrants to an unrelated third-party
      for proceeds of approximately $5.2 million.  The Warrants were
      exercised into common shares of China Sunergy BVI in August
      2006.





11.
            REDEEMABLE
      CONVERTIBLE PREFERRED SHARES





As
discussed in Note 10, in April 2006, China Sunergy BVI issued 12,847,300 Series
A redeemable convertible preferred shares, par value $0.0001 per share (the
"Series A Shares'').  China Sunergy BVI incurred issuance costs of
$149,590 which it has deducted from the carrying value of the loans and,
correspondingly, the Series A shares.  In May 2006, China Sunergy BVI
issued 23,905,100 Series B redeemable convertible preferred shares, par value
$0.0001 per share (the "Series B Shares''), China Sunergy BVI incurred issuance
costs of $50,000 which it has deducted from the carrying value of the Series B
shares.





In
September 2006, the Company issued 6,901,000 Series C redeemable convertible
preferred shares, par value $0.0001 per share (the "Series C
Shares'') (collectively with the Series A and Series B Shares, the
“Preferred Shares”), and incurred issuance costs of $100,000 which it has
deducted from the carrying value of the Series C shares.


F-30





11.
            REDEEMABLE
      CONVERTIBLE PREFERRED SHARES -
continued





Dividends





The
Preferred Shares are entitled to dividends at an annual rate of 3% of the
original issue price, compounded quarterly, whether or not declared by the Board
of Directors of the Company. After payment of the Preferred Shares dividend,
holders of Preferred Shares are entitled to participate in dividends paid to
holders of ordinary shares on an as-converted basis.





Conversion





The
preferred shares, plus all accrued but unpaid dividends thereon were originally
convertible into ordinary shares at pre-set conversion prices, at the option of
the holder at any time after the date of issuance of such shares.  The
preferred shares are automatically converted upon the consummation of an initial
public offering (“IPO”) or by obtaining the necessary written consent from
the holders of the Preferred Shares. An IPO refers to an initial public offering
duly approved by the Company’s board of directors.  The conversion
price is subject to adjustment for dilution, the issuance of additional equity
securities with a conversion price lower than that of the Preferred Shares, upon
certain distributions made by the Company and upon an earnings adjustment in the
event the Company’s 2006 (for series A and B); and 2007 (for series C) net
earnings as defined under the agreement, is less than a predefined
amount.





For each
of the Preferred Shares, the Group recognized an initial beneficial conversion
feature (“BCF”) based on the conversion price that would be in effect assuming
the Group would not generate any additional income or issue any additional
ordinary shares on A, series B and series C issuance dates, the Group’s earnings
were below the pre-defined amounts.  As such, the Group assumed that
if there are no changes to the current circumstances other than the passage
of time the conversion price would be (i) approximately $0.0001 per share for
both the series A and series B shares as there was no floor on the conversion
price adjustment, and (ii) $1.76 for the series C shares, representing the
adjustment floor (collectively the “Effective Conversion
Price”).  Based on this, the Group recorded a BCF, limited to proceeds
received upon issuance, for the series A, series B and series C preferred shares
of $13,110,400, $27,999,948 and $6,941,170 respectively, during the year ended
December 31, 2006.  This amount was amortized immediately as a
dividend to holders of the preferred shares as the Preferred Shares were
convertible upon issuance.





As the
Group’s 2006 net earnings were less than the pre-defined earnings target, the
conversion prices of the series A and series B shares were adjusted to $0.39 and
$0.44, respectively (collectively the “Adjusted Conversion Price”), effective
December 31, 2006.  The Adjusted Conversion Price was greater than the
Effective Conversion Price, resulting in an adjusted BCF (intrinsic value) that
is lower than the BCF (intrinsic value) recognized at issuance of the series A
and series B shares.  As the BCF had been fully amortized and there
was no incremental BCF to recognize based on the Adjusted Conversion Price, no
further adjustment was required.


F-31





11.
            REDEEMABLE
      CONVERTIBLE PREFERRED SHARES -
continued





Conversion -
continued





In March
2007, our shareholders adopted a third amended and restated memorandum and
articles of association to (a) modify the conversion prices of our Series A,
Series B and Series C preferred shares, which were revised to $.39, $.44 and
$1.76, respectively, subject to adjustments in the case of certain dilution
events, and (b) replace the definition of “qualified IPO” or “QIPO” with the
definition of “IPO.” The purposes of these modifications were to (a) ensure that
there would be no preferred share outstanding after the completion of our
initial public offering, (b) fix the conversion prices of our Series A and
Series B preferred shares according to the earnings-based adjustments based on
our 2006 net earnings as provided in our previous memorandum and articles of
association, and (c) re-set the conversion price of our Series C preferred
shares and delete the provision on the adjustment of such conversion price based
on our 2007 net earnings, in order to avoid any dilution caused by the possible
earnings-based adjustment. Such modifications did not have a significant impact
on expected cash flows and, as such, did not impact our consolidated financial
statements.





In March
2007, our shareholders mutually agreed for holders of our Series A and Series B
preferred shares to sell a portion of their preferred shares to the Group for
nominal consideration. The number of Series A and Series B shares sold was
determined based on a calculation to offset the dilution impact of the
adjustment of conversion prices caused by non-cash compensation charges of $4.7
million. Accordingly, we purchased 48,238 Series A preferred Shares, 72,079
Series B preferred shares, 8,009 Series B preferred shares and 9,610 Series B
preferred shares from PraxCapital, Exuberance Investment Limited, Gersec Trust
Reg., and China Environmental Fund 2004, LP, respectively, with nominal
consideration. According to Cayman Islands law, these Series A and Series B
preferred shares were automatically cancelled upon our purchase.





All the
outstanding Series A, Series B and Series C redeemable convertible preferred
shares of 12,847,300, 23,905,100 and 6,901,000 were automatically converted into
74,138,777 ordinary shares upon the consummation of the Group's initial public
offering on May 22, 2007.





Redemption





The
Preferred Shares may redeem at any time after the occurrence of a redemption
event, which includes (i) March 31, 2008 with respect to the Series A Shares,
May 6, 2009 with respect to the Series B Shares and September 26, 2009 with
respect to the Series C Shares (ii) a breach in the Preferred Share
agreements by the Company or its founders, (iii) a non-competition breach
by the founders or (iv) the commencement of a liquidation procedure or related
action.  The Company is only obligated to redeem 9,799,300 of the
Series A Shares upon the occurrence of events (iii) or (iv)
above.  The Company has the ability to request a one year extension of
the redemption date upon the occurrence of event (i) above, the extension of
which requires the approval of the majority of the holders of the Series A,
Series B or Series C Shares, respectively.  The redemption amount must
be paid in cash and is that amount which would provide the holder with an
internal rate of return of 15% for Series A and Series B Shares and 12% for
Series C Shares.


F-32





11.
            REDEEMABLE
      CONVERTIBLE PREFERRED SHARES -
continued





Voting
rights





Each
Preferred Share has voting rights equivalent to the number of ordinary shares
into which it is convertible.








12.
            SUBSCRIPTION
      RECEIVABLE




In
March 2006, Sunergy Nanjing modified its existing articles
of  incorporation. Such modifications had the effect of reducing the
cash capital contribution requirements of certain of its shareholders, who were
also employees. The Company has accounted for this as forgiveness of a
shareholder loan and has recorded compensation charges of $540,000.




As
described in Note 11, in April 2006, China Sunergy BVI acquired all of Sunergy
Nanjing ownership interests for $4,046,811 which was paid to Sunergy Nanjing
Chinese shareholder as a distribution on reorganization. Under the terms of an
agreement, the Chinese shareholder was required to remit these funds, and did so
in August 2006, to Sunergy Nanjing.




The
$405,313 subscription receivable recorded in 2008 represents amount due from
employee for options exercised but not yet paid in 2008.





13.
            MAINLAND
      CHINA CONTRIBUTION PLAN





Full time
employees of the Group in the PRC participate in a government-mandated
multiemployer defined contribution plan pursuant to which certain pension
benefits, medical care, unemployment insurance, employee housing fund and other
welfare benefits are provided to employees.  PRC labor regulations
require the Group to accrue for these benefits based on certain percentages of
the employees’ salaries.  The total contribution for such employee
benefits was $278,235, $636,913 and $2,240,492 for the years ended December 31,
2006, 2007 and 2008, respectively.





14.
            PROFIT
      APPROPRIATION





Pursuant
to laws applicable to entities incorporated in the PRC, Sunergy Nanjing is
prohibited from distributing its statutory capital and must make appropriations
from PRC GAAP after-tax profit to other non-distributable reserve funds. These
reserve funds include one or more of the following: (i) a general reserve, (ii)
an enterprise expansion fund and (iii) a staff bonus and welfare fund. Subject
to certain cumulative limits, the general reserve fund requires annual
appropriation of 10% of after tax profit (as determined under accounting
principles generally accepted in the PRC at each year-end); the appropriation to
the other fund are at Sunergy Nanjing’s discretion. These reserve funds can only
be used for specific purposes of enterprise expansion and staff bonus and
welfare and are not distributable as cash dividends, loans or advances to the
Company.


F-33





14.
            PROFIT
      APPROPRIATION - continued





In 2006,
Sunergy Nanjing made appropriations of $1,617,997 to the non-distributable
general reserve fund. Due to a net loss in 2007 and 2008, Sunergy Nanjing made
no appropriation for 2007 and 2008.





In 2007,
with a board resolution on December 20, 2007, Sunergy Nanjing declared a
dividend of $15,827,573 to the then shareholder, China Sunergy BVI, for the
profit made in 2006.





As a
result of these PRC laws and regulations, Sunergy Nanjing is restricted in its
ability to transfer the registered capital to the Company in the form of
dividends, loans or advances.  The restricted portion amounted to
$121,564,808, as of December 31, 2008.





15.
            OTHER
      (EXPENSE) INCOME, NET





Years ended December 31,2006
                        
                        
                        2007
                        
                        
                        2008$
                        
                        
                        $
                        
                        
                        $Foreign
      currency exchange loss, net
                        
                        
                        (1,250,644
                        )
                        
                        
                        (1,173,159
                        )
                        
                        
                        (6,858,856
                        )Convertible
      bond repurchase gain
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        4,525,625Government
      grants
                        
                        
                        583,569
                        
                        
                        
                        1,660,567
                        
                        
                        
                        98,732Others
                        
                        
                        (177,739
                        )
                        
                        
                        (393,996
                        )
                        
                        
                        (33,068
                        )(844,814
                        )
                        
                        
                        93,412
                        
                        
                        
                        (2,267,567
                        )





16.
            INCOME
      TAX BENEFIT





Tax
benefit comprises:





Years ended December 31,2006
                        
                        
                        2007
                        
                        
                        2008$
                        
                        
                        $
                        
                        
                        $Current
      tax
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Deferred
      tax benefit
                        
                        
                        70,674
                        
                        
                        
                        705,504
                        
                        
                        
                        2,648,62170,674
                        
                        
                        
                        705,504
                        
                        
                        
                        2,648,621





China
Sunergy Cayman and China Sunergy BVI are not subject to tax in these
jurisdictions as they are incorporated in the Cayman Islands and British Virgin
Islands, respectively.  China Sunergy Hong Kong is subject to 16.5%
income tax rate.





Sunergy
Nanjing was governed by the Income Tax Law of PRC Concerning Foreign Investment
and Foreign Enterprise for the period before January 1, 2008, and the statutory
rate was 33% (30% of state income tax plus 3% local income tax) on PRC taxable
income.  Sunergy Nanjing, as a foreign-invested manufacturing enterprise
established in Nanjing (within a coastal economic zone), enjoyed a preferential
rate of 24%.  In addition, Sunergy Nanjing was granted a “2+3” tax holiday
(two year exemption followed by three years 50% deduction) starting from its
first profit making year which was 2006.  Thus Sunergy Nanjing was tax
exempted in 2006 and 2007.


F-34


16.
            INCOME
      TAXES - continued





On March
16, 2007, the National People’s Congress approved and promulgated a new tax law,
China’s Unified Enterprise Income Tax Law (“new EIT law”). On December 6, 2007,
the Congress also adopted its Implementing Regulation. On December 26, 2007,
State Council of China promulgated the circular on implementation of enterprise
income tax transition preferential policy. The New EIT Law and its Implementing
Regulation have become effective on January 1, 2008. Under the new EIT law, FIEs
and domestic companies are subject to a uniform tax rate of 25%, and enterprises
which were established and already enjoyed preferential tax treatments before
March 16, 2007 will continue to enjoy them (i) in the case of preferential tax
rates, for a period of five years from January 1, 2008, and the enterprises
which previously enjoyed the tax rate of 24% shall be subject to the tax rate of
25% in 2008, and (ii) in the case of preferential tax exemption or reduction for
a specified term, until the expiration of such term. Therefore, we are subject
to an applicable income tax rate of 12.5% in 2008, 2009 and 2010.





In 2008,
Sunergy Nanjing obtained the certificate of High and New Technology Enterprises
(“HNTEs”), the valid period of which is from 2008 to 2010. Under the new EIT
Law,  HNTEs are subject to a lower tax rate of
15%.   As Sunergy Nanjing is still in a tax holiday specified
above, the applicable rate for 2008, 2009 and 2010 is 12.5%.  15%
favored rate will be granted from 2011 if the HNTE certificate is
renewed.





Effective
on January 1, 2007, the Group adopted the provisions of FASB Interpretation No.
48, “Accounting for
Uncertainty in Income Taxes—an Interpretation of SFAS No. 109” (“FIN
48”), which clarifies the accounting and disclosure for uncertainty in tax
positions, as defined in that statement.  FIN 48 prescribes a
more-likely-than-not threshold for financial statement recognition and
measurement of tax position taken or expected to taken in a tax
return.  This interpretation also provides guidance on de-recognition
of income tax assets and liabilities, classification of current and deferred
income tax assets and liabilities, accounting for interest and penalties
associated with tax positions, accounting for income taxes in interim periods
and income tax disclosures.  Based on its FIN 48 analysis
documentation, the Group has made its assessment of the level of tax authority
for each tax position (including the potential application of interest and
penalties) based on the technical merits.  The adoption of FIN 48 did
not have any impact on the Group’s total liabilities or shareholders’
equity.  The Group has no material uncertain tax position as of
December 31, 2008 or unrecognized tax benefit which would favorably affect the
effective income tax expense.  The Group does not anticipate any
significant increases or decreases to its liabilities for unrecognized tax
benefits within the next 12 months.


F-35





16.
            INCOME
      TAXES - continued





The
principal components of the deferred income tax assets are as
follows:





At December 31,2006
                                  
                                  
                                  2007
                                  
                                  
                                  2008$
                                  
                                  
                                  $
                                  
                                  
                                  $Deferred
      tax assets:Pre-operating
      expense
                                  
                                  
                                  58,573
                                  
                                  
                                  
                                  61,179
                                  
                                  
                                  
                                  34,469Depreciation
      of property, plant and equipment
                                  
                                  
                                  49,307
                                  
                                  
                                  
                                  151,570
                                  
                                  
                                  
                                  169,011Warranty
      costs
                                  
                                  
                                  42,551
                                  
                                  
                                  
                                  56,121
                                  
                                  
                                  
                                  47,354Inventory
      provision
                                  
                                  
                                  -
                                  
                                  
                                  
                                  242,686
                                  
                                  
                                  
                                  1,648,271Bad
      debts provision
                                  
                                  
                                  -
                                  
                                  
                                  
                                  137,134
                                  
                                  
                                  
                                  127,952Tax
      losses carried forward
                                  
                                  
                                  -
                                  
                                  
                                  
                                  147,541
                                  
                                  
                                  
                                  216,536Derivative
      assets (liabilities)
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,225,925Others
                                  
                                  
                                  -
                                  
                                  
                                  
                                  59,704
                                  
                                  
                                  
                                  35,038Total
      deferred tax assets
                                  
                                  
                                  150,431
                                  
                                  
                                  
                                  855,935
                                  
                                  
                                  
                                  3,504,556Analysis
      as:Current
                                  
                                  
                                  -
                                  
                                  
                                  
                                  527,361
                                  
                                  
                                  
                                  1,992,759Non-current
                                  
                                  
                                  150,431
                                  
                                  
                                  
                                  328,574
                                  
                                  
                                  
                                  1,511,797Total
      deferred tax assets
                                  
                                  
                                  150,431
                                  
                                  
                                  
                                  855,935
                                  
                                  
                                  
                                  3,504,556





The tax
losses available for carry forward in 2007 and 2008 amounted to approximately
$1,180,328 and $1,732,288, and will expire in 2012 and 2013
respectively.




The Group
considers positive and negative evidence to determine whether some portion or
all of the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible. Based
upon the level of historical taxable income and projections for future taxable
income over the periods in which the deferred tax assets are deductible, the
Group believes it is more-likely-than-not that the Group will realize the
benefits of these deductible differences, and as such, no valuation allowances
as of December 31, 2008 have been recorded. The amount of the deferred tax
assets considered realizable, however, could be reduced in the near term if
estimates of future taxable income during the carry forward periods are
reduced.


F-36





16.
            INCOME
      TAXES - continued





Reconciliation
between the provision for income tax computed by applying the PRC corporate income tax to income
before income taxes and the actual provision for income tax is as
follows:





Years ended December 31,2006
                  
                  
                  2007
                  
                  
                  2008PRC
      enterprise income tax
                  
                  
                  33.0
                  %
                  
                  
                  33.0
                  %
                  
                  
                  25.0
                  %Expense
      not deductible for tax purposesForgiveness
      of shareholder receivable
                  
                  
                  1.5
                  %
                  
                  
                  -Excess
      of prorata distribution to shareholders
                  
                  
                  10.2
                  %
                  
                  
                  -Purchase
      and retirement of treasury shares
                  
                  
                  1.1
                  %
                  
                  
                  -Return
      of distribution on reorganization
                  
                  
                  11.1
                  %
                  
                  
                  -Government
      grants
                  
                  
                  3.0
                  %
                  
                  
                  -50%
      additional deduction of R&D expense
                  
                  
                  -
                  
                  
                  
                  (11.7
                  )%
                  
                  
                  0.4
                  %Other
      expense non-deductible for tax purposes
                  
                  
                  0.2
                  %
                  
                  
                  1.3
                  %
                  
                  
                  (0.7
                  )%Effect
      of tax rate change
                  
                  
                  -
                  
                  
                  
                  0.1
                  %
                  
                  
                  (0.2
                  )%Different
      tax rates in other jurisdictions
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (3.0
                  )%Tax
      holiday granted to Sunergy Nanjing
                  
                  
                  (60.7
                  )%
                  
                  
                  (10.0
                  )%
                  
                  
                  (11.1
                  )%(0.6
                  )%
                  
                  
                  12.7
                  %
                  
                  
                  10.4
                  %Gross
      tax holiday effect
                  
                  $
                  22,163,865
                  
                  
                  $
                  3,117,790
                  
                  
                  $
                  2,514,002Tax
      holiday per share-basic
                  
                  $
                  0.17
                  
                  
                  $
                  0.02
                  
                  
                  $
                  0.01Tax
      holiday per share-diluted
                  
                  $
                  0.17
                  
                  
                  $
                  0.02
                  
                  
                  $
                  0.01





The
Company plans to indefinitely reinvest the undistributed earnings of the
Company's PRC subsidiaries.  However, as of December 31, 2008, the PRC
subsidiaries have an accumulated deficit of $30.2 million. Upon distribution of
any future earnings in the form of dividends or otherwise, the Company would be
subject to the then applicable PRC tax laws and regulations.





17.
            SHARE
      BASED COMPENSATION




The
Company measures share-based compensation cost on the grant date at the fair
value of the award and recognizes this cost as an expenses over the grant
recipient's requisite service periods.





Prior to
2006, the Company did not grant share options to employees, officers, directors
or individual consultants and/or advisors who rendered services to the
Group.





In
October 2006, the Company adopted the Share Incentive Plan (the “First Plan”)
which allows the Company to offer share incentive awards to employees, officers,
directors, individual consultants or advisors who rendered services to the
Group, pursuant to which 1,366,400 ordinary shares were authorized and granted.
Under the First Plan, options are granted with an exercise price equal to 70% of
the fair market value of the underlying shares, as determined by the Board of
Directors at the date of grant and expire after 10 years, with vesting occurring
25% upon each anniversary of the grant. The proceeds from the exercise of the
options by the grantee will be equity settled by cash or other method as
permitted and set forth in the plan.


F-37





17.
            SHARE
      BASED COMPENSATION - continued




On April
24, 2007, the Company amended and restated the above Share Incentive Plan, which
approved the issuance of up 2,500,000 ordinary shares of the Company pursuant to
awards of options. Under the First plan, additional 684,500 ordinary shares were
granted at an exercise price equal to 70% of the IPO offering price per ordinary
share.





On
January 10, 2008, under the First Plan, the Company further granted options to
purchase 716,226 ordinary shares to certain employees at an exercise price of
US$1.283 per share. The options expire ten years from the date of grant, with
one–fourth of the options vesting on each of the following four grant date
anniversaries.





On
February 5, 2008, the shareholders granted approval for its Second Share
Incentive Plan (the “Second Plan”). The Second Plan is open to members of the
China Sunergy Board, as well as employees and consultants as determined by the
Compensation Committee of the Board. The maximum number of shares that may be
issued pursuant to the Second Plan is 4,190,748. The Company granted 2,397,301
and 1,078,785 restricted common shares to its CEO and CFO on the same day, which
vest one third annually over the following three years.




The
Company recorded $114,563, $535,856 and $3,231,594 as compensation expense for
the years ended December 31, 2006, 2007 and 2008, respectively.




The
derived fair value of the ordinary shares underlying the options was determined
by the Company, with references to a retrospective third-party valuation as of
September 30, 2006, an independent appraiser, using generally accepted valuation
methodologies, including a weighted average equity value derived by using a
combination of the discounted cash flow method, a method within the income
approach whereby the present value of future expected net cash flows is
calculated using a discount rate and the guideline companies method, which
incorporates certain assumptions including the market performance of comparable
listed companies as well as the financial results and growth trends of the
Group, to derive the total equity value of the Group. The valuation model
allocated the equity value between the ordinary shares and the preferred shares
and determined the fair value of ordinary shares based on the option-pricing
method under the enterprise value allocation method. Under this method, the
ordinary shares have value only if the funds available for distribution to
shareholders exceed the value of the liquidation preference at the time of a
liquidity event (for example, merger or sale). The ordinary shares are
considered to be a call option with claim on the enterprise at an exercise price
equal to the remaining value immediately after the preferred shares are
liquidated.




The fair
value of each award is estimated on the date of grant using the binomial
option-pricing formula that uses the assumptions noted below. Expected
volatilities are based on the average volatility of comparable companies with
the time period commensurate with the expected time period. The Group uses
historical data to estimate option exercise and employee termination within the
pricing formula. The contractual life of the option is 10 years.  The
risk-free rate for periods within the contractual life of the option is based on
the yield of US Treasury Bond.


F-38





17.
            SHARE
      BASED COMPENSATION - continued




2006
                  
                  
                  2007
                  
                  
                  2008Average
      risk-free rate of return
                  
                  
                  4.77
                  %
                  
                  
                  4.63
                  %
                  
                  
                  3.91
                  %Contractual
      life of the option
                  
                  10
      years
                  
                  
                  10
      years
                  
                  
                  10
      yearsVolatility
      rate
                  
                  
                  65
                  %
                  
                  
                  61
                  %
                  
                  
                  60
                  %Dividend
      yield
                  
                  
                  0
                  %
                  
                  
                  0
                  %
                  
                  
                  0
                  %




The
weighted average grant-date fair value of options granted during year 2006, 2007
and 2008 was $1.34, $0.96 and $1.20 per share, respectively. There were no
options exercised during the year ended December 31, 2006 and
2007.  Total fair value of options vested during the year ended
December 31, 2006, 2007 and 2008 is nil, $369,840 and $341,934,
respectively.




In
November 2007, the Company modified the exercise price of all the options
granted in 2006 from $1.99 to $1.28 per ordinary share.  The total
incremental compensation expense resulting from the modification was $139,600,
which will be amortized over the remaining requisite service period of 2.95
years.




All the
amounts below reflect the modification of exercise prices of
options.





A summary
of the option activities is follows:





Weighted
      averageNumber
      of
                    
                    
                    Weighted
      average
                    
                    
                    remaining
                    
                    
                    AggregateOptions
                    
                    
                    exercise price
                    
                    
                    contract term
                    
                    
                    intrinsic valueOutstanding
      at January 1, 2008
                    
                    
                    1,586,900
                    
                    
                    $
                    1.283Granted
                    
                    
                    716,226
                    
                    
                    $
                    1.283Forfeited
                    
                    
                    (651,420
                    )
                    
                    $
                    1.283Exercised
                    
                    
                    (371,580
                    )
                    
                    $
                    1.283
                    
                    
                    
                    
                    
                    $
                    125,222Outstanding
      at December 31, 2008
                    
                    
                    1,280,126
                    
                    
                    $
                    1.283
                    
                    
                    
                    8.36
                    
                    
                    $
                    0Options
      vested or expected to vest at December 31, 2008
                    
                    
                    1,280,126
                    
                    
                    $
                    1.283
                    
                    
                    
                    8.36
                    
                    
                    $
                    0Options
      exercisable at December 31, 2008
                    
                    
                    267,790
                    
                    
                    $
                    1.283
                    
                    
                    
                    7.85
                    
                    
                    $
                    0




As of
December 31, 2008, there was $1,147,278 of unrecognized compensation expense
related to unvested share-based compensation, which is expected to be recognized
over a weighted-average period of 2.24 years.


F-39


17.
            SHARE
      BASED COMPENSATION - continued




The
following table summarizes the activity of restricted shares during the year
ended December 31, 2008:





weightedNumber
      of
                      
                      
                      average
      grant-Restricted Shares
                      
                      
                      date fair valueNon-vested
      as of January 1, 2008
                      
                      
                      -
                      
                      
                      
                      -Granted
                      
                      
                      3,476,086
                      
                      
                      $
                      1.13Forfeited
                      
                      
                      -
                      
                      
                      
                      -Vested
                      
                      
                      (1,158,695
                      )
                      
                      
                      1.13Non-vested
      as ofDecember 31, 2008
                      
                      
                      2,317,391
                      
                      
                      
                      1.13




The group
did not grant any restricted shares prior to 2008. The weighted average
grant-date fair value of restricted shares granted during year 2008 was $1.13
per share. Total fair value of restricted shares vested during the year ended
December 31, 2008 is $1,314,933.




As of
December 31, 2008, there was $1,303,540 of total unrecognized compensation
expense related to restricted shares granted under the plan, which is expected
to be recognized over a weighted-average period of 1.66 years.





18.
            RELATED
      PARTY TRANSACTIONS AND BALANCES





Related
party balances





Amounts
      due from related parties:
                        
                        Years ended December 31,2006
                        
                        
                        2007
                        
                        
                        2008$
                        
                        
                        $
                        
                        
                        $Balances
      with directors
                        
                        
                        768
                        
                        
                        
                        -
                        
                        
                        
                        410,778Trade
      related balances.
                        
                        
                        1,535,648
                        
                        
                        
                        2,111,890
                        
                        
                        
                        18,172,541Non-trade
      related balances.
                        
                        
                        439,994
                        
                        
                        
                        -
                        
                        
                        
                        -Amounts
      due from related parties
                        
                        
                        1,976,410
                        
                        
                        
                        2,111,890
                        
                        
                        
                        18,583,319





Balances
with directors in 2006 pertain to petty cash advances to directors for business
travel. Balances with directors in 2008 pertain to withheld individual income
tax paid for director.


F-40





18.
            RELATED
      PARTY TRANSACTIONS AND BALANCES -
continued





Related party
balances - continued





Trade
related balances pertain to receivables and prepayments in respect of sales and
inventory purchases to/from related parties with common ultimate
investors.  Details of trade related balances with such parties are as
follows:





At December 31,Name of related party
                        
                        2006
                        
                        
                        2007
                        
                        
                        2008$
                        
                        
                        $
                        
                        
                        $CEEG
      (Nanjing) International Trading Co., Ltd.
                        
                        
                        1,535,648
                        
                        
                        
                        90,321
                        
                        
                        
                        -CEEG
      (Nanjing) Semiconductor Co., Ltd.
                        
                        
                        -
                        
                        
                        
                        441,627
                        
                        
                        
                        11,479,561CEEG
      (Shanghai) Solar Science and Technology Co., Ltd.
                        
                        
                        -
                        
                        
                        
                        1,159,337
                        
                        
                        
                        6,692,980CEEG
      (Nanjing) Solar Research Institute
                        
                        
                        -
                        
                        
                        
                        420,605
                        
                        
                        
                        -1,535,648
                        
                        
                        
                        2,111,890
                        
                        
                        
                        18,172,541





In 2006,
the non-trade related balance pertains to payments of $212,684 made on behalf of
CEEG (Nanjing) Special Transformer Manufacturing Co., Ltd. in respect of
purchase of fixed assets, and $227,310 made on behalf of CEEG Nanjing
International Trade Co., Ltd. in respect of purchase of
inventories.





Amounts
      due to related parties:
                        
                        At December 31,2006
                        
                        
                        2007
                        
                        
                        2008$
                        
                        
                        $
                        
                        
                        $Balances
      with directors
                        
                        
                        3,742
                        
                        
                        
                        -
                        
                        
                        
                        -Trade-related
      balance
                        
                        
                        -
                        
                        
                        
                        8,214
                        
                        
                        
                        246,465Non-trade
      related balances
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Amounts
      due to related parties
                        
                        
                        3,742
                        
                        
                        
                        8,214
                        
                        
                        
                        246,465





Balances
with directors pertain to expense reimbursements payable to
directors.





Trade
related balances pertain to payables and pre collected amounts in respect of
rental, inventory and fixed assets purchases and sales to/from related parties
with common ultimate investors.  Details of trade related balances
with such parties are as follows:





At December 31,Name of related party
                  
                  2006
                  
                  
                  2007
                  
                  
                  2008$
                  
                  
                  
                  $
                  
                  
                  
                  $CEEG
      (Nanjing) Special Transformer Co., Ltd.
                  
                  
                  -
                  
                  
                  
                  8,214
                  
                  
                  
                  17,560China
      Electric Equipment Group Co., Ltd.
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  150,119China
      Electric Equipment Group(Hongkong)
      Limited...
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  76,618CEEG
      (Nanjing) New Energy Co., Ltd.
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,168-
                  
                  
                  
                  8,214
                  
                  
                  
                  246,465


F-41





18.
            RELATED
      PARTY TRANSACTIONS AND BALANCES -
continued





Related
party transactions





Other
than as disclosed in Note 6, details of related party transactions are as
follow:





Sales to
related parties with common ultimate investors:





Name of related party
                            
                            Years ended December 31,2006
                            
                            
                            2007
                            
                            
                            2008$
                            
                            
                            $
                            
                            
                            $CEEG
      Nanjing International Trade Co., Ltd.
                            
                            
                            4,772,552
                            
                            
                            
                            3,234,428
                            
                            
                            
                            -Jiangsu
      East China Micro-wareEquipment
      Co., Ltd.
                            
                            
                            55,685
                            
                            
                            
                            -
                            
                            
                            
                            -CEEG
      (Shanghai) Solar Science and Technology Co., Ltd.
                            
                            
                            -
                            
                            
                            
                            5,192,155
                            
                            
                            
                            46,575,536CEEG
      (Nanjing) Solar Research Institute
                            
                            
                            -
                            
                            
                            
                            1,521,110
                            
                            
                            
                            1,265,956CEEG
      (Nanjing) New Energy Co., Ltd.
                            
                            
                            -
                            
                            
                            
                            41,927
                            
                            
                            
                            7,159,226CEEG
      (Nanjing) Semiconductor Co., Ltd.
                            
                            
                            -
                            
                            
                            
                            602,796
                            
                            
                            
                            -4,828,237
                            
                            
                            
                            10,592,416
                            
                            
                            
                            55,000,718





Purchases
from related parties with common ultimate investors are as follows:





Name of related party
                        
                        Years ended December 31,2006
                        
                        
                        2007
                        
                        
                        2008$
                        
                        
                        $
                        
                        
                        $CEEG
      (Nanjing) Solar Research Institute
                        
                        
                        -
                        
                        
                        
                        155,374
                        
                        
                        
                        11,147CEEG
      Nanjing International Trade Co., Ltd.
                        
                        
                        6,462,879
                        
                        
                        
                        1,166,712
                        
                        
                        
                        -CEEG
      (Shanghai) Solar Science and Technology Co., Ltd.
                        
                        
                        -
                        
                        
                        
                        704,880
                        
                        
                        
                        257,301CEEG
      (Nanjing) Semiconductor Co., Ltd.
                        
                        
                        -
                        
                        
                        
                        1,425,888
                        
                        
                        
                        7,076,920China
      Electric Equipment Group (Hongkong) Limited -
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        76,7136,462,879
                        
                        
                        
                        3,452,854
                        
                        
                        
                        7,422,081





In 2006,
Sunergy Nanjing entered into a rental tenancy agreement with CEEG Jiangsu
(Nanjing) Special Transformer Co., Ltd. for the use of warehouse premises. The
tenancy agreement provides for annual rental payments of $8,214, and has a
remaining term of 3 years as of December 31, 2008. Rental expense for the years
ended December 31, 2006, 2007 and 2008 was $1,921, $7,940 and
$8,487.





In 2007,
Sunergy Nanjing purchased the right to use a parcel of land of approximately
26,000 square meters from China Electric Equipment Group Co., Ltd, or CEEG, for
approximately $1.2 million. The land use right is with a period of 46 years,
starting from August 21, 2007.


F-42





18.
            RELATED
      PARTY TRANSACTIONS AND BALANCES -
continued





Related party
transactions - continued





In
October 2007, Sunergy Nanjing and CEEG entered into an agreement to jointly
construct a transformer substation. The total budget investment for the
construction was $4.79 million, which was 50% funded by the Jiangning
Development Zone Administration Committee funds and 50% by Sunergy Nanjing and
CEEG Group. Pursuant to the agreement, Sunergy Nanjing should contribute
approximately $1.33 million, which represents 55.7% of the investment
contributed by Sunergy Nanjing and CEEG Group. By December 31, 2008, the
construction has been completed, and Sunergy Nanjing has paid approximately
$1.26 million, accrued a payable of $0.07 million. The investment by Sunergy
Nanjing was recorded as a long-term deferred asset in Balance Sheet, and
amortized over 10 years.





In 2008,
the Group purchased equipments from CEEG with total amount of approximately $1.4
million. The Group also entered into an agreement to lease the land use right
from CEEG (Nanjing) Special Transformer Co., Ltd. for a term until March 2013.
The tenancy agreement provides for annual rental payments of approximately
$3,000.





19.
            COMMITMENTS
      AND CONTINGENCIES





a)
            Operating
      lease commitments





The Group
has operating lease agreements principally for staff quarters and for warehouse
premises in the PRC.  Such leases have remaining terms within 60
months, and are renewable upon negotiation.  Rental expense was
$66,113, $253,779 and $390,649 for the years ended December 31, 2006, 2007 and
2008, respectively.





Future
minimum lease payments under non-cancelable operating lease agreements at
December 31, 2008 were as follows:





Twelve-month
period ending December 31,





2009
                      
                      $
                      161,6542010
                      
                      $
                      38,3342011
                      
                      $
                      36,1402012
                      
                      $
                      29,5562013
                      
                      $
                      27,141Over
      5 years
                      
                      $
                      186,551$
                      479,376


F-43





19.
            COMMITMENTS
      AND CONTINGENCIES - continued





b)
            Purchase
      commitments





At December 31,2006
                          
                          
                          2007
                          
                          
                          2008$
                          
                          
                          $
                          
                          
                          $Commitments
      to purchase property, plant and equipment
                          
                          
                          3,571,400
                          
                          
                          
                          22,857,763
                          
                          
                          
                          10,024,744Commitments
      to purchase silicon raw materials
                          
                          
                          114,714,909
                          
                          
                          
                          204,932,508
                          
                          
                          
                          828,705,901118,286,309
                          
                          
                          
                          227,790,271
                          
                          
                          
                          838,730,645





c)
            Contingencies





The Group
is subject to claims and legal proceedings that arise in the ordinary course of
its business. Each of these matters is subject to various uncertainties, and it
is possible that some of these matters may be decided unfavorably to the Group.
The Group does not believe that any of these matters will have a material
adverse affect on its business, assets or operations.





20.
            SEGMENT
      INFORMATION





The
Group's chief operating decision maker has been identified as the Chief
Executive Officer, who reviews consolidated results when making decisions about
allocating resources and assessing performance of the Group. Based on this
assessment, the Group has determined that it operates in a single business
segment that includes the design, development, and manufacture of solar cells
and modules.  The following table summarizes the Group's net revenues
generated from different geographic locations:





Years ended December 31,2006
                        
                        
                        2007
                        
                        
                        2008$
                        
                        
                        $
                        
                        
                        $Europe:-
      Germany
                        
                        
                        14,893
                        
                        
                        
                        62,313,810
                        
                        
                        
                        126,859,750-
      Italy
                        
                        
                        12,234,738
                        
                        
                        
                        8,980,140
                        
                        
                        
                        6,127,527-
      Netherlands
                        
                        
                        8,956,669
                        
                        
                        
                        -
                        
                        
                        
                        --
      Spain
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        9,399,022-
      Others
                        
                        
                        175,084
                        
                        
                        
                        1,802,956
                        
                        
                        
                        51,109Europe
      total
                        
                        
                        21,381,384
                        
                        
                        
                        73,096,906
                        
                        
                        
                        142,437,408PRC
                        
                        
                        119,237,947
                        
                        
                        
                        151,057,878
                        
                        
                        
                        196,628,021South
      Africa
                        
                        
                        3,712,425
                        
                        
                        
                        83,437
                        
                        
                        
                        -India
                        
                        
                        1,053,951
                        
                        
                        
                        2,332,253
                        
                        
                        
                        1,153,918South
      Korea
                        
                        
                        3,183,301
                        
                        
                        
                        6,418,664
                        
                        
                        
                        10,256,856Others
                        
                        
                        951,936
                        
                        
                        
                        1,918,763
                        
                        
                        
                        443,758Total
      net revenues
                        
                        
                        149,520,944
                        
                        
                        
                        234,907,901
                        
                        
                        
                        350,919,961





Substantially
all the identifiable assets of the Group are located in the
PRC.


F-44





21.
            MAJOR
      CUSTOMERS





Details
of the customers accounting for 10% or more of total net sales are as
follows:





Name of Customer
                  
                  Years ended December 31,2006
                  
                  
                  2007
                  
                  
                  2008Company
      A
                  
                  
                  *
                  
                  
                  
                  17
                  %
                  
                  
                  18
                  %Company
      B
                  
                  
                  17
                  %
                  
                  
                  24
                  %
                  
                  
                  15
                  %Company
      C
                  
                  
                  *
                  
                  
                  
                  *
                  
                  
                  
                  13
                  %Company
      D
                  
                  
                  19
                  %
                  
                  
                  *
                  
                  
                  
                  *Company
      E
                  
                  
                  17
                  %
                  
                  
                  *
                  
                  
                  
                  *





* Less
than  10%





Accounts receivable from customers
accounting for 10% or more of total gross accounts receivable are as
follows:





Name of Customer
                  
                  December 31,2006
                  
                  
                  2007
                  
                  
                  2008Company
      A
                  
                  
                  44
                  %
                  
                  
                  76
                  %
                  
                  
                  47
                  %Company
      C
                  
                  
                  *
                  
                  
                  
                  *
                  
                  
                  
                  43
                  %Company
      D
                  
                  
                  45
                  %
                  
                  
                  *
                  
                  
                  
                  -Company
      E
                  
                  
                  -
                  
                  
                  
                  11
                  %
                  
                  
                  -


* Less
than 10%





22.
            SUBSEQUENT
      EVENTS





On
January 9, 2009, the Group granted options to purchase 260,002 and 80,640
ordinary shares to certain employees at an exercise price of US$1.283 and US$0.7
per share, respectively. The options expire ten years from the date of grant,
with one-fourth of the options vesting on each of the following four grant date
anniversaries. At the same date, the Group also granted options to purchase
100,002 ordinary shares to its strategy consultant at an exercise price of
US$0.7 per share. The shares subject to the option will be vested on the
December 31, 2009 and will be exercisable within 5 years from the date the
option is vested.





In
January 2009, the Sunergy Nanjing entered into a purchase contract with Jiangxi
Jingde Semiconductor New Material Co., Ltd., an entity controlled by our
chairman, under which Jiangxi Jingde Semiconductor New Material Co., Ltd. agreed
to supply an aggregate of 220 tons of polysilicon to Sunergy Nanjing from
March 2009 to December 2009. The purchase prices shall be negotiated between the
parties before shipment. In connection with this contract, Sunergy Nanjing
issued a bank accepted note in the amount of approximately $14.7 million to
Jiangxi Jingde Semiconductor New Material Co., Ltd.





On
February 6, 2009, the Company announced its Chief Financial Officer, Kenneth
Luk, resigned effective March 31, 2009, with a need to return to Hong Kong for
family reasons. Mr. Luk will remain available in an advisory capacity to the
Group for a certain period of time after his resignation.  The Company
and Mr. Luk entered into an Amendment of Restricted Shares Award Agreement for
the unvested Restricted Shares 719,190 on February 5, 2009.  120,000
Restricted Shares will vest on April 30, 2009.  120,000 Restricted
Shares will vest on August 31, 2009. For the remaining 479,190 unvested
Restricted Shares, both Mr. Luk and the Company agreed that the Company hereby
repurchase the above 479,190 unvested Restricted Shares and the Repurchase Price
will be paid according to the original Agreement.




F-45





In June
2009, the Company repurchased in open market of US$4.0 million aggregate
principal amount of the Convertible Notes for a total cash consideration of
US$1.8 million.





*     *     *     *     *     *


F-46


ADDITIONAL
INFORMATION-FINANCIAL STATEMENTS SCHEDULE 1





CHINA
SUNERGY CO., LTD.





These
financial statements have been prepared in conformity with accounting principles
generally accepted in the United States.





Financial
information of parent company


BALANCE
SHEET


(In
U.S. dollars)





December 31,2006
                
                
                2007
                
                
                2008$
                
                
                $
                
                
                $ASSETSCurrent
      assets:Cash
                
                
                487,206
                
                
                
                5,866,420
                
                
                
                7,255,917Restricted
      cash
                
                
                -
                
                
                
                19,000,000
                
                
                
                11,250,000Amount
      due from subsidiaries
                
                
                3,500,000
                
                
                
                46,732,922
                
                
                
                98,542,114Dividend
      receivable
                
                
                -
                
                
                
                15,827,573
                
                
                
                15,827,573Other
      receivables
                
                
                -
                
                
                
                849,731
                
                
                
                158,545Total
      current assets
                
                
                3,987,206
                
                
                
                88,276,646
                
                
                
                133,034,149Investments
      in subsidiaries
                
                
                80,378,077
                
                
                
                97,370,678
                
                
                
                89,354,208Restricted
      cash-collateral account
                
                
                -
                
                
                
                -
                
                
                
                17,502,450Convertible
      bond issuance cost
                
                
                -
                
                
                
                -
                
                
                
                3,450,859Total
      assets
                
                
                84,365,283
                
                
                
                185,647,324
                
                
                
                243,341,666LIABILITIES,
      MEZZANINE EQUITY AND SHAREHOLDERS’ EQUITY:Liabilities:Amount
      due to subsidiary
                
                
                99,590
                
                
                
                983,849
                
                
                
                1,253,578Other
      liabilities
                
                
                200,000
                
                
                
                815,382
                
                
                
                1,529,893Total
      current liabilities
                
                
                299,590
                
                
                
                1,799,231
                
                
                
                2,783,471Collateral
      account payable
                
                
                -
                
                
                
                -
                
                
                
                17,502,450Convertible
      bond payable
                
                
                -
                
                
                
                -
                
                
                
                48,098,364Total
      liabilities
                
                
                -
                
                
                
                1,799,231
                
                
                
                68,384,285Mezzanine
      equity:Series
      A redeemable convertible preferred shares ($0.0001 par value; 12,847,300
      shares authorized, 12,847,340 and nil shares issued and outstanding as of
      December 31, 2007 and 2008, respectively)
                
                
                13,227,862
                
                
                
                -
                
                
                
                -Series
      B redeemable convertible preferred shares ($0.0001 par value; 23,905,100
      shares authorized, 23,905,100 and nil shares issued and outstanding as of
      December 31, 2007 and 2008, respectively)
                
                
                28,501,788
                
                
                
                -
                
                
                
                -Series
      C redeemable convertible preferred shares ($0.0001 par value; 6,901,000
      shares authorized, 6,901,000 and nil shares issued and outstanding as of
      December 31, 2007 and 2008, respectively)
                
                
                20,056,093
                
                
                
                -
                
                
                
                -


F-47





Financial
information of parent company


BALANCE
SHEET - continued


(In
U.S. dollars)





December 31,2006
                
                
                2007
                
                
                2008$
                
                
                $
                
                
                $Shareholders’
      equity:Ordinary
      shares (par value $0.0001; 463,247,600 shares authorized, 104,544,000,
      237,332,777 and 267,766,443 shares issued and outstanding as of December
      31, 2006, 2007 and 2008, respectively)
                
                
                10,454
                
                
                
                23,733
                
                
                
                26,777Additional
      paid-in capital
                
                
                20,144,945
                
                
                
                178,361,461
                
                
                
                182,070,348Subscription
      receivable
                
                
                -
                
                
                
                -
                
                
                
                (405,313
                )Accumulated
      deficit
                
                
                -
                
                
                
                (4,854,650
                )
                
                
                (27,792,246
                )Accumulated
      other comprehensive income
                
                
                2,124,551
                
                
                
                10,317,549
                
                
                
                21,057,815Total
      shareholders’ equity
                
                
                22,279,950
                
                
                
                183,848,093
                
                
                
                174,957,381TOTAL
      LIABILITIES, MEZZANINE EQUTIY ANDSHAREHOLDERS’
      EQUITY
                
                
                84,365,283
                
                
                
                185,647,324
                
                
                
                243,341,666


F-48


Financial
information of parent company


STATEMENT
OF OPERATIONS


(In
U.S. dollars)





Period
      fromJanuary
      27, 2006(date
      of inception)
                
                
                Year
      ended
                
                
                Year
      endedto
      December 31,
                
                
                December
      31,
                
                
                December
      31,2006
                
                
                2007
                
                
                2008$
                
                
                $
                
                
                $General
      and administrative expenses
                
                
                (121,102
                )
                
                
                (1,670,018
                )
                
                
                (4,622,480
                )Total
      operating expenses
                
                
                (121,102
                )
                
                
                (1,670,018
                )
                
                
                (4,622,480
                )Loss
      from operations
                
                
                (121,102
                )
                
                
                (1,670,018
                )
                
                
                (4,622,480
                )Interest
      expense
                
                
                -
                
                
                
                -
                
                
                
                (2,179,735
                )Interest
      income
                
                
                30,239
                
                
                
                1,062,420
                
                
                
                2,841,185Equity
      in earnings of subsidiaries
                
                
                14,388,238
                
                
                
                (4,408,014
                )
                
                
                (23,426,736
                )Other
      income (expense), net
                
                
                -
                
                
                
                160,962
                
                
                
                4,450,170Net
      income (loss)
                
                
                14,297,375
                
                
                
                (4,854,650
                )
                
                
                (22,937,596
                )Dividend
      on Series A redeemable convertible preferred shares
                
                
                (13,377,452
                )
                
                
                (154,723
                )
                
                
                -Dividend
      on Series B redeemable convertible preferred shares
                
                
                (28,551,788
                )
                
                
                (330,229
                )
                
                
                -Dividend
      on Series C redeemable convertible preferred shares
                
                
                (7,097,263
                )
                
                
                (233,125
                )
                
                
                -Net
      loss attributable to holders of ordinary shares
                
                
                (34,729,128
                )
                
                
                (5,572,727
                )
                
                
                (22,937,596
                )


F-49


Financial
information of parent company


STATEMENT
OF CASH FLOWS


(In
U.S. dollars)





Period
      fromJanuary
      27, 2006(date
      of inception)
                  
                  
                  Year
      ended
                  
                  
                  Year
      endedto
      December 31,
                  
                  
                  December
      31,
                  
                  
                  December
      31,2006
                  
                  
                  2007
                  
                  
                  2008$
                  
                  
                  $
                  
                  
                  $Operating
      activities:Net
      loss attributable to holders of ordinary shares
                  
                  
                  (34,729,128
                  )
                  
                  
                  (5,572,727
                  )
                  
                  
                  (22,937,596
                  )Dividend
      on Series A redeemable convertible preferred shares
                  
                  
                  13,377,452
                  
                  
                  
                  154,723
                  
                  
                  
                  -Dividend
      on SeriesB redeemable convertible preferred shares
                  
                  
                  7,097,263
                  
                  
                  
                  330,229
                  
                  
                  
                  -Dividend
      on Series C redeemable convertible preferred shares
                  
                  
                  7,097,263
                  
                  
                  
                  233,125
                  
                  
                  
                  -Net
      income (loss)
                  
                  
                  14,297,375
                  
                  
                  
                  (4,854,650
                  )
                  
                  
                  (22,937,596
                  )Adjustments
      to reconcile net income (loss) to net cash used in operating
      activitiesEquity
      in earnings of subsidiaries
                  
                  
                  (14,388,238
                  )
                  
                  
                  4,408,014
                  
                  
                  
                  23,426,736Share-based
      compensation
                  
                  
                  114,563
                  
                  
                  
                  535,856
                  
                  
                  
                  3,231,594Gain
      on repurchase of convertible notes
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (4,525,625
                  )Amortization
      of convertible senior notes
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  886,715Others
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (258,333
                  )Changes
      in operating assets and liabilities:Other
      receivables
                  
                  
                  -
                  
                  
                  
                  (849,731
                  )
                  
                  
                  691,186Other
      liabilities
                  
                  
                  -
                  
                  
                  
                  615,382
                  
                  
                  
                  804,687Deferred
      other income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  266,520Amounts
      due from subsidiaries
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (2,192,788
                  )Net
      cash used in operating activities
                  
                  
                  (3,476,300
                  )
                  
                  
                  (145,129
                  )
                  
                  
                  (606,904
                  )Investing
      activity:Investments
      in subsidiaries
                  
                  
                  (57,157,296
                  )
                  
                  
                  (29,035,190
                  )
                  
                  
                  (4,670,000
                  )Amounts
      due from subsidiaries
                  
                  
                  -
                  
                  
                  
                  (43,232,922
                  )
                  
                  
                  (49,541,380
                  )Increase
      in restricted cash
                  
                  
                  -
                  
                  
                  
                  (19,000,000
                  )
                  
                  
                  7,750,000Net
      cash used in investing activity
                  
                  
                  (57,157,296
                  )
                  
                  
                  (91,268,112
                  )
                  
                  
                  (46,461,380
                  )Financing
      activities:Proceeds
      from investor upon formation of the Company
                  
                  
                  13,110,400Proceeds
      from issuance of Series B redeemable convertible preference
      shares
                  
                  
                  27,999,948
                  
                  
                  
                  -
                  
                  
                  
                  -Proceeds
      from issuance of Series C redeemable convertible preference
      shares
                  
                  
                  20,000,000
                  
                  
                  
                  -
                  
                  
                  
                  -Proceeds
      from issuance of ordinary shares
                  
                  
                  10,454
                  
                  
                  
                  107,525,000
                  
                  
                  
                  -Issuance
      cost of ordinary shares
                  
                  
                  -
                  
                  
                  
                  (11,616,804
                  )
                  
                  
                  -Amounts
      due to subsidiaries
                  
                  
                  -
                  
                  
                  
                  884,259
                  
                  
                  
                  269,729Proceeds
      from issuance of convertible senior notes
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  54,500,000Payment
      of debt issuance costs
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (4,337,573
                  )Payment
      of convertible senior notes repurchase
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,974,375
                  )Net
      cash provided by financial activities
                  
                  
                  61,120,802
                  
                  
                  
                  96,792,455
                  
                  
                  
                  48,457,781Net
      increase in cash and cash equivalents
                  
                  
                  487,206
                  
                  
                  
                  5,379,214
                  
                  
                  
                  1,389,497Cash
      and cash equivalents at the beginning of the period/year
                  
                  
                  -
                  
                  
                  
                  487,206
                  
                  
                  
                  5,866,420Cash
      and cash equivalents at the end of the period/year
                  
                  
                  487,206
                  
                  
                  
                  5,866,420
                  
                  
                  
                  7,255,917


F-50





Financial
information of parent company





Note
to Schedule 1





China
Sunergy BVI undertook a restructuring in anticipation of an initial public
offering involving a holding company (the “Company”) that was incorporated in
the Cayman Islands on August 4, 2006. The Company became the ultimate holding
company on August 30, 2006 by acquiring a 100% interest in China Sunergy BVI.
This transaction was accounted for as a legal reorganization as there was no
change in the ownership structure between the Company and China Sunergy
BVI.





*     *     *     *     *     *


F-51