UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended ~~March~~June 3130, 2012

Commission File Number 1-11512

SATCON TECHNOLOGY CORPORATION

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		04-2857552 (IRS Employer Identification No.)
Delaware		04-2857552
27 Drydock Avenue Boston, Massachusetts (Address of principal executive offices)		02210 (Zip Code)
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

27 Drydock Avenue Boston, Massachusetts		02210
(Address of principal executive offices)		(Zip Code)

(617) 897-2400

(Registrant’s telephone number, including area code)

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 o

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 x No o

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

Large accelerated filer o		Accelerated filer x

Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, $0.01 Par Value, 18,026,016 shares outstanding as of July 31, 2012.

144,053,553 shares outstanding as of April 30, 2012.

Table of Contents

TABLE OF CONTENTS

	Page
PART I. FINANCIAL INFORMATION	3
Item 1. Financial Statements (Unaudited)	3
Financial Statements of Satcon Technology Corporation	3
Consolidated Balance Sheets	3
Consolidated Statements of Operations	4
Consolidated Statements of Changes in Stockholders’ Deficit and Comprehensive Loss
Consolidated Statements of Changes in Stockholders’ Deficit	5
Consolidated Statements of Cash Flows	6
Notes to Interim Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
Item 3. Quantitative and Qualitative Disclosures About Market Risk	47
Item 4. Controls and Procedures	49
PART II. OTHER INFORMATION	50
Item 1. Legal Proceedings	50
Item 1A. Risk Factors	50
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3. Defaults Upon Senior Securities	51
Item 4. Mine Safety Disclosure
Item 4. Mine Safety Disclosures	51
Item 5. Other Information	52
Item 6. Exhibits	52
Signatures	53
Exhibit Index	54

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

SATCON TECHNOLOGY CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	March 31, 2012			December 31, 2011
	June 30, 2012			December 31, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	152,~~916~~993,~~614~~370		$	21,586,497
Accounts receivable, net of allowances of $3,400,492 and $2,231,616 at March 31, 2012 and December 31, 2011, respectively	34,087,346			46,082,592
Accounts receivable, net of allowances of $2,826,912 and $2,231,616 at June 30, 2012 and December 31, 2011, respectively	30,386,806			46,082,592
Inventory	4643,~~029~~113,~~526~~828			49,937,028
Note receivable	100,000			4,114,388
Prepaid expenses and other current assets	24,~~085~~670,~~174~~681			2,468,202
Total current assets	9881,~~218~~264,~~660~~685			124,188,707
Property and equipment, net	10,~~565~~500,~~644~~544			11,091,910
Other long-term assets	576,990			676,850
Total assets	$	~~109~~92,~~361~~342,~~294~~219		$	135,957,467
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Line of credit	$	2015,~~487~~417,~~546~~766		$	34,675,000
Accounts payable	5545,~~040~~120,~~479~~432			51,955,218
Accrued payroll and payroll related expenses	2,~~142~~468,~~444~~136			3,011,981
Other accrued expenses	7,~~473~~155,~~788~~181			6,959,197
Accrued restructuring costs	~~896~~892,~~285~~186			1,543,830
Note payable, current portion, net of discount of $273,796 and $320,592 at March 31, 2012 and December 31, 2011, respectively	4,093,930			3,912,600
Note payable, current portion, net of discount of $225,426 and $320,592 at June 30, 2012 and December 31, 2011, respectively	4,281,110			3,912,600
Current portion of subordinated convertible note	107,~~360~~270,000			12,369,336
Current portion of deferred revenue	35,~~460~~879,~~394~~003			6,015,235
Total current liabilities	~~103~~88,~~954~~483,~~866~~814			120,442,397
Warrant liabilities	5022,000			131,530
Note payable, net of current portion and discount of $71,275 and $120,931 at March 31, 2012 and December 31, 2011, respectively	4,010,117			5,104,157
Note payable, net of current portion and discount of $33,985 and $120,931 at June 30, 2012 and December 31, 2011, respectively	2,867,362			5,104,157
Subordinated convertible note, net of current portion	—			5,870,664
Deferred revenue, net of current portion	2729,~~194~~834,~~160~~901			25,525,032
Other long-term liabilities	~~715~~725,~~076~~680			709,986
Total liabilities	~~135~~121,~~924~~933,~~219~~757			157,783,766
Commitments and contingencies (Note I)
Stockholders’ deficit:
Preferred stock; $0.01 par value 1,000,000 shares authorized, 0 shares issued and outstanding at March 31, 2012 and December 31, 2011	—			—
Preferred stock; $0.01 par value 1,000,000 shares authorized, 0 shares issued and outstanding at June 30, 2012 and December 31, 2011	—			—
Common stock; $0.01 par value, 200,000,000 shares authorized; 135,125,036 and 121,803,656 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively	1,351,251			1,218,037
Common stock; $0.01 par value, 37,500,000 shares authorized; 18,026,016 and 15,225,457 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively	180,261			152,255
Additional paid-in capital	~~314~~318,~~109~~816,~~889~~386			~~305~~306,~~310~~375,~~085~~867
Accumulated deficit	(~~340~~347,~~594~~158,~~497~~617		)	(326,924,853		)
Accumulated other comprehensive loss	(1,429,568		)	(1,429,568		)
Total stockholders’ deficit	(2629,~~562~~591,~~925~~538		)	(21,826,299		)
Total liabilities and stockholders’ deficit	$	~~109~~92,~~361~~342,~~294~~219		$	135,957,467

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

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SATCON TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

	Three Months Ended						Six Months Ended
	March 31, 2012			March 31, 2011
	June 30, 2012			June 30, 2011			June 30, 2012			June 30, 2011
Product revenue	$	2423,~~288~~667,~~514~~108		$	6245,~~004~~497,~~937~~036		$	47,955,622		$	107,501,973
Cost of product revenue	2418,~~127~~951,~~818~~154			4741,~~132~~866,~~525~~139			43,078,972			88,998,664
Gross margin	~~160~~4,~~696~~715,954			143,~~872~~630,~~412~~897			4,876,650			18,503,309
Operating expenses:
Research and development	32,~~236~~575,~~226~~921			69,~~136~~718,~~333~~388			5,812,147			15,854,721
Selling, general and administrative	98,~~975~~017,~~174~~551			1012,~~223~~898,~~313~~591			17,992,725			23,121,904
Restructuring charges	~~292~~581,~~221~~600			—1,134,254			873,821			1,134,254
Total operating expenses	1311,~~503~~175,~~621~~072			1623,~~359~~751,~~646~~233			24,678,693			40,110,879
Operating loss	(136,~~342~~459,~~925~~118		)	(120,~~487~~120,~~234~~336		)	(19,802,043		)	(21,607,570		)
Change in fair value of convertible note and warrants	~~450~~1,~~041~~733,320			~~123~~1,~~561~~023,622			2,183,361			1,147,183
Other income (expense), net	116,567			(199,856		)
Loss on extinguishment of convertible note	(1,070,000		)	—			(1,070,000		)	—
Interest income	455			151
Other income (expense), net	(170,324		)	(277,757		)	(53,757		)	(477,613		)
Interest expense	(893,782		)	(575,249		)
Interest income	11,011			183,125			11,466			183,276
Net loss before provision for income taxes	(13,669,644		)	(2,138,627		)
Interest expense	(605,594		)	(2,036,396		)	(1,499,376		)	(2,611,645		)
Provision for income taxes	—			—
Net loss before provision for income taxes	(6,560,705		)	(21,227,742		)	(20,230,349		)	(23,366,369		)
Net loss	(13, 669,644		)	(2,138,627		)
Provision for income taxes	(3,415		)	—			(3,415		)	—
Net loss per weighted average share, basic and diluted	$	(0.11	)	$	(0.02	)
Net loss	$	(6,564,120	)	$	(21,227,742	)	$	(20,233,764	)	$	(23,366,369	)
Weighted average number of common shares, basic and diluted	128,096,372			118,726,322
Net loss per weighted average share, basic and diluted	$	(0.37	)	$	(1.43	)	$	(1.20	)	$	(1.57	)
Weighted average number of common shares, basic and diluted	17,830,345			14,892,126			16,921,195			14,866,458

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

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SATCON TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT ~~AND COMPREHENSIVE LOSS~~

For the Three Months Ended ~~March~~June 3130, 2012

(Unaudited)

	Common Shares	Common Stock		Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders’ Deficit			~~Comprehensive Loss~~
Balance, December 31, 2011	~~121~~15,~~803~~225,~~656~~457	$	1152,~~218,037~~255	$	~~305~~306,~~310~~375,~~085~~867	$	(326,924,853	)	$	(1,429,568	)	$	(21,826,299	)
Net loss	—	—		—		(1320,~~669~~233,~~644~~764		)	—			(1320, ~~669~~233,~~644~~764		)	$	~~(13, 669,644~~	)
Employee stock-based compensation	—	—		12,~~281~~289,~~503~~616		—			—			12,~~281~~289,~~503~~616			—
Issuance of common stock in connection with the Employee Stock Purchase Plan	~~166~~40,~~209~~098	~~1,662~~401		85216,~~097~~969		—			—			86217,~~759~~370			—
Issuance of common stock tocontractors	~~100~~12,~~000~~500	~~1,000~~125		49,~~000~~875		—			—			50,000			—
Issuance of common stock from the conversion of Subordinated Convertible Note	13,055,171	130,552		7,384,204		—			—			7,514,756			—
Issuance of common stock from the conversion of Subordinated Convertible Note, net of filing fees	2,747,961	27,480		9,884,059		—			—			9,911,539
Comprehensive loss	—	—		—		—			—			—			$	(13, 669,644)
Balance, June 30, 2012	18,026,016	$	180,261	$	318,816,386	$	(347,158,617	)	$	(1,429,568	)	$	(29,591,538	)
Balance, March 31, 2012	135,125,036	$	1,351,251	$	314,109,889	$	(340,594,497	)	$	(1,429,568	)	$	(26,562,925	)

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

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SATCON TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three Months Ended
	Six Months Ended
	March 31, 2012			March 31, 2011
	June 30, 2012			June 30, 2011
Cash flows from operating activities:
Net loss	$	(1320,~~669~~233,~~644~~764	)	$	(223,~~138~~366,~~627~~369	)
Adjustments to reconcile net loss to net cash used in operating activities:
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	~~556~~1,~~788~~324,109			~~466~~917,~~846~~320
Provision for uncollectible accounts	1,~~168~~694,~~876~~487			~~130~~1,~~338~~054,639
Provision for excess and obsolete inventory	~~(557~~750,~~898~~676		)	901,~~793~~724,051
Non-cash stock based compensation expense	12,~~331~~339,~~503~~616			13,~~337~~052,~~075~~247
Change in fair value of convertible note and warrants	(~~450~~2,~~041~~183,361		)	(~~123~~1,~~561~~147,183		)
Non-cash interest expense	132,835			115,064
Loss on extinguishment of debt	1,070,000			—
Non-cash interest expense	254,878			229,414
Financing cost related to subordinated convertible notes	—			1,100,000
Changes in operating assets and liabilities:
Accounts receivable	1014,~~826~~001,~~370~~299			4(5,~~183~~039,~~247~~473		)
Prepaid expenses and other current assets	~~346~~2,~~645~~275,244			(~~686~~893,~~902~~604		)
Other long-term assets	99,860			(~~217~~517,744		)
Inventory	46,~~465~~072,~~400~~524			(3257,~~418~~394,~~172~~547		)
Note receivable	4,014,388			—(4,382,546		)
Accounts payable	3(6,~~085~~834,~~261~~786		)	1141,~~439~~717,~~357~~855
Accrued expenses and payroll	(~~351~~402,~~679~~491		)	~~303~~(1,~~010~~771,496		)
Accrued restructuring	(~~647~~651,~~545~~644		)	~~(49~~983,~~203~~113		)
Deferred revenue, current and long-term portion	(885,713		)	5,805,366
Accrued contract loss	—			2,268,346
Other liabilities	5,090			13,381
Deferred revenue, current and long-term portion	4,173,637			8,165,509
Total adjustments	23,140,140			(9,611,105		)
Other liabilities	15,694			303,791
Net cash provided by (used in) operating activities	9,470,496			(11,749,732		)
Total adjustments	23,463,642			(9,630,308		)
Net cash provided by (used in) operating activities	3,229,878			(32,996,677		)
Cash flows from investing activities:
Purchases of property and equipment	(30867,~~522~~538		)	(15,~~823~~672,~~937~~520		)
Net cash used in investing activities	(30,522		)	(1,823,937		)
Proceeds from the sale of property and equipment	134,795			—
Net cash used in investing activities	(732,743		)	(5,672,520		)
Cash flows from financing activities:
Net (payments) borrowings under line of credit	(1419,~~187~~257,~~454~~234		)	1520,000,000
Proceeds from Employee Stock Purchase Plan	86217,~~759~~370			~~278~~645,~~516~~724
Repayment of note payable	(12,~~009~~050,~~162~~398		)	—(615,691		)
Net proceeds from exercise of options to purchase common stock	—			294,772
Net proceeds from issuance of subordinated convertible notes				14,900,000
Net proceeds from exercise of warrants to purchase common stock	—			1,526,042
Net proceeds from exercise of options to purchase common stock	—			560,634
Net cash provided by (used in) financing activities	(15,109,857		)	17,099,330
Net proceeds from exercise of warrants to purchase common stock	—			1,515,079
Net (decrease) increase in cash and cash equivalents	(5,669,883		)	3,525,661
Net cash provided by (used in) financing activities	(21,090,262		)	37,005,746
Net decrease in cash and cash equivalents	(18,593,127		)	$	(1,663,451	)
Cash and cash equivalents at beginning of period	$	21,586,497		30,094,162
Cash and cash equivalents at end of period	$	152,~~916~~993,~~614~~370		$	3328,~~619~~430,~~823~~711

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

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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

	Three Months Ended,
	Six Months Ended,
	March 31, 2012		March 31, 2011
	June 30, 2012		June 30, 2011
Non-cash Investing and Financing Activities:
Employee stock-based compensation	$	12,~~281~~289,~~503~~616	$	13,~~337~~052,~~075~~347
Issuance of stock to consultant	50,000		—
Issuance of warrants	—		1,310,000
Modification of warrants related to subordinated debt	—		62,919
Interest and Income Taxes Paid:
Interest	$	~~691~~1,~~651~~244,495	$	~~115~~1,~~063~~282,232
Income taxes	—		—

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

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SATCON TECHNOLOGY CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

~~MARCH 31~~JUNE 30, 2012 (“2012”) AND ~~MARCH~~ JUNE 31, 2011 (“2011”)

(Unaudited)

Note A. Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of Satcon and its wholly owned subsidiaries (Satcon Power Systems Canada, Ltd. and Satcon Trading (Shenzhen) Co., Ltd.) (collectively, the “Company”) as of ~~March~~June 3130, 2012 and for the three and six months ended ~~March~~June 3130, 2012 and 2011, and have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. All intercompany accounts and transactions have been eliminated. These unaudited consolidated financial statements, which, in the opinion of management, reflect all adjustments (including normal recurring adjustments) necessary for a fair presentation, should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. Operating results for the three and six months ended ~~March~~June 3130, 2012 are not necessarily indicative of the results that may be expected for any future interim period or for the entire fiscal year.

Reverse Stock Split. Effective July 19, 2012, the Company effected a 1-for-8 reverse stock split of the Company’s common stock, reducing the number of outstanding shares of common stock from approximately 144.2 million to approximately 18.0 million, and proportionately reduced the number of authorized shares of the Company’s common stock to 37.5 million. The accompanying consolidated financial statements and all related notes reflect the results of the reverse stock split as if effected as of the first date presented.

Note B. Realization of Assets and Liquidity

The Company has ~~developed~~implemented a business plan ~~that~~to ~~envisions~~improve anits ~~increase~~results infrom ~~assets~~operations and ~~revenue~~liquidity ~~from~~by ~~the~~reducing ~~results~~its ~~experienced in the recent past. This plan includes announced reductions in our~~ global workforce ofby approximately 3550%, by closing its ~~Canada~~Canadian manufacturing facility and by resizing its infrastructure in Europe, China and the U.S. The ~~Company~~bulk ~~expects~~of these reductions ~~will~~were be completed byduring the quarter ended June 30, 2012, although further cost reductions are anticipated to be implemented during the balance of 2012. The Company has also focused product design, commercial sales and marketing on its best performing markets in North America and Asia, and will be moving a significant portion of international sales and marketing to a partnership model. The Company’s cost reduction program also includes optimizing the design of its Prism Platform solutions and transferring more subassembly work to Asia. These actions reset the Company’s expense structure to much lower levels. In addition, the Company has reduced the amount of working capital held on the Company’s balance sheet by ~~bringing~~selling ~~down~~ inventory and collecting accounts receivable. As a result of these cost and working capital reduction measures, the Company was able to ~~more~~generate ~~normalized~~$3.4 ~~levels~~million in cash flow from operations during the first six months of 2012. During the same period, the Company has repaid approximately $21.3 million in its secured debt obligations and reduced its overall trade payables by approximately $6.8 million. Primarily as a result of these actions, the Company’s cash declined from approximately $21.5 million at the end of 2011 to approximately $3.0 million at June 30, 2012. The Company believes that its existing plan will generate sufficient cash which, along with its existing cash on hand, will enable it to fund operations through at least ~~March~~June 3130, 2013. ~~Additionally~~As discussed in Note I, the Company’s ~~has~~lending aarrangement ~~line~~with ofSilicon ~~credit,~~Valley asBank ~~modified~~requires init ~~June 2011,~~to have $15.0 million in ~~place~~cash ~~with~~plus ~~Silicon~~availability ~~Valley~~under ~~Bank~~the ~~and~~line ~~believes~~of ~~that~~credit iton ~~has~~September 15, 2012. During the ~~ability~~quarter toended ~~refinance~~June ~~and/or~~30, ~~expand~~2012, the ~~availability~~Company ofwas ~~such~~not ~~asset-based~~in ~~financing.~~compliance ~~Such~~with ~~actions~~the ~~would~~minimum ~~likely~~liquidity ~~require~~covenant under the ~~consent~~loan ofagreement. ~~its~~Absent ~~existing~~a ~~lenders,~~cash ~~and~~infusion ~~there~~from ~~can~~a becapital noraising ~~assurance~~transaction, ~~that~~the ~~such~~Company ~~consents~~does ~~would~~not beanticipate ~~given.~~that ~~Furthermore,~~it ~~there~~will ~~can~~ be noable ~~assurance~~to meet that ~~the~~requirement ~~Company~~and would beneed ~~able~~ to ~~obtain~~seek ~~similar~~a orwaiver ~~additional~~from ~~asset-based~~Silicon ~~financing~~Valley ifBank ~~and~~in ~~when~~order ~~sought~~not to be in default under our line of credit.

The Company’s funding plans for its working capital needs and other commitments may be adversely impacted if it fails to realize its underlying assumed levels of revenues and expenses, receivables are not collected or if the Company fails to remain in compliance with the covenants of its bank line, subordinated note payable or subordinated convertible note. In addition, a default on the Company’s subordinated convertible notes, due to delisting or other trading restrictions, could cause the Company to ~~have~~be required to make payments in cash, subject to restrictions for other debt holders. If any of these events were to occur, the Company may need to raise additional funds in order to sustain operations by selling equity or taking other actions to conserve its cash position, which could include selling certain assets, delaying capital expenditures and incurring additional indebtedness. ~~Such~~There ~~actions would likely require the consent of Silicon Valley Bank, the lender of the Company’s subordinated note, and/or the holder of the Company’s subordinated convertible note, and there~~ can be no assurance that ~~such consents would be given. Furthermore, there can be no assurance that~~ the Company will be able to raise such funds if they are required.

The Company has retained and investment banking firm to advise us in exploring strategic options for the Company.

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Note C. Significant Accounting Policies and Basis of Consolidation

There have been no material changes from the Significant Accounting Policies and Basis of Presentation previously disclosed in Part II, Item 8, contained within “Notes to Consolidated Financial Statements” of the Company’s Annual Report on Form 10-K for the fiscal year ending December 31, 2011, except for the effect of the 1 — for - 8 reverse stock split of the Company’s common stock effective as of July 19, 2012.

Basis of Consolidation

The consolidated financial statements include the accounts of Satcon and its wholly owned subsidiaries (Satcon Power Systems Canada, Ltd. and Satcon Trading (Shenzhen) Co., Ltd.). All intercompany accounts and transactions have been eliminated in consolidation.

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Use of Estimates

The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period reported. Management believes the most significant estimates include the net realizable value of accounts receivable and inventory, warranty provisions, the recoverability of long-lived assets, the recoverability of deferred tax assets and the fair value of equity, financial instruments and revenue. Actual results could differ from these estimates.

Revenue Recognition

The Company recognizes revenue from product sales when there is persuasive evidence of an arrangement, the fee is fixed or determinable, delivery of the product to the customer has occurred and the Company has determined that collection of the fee is probable. Title to the product passes upon shipment of the product, as the products are typically shipped FOB shipping point, unless otherwise agreed upon in advance with the customer. If the product requires installation to be performed by the Company, all revenue related to the product is deferred and recognized upon the completion of the installation. If the product requires specific customer acceptance, revenue is deferred until customer acceptance occurs or the acceptance provisions lapse, unless the Company can objectively and reliably demonstrate that the criteria specified in the acceptance provisions are satisfied. When appropriate the Company provides for a warranty reserve at the time the product revenue is recognized. If a contract involves the provision of multiple elements and the elements qualify for separation, total estimated contract revenue is allocated to each element based on the relative selling price of each element provided. The amount of revenue allocated to each element is limited to the amount that is not contingent upon the delivery of another element in the future. Revenue is recognized on each element as described above.

Cost of product revenue includes materials, labor, overhead, warranty and freight.

Deferred revenue primarily consists of cash received for extended product warranties, preventative maintenance plans and up-time guarantee programs. Deferred revenue also consists of payments received from customers in advance of services performed, product shipped or installation completed. When an item is deferred for revenue recognition purposes, the deferred revenue is recorded as a liability and the deferred costs are recorded as a component of inventory in the consolidated balance sheets.

Contract Losses

When the current estimates of total contract revenue for a customer order indicates a loss, a provision for the entire loss on the contract is recorded. At ~~March 31~~June 30, 2012 and December 31, 2011, there were no amounts accrued related to contract losses. The excess costs over projected revenues are recorded as a component of both cost of sales and research and development expense.

Cash and Cash Equivalents

Cash and cash equivalents include demand deposits and highly-liquid investments with maturities of three months or less when acquired. Cash equivalents are stated at cost, which approximates market value. At ~~March~~June 3130, 2012 and December 31, 2011, the Company had no restricted cash.

Accounts Receivable

Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. The estimated allowance for uncollectible amounts is based primarily on a specific analysis of accounts in the receivable portfolio and historical write-off experience. While management believes the allowance to be adequate, if the financial condition of our customers were to deteriorate, resulting in impairment of their ability to make payments, additional allowances may be required.

Inventory

Inventory is valued at the lower of actual cost to purchase and/or manufacture the inventory or the current estimated market value of the inventory, and costs are determined based on the first-in, first-out method of accounting and include material, labor and manufacturing overhead costs. A significant decrease in demand for the Company’s products could result in a short-term increase in the cost of inventory purchases and an increase of excess inventory quantities on hand. In addition, the industry is characterized by rapid technological change, frequent new product development, and rapid product obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand. Therefore, although the Company makes every effort to ensure the accuracy of its forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of the inventory and reported operating results. The Company records, as a charge to cost of product revenue, any amounts required to reduce the carrying value to net realizable value.

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write-off experience. While management believes the allowance to be adequate, if the financial condition of our customers were to deteriorate, resulting in impairment of their ability to make payments, additional allowances may be required.

Inventory

Property and Equipment

Property and equipment are stated at cost. Depreciation and amortization is computed using the straight-line method over the asset’s estimated useful life. The estimated useful lives of property and equipment are as follows:

		Estimated Lives
Machinery and equipment		2-10 years
Furniture and fixtures		7-10 years
Computer hardware/software		3 years
Leasehold improvements		Lesser of the remaining life of the lease or the useful life of the improvement

When assets are retired or otherwise disposed of, the cost and related depreciation and amortization are eliminated from the accounts and any resulting gain or loss is reflected in operating expenses.

Impairment of Long-Lived Assets

The Company reviews its long-lived assets whenever events or changes in circumstances indicate that a carrying amount of the asset may not be recoverable. The Company determines the fair value of certain of the long-lived assets based on a discounted cash flow income approach. The income approach indicates the fair value of a long-lived assets based on the discounted value of the cash flows that the long-lived asset can be expected to generate in the future over the life of the long-lived asset. This analysis is based upon projections prepared by the Company. These projections represent management’s best estimate of future results. In making these projections, the Company considers the markets it is addressing, the competitive environment and the Company’s advantages. There will usually be differences between estimated and actual results as events and circumstances frequently do not occur as expected, and those differences may be material. In addition, the Company performs a macro assessment of the overall likelihood that we would achieve the projected cash flows and performed sensitivity analysis using historical data as the basis for projected cash flows.

Warranty

The Company offers warranty coverage for our products for period of 5 years after shipment. The Company estimates the anticipated costs of repairing products under warranty based on the historical or expected cost of the repairs and expected failure rates. The assumptions used to estimate warranty accruals are re-evaluated quarterly, at a minimum, in light of actual experience and, when appropriate, the accruals or the accrual percentage is adjusted based on specific estimates of project repair costs and quantity of product returns. The Company’s determination of the appropriate level of warranty accrual is based on estimates of the percentage of units affected and the repair costs. Estimated warranty costs are recorded at the time of sale of the related product, and are recorded within cost of sales in the consolidated statements of operations.

Foreign Currency Translation

As of April 1, 2010, the Company determined that the functional currency of its foreign subsidiaries was the US dollar. As the functional currency changed from the foreign currency to the reporting currency, the translation adjustments as of April 1, 2010 remains as a component of accumulated other comprehensive income (loss). Prior to this determination, the functional currency was the local currency, assets and liabilities were translated at the rates in effect at the balance sheet dates, while stockholders’ equity (deficit) including the long-term portion of intercompany advances was translated at historical rates. Statements of operations and cash flow amounts were translated at the average rate for the period. Translation adjustments were included as a component of accumulated other comprehensive income (loss). The Company records the impact from foreign currency transactions as a component of other income (expense). Foreign currency gains and losses were a gain of $53,130 and a loss of $28,000 for the three months ended March 31, 2012 and March 31, 2011, respectively. All foreign currency transaction gains and losses were recorded as a component of other income (loss), net.

Foreign Currency Hedges

The Company uses foreign currency contracts to manage its exposure to changes in foreign currency exchange rates associated with our foreign currency denominated receivables. The Company primarily hedges foreign currency exposure to the Euro. The Company does not engage in trading, market making or speculative activities in the derivatives markets. The foreign currency contracts utilized by the Company do not qualify for hedge accounting treatment, and as a result, any fluctuations in the value of these foreign currency contracts are recognized in other income (expense),net in our consolidated statements of operations as incurred. The fluctuations in the value of these foreign currency contracts do, however, largely offset the impact of changes in the value of the underlying risk that they are intended to economically hedge. As of March 31, 2011, the Company had foreign currency contracts with a net notional value equivalent to $2.2 million, which matured on April 18, 2011. On April 18, 2011, the Company entered into a foreign currency hedge with a bank with a notional amount of approximately $1.6 million, and a term of 90 days. For the three months ended March 31, 2012, the Company has no foreign currency contracts.

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~~The~~flow ~~following~~amounts ~~table~~were ~~shows~~translated at the ~~changes~~average inrate for the ~~fair~~period. ~~value~~Translation adjustments were included as a component of ~~our~~accumulated other comprehensive income (loss). The Company records the impact from foreign currency ~~contract~~transactions ~~recorded~~as ina ~~net~~component of other income (expense). Foreign currency gains and losses were a loss ~~during~~of $167,444 and $114,314 and a loss of $203,017 and $230,792 for the three ~~month~~and ~~period~~six months ended ~~March~~June 3130, 2012 and 2011:, respectively.

	(Loss) Gain
	Three Months Ended March 31, 2011
Foreign currency hedges (a)	$	(130,410	)

Foreign Currency Hedges

~~(a)~~ The Company ~~recorded~~uses ~~transaction~~foreign ~~losses~~currency contracts to manage its exposure to changes in foreign currency exchange rates associated with ~~the~~our ~~re-measurement~~foreign ofcurrency ~~its~~denominated receivables. The Company primarily hedges foreign ~~denominated~~currency ~~assets~~exposure ofto ~~$27~~the Euro. The Company does not engage in trading,~~775~~ market making or speculative activities in the ~~three~~derivatives ~~months~~markets. ~~ended~~The ~~March 31~~foreign currency contracts utilized by the Company do not qualify for hedge accounting treatment, ~~2011.~~and ~~Transaction~~as ~~losses~~a ~~were~~result, ~~included~~any fluctuations in ~~Other~~the value of these foreign currency contracts are recognized in other income (expense), net in ~~the~~our consolidated statements of operations as incurred. The ~~net~~fluctuations ~~impact~~in the value of ~~transaction~~these ~~(losses)~~foreign ~~gains~~currency ~~associated~~contracts ~~with~~do, however, largely offset the ~~re-measurement~~impact of ~~the~~changes ~~foreign~~in ~~denominated~~the ~~assets~~value ~~and~~of the ~~losses~~underlying ~~incurred~~risk onthat they are intended to economically hedge. As of April 18, 2011, the Company entered into a foreign currency ~~hedges~~hedge ~~was~~with a ~~net~~bank ~~loss~~with a notational amount of approximately $~~158~~1.6 million,~~185~~ which matured on July 18, 2011. For the three and six months ended June 30, 2012, the Company had no foreign currency contracts.

The following table shows the fair value of our foreign currency hedge at June 30, 2011:

The following table shows the changes in the fair value of our foreign currency contract recorded in net loss during the three and six month periods ended June 30, 2011:

	(Loss) Gain Three Months Ended		(Loss) Gain Six Months Ended
	June 30, 2011		June 30, 2011
Foreign currency hedges (a)	$	120,102	$	(10,308	)

(a) The Company recorded transaction losses associated with the re-measurement of its foreign denominated assets of $203,017 and $230,792 in the three and six months ended June 30, 2011. Transaction losses were included in Other loss (income) in the consolidated statements of operations. The net impact of transaction (losses) gains associated with the re-measurement of the foreign denominated assets and the gains (losses) incurred on the foreign currency hedge was a net loss of $82,913 and $241,100 for the three and six month period ended June 30, 2011, respectively.

Income Taxes

The Company accounts for income taxes utilizing the asset and liability method for accounting and reporting for income taxes. Under this method, deferred tax assets and deferred tax liabilities are recognized based on temporary differences between the financial reporting and income tax basis of assets and liabilities using statutory rates. In addition, the Company is required to establish a valuation allowance against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

The Company is allowed to recognize the tax benefits of uncertain tax positions only where the position is “more likely than not” to be sustained assuming examination by tax authorities. The amount recognized is the amount that represents the largest amount of tax benefit that is greater than 50% likely of being ultimately realized. A liability is recognized for any benefit claimed, or expected to be claimed, in a tax return in excess of the benefit recorded in the financial statements, along with any interest and penalties (if applicable) on that excess. In addition, the Company is required to provide a tabular reconciliation of the change in the aggregate unrecognized tax benefits claimed, or expected to be claimed, in tax returns and disclosure relating to the accrued interest and penalties for unrecognized tax benefits. Discussion is also required for those uncertain tax positions where it is reasonably possible that the estimate of the tax benefit will change significantly in the next twelve months.

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As of December 31, 2011, the Company had federal and state net operating loss (“NOL”) carry forwards and federal and state R&D credit carry forwards, which may be available to offset future federal and state income tax liabilities which expire at various dates through 2032. Utilization of the NOL and R&D credit carry forwards may be subject to a substantial annual limitation due to ownership change limitations that have occurred previously or that could occur in the future provided by Sections 382 or 383 of the Internal Revenue Code of 1986, as well as similar state and foreign provisions. These ownership changes may limit the amount of NOL and R&D credit carry forwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50 percentage points over a rolling three-year period. Since the Company’s formation, the Company has raised capital through the issuance of capital stock on several occasions (both pre and post initial public offering) which, combined with the purchasing shareholders’ subsequent disposition of those shares, may have resulted in a change of control, as defined by Section 382, or could result in a change of control in the future upon subsequent disposition.

The Company commissioned a study to determine whether Sections 382 or 383 could limit the use of our carryforwards in this manner. After completing this study, the Company has concluded that the limitation will not have a material impact on its ability to utilize its net operating loss or credit carryforwards.

The tax years 1996 through 2011 remain open to examination by major taxing jurisdictions to which the Company is subject, which are primarily in the United States, as carryforward attributes generated in years past may still be adjusted upon examination by the Internal Revenue Service or state tax authorities if they are or will be used in a future period. The Company is currently not under examination by the Internal Revenue Service or any other jurisdiction for any tax years. The Company did not recognize any interest and penalties associated with unrecognized tax benefits in the accompanying financial statements. The Company would record any such interest and penalties as a component of interest expense. The Company does not expect any material changes to the unrecognized benefits within 12 months of the reporting date.

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Accounting for Stock-based Compensation

The Company has several stock-based employee compensation plans, as well as stock options issued outside of such plans as an inducement to engage new executives. Stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the service period.

The Company uses the Black-Scholes valuation model for valuing options. This model incorporates several assumptions, including volatility, expected life and discount rate. The Company uses historical volatility as it believes it is more reflective of market conditions and a better indicator of volatility. The Company uses historical information in the calculation of expected life for its “plain-vanilla” option grants. If the Company determines that another method used to estimate expected volatility is more reasonable than the Company’s current methods, or if another method for calculating these input assumptions is prescribed by authoritative guidance, the fair value calculated for share-based awards could change significantly. Higher volatility and longer expected lives would result in an increase to share-based compensation determined at the date of grant.

The Company recognized the full impact of its share-based compensation plans in the consolidated financial statements for the three and six months ended ~~March~~June 3130, 2012 and 2011 and did not capitalize any such costs on the consolidated balance sheets, as such costs that qualified for capitalization were not material. The following table presents stock-based compensation expense, included in the Company’s consolidated statement of operations:

	Three Months Ended				Six Months Ended
	March 31, 2012		March 31, 2011
	June 30, 2012		June 30, 2011		June 30, 2012		June 30, 2011
Cost of product revenue	$	9089,~~001~~673	$	~~145~~123,~~727~~661	$	179,674	$	269,388
Research and development	~~219~~182,~~656~~854		~~271~~312,~~492~~868		402,510		584,360
Selling, general and administrative expenses	~~971~~735,~~846~~586		~~919~~1,~~856~~278,643		1,707,432		2,198,499
Share-based compensation expense from continuing operations before tax	1,~~281~~008,~~503~~113		1,~~337~~715,~~075~~172		2,289,616		3,052,247
Income tax benefit	—		—		—		—
Net share-based compensation expense	$	1,~~281~~008,~~503~~113	$	1,~~337~~715,~~075~~172	$	2,289,616	$	3,052,247

Compensation expense associated with the granting of stock options to employees is being recognized on a straight line basis over the requisite service period ~~of the option~~. In instances where the actual compensation expense would be greater than that calculated using the straight line method, the actual compensation expense is recorded in that period.

Included in the 2012 and 2011 stock-based compensation expense above are amounts related to employee participation in the Employee Stock Purchase Plan (“ESPP”) of approximately $103,000 and $134,000, respectively. See Note R, Employee Benefit Plan.

At March 31, 2012 approximately $7.1 million in unrecognized compensation expense remains to be recognized over a weighted average period of 1.3 years. The table below summarizes the recognition of the deferred compensation expense associated with employee stock options over the next four years as follows:

Calendar Years Ending December 31,	Non Cash Stock-Based Compensation Expense
2012	$	2,338,509
2013	2,556,143
2014	1,870,291
2015	369,832
2016	781
Total	$	7,135,556

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~~The~~Included ~~weighted~~in ~~average~~the ~~grant~~2012 ~~date~~and ~~fair~~2011 ~~value~~stock-based ofcompensation ~~options~~expense ~~granted~~above ~~during~~are ~~the~~amounts ~~three~~related ~~months~~to ~~ended~~employee ~~March 31,~~participation ~~2012~~in ~~and~~the ~~2011~~Employee ~~were~~Stock ~~$0.48~~Purchase ~~and~~Plan ~~$4.40,~~(“ESPP”) ~~respectively,~~of ~~per~~approximately ~~option. The~~$70,000 ~~fair~~and ~~value~~$172,000 ofand ~~each~~$290,000 ~~stock~~and ~~option~~$424,000, isfor ~~estimated~~the onthree ~~the~~and ~~date~~six ofmonth ~~the~~periods ~~grant~~ended ~~using~~June 30, ~~the~~2012 ~~Black-Scholes~~and ~~option-pricing~~June 30, ~~model~~2011, ~~with~~respectively. ~~the~~See ~~following~~Note R, ~~range~~Employee ofBenefit ~~assumptions:~~Plan.

	Three Months Ended
Assumptions:	March 31, 2012	March 31, 2011
Expected life	5.6 years (1)	5.6 years (1)
Expected volatility ranging from	78.71% – 82.53% (2)	73.63% – 75.08% (2)
Dividends	none	none
Risk-free interest rate	1.0% (3)	2.15% (3)
Forfeiture Rate (4)	0% - 6.25%	0% - 6.25%

At June 30, 2012 approximately $6.4 million in unrecognized compensation expense remains to be recognized over a weighted average period of 1.3 years. The table below summarizes the recognition of the deferred compensation expense associated with employee stock options over the next five years as follows:

Calendar Years Ending December 31,	Non Cash Stock-Based Compensation Expense
2012	$	1,363,258
2013	2,543,617
2014	1,914,623
2015	496,403
2016	43,375
Total	$	6,361,276

The weighted average grant date fair value of options granted during the three and six months ended June 30, 2012 and 2011 were $3.13 and $3.01 and $23.82 and $25.74, respectively, per option. The fair value of each stock option is estimated on the date of the grant using the Black-Scholes option-pricing model with the following range of assumptions:

	Three Months Ended		Six Months Ended
Assumptions:	June 30, 2012	June 30, 2011	June 30, 2012	June 30, 2011
Expected life	0 to 5.6 (1)	0 to 5.6 (1)	0 to 5.6 (1)	0 to 5.6 (1)
Expected volatility ranging from	86.5% to 89.3% (2)	73.6% to 73.9% (2)	78.7% to 89.3% (2)	73.6% to 75.1% (2)
Dividends	none	none	none	none
Risk-free interest rate	1% (3)	1% (3)	1% (3)	1% to 2.15% (3)
Forfeiture Rate (4)	0% to 6.25%	0% to 6.25%	0% to 6.25%	0% to 6.25%

(1) The option life was determined using actual option experience. Prior to March 31, 2010, the option life was determined using the simplified method for estimating expected option life, which qualify as “plain vanilla” options.

(2) The stock volatility for each grant is measured using the weighted average of historical daily price changes of the Company’s common stock over the most recent period equal to the expected option life of the grant, the historical short term trend of the option and other factors, such as expected changes in volatility arising from planned changes in the Company’s business operations.

(3) The risk-free interest rate for each grant is equal to the U.S. Treasury yield curve in effect at the time of grant for instruments with a similar expected life.

(4) The estimated forfeiture rate for each option grant is between 0% - 6.25%. The Company periodically reviews the estimated forfeiture rate, in light of actual experience.

Net Loss per Basic and Diluted Common Share

The Company reports net loss per basic and diluted common share in accordance with standards established for computing and presenting earnings per share. Basic earnings per share excludes dilution and is computed by dividing income attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company, except when the effect would be anti-dilutive. See Note E, Loss Per Share, for more information related to options, warrants and Convertible Subordinated Note which would be considered anti-dilutive.

Concentration of Credit Risk

Financial instruments that subject the Company to concentrations of credit risk principally consist of cash equivalents, trade accounts receivable, unbilled contract costs and deposits in bank accounts. The Company deposits its cash and invests in short-term investments primarily through a national commercial bank. Deposits in excess of amounts insured by the Federal Deposit Insurance Corporation (FDIC) are exposed to loss in the event of nonperformance by the institution.

The Company’s trade accounts receivable and fees are primarily from sales to commercial customers. The Company does not require collateral and has not historically experienced significant credit losses related to receivables, letters of credit or unbilled contract costs and fees from individual customers or groups of customers in any particular industry or geographic area.

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~~Significant~~The ~~customers~~Company’s ~~are~~trade ~~defined as those customers that account for 10% or more of total net revenue in a fiscal year or 10% or more of~~ accounts receivable atare ~~the~~primarily ~~end~~from ofsales ato ~~fiscal~~commercial ~~period~~customers. The ~~table~~Company ~~below~~does ~~details~~not ~~out~~require ~~customers~~collateral ~~that~~and ~~were~~has ~~considered~~not ~~significant,~~historically ~~greater~~experienced ~~than~~significant ~~10%,~~credit aslosses itrelated ~~pertains~~ to ~~both~~receivables, ~~revenues~~letters ~~for~~of ~~the~~credit ~~three~~or ~~months~~unbilled ~~ended~~contract ~~March 31,~~costs ~~2012~~ and ~~2011~~fees ~~and~~from ~~accounts~~individual ~~receivable~~customers asor groups of ~~March 31,~~customers ~~2012~~in ~~and~~any ~~December 31,~~particular ~~2011~~industry or geographic area.

Period	Revenue Three Months Ended March 31, 2012 and March 31, 2011	Accounts Receivable At March 31, 2012 and December 31, 2011
2012	QCells North America (approximately 19.4%) SunPower Corporation (approximately 13.7%)	QCells North America (approximately 10.1%)
2011	GCL Solar Limited (approximately 15.1%) The Ciro Group (approximately 14.3%) RMT, Inc. (approximately 12.2%) SunPower Corporation (Approximately 10.0%)	GCL Solar Limited (approximately 10.5%)*

Significant customers are defined as those customers that account for 10% or more of total net revenue in a fiscal year or 10% or more of accounts receivable at the end of a fiscal period. The table below details out customers that were considered significant, greater than 10%, as it pertains to both revenues for the three and six months ended June 30, 2012 and 2011 and accounts receivable as of June 30, 2012 and December 31, 2011.

* The accounts receivable associated with this customer were backed by irrevocable letters of credit at December 31, 2011.

	Revenue		Accounts Receivable
Period	Three Months ended June 30,	Six Months ended June 30,	At June 30, 2012 and December 31, 2011

2012	SunPower Corporation (approximately 14.8%) Skwentex International Corporation (approximately 12.6%)*	SunPower Corporation (approximately 14.3%)	GCL Solar Limited (approximately 13.3%)

2011	Q-Cell International Canada Corporation (approximately 11.3%)	SunPower Corporation (approximately 12.3%)	The Ciro Group (approximately 18.1%) GCL Solar Limited (approximately 11.8%)

~~Significant~~* ~~suppliers~~The ~~are defined as those suppliers that account for 10% or more of total purchases in a fiscal year or 10% or more of~~ accounts ~~payable~~receivable atassociated ~~the~~with ~~end of a fiscal period. At March 31, 2012, there was one supplier, Perfect Galaxy, which made up approximately 39.5% of the Company’s gross accounts payable. Purchases from~~ this ~~supplier~~customer ~~for the first quarter of 2012~~ were ~~approximately~~backed ~~$11.2 million. At~~by ~~December 31,~~irrevocable ~~2011,~~letters ~~there was one supplier, Perfect Galaxy, which made up approximately 66%~~ of ~~the~~credit ~~Company’s gross accounts payable~~ at ~~December~~June 3130, ~~2011. The Company’s non-exclusive contract manufacturing agreement with Perfect Galaxy was extended for 5 years in February~~ 2012.

Significant suppliers are defined as those suppliers that account for 10% or more of total purchases in a fiscal year or 10% or more of accounts payable at the end of a fiscal period. At June 30, 2012, there was one supplier, Perfect Galaxy, which made up approximately 74.1% of the Company’s gross accounts payable. Purchases from this supplier for six months ended June 30, 2012 were approximately $22.0 million. At December 31, 2011, there was one supplier, Perfect Galaxy, which made up approximately 66% of the Company’s gross accounts payable at December 31, 2011. The Company’s non-exclusive contract manufacturing agreement with Perfect Galaxy was extended for 5 years in February 2012.

Research and Development Costs

The Company expenses research and development costs as incurred. Cost of research and development and other revenue includes costs incurred in connection with both funded research and development and other revenue arrangements and unfunded research and development activities.

Comprehensive Income (Loss)

Comprehensive income (loss) includes net loss and foreign currency translation adjustments prior to the changing of the functional currency in Canada to the US dollar. Pursuant to ASC 220, as amended, the Company is required to present the components of net income (loss) and other comprehensive income (loss) either as one continuous statement or as two separate but consecutive statements. The Company, since the change in the functional currency of its Canadian subsidiary in April 2010, does not have any other comprehensive income (loss) activity for the three months ended March 31, 2012, and therefore will not be presenting this information in tabular format as required.

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Fair Value of Financial Instruments

The Company’s financial instruments consist of cash equivalents, accounts receivable, warrants to purchase shares of common stock, accounts payable, foreign currency hedge, subordinated convertible note, note payable and the line of credit. The estimated fair values have been determined through information obtained from market sources and management estimates. The estimated fair value of certain financial instruments including cash equivalents, accounts receivable and account payable, approximate the carrying value due to their short-term maturity. The Company’s warrant liability and ~~foreign~~subordinated ~~currency~~convertible ~~hedge~~note isare recorded at fair value. See “Fair Value Measurements” below. The carrying value of the ~~subordinated~~note ~~notes~~ payable, as of ~~March~~June 3130, 2012, is not materially different from the fair value of the notes. The estimated fair values of the remaining financial instruments approximate their carrying values at ~~March~~June 3130, 2012 and December 31, 2011.

Fair Value Measurements

The fair value of the Company’s financial assets and liabilities are measured using inputs from the three levels of fair value hierarchy which are as follows:

Level 1	—	Quoted prices in active markets for identical assets or liabilities.
Level 2	—	Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3	—	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The amounts outstanding under ~~our~~the ~~Loan~~line ~~Agreement~~of credit and ~~subordinated~~note ~~notes~~ payable are not measured at fair value in ~~our~~the accompanying consolidated balance sheets. The WeCompany ~~determine~~determines the fair value of the amount outstanding under ~~our~~the ~~Loan~~line ~~Agreement~~of credit and ~~subordinate~~note ~~notes~~ payable using a discounted ~~cashlow~~cash flow approach based on current market interest rates for debt issues with similar remaining years to maturity. ~~Our~~The ~~Loan~~line ~~Agreement~~of credit and ~~subordinated notes~~ note payable are valued using level 2 inputs.

There were no assets measured at fair value on a recurring basis at June 30, 2012. The following table sets forth the fair value of certain of ~~our~~the Company’s liabilities as of ~~March 31~~June 30, 2012 by level within the fair value hierarchy are as follows:

	Fair Value Measurements at Reporting Date Using
Description	Balance as of ~~March~~June 3130, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Liabilities
Subordinated convertible note (2)	$	107,~~360~~270,000	$	—	$	—	$	107,~~360~~270,000
Long-term warrant liabilities (1)	5022,000		—		5022,000		—
Total Liabilities	$	107,~~410~~292,000	$	—	$	5022,000	$	107,~~360~~270,000

Transfers in and out of Level 3 of the fair value hierarchy consist of settlements of the subordinated convertible note, ~~and~~the adjustments to the fair value of the subordinated convertible note and the modification in April 2012 (for details of the change in fair value related activity, see Note I Commitments and Contingencies):

	Subordinated Convertible Note
Balance at December 31, 2011	$	18,240,000
Transfers into Level 3	—6,740,000
Transfers out of Level 3	—(5,670,000		)
Total losses for the period	—
Fair value adjustment	(~~368~~2,~~511~~073,832		)
Settlement (conversion to common shares)	(79,~~511~~966,~~489~~168		)
Fair value at March 31, 2012	$	10,360,000
Fair value at June 30, 2012	$	7,270,000

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There were no assets measured at fair value on a recurring basis as of December 31, 2011. Liabilities measured at fair value on a recurring basis as of December 31, 2011 are as follows:

	Fair Value Measurements at Reporting Date Using
Description	Balance as of December 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Liabilities
Subordinated convertible note (2)	$	18,240,000	$	—	$	—	$	18,240,000
Long-term warrant liabilities (1)	$	131,530	$	—	$	131,530	$	—
Total Liabilities	$	18,371,530	$	—	$	131,530	$	18,240,000

Transfers in and out of Level 3 of the fair value hierarchy consist of the issuance of the subordinated convertible note in June 2011, and the subsequent modification in December 2011 (for details of the change in fair value related activity see Note I, Commitments and Contingencies - Subordinated Convertible Note).

The following table rolls forward the Level 3 balance as it relates to the subordinated convertible note:

	Subordinated Convertible Note
Balance at December 31, 2010	$	—
Transfers into Level 3	36,090,000
Transfers out of Level 3	(17,320,000		)
Total losses for the period	—
Fair value adjustment	679,152
Settlement (conversion to common shares)	(1,209,152		)
Fair value at December 31, 2011	$	18,240,000

(1) The Company’s Level 2 financial liabilities consist of long term investor warrant liabilities comprised of the Warrant As, Warrant Cs, the warrants issued to the investors in connection with the 2007 preferred stock financing (the “2007 Financing Warrants”) and the placement agent warrants. The fair value of the Warrant As and Warrant Cs is being estimated using a binomial lattice model and the fair value of the placement agent warrants and the 2007 Financing Warrants is being estimated using the Black-Scholes option pricing model. (See Note K. Warrant Liabilities-Valuation — Methodology and Significant Assumptions; Note L - ~~Redeemable Convertible~~ Series ~~B and Series~~ C Convertible Preferred Stock and Warrants; and “Warrant Liabilities”).

(2) The Company’s Level 3 financial liabilities consist of a subordinated convertible notes. (See Note I. Commitments and Contingencies.) The valuation of this instrument utilizes a continuous-variable stochastic process in the form of a Monte-Carlo Simulation and includes unobservable inputs supported by little or no market activity such as discount rate applicable to the instrument’s debt-like feature, probabilities of debt-like and equity-like positions, and various probabilities of occurrences of certain future events. The analysis also includes the contractual terms of instrument in the form of interest rate, timing and extent of principal and interest payments, and time to maturity.

The estimated fair value of certain financial instruments including cash, accounts receivable and accounts payable, approximate carrying value due to their short maturity.

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Subordinated Convertible Note

The Company has elected to account for the Subordinated Convertible Note (“Convertible Note”) as an instrument that has the characteristics of a debt host contract containing several embedded derivative features that would require bifurcation and separate accounting as a derivative instrument pursuant to the provisions of ASC 815. The Company has identified all of the derivatives associated with the June 30, 2011 financing; however, several of the derivatives cannot be reliably measured nor reliably associated with another derivative that can be reliably measured. As such, the Company has appropriately valued these derivatives as a single contract together with the Convertible Note. As permitted under ASC 825-10-10, the Company has elected as of the issuance date to measure the Convertible Note in its entirety at fair value with changes in fair value recognized as either gain or loss until the notes are settled. This election was made by the Company after determining that the fair value of the Convertible Note to be more meaningful in the context of the Company’s financial statements than if separate fair values were assigned to each of the multiple embedded instruments contained in such Convertible Note.

Warrant Liabilities

Upon issuance, the Warrant As, Warrant Bs and Warrant Cs, along with the Placement Agent Warrants (together, the “Warrants”), did not meet the requirements for equity classification, because such warrants (a) must be settled in registered shares, (b) are subject to substantial liquidated damages if the Company is unable to maintain the effectiveness of the resale registration of the shares and (c) provide a cash-out election using a Black-Scholes valuation under various circumstances. Therefore these Warrants are required to be accounted for as freestanding derivative instruments. Changes in fair value are recognized as either a gain or loss in the consolidated statement of operations under the caption “Change in fair value of warrant liabilities.”

The Company determined the fair value of the investor warrants (the Warrant As and Warrant Cs) and placement agent warrants using valuation models it considers to be appropriate. The Company’s stock price has the most significant influence on the fair value of its warrants. An increase in the Company’s common stock price would cause the fair values of the warrants to increase, because the exercise price of the warrants is fixed at $114.~~815~~52 per share, and result in a charge to the Company’s statement of operations. A decrease in the Company’s stock price would likewise cause the fair value of the warrants to decrease and result in a credit to the Company’s statement of operations. See Note K. Warrant Liabilities for valuation discussion.

Note D. Shareholders Rights Agreement

On January 6, 2011, the Company entered into a stockholder rights agreement (the “Rights Agreement”). The Rights Agreement provides for a dividend distribution of one preferred stock purchase right for each outstanding share of the Company’s common stock. Each right entitles the registered holder to purchase from the Company one-thousandth of a share of the Company’s Series A Junior Participating Preferred Stock. The Company’s board of directors adopted the Rights Agreement to protect the Company’s ability to use its net operating losses and certain other tax attributes (“NOLs”) for federal and state income tax purposes. Under the Internal Revenue Code of 1986, as amended (the “Code”), the Company may utilize the NOLs in certain circumstances to offset current and future earnings and thus reduce its federal income tax liability, subject to certain requirements and restrictions. If the Company experiences an “ownership change,” as defined in Section 382 of the Code, its ability to use the NOLs could be substantially limited or lost altogether. In general terms, the Rights Agreement is intended to act as a deterrent to any person or group that acquires 4.99% or more of the Company’s common stock without approval of the Company’s board of directors by allowing other stockholders to acquire equity securities of the Company at half of their fair value. The Rights Plan will continue in effect until January 6, 2014, unless it is terminated or redeemed earlier by the Company’s board of directors.

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Note E. Loss Per Share

The following is the reconciliation of the numerators and denominators of the basic and diluted loss per share computations:

	Three Months Ended						Six Months Ended
	March 31, 2012			March 31, 2011
	June 30, 2012			June 30, 2011			June 30, 2012			June 30, 2011
Net Loss	$	(13,669,644	)	$	(2,138,627	)
Net loss	$	(6,564,120	)	$	(21,227,742	)	$	(20,233,764	)	$	(23,366,369	)
Basic and diluted:
Common shares outstanding, beginning of period	~~121~~16,~~803~~890,~~656~~630			~~117~~14,~~911~~875,~~278~~956			15,225,457			14,738,910
Weighted average common shares issued during the period	6939,~~292,716~~715			~~815~~16,~~044~~170			1,695,738			127,548
Weighted average shares outstanding—basic and diluted	~~128~~17,~~096~~830,~~372~~345			~~118~~14,~~726~~892,~~322~~126			16,921,195			14,866,458
Net loss per weighted average share, basic and diluted	$	(0.11	)	$	(0.02	)
Net loss per weighted average share, basic and diluted:
From loss from continuing operations, before discontinued operations, attributable to common stockholders	$	(0.37	)	$	(1.43	)	$	(1.20	)	$	(1.57	)

AsThe ofpresentation ~~March 31, 2012 and 2011, shares~~ of ~~common~~the ~~stock~~share ~~issuable~~information ~~upon~~in the ~~exercise~~tables ofabove ~~options~~ and ~~warrants and upon the conversion of the convertible note were excluded from the diluted average common shares outstanding~~below, asgives ~~their~~ effect would have been antidilutive. Basic earnings per share excludes dilution and is computed by dividing income attributable to common stockholders by the weighted average number of common shares outstanding 1-for-8 ~~the~~reverse ~~period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common~~ stock ~~were~~split, ~~exercised~~which oroccurred ~~converted~~on ~~into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company~~July 19, ~~except when the effect would be antidilutive~~2012.

As of June 30, 2012 and 2011, shares of common stock issuable upon the exercise of options and warrants and upon the conversion of the convertible note were excluded from the diluted average common shares outstanding, as their effect would have been antidilutive. Basic earnings per share excludes dilution and is computed by dividing income attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company, except when the effect would be antidilutive.

The table below summarizes the actual number of shares of common stock issuable upon the exercise of options and warrants and upon the conversion of the convertible note that were excluded from the calculation above due to their effect being antidilutive:

	March 31, 2012		March 31, 2011
	June 30, 2012		June 30, 2011
Common Stock issuable upon the exercise of:
Options	131,~~812~~930,~~439~~258		131,~~712~~842,~~720~~696
Warrants	151,~~442~~930,~~350~~294		151,~~551~~943,~~443~~930
Total Options and Warrants excluded	293,~~254~~860,~~789~~552		293,~~264~~786,~~163~~626
Common Stock issuable upon the conversion of the convertible note and excluded(1)	10,578,065		—
Common Stock issuable upon the conversion of the convertible note and excluded	1,962,649	(1)	684,932	(2)

(1) This amount represents the number of shares issuable using the conversion price of $03.~~8381~~20 per share, without considering the volume weighted average price of the Company’s common stock, at ~~March~~June 3130, 2012, divided by the convertible note balance outstanding of $6.3 million. See Note I. Commitments and Contingencies for discussion of the conversion price. The Company has registered for resale 344,~~557~~319,~~281~~660 shares related to the subordinated convertible note, of which 191,~~672~~343,~~909~~049 shares remain unissued as of ~~March~~June 3130, 2012.

~~The~~(2) This ~~table~~amount ~~below~~represents ~~details~~the ~~out~~number of shares ofissuable ~~common~~using ~~stock~~the ~~underlying~~conversion ~~securities~~price ~~for~~of ~~which~~$23.36 ~~the~~divided ~~securities~~by ~~would~~the ~~have~~convertible ~~been~~note ~~considered~~balance ~~dilutive~~outstanding at ~~March~~June 3130, ~~2012 and~~ 2011, ~~had~~which ~~the~~was ~~Company~~$16.0 ~~not been in a loss position:~~million.

	# of Underlying Common Shares
	March 31, 2012	March 31, 2011
Employee stock options	1,000	11,976,220
Warrants to purchase common stock	—	15,551,443
Convertible note(1)	10,578,065	—
Total	10,579,065	27,527,663

The table below details out shares of common stock underlying securities for which the securities would have been considered dilutive at June 30, 2012 and 2011, had the Company not been in a loss position:

	# of Underlying Common Shares
	June 30, 2012		June 30, 2011
Employee stock options	16,625		1,125,178
Warrants to purchase common stock	—		1,943,930
Convertible note	1,962,649	(1)	—	(2)
Total	1,979,274		3,069,108

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Note F. Inventory

Inventory components at the end of each period were as follows:

	March 31, 2012		December 31, 2011
	June 30, 2012		December 31, 2011
Raw material	$	2120,~~897~~951,~~560~~655	$	25,163,100
Work-in-process	~~934~~879,~~090~~677		1,677,360
Finished goods	2321,~~197~~282,~~876~~496		23,096,568
	$	4643,~~029~~113,~~526~~828	$	49,937,028

During December of 2011, the Company reorganized its operations focusing commercial sales, marketing and product development on its fastest growing markets in North America and Asia. As a result of this reorganization, the Company recorded a provision for excess and obsolete inventory of $16 million relating primarily to its Solstice product line and its European inventory and other inventory considered excess or obsolete. During the three and six month period ended ~~March~~June 3130, 2012, the Company sold approximately $2.0 million and $2.98 million of the inventory that was fully reserved.

Note G. Property and Equipment

Property and equipment consisted of the following:

	March 31, 2012			December 31, 2011
	June 30, 2012			December 31, 2011
Machinery and equipment	$	73,~~053~~615,~~745~~066		$	6,758,627
Assets under construction	~~232~~788,~~267~~257			232,267
Furniture and fixtures	1,~~211~~102,~~574~~278			1,211,574
Computer software	~~897~~1,~~425~~199,821			1,162,032
Leasehold improvements	87,~~521~~978,~~803~~013			8,~~521~~522,~~503~~803
	17,916,814			17,886,303
	14,683,435			17,886,303
Less: accumulated depreciation and amortization	(74,~~351~~182,~~170~~991		)	(6,794,393		)
	$	10,~~565~~500,~~644~~444		$	11,091,910

Depreciation and amortization expense relating to property and equipment for the three and six months ended ~~March~~June 3130, 2012 and 2011 was approximately $0.67 million and $1.3 million and approximately $0.5 million and $0.9 million, respectively.

Note H. Legal Matters

From time to time, the Company is a party to routine litigation and proceedings in the ordinary course of business. Except as described below, the Company is not aware of any current or pending litigation in which the Company is or may be a party that it believes could materially adversely affect the results of operations or financial condition.

In the normal course of the Company’s business, the Company is party to various claims and suits pending for alleged damages to persons and property, alleged violations of certain laws and alleged liabilities arising out of matters occurring during the normal operation of its business.

In accordance with ASC 450-20, the Company accrues for legal proceedings when losses become probable and reasonably estimable. As of the end of each applicable reporting period, the Company reviews each of its legal proceedings to determine whether it is probable, reasonably possible or remote that a liability has been incurred and, if it is at least reasonably possible, whether a range of loss can be reasonably estimated under the provisions of ASC 450-20-25-2. In instances where the Company determines that a loss is probable and the Company can reasonably estimate a range of losses the Company may incur with respect to such a matter, the Company records an accrual for the amount within the range that constitutes its best estimate of the possible loss. If the Company is able to reasonably estimate a range but no amount within the range appears to be a better estimate than any other, the Company records an accrual in the amount that is the low end of such range. When a loss is reasonably possible but not probable the Company will not record an accrual but it will disclose its estimate of the possible range of loss where such estimate can be made in accordance with ASC 450-20-25-3. During 2011, the Company had accrued approximately $0.7 million related to the FuelCell Energy Arbitration and $0.5 million related the SynQor dispute noted below. During the Quarter ended March 31, 2012, the Company accrued an additional $0.3 million related to the SynQor dispute.

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FuelCell Energy Arbitration and $0.5 million related the SynQor dispute noted below. During the three and six months ended June 30, 2012, the Company accrued an additional $0.1 and $0.3 million related to the SynQor dispute.

The Company offers no prediction of the outcome of any of the proceedings or negotiations described below. The Company is vigorously defending each of these lawsuits and claims. However, there can be no guarantee the Company will prevail or that any judgments against it, if sustained on appeal, will not have a material adverse effect on our business, financial condition, results of operations or cash flows.

FuelCell Arbitration. On February 17, 2011, FuelCell Energy, Inc. (“FuelCell Energy”) filed a Demand for Arbitration with the American Arbitration Association seeking recovery of damages related to allegedly defective transformers that the Company procured for them. In its Demand for Arbitration, FuelCell Energy ~~asserts~~asserted that it iswas entitled to recovery of approximately $2.8 million from the Company. On October 27, 2011, the Company and FuelCell Energy reached a settlement in regards to these claims. The Company, among other considerations, paid FuelCell Energy approximately $225,000. In addition, the Company guaranteed discounts on future purchases of approximately $160,000. These amounts have been included in the Company’s result of operations for the year ended December 31, 2011.

Class Action Litigation. In July 2011, two purported securities class action complaints were filed against us, our Chief Executive Officer and our former Chief Financial Officer by the following plaintiffs, individually and on behalf of all others similarly situated, in the U.S. District Court, District of Massachusetts: Allan Edwards (filed July 19, 2011) and Larry Ziegler (filed July 21, 2011). The virtually identical complaints were consolidated into a single action on April 19, 2012, with the Government of Bermuda contributory and Publice Service Superannuation Pension Plan designated as the lead plaintiffs. The cases are purportedly brought on behalf of persons who acquired our common stock during the period of March 4, 2010 through July 5, 2011, and allege claims against all defendants for violations under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, as well as claims against the individual defendants for violations of Section 20(a) of the Exchange Act. Putative plaintiffs claim that the defendants caused our common stock to trade at artificially inflated prices through false and misleading statements and/or omissions related to our business. The complaints seek compensatory damages for all damages sustained as a result of the defendants’ actions, including reasonable costs and expenses, and other relief as the court may deem just and proper. The Company believe these allegations are baseless and the Company intends to defend against them vigorously. At this time, the Company believes a loss is neither probable or estimable.

Shareholder Derivative Litigation. On August 2, 2011, a shareholder derivative action was brought by plaintiff purportedly on behalf of our company against several of our senior officers and directors, in the U.S. District Court, District of Massachusetts. The complaint alleges that the officer and director defendants breached their fiduciary duties by providing allegedly misleading and inaccurate information regarding our business. The shareholder derivative action generally seeks compensatory damages for all alleged losses sustained as a result of the individual defendants’ actions, including reasonable costs and expenses, and other relief as the court may deem just and proper. The Company believe that these allegations are baseless and the Company intends to defend against them vigorously. At this time, the Company believes a loss is neither probable or estimable.

SynQor, Inc. On August 23, 2011, SynQor, Inc. instituted suit against the Company seeking approximately $5,000,000 in damages arising out of the Company’s alleged failure to pay SynQor for products supplied to the Company and for allegedly inducing SynQor to purchase raw materials on the Company’s behalf. Subsequent to the filing of the suit the Company has paid SynQor for all open invoices for goods that SynQor has supplied to the Company. The Company does not believe that the Company has any liability to SynQor for inducing them to buy raw materials on the Company’s behalf and the Company intends to defend this matter vigorously. SynQor and the Company agreed to submit this matter to non-binding mediation and a mediation session which took place in March 2012. Following the mediation session, the Company and SynQor have continued to discuss the possibility of settling the case. The parties have ~~tentatively~~settled ~~proposed, subject to~~ the ~~negotiation of formal settlement documents, settling the~~ matter for a payment by the Company of $0.8 million. The Company initially expensed $0.5 million during the year ended December 31, 2011. For the six month period ended ~~March~~June 3130, 2012 the Company expensed the additional $0.3 million. The settlement is to be paid out in 12 monthly installments beginning in July 2012.

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Note I. Commitments and Contingencies

Operating Leases

The Company leases its facilities under various operating leases that expire through October 2016. During 2012 the Company entered into a sublease for a portion of its headquarters to a third party. The sublease runs through 2014.

Future minimum annual rentals, net of sublease income, under lease agreements at ~~March~~June 3130, 2012 are as follows:

Fiscal Year	Minimum Lease Commitments		Sublease Income		Net Lease Commitments
2012	$	21,~~004~~134,~~758~~100	$	180,628	953,472
2013	2,237,841		361,365		1,876,476
2014	2,234,471		120,487		2,113,984
2015	1,680,105		—		1,680,105
2016	1,526,255		—		1,526,255
thereafter	890,315		—		890,315
Total	$	109,~~573~~703,~~745~~087	$	662,480	$	9,040,607

Purchase Order Liability

At December 31, 2011, the Company had non-cancellable purchase commitments with several of its key suppliers. At December 31, 2011, the Company evaluated these purchase commitments and determined that approximately $8.1 million of the outstanding purchase commitment related to excess and obsolete inventory and would result in a loss. As a result, the Company recorded a liability of $8.1 million and expensed the cost of these materials in the statement of operations for the year ended December 31, 2011. As of ~~March~~June 3130, 2012, ~~the Company had a non-cancellable purchase order liability of approximately~~ $~~17.~~4.6 million, ~~for which there~~ remains arecorded ~~$5.2~~for ~~million~~this liability for excess and obsolete inventory.

Letters of Credit:

The Company utilizes a standby letter of credit to satisfy a security deposit requirement. Outstanding standby letters of credit as of ~~March~~June 3130, 2012 and December 31, 2011 were $0.38 million and $0.3 million, respectively. The Company may be required to pledge cash as collateral on these outstanding letters of credit. As of ~~March~~June 3130, 2012 and December 31, 2011, there was not any cash pledged as collateral for these letters of credit.

Employment Agreements

The Company’s employment arrangements with each of its current Chief Executive Officer, Chief Financial Officer, Chief Technology Officer, Executive Vice President of Sales and Marketing, Vice President of Global Operations, ~~Vice President of Quality~~ and Vice President, Administration & Secretary provide that, if such officer’s employment is terminated by the Company without cause or is constructively terminated, his salary and medical benefits will be continued for one year thereafter subject to his execution of a release agreement with the Company. In May 2011, the Company terminated the employment of its then Chief Financial Officer. Accordingly, the Company has recorded a severance accrual of approximately $0.3 million. As of ~~March~~June 3130, 2012, ~~approximately~~these ~~$72,000~~accrued ~~remains~~amounts tohad bebeen paid in full.

Line of Credit

OnThe ~~February 26, 2008, the~~ Company ~~entered~~has ~~into~~ a ~~Loan~~line ~~and~~of ~~Security~~credit ~~Agreement~~in ~~(the~~place ~~“Loan Agreement”)~~ with Silicon Valley Bank (the “Bank”). ~~Under~~pursuant ~~the~~to ~~terms~~a ofloan ~~the~~and ~~Loan~~security ~~Agreement,~~agreement ~~the~~(as ~~Bank~~amended ~~agreed~~ to ~~provide~~date, including the ~~Company~~term ~~with~~sheet aexecuted ~~credit~~on ~~line up to $10.0~~June ~~million.~~28, ~~The~~2012, ~~Company’s~~as ~~obligations~~described ~~under~~below the “Loan Agreement”). The ~~are secured by substantially all of the assets of the Company and advances under the~~ Loan Agreement ~~were~~provides ~~limited~~for toa ~~80%~~senior ofsecured ~~eligible~~revolving ~~receivables~~credit ~~and~~facility ~~the lesser~~ of ~~25%~~up ofto ~~the value of the Company’s eligible inventory, as defined, or~~ $~~1.0~~ 25 million. There ~~Interest~~is ~~on outstanding borrowings accrued at~~ a ~~rate~~$10 ~~(per~~million ~~annum)~~sublimit ~~equal~~for to the ~~Prime~~issuance ~~Rate~~of ~~plus~~standby ~~one~~letters ~~percent~~of (1credit.~~0%),~~ ~~as defined, or the LIBOR Rate plus three and three quarter percent (3.75%).~~ The ~~Loan~~amount ~~Agreement~~available ~~contained certain financial covenants relating~~ to ~~tangible~~borrow ~~net~~by ~~worth, as defined, which~~ the Company ~~had~~is toreduced ~~satisfy in order~~ to ~~borrow under~~ the ~~agreement.~~extent Inthat ~~addition,~~ the Company ~~agreed~~has toletters ~~pay to the Bank a collateral monitoring fee~~ of ~~$750~~credit ~~per~~backed ~~month~~by ~~and agreed to~~ the ~~following additional terms: (i) $50,000 commitment fee, $25,000 to be paid at signing of the~~ Loan Agreement. There ~~and~~is ~~$25,000 to be paid on the one year anniversary of the Loan Agreement; (ii)~~ an unused line fee in the amount of 0.5375% per annum of the average unused portion of the revolving line~~; and (iii) an early termination fee of 0~~.5% The ofLoan ~~the~~Agreement, ~~total credit line~~ if ~~the~~not ~~Company~~sooner terminated ~~the~~in ~~Loan~~accordance ~~Agreement~~with ~~prior~~its toterms, ~~12 months~~expires ~~from~~on ~~the~~April 23, ~~Loan Agreement’s effective date~~2013.

The obligations of the Company and its subsidiaries under the Loan Agreement are secured under various collateral documents by first priority liens on substantially all of the assets of the Company and certain of its subsidiaries. Total outstanding debt under the Loan Agreement may not exceed (a) the sum of (1) 80% of the book value of eligible receivables (other than those accounts denominated in Euros or Canadian dollars), plus (2) 70% of the book value of eligible receivable in Euros or Canadian dollars, plus

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~~During 2011 and 2010, the Company entered into several amendments to the Loan Agreement. On April~~(3) ~~22,~~80% ~~2011,~~of the ~~Company~~eligible ~~and~~foreign ~~certain of its subsidiaries entered into an Amended and Restated Credit Agreement (as amended to date~~receivables, ~~the~~plus ~~“Amended Loan Agreement”~~(4) 70% ~~with~~of the ~~Bank,~~eligible asChinese ~~administrative agent~~receivables, ~~issuing~~less lender and swingline lender, and such other lenders as set forth from time to time in the Amended Loan Agreement. The Amended Loan Agreement amended and restated the Company’s prior Loan Agreement, and provides for a senior secured revolving credit facility of up to $35(b) ~~million. In addition,~~ the ~~Company~~amount ~~may make a one-time request for an additional $15 million to increase the credit facility to an aggregate~~ of ~~$50 million,~~any ~~subject~~reserves toestablished ~~the~~by ~~approval of~~ the ~~lending group~~Bank.

~~Total~~The ~~outstanding debt under the Amended~~ Loan Agreement ~~may~~contains ~~not~~restrictions ~~exceed~~regarding ~~(a)~~ the ~~sum~~incurrence of ~~(1) 80%~~additional ofindebtedness by the ~~book~~Company ~~value~~or ofits ~~eligible~~subsidiaries, ~~receivables~~the ~~(other~~ability ~~than~~to ~~those~~enter ~~accounts~~into ~~denominated~~various infundamental ~~Euros~~changes or(such ~~Canadian~~as ~~dollars),~~mergers ~~plus~~and (2acquisitions) ~~70%~~, of the ~~book~~ability ~~value~~to ofmake ~~eligible~~certain ~~receivable~~payments ~~in Euros~~ or ~~Canadian dollars~~investments, ~~plus~~and ~~(3) 80%~~other oflimitations ~~the~~customary ~~eligible~~in ~~foreign~~senior ~~receivables,~~secured ~~plus~~credit ~~(4) 70%~~facilities. In ~~of the eligible Chinese receivables~~addition, ~~plus~~commencing ~~(5) the~~on ~~lesser of (i)~~September ~~60%~~15, of2012, the ~~cost~~Company ofmust ~~eligible~~maintain ~~inventory~~liquidity or (~~ii) the~~defined ~~net~~as ~~orderly~~cash ~~liquidation~~on ~~value~~deposit ofwith ~~eligible~~the ~~inventory,~~Bank asplus ~~adjusted~~availability ~~pursuant~~under to the ~~Amended~~ Loan Agreement~~, less (b~~) ~~the~~ ~~amount~~ of ~~any~~at ~~reserves~~least ~~established by the Bank~~$15 million.

~~The~~Interest ~~amount~~on ~~available~~outstanding indebtedness under the Loan Agreement accrues at an annual rate equal to ~~borrow~~(a) the byhigher of (i) the prime rate and (ii) the federal funds effective rate plus one-half of one percent (0.5%) plus (b) the applicable margin. The applicable margin is based on the Company’s liquidity. If the Company’s liquidity is ~~reduced~~less tothan $10 million, the ~~extent~~applicable ~~that~~margin is 4.0%; if the Company’s ~~has~~liquidity ~~letters~~is ofless ~~credit~~than ~~backed~~$20 bymillion (but not less than $10 million), the ~~Amended~~applicable ~~Loan~~margin ~~Agreement~~is 2.0%; Atif ~~March 31~~the Company’s liquidity is less than $35 million (but not less than $20 million), ~~2012~~the applicable margin is 1.0%; and if the Company’s ~~had~~liquidity ~~approximately~~is more than $35 million, the applicable margin is 0.35%. As of June 30, 2012, the Company’s liquidity was $6.8 million; ~~outstanding~~accordingly, onthe ~~letters~~applicable ofmargin ~~credit~~is currently 4.0%.

~~The~~On ~~Amended~~June 28, 2012, the Company entered into a term sheet (the “Term Sheet”) with Silicon Valley Bank (the “Bank”) regarding proposed amendments to the Company’s loan agreement with Bank (the “Loan Agreement”). Although ~~contains~~the ~~restrictions~~Term ~~regarding~~Sheet is subject to the ~~incurrence~~execution of ~~additional~~formal ~~indebtedness~~documentation, which has been drafted and is currently being reviewed by the Company, orthe ~~its~~Company ~~subsidiaries,~~and the ~~ability~~Bank have informally abided by the portions of the Term Sheet which (i) reduced the size of the credit facility from $35.0 million to ~~enter~~$25.0 ~~into~~million; ~~various~~(ii) removed ~~fundamental~~inventory ~~changes~~from the borrowing base calculation; (~~such~~iii) eliminated asthe ~~mergers~~minimum liquidity requirement until September 15, 2012, at which time the minimum liquidity requirement will return to $15.0 million and ~~acquisitions~~continue at that level through maturity; and (iv) with respect to the interest rate, tied the ~~ability~~“applicable margin” to ~~make~~liquidity ~~certain~~levels. Interest ~~payments~~on oroutstanding ~~investments,~~indebtedness under the Loan Agreement accrues at an annual rate equal to (a) the higher of (i) the prime rate and ~~other~~(ii) the ~~limitations~~federal ~~customary~~funds ineffective ~~senior~~rate ~~secured~~plus ~~credit~~one-half ~~facilities~~of one percent (0.5%) Inplus ~~addition,~~(b) the applicable margin. If the Company’s ~~must~~liquidity ~~comply~~is ~~with~~less ~~certain~~than ~~financial~~$10 ~~conditions~~million, the applicable margin is 4.0%; if ~~its~~the Company’s liquidity is less than $20 million (~~defined~~but asnot ~~cash~~less onthan ~~deposit~~$10 ~~with~~million), the ~~Bank~~applicable ~~plus~~margin ~~availability~~is ~~under~~2.0%; if the ~~Amended~~Company’s ~~Loan~~liquidity ~~Agreement~~is less than $35 million (but not less than $20 million), the applicable margin is ~~less~~1.0%; and if the Company’s liquidity is more than $1535 million, the applicable margin is 0.5%. As of June 30, 2012, the Company’s liquidity was $6.5 million; accordingly, the applicable margin is currently 4%%.

~~Borrowings~~In ~~under~~connection with the ~~Amended~~amendments ~~Loan~~contemplated ~~Agreement~~by ~~are permitted to be used for refinancing~~ the ~~amounts~~Term ~~outstanding~~Sheet, ~~under~~ the ~~existing~~Company ~~loan~~agreed ~~agreement~~to ~~with~~pay the Bank, toan ~~repay~~accommodation ~~certain~~fee ~~fees~~of ~~and expenses~~$200,000, ~~and~~with ~~for~~$100,000 ~~ongoing~~payable ~~working~~at ~~capital~~close and ~~general~~$100,000 ~~corporate~~payable ~~purposes.~~upon ~~Interest on outstanding indebtedness under~~ the ~~Amended~~earlier ~~Loan Agreement will accrue at an annual rate equal to (a) the higher~~ of (i) ~~the~~default, ~~prime rate and~~ (ii) ~~the~~December 15, ~~federal~~2012, ~~funds effective rate plus one-half of one percent~~ (~~0.5%~~iii) ~~plus (b)~~ the ~~applicable~~date ~~margin.~~on ~~The~~which ~~initial~~the ~~applicable~~Company ~~margin~~consummates isa ~~0.75%,~~new ~~and~~equity isor ~~subject~~subordinated todebt ~~adjustment~~raise ~~based~~or on(iv) any ~~the~~transaction ~~Company’s~~that ~~liquidity~~results in ~~each~~a ~~fiscal~~change ~~quarter~~in ~~such~~control. ~~that,~~As ifof ~~the~~August ~~Company’s liquidity is above $35 million~~9, ~~then~~2012 the ~~applicable~~close ~~margin~~has isnot ~~reduced to 0~~occurred.~~25%.~~

The ~~obligations~~Loan Agreement provides that events of default will exist in certain circumstances, including failure to make payment of principal or interest on the ~~Company~~loans ~~and~~when ~~its~~required, ~~subsidiaries~~failure to perform obligations under the ~~Amended~~ Loan Agreement ~~are~~and ~~secured~~related ~~under~~documents, ~~various~~defaults ~~collateral~~on ~~documents~~other byindebtedness ~~first~~in ~~priority~~excess ~~liens~~of on$200,000, ~~substantially~~the ~~all~~occurrence of a change of control of the ~~assets~~Company, the failure of the Company to have liquidity of $15.0 million on and after, September 15, 2012, and certain other events. Upon an event of ~~its~~default, ~~subsidiaries~~the Bank may accelerate maturity of the loans and enforce remedies under the Loan Agreement and related documents.

~~The~~During ~~Amended Loan Agreement provides that events of default will exist in certain circumstances, including failure to make payment of principal or interest on~~ the ~~loans~~quarter ~~when~~ended ~~required,~~June ~~failure to perform obligations under the Amended Loan Agreement and related documents~~30, ~~defaults on other indebtedness in excess of $200~~2012,~~000,~~ the ~~occurrence of a change of control of the~~ Company, ~~and~~was ~~certain~~not ~~other~~in ~~events.~~compliance ~~Upon~~with ~~an event of default,~~ the ~~Bank~~minimum ~~may~~liquidity ~~accelerate~~covenant ~~maturity of the loans and enforce remedies~~ under the ~~Amended~~ Loan Agreement ~~and related documents~~.

~~The~~At ~~Amended~~June 30, 2012 and December 31, 2011, the Company had $15.4 million and $34.7 million outstanding under the Loan Agreement, ifand ~~not~~the ~~sooner~~Bank’s ~~terminated~~prime inrate ~~accordance~~was ~~with~~4%. ~~its~~The ~~terms,~~rate ~~originally~~used was tothe ~~expire~~Bank’s onprime ~~April 23,~~rate ~~2014~~of 4.0% Onplus 0.50% (or 4.5% at June 30, ~~2011~~2012 and December 31, in2011). ~~conjunction~~At ~~with~~June 30, 2012, the Company’s ~~subordinated~~had ~~convertible~~approximately ~~note~~$0.8 million ~~financing~~outstanding on letters of credit. As of June 30, 2012, the ~~Amended~~Company ~~Loan~~had ~~Agreement~~approximately ~~was~~$33,000 ~~amended~~available tounder ~~expire~~the online ~~April 23,~~of ~~2013~~credit.

At March 31, 2012 and December 31, 2011, the Company had $20.5 million and $34.7 million outstanding under the Loan Agreement and the Bank’s prime rate was 4%. The rate used was the Bank’s prime rate of 4.0% plus 0.50% (or 4.5% at March 31, 2012 and December 31, 2011). As of March 31, 2012, the Company had approximately $1.3 million available under the line of credit.

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Subordinated Convertible Note

On June 29, 2011, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with the purchaser named therein (the “Purchaser”) in connection with the private placement (the “Private Placement”) of $16.0 million principal amount of an unsecured, subordinated convertible note (the “Convertible Note”). The Private Placement closed on June 30, 2011. 344,~~557~~319,~~281~~660 shares that may be issued upon conversion of the Convertible Note, or as payment of principal or interest on the Convertible Notes in lieu of cash, were registered for resale under the Securities Act.

Among other terms, the Purchase Agreement provides that the Company will not redeem or declare or pay any dividends on, any of its securities without consent of the Purchaser.

The Company also entered into a Registration Rights Agreement with the Purchaser pursuant to which the Company agreed to register the common stock issuable upon conversion of, or the payment of interest on, the Convertible Note, as further described below. The Company agreed to file a registration statement under the Securities Act within 20 days of the closing of the Private Placement to register the resale of the shares of common stock issuable upon conversion of the Convertible Note and as payment of interest on the Convertible Note, which it did. The Company agreed to use its best efforts to cause the registration statement to be declared effective within 70 days following the closing of the Private Placement (or 90 days of the registration statement is reviewed by the Securities and Exchange Commission) and to keep the registration statement effective until the earlier of (1) the date all of the securities covered by the registration statement have been sold, (2) the date all of the securities covered by the registration statement may be sold without restriction under Rule 144 promulgated under the Securities Act of 1933, as amended (the “Securities Act”). If the Company fails to comply with these or certain other provisions, then the Company shall be required to pay liquidated damages of 1% of the outstanding principal amount of the Convertible Note for the initial occurrence of such failure and for each subsequent 30 day period in which the failure continues. The net proceeds of the sale of the Convertible Note were approximately $14.9 million, after deducting placement fees and other offering-related expenses. The initial Registration Statement covering 111,~~403~~425,~~988~~499 shares of common stock was declared effective on July 27, 2011. Following the automatic reset of the conversion price on the Adjustment Date (as defined below), a subsequent registration statement covering an additional 232,~~153~~894,~~293~~162 shares of common stock was filed and was declared effective on December 21, 2011.

The Convertible Note had a principal amount of $16.0 million and was initially convertible into shares of the Company’s common stock at a conversion price of $223.9236, subject to adjustment. The conversion price adjusted on the eleventh trading day following the public announcement of the Company’s financial results for the quarter ending September 30, 2011 (the “Adjustment Date”), to the lower of (i) the then effective conversion price and (ii) 110% of the arithmetic average of the volume weighted average price of the Company’s common stock for the ten consecutive trading days ending on the trading day immediately preceding the Adjustment Date, or $0.~~8381~~6.70 per share . Accordingly, on the Adjustment Date, the conversion price was adjusted to $06.~~8381~~70. On December 1, 2011, the Convertible Note was amended to provide that the conversion price of the Convertible Note on the applicable conversion date is the lower of (1) the conversion price then in effect and (2) with respect to a total of ten separate conversions, a price equal to 92% of the closing bid price of our common stock on the trading day immediately preceding the applicable conversion date. On April 20, 2012, the Company and the Purchaser entered into an agreement regarding the Convertible Note (the “April 2012 Agreement”), which among other things, lowered the conversion price to $03.4020 while still allowing for ten separate conversions of the Convertible Note at a price equal to 92% of the closing bid price of the Company’s common stock on the trading day immediately preceding the applicable conversion date. The April 2012 Agreement is further described below.

The Convertible Note matures on July 1, 2013, and bears an interest at a rate of 7.0% per annum. Interest is payable monthly, beginning on November 1, 2011. Principal and interest (each, an “installment amount”) are payable monthly (which commenced on November 1, 2011), and may be made in cash or, at the option of the Company if certain equity conditions are satisfied, in shares of its common stock. If all or any portion of an installment amount is paid in shares of common stock, the price per share (the “Company Conversion Price”) will be at the lower of (i) the then current conversion price and (ii) 82% of the arithmetic average of the volume weighted average price of the Company’s common stock for the ten consecutive trading days ending on the trading day immediately preceding the payment date (but in no event greater than the dollar volume weighted average price of our common stock on the trading day immediately preceding the payment date). In addition, the holder may, at its option, during the ten trading days immediately following each installment date, deliver one or more written notices electing to have up to two additional installment amounts converted into common stock at a conversion price equal to the Company Conversion Price in effect for the immediately preceding installment payment date. The holder may also, at its option, elect to have the payment of all or any portion of an installment amount payable on an installment date deferred until any later installment date selected by the holder. Any amounts so deferred by the holder are added to, and become part of, such later installment amount and continue to accrue interest under the Convertible Note.

If the closing sale price of Company common stock exceeds 175% of the conversion price for 30 consecutive trading days, then, if certain equity conditions are satisfied, the Company may require the holder of the Convertible Note to convert all or any part of the outstanding principal into shares of common stock at the then applicable conversion price, provided that the Company may only

of the outstanding principal into shares of common stock at the then applicable conversion price, provided that the Company may only

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make a one-time election to force conversion. The Convertible Note contains certain limitations on optional and mandatory conversion, including that, absent stockholder approval of the transaction, the Company will not issue shares of common stock under the Convertible to the extent such issuances equal or exceed 20.0% of the Company’s outstanding shares on the closing date. In the event that the Company is prohibited from issuing any shares of common stock due to this cap, the Company must pay cash in exchange for cancelling such excess shares at a price equal to the product of (i) such number of excess shares and (ii) the closing bid price on the trading day immediately preceding the date such excess shares would otherwise be required to be delivered to the noteholder. In addition, a provision of the Convertible Note does not allow the holder of the note to own more than 4.99% of the Company’s common stock at any one time.

The Convertible Note contains certain covenants and restrictions, including, among others, that, for so long as the Convertible Note is outstanding, the Company will not incur any indebtedness that is senior to, or on parity with, the Convertible Note in right of payment, subject to limited exceptions for existing indebtedness. Events of default under the Convertible Note include, among others, payments defaults, cross-defaults, the Company’s common stock is suspended from trading for a period of time or no longer listed on an eligible trading market, and certain bankruptcy-type events involving the Company or any subsidiary. Upon an event of default, the holder may elect to require the Company to redeem all or any portion of the outstanding principal amount of the Convertible Note for a price equal to the greater of 120% of (i) the amount to be redeemed (as calculated through the redemption date) and (ii) the product of (A) the conversion rate with respect to such amount in effect at such time as the holder deliver a redemption notice and (B) the greatest closing sale price of the Company’s common stock on any trading day during the period starting on the date immediately preceding the event of default and ending on the trading day immediately prior to the date the Company is required to pay the redemption amount. The holder may elect to require the Company to redeem for cash all or any portion of the outstanding principal on the Convertible Note in connection with a change of control of the Company.

In addition, the Company may redeem all (but not less than all) of the then outstanding amount of the Convertible Note in cash at a price equal to the greater of 125% of (i) the amount to be redeemed (as calculated through the redemption date) and (ii) the product of (A) the conversion rate with respect to such amount in effect at such time as the Company delivers a redemption notice and (B) the greatest closing sale price of the Company’s common stock on any trading day during the period starting on the date notice of redemption is given and ending on the date immediately prior to the redemption, provided that the Company may only deliver one such redemption notice.

Upon issuance of the Convertible Note the Company determined the initial carrying value of the Convertible Note to be $16.0 million. On December 1, 2011, certain of the provisions of the Convertible Note were modified. In accordance with ASC 470, the modifications resulted in the Convertible Note being deemed to be substantially different post modification because a substantive embedded conversion option was added to the Convertible Note. The modification resulted in the extinguishment of the Convertible Note on December 1, 2011, the modification date, and the establishment of a modified Convertible Note. On the date of modification the Company recorded a charge to loss on extinguishment of convertible note in the statement of operations of approximately $2.8 million. The change in fair value related to the Convertible Note is recorded as change in fair value of note and warrants in the statement of operations for the year ended December 31, 2011. Due to the Convertible Note being carried at fair value in accordance with ASC 825, financing costs associated with obtaining the Convertible Note were immediately expensed. The Company paid approximately $1.1 million in related transaction costs, which was recorded as interest expense in the statement of operations for the year ended December 31, 2011.

~~The~~During ~~holder of~~ the ~~Convertible~~six Note deferred principal payments, in whole or in part, due on November 1, 2011($761,905), December 1, 2011 ($238,095), January 1, 2012 ($111,904), February 1, 2012 ($359,250) and March 1, 2012 ($761,905). In addition, during the three months ended ~~March~~June 3130, 2012, the holder converted approximately $510.20 million of principal which ~~has~~had either been previously deferred or was due from the Company in future periods. AsAt ~~a result of the election to defer principal payments at March~~June 3130, 2012 approximately $36.13 million of principal ~~originally~~remained ~~due~~outstanding ~~has~~and ~~been~~is ~~deferred~~due toon ~~later~~October 1, ~~periods~~2012. The holder of the Convertible Note elected to have the interest payments due on the Convertible Note paid in cash, which was approximately $0.21 million and $0.3 million for the ~~quarter~~three ~~ended~~and ~~March~~six 31months ended June 30, 2012. These amounts are recorded as interest expense in the statement of operations for the ~~quarter~~three ~~ended~~and ~~March~~six 31month periods ended June 30, 2012, respectively.

On April 20, 2012, the Company and the Holder entered into an amendment to the Convertible Note (~~The~~the “April 2012 Agreement”). Among other things, the April 2012 Agreement ~~requires~~required the Company to seek approval from its stockholders at its next annual meeting of stockholders, ~~scheduled~~held ~~for~~on June 20, 2012, to issue up to 253,~~000~~125,000 additional shares of the Company’s common stock to the Holder upon conversion of, or as a payment of principal and interest on, the convertible Note, which approval was obtained. In addition, the April 2012 Agreement requires the Holder, in the absence of an event of default or a change of control of the Company, to refrain from exercising its conversion rights under the Convertible Note or demanding payments (other than interest payments) until October 1, 2012. As a result of the April 2012 Agreement, the principal installment due on October 1, 2012 will be approximately $6.3 million. The April 2012 Agreement also amends the conversion price under the Convertible Note to $03.4020. In accordance with ASC 470, the April 20, 2012 modifications resulted in the Convertible Note being deemed to be substantially different post modification because a substantive embedded conversion option was added to the Convertible Note. The modification resulted in the extinguishment of the Convertible Note on April 20, 2012, the modification date, and the establishment of a modified Convertible Note. On the date of modification the Company recorded a charge to loss on extinguishment of convertible note in the statement of operations of approximately $1.1 million.

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A summary of changes in the Convertible Note is as follows:

	Convertible Note
Initial gross proceeds	$	16,000,000
Fair value adjustment, pre modification	1,320,000		(1)
Fair value pre modification	17,320,000
Loss on extinguishment of note	2,770,000
Post modification Convertible Note valuation	20,090,000
Conversion of principal by holder	(1,209,152		)(2)
Fair value adjustment	(640,848		)(1)
Fair value at December 31, 2011	$	18,240,000
Conversion of principal by holder	(79,~~511~~966,~~489~~168		)(3)
Fair value adjustment	(368,511		)(1)
Fair value adjustment, pre modification	(2,603,832		)(1)
Fair value at March 31, 2012	$	10,360,000
Fair value pre modification	5,670,000
Loss on extinguishment of note	1,070,000
Post modification Convertible Note valuation	6,740,000
Fair value adjustment, post modification	530,000		(1)
Fair value at June 30, 2012	$	7,270,000

(1) Amounts included in change in fair value of note and warrants on consolidated statement of operations.

(2) On December 1, 2011, subsequent to the modification, the holder of the Convertible Note elected to convert a portion of the principal payment due on December 1, 2011. As a result of the conversion the Company issued 858,704 shares of common stock. The stock was issued at $0.61when the fair market value of the stock was $0.73 per share. On December 15, 2011, the holder of the Convertible Note elected to convert $500,000 of principal on the Convertible Note. As a result the Company issued 970,497 shares of common stock. The stock was issued at $0.5152 (92% of the prior day closing bid price of $0.56) per share when the fair market value of the stock on the date of conversion was $0.60 per share.

(3) During the ~~three~~six months ended ~~March 31~~June 30, 2012, the holder of the Convertible Note elected to convert principal payments due of approximately $~~923,809~~10.0 million into shares of the Company’s common stock. As a result of the conversion of the principal payments the Company issued 12,~~989~~747,~~469~~961 shares of common stock. In addition, during the three months ended March 31, 2012, the holder of the Convertible Note elected to accelerate conversion of approximately $5,186,905 of principal and $3,267 of accrued interest into shares of the Company’s common stock. As a result of the accelerated conversions the Company issued to the Convertible Note holder 11,065,702 shares of common stock.

Valuation—Methodology and Significant Assumptions

The process of analyzing/valuing financial and derivative instruments utilizes facts and circumstances as of the measurement date as well as certain inputs, assumptions, and judgment calls that may affect the estimated fair value of the instruments. The estimated fair value of the Convertible Note is based on a utilization of certain valuation models that consider current and expected stock prices, expected volatility, expected interest rates, scheduled principal and interest payments, expected rate of returns and discount rates, probabilities of occurrences of certain future events, and expected liquidation horizons. Such inputs and assumptions as well as the conclusions of values are subject to significant estimates and actual results may differ. The methods, inputs, and significant assumptions utilized in estimating the fair value of the Convertible Note are summarized in the following sections.

Methods

A continuous-variable stochastic process in the form of a Monte-Carlo Simulation was utilized to estimate the fair value of the Convertible Note as of the Issuance Date. Monte Carlo simulation, a process of randomly generating values for uncertain variables, is meant to imitate a real-life system especially when other analyses are too mathematically complex or too difficult to reproduce. This method was used to simulate future expected stock prices, variable strike prices, and the behavior of each of the instrument’s significant features, as discussed above, as well as the respective outcomes at each particular time in the future—bi-weekly time steps were utilized throughout the maturity of the Convertible Note as well as daily time steps for purposes of estimating the adjustment to the Conversion price as discussed above. Other valuation methods were considered, such as the Black-Scholes-Merton option-pricing model and a binomial lattice model, but the simulation model was found as most appropriate in the analysis of the Convertible Note due to the potential variability of the conversion price (and its path dependency on stock prices during a period of 10 consecutive trading days prior to the potential adjustment day) and the Company’s ability to force conversion should certain condition are met in the future (as discussed above).

The simulation model was first utilized to continuously simulate the expected prices of the Company’s common stock at each time step and throughout the remaining life of the instrument. Secondly, an analysis of each of the instrument’s significant features was conducted at each time step for purposes of determining the respective value of each feature and its effect on the price market participants would be willing to pay for the Convertible Note. Based on the simulated stock prices, the value of each of the features at each time step, the greater of (or lower of—in the case of the options at the Company’s hands) the conversion positions, redemption positions, or holding positions (i.e. fair value as of each respective future time step discounted using the applicable effective discount rate) was conducted relative to each time step and from the

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the value of each of the features at each time step, the greater of (or lower of—in the case of the options at the Company’s hands) the conversion positions, redemption positions, or holding positions (i.e. fair value as of each respective future time step discounted using the applicable effective discount rate) was conducted relative to each time step and from the perspective of the Holders, until a final fair value of the instrument is determined at the time step representing the measurement date. This model requires the following key inputs with respect to the Company and/or instrument:

Inputs

	Pre-Modification December 1, 2011			Post-Modification December 1, 2011			December 31, 2011			~~Pre-Modification~~ February 7, 2012			~~Post-Modification~~March ~~February 7~~31, 2012			~~March~~Pre- 31Modification April 20, 2012			Post- Modification April 20, 2012			June 30, 2012
Stock Price	$	05.7384		$	05.7384		$	04.6080		$	06.8580		$	02.8588		$	03.3676		$	3.76		$	1.83
Strike Price (subject to certain adjustments)	~~0.84~~$	6.72		$	06.8472		$	06.8472		$	06.8472		$	06.8472		$	06.8472		$	2.40		$	2.40
Expected remaining term (in years)	1.61			1.61			1.5			1.4			1.427			1.272			1.2			1.0
Stock Volatility	90		%	90		%	95		%	125		%	~~125~~95		%	95110		%	110		%	120		%
Risk-Free Rate (based on 2-years life)	19.3		%	0.21		%	0.18		%	0.18		%	0.1822		%	0.2220		%	0.20		%	0.21		%
Forward Risk Rates (at each time step)	varies			varies			varies			~~Varies~~varies			~~Varies~~varies			varies			varies			varies
Discount Rate (applicable to instrument’s debt feature)	25		%	25		%	25		%	30		%	3025		%	2530		%	30		%	35		%
Probability of Equity-Like Positions (from holders’ perspective and throughout life of instrument)	76.9		%	48.7		%	64.9		%	2.86		%	20.8600		%	0.00		%	0.00		%	0.00		%
Probability of Debt-Like Positions (from holders’ perspective and throughout life of instrument)	23.1		%	51.3		%	35.1		%	97.14		%	97100.140		%	100.0		%	100		%	100		%
Effective discount rate	12.9		%	12.9		%	8.9		%	29.1		%	2930.10		%	30.0		%	30		%	30		%
Dividend Rate (on Company’s common stock)	0		%	0		%	0		%	0		%	0		%	0		%	0		%	0		%
Outstanding Shares of Common Stock	119,974,455			119,974,455			121,803,656			119,327,864			119,327,864			119,327,864
Probability of an event of default (as defined in the Agreement)	5		%	5.0		%	5.0		%	5.0		%	5.0		%	5		%	5		%	5		%
Probability of an event of default (as defined in the Agreement)	5		%	5.0		%	5.0		%	5.0		%	5.0		%	5.0		%
Probability of a change of control transaction (as defined in the Agreement)	5		%	5		%	5		%	5		%	5		%	5		%	5		%	5		%
Probability of a change of control transaction (as defined in the Agreement)	5		%	5		%	5		%	5		%	5		%	5		%
Number of Trials during each simulation analysis	1,000			1,000			1,000			10,000			10,000			10,000			10,000			10,000
Number of Trials during each simulation analysis	1,000			1,000			1,000			10,000			10,000			10,000

Significant Assumptions:

· The Company expects to pay on time (and in shares of the Company’s common stock) all principal and accrued interests due to the holders on each of the installment date. The dilution effects as a result of the payment in stock vs. cash was assumed to be immaterial to the overall conclusion of the fair value of the instrument as of the valuation date;

· The volatility of the Company’s common stock was estimated by considering (i) the annualized daily volatility of the Company’s stock prices during the historical period preceding the respective valuation date and measured over a period corresponding to the remaining life of the instrument and (ii) the implied volatility based on the Company’s publicly-traded options to buy or sell shares of the Company’s stock;

· The quoted market price of the Company’s stock was utilized in the valuations because the authoritative guidance requires the use of quoted market prices without consideration of blockage discounts. The quoted market price may not reflect the market value of a large block of stock;

· The quoted market price of the Company’s stock as of measurement dates and expected future stock prices were assumed to reflect the effect of dilution upon conversion of the instruments to shares of common stock;

· The volume weighted average price for the 10 trading days preceding the potential adjustment to the Conversion price was reasonably approximated by the average of the simulated stock price at each respective time step of the simulation model;

· The simulated stock prices at each bi-weekly time step following the date of the potential adjustment to the Conversion price were assumed to reasonably approximate the Company’s stock prices during a period of 30 consecutive trading days for purposes of determining whether the price condition underlying the Company’s right to force conversion (as discussed above), has been met;

· Based on the Company’s historical operations and management’s expectations for the foreseeable future, the probability of occurrence during the remaining life of the instrument was assumed diminutive (thus assigned as 5% probability in the simulation model) for events of default and change of control transactions (as defined the Convertible Note);

· Based on the Company’s historical operations and management’s expectations for the foreseeable future, equity conditions failures or fundamental transactions (as defined in the Convertible Note) were not expected to occur during the remaining life of the instrument;

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· The date of the potential adjustment date to the conversion price, as discussed above, was assumed to be based on 45 days following the end of the third calendar quarter of 2011 (November 15, 2011); and

· Based on the Company’s historical operations and management’s expectations for the near future, the Company’s stock was assumed to be a non-dividend-paying stock;.

The following table details the principal payments on the Convertible Note through maturity (assuming no deferral of such payments by the Holder, as permitted by the terms of the Convertible Note).

Calendar Years Ending December 31,	Principal Payments on Subordinated Convertible Notes
2012	$	8,865,476
Total	$	8,865,476

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Calendar Years Ending December 31,	Principal Payments on Subordinated Convertible Notes
2012	$	6,280,476
Total	$	6,280,476

Subordinated Note Payable

On June 16, 2010, the Company entered into a Venture Loan and Security Agreement with Compass Horizon Funding Company LLC (the “Lender”) pursuant to which the Lender has loaned the Company $12,000,000 (the “Note Payable”). After the Lender’s closing fees and expenses, the net proceeds to the Company were $11,826,500. Interest on the Note Payable will accrue at a rate per annum equal to 12.58%. The Note Payable is subordinated to up to $15,000,000 of senior indebtedness, provided that from and after August 31, 2010, the senior indebtedness cannot exceed an amount equal to 80% of the Company’s accounts receivable plus 40% of its inventory. The Note Payable is to be repaid over 42 months following the closing. From June 15, 2010 through April 30, 2011, the Company is only required to pay interest on the Note Payable and thereafter the Note Payable will be repaid in 33 substantially equal monthly installments of interest and principal. The Note Payable may be prepaid by the Company by paying all accrued interest through the date of payment, the then outstanding principal balance and a prepayment premium equal to a declining percentage of the principal amount outstanding at the time of prepayment (initially 4% during the first twelve months of the Note Payable decreasing to 3% for the succeeding twelve months and 2% thereafter). In connection with the Note Payable, the Company has issued to the Lender five year warrants to acquire up to an aggregate of ~~591~~73,~~716~~965 shares of the Company’s common stock at an exercise price of $219.4344 per share (which was the 20-day trailing volume weighted average price of the Company’s common stock). On June 30, 2011, the warrants were amended to lower the exercise price to $28.00 per share. The relative fair value of the warrants of $0.9 million at issuance was recorded as a discount on the Note Payable and is being amortized into interest expense over the term of the Note Payable using the effective interest method. Upon modification of the warrants in 2011, the relative fair value was increased by approximately $0.1 million, which was recorded as an additional discount on the Note Payable and is being recorded as interest expense over the term of the Note Payable using the effective interest method. The Company estimated the fair value of the warrants on the date of issuance and the modification date using the Black-Scholes option pricing model using the following assumptions:

	June 16, 2010		June 30, 2011
*Assumptions:*
Expected life	5 years		4 years
Expected volatility	74.9	%	75.0	%
Dividends	none		none
Risk-free interest rate	2.0	%	0.5	%

The Note Payable is to be repaid as follows:

Fiscal Year	Principal Repayment
2012	$	32,~~224~~182,~~029~~794
2013	4,797,531
2014	427,558
Total	$	87,~~449~~407,~~118~~833

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Note J. Product Warranties

The Company provides a warranty to its customers for most of its products sold. In general the Company’s warranties are for one year after the sale of the product and five years for photovoltaic inverter product sales. The Company reviews its warranty liability quarterly. The Company’s estimate for product warranties is based on an analysis of actual expenses by specific product line and estimated future costs related to warranty. Factors taken into consideration when evaluating the Company’s warranty reserve are (i) historical claims for each product, (ii) the development stage of the product, (iii) volume increases, (iv) life of warranty and (v) other factors. To the extent actual experience differs from the Company’s estimate, the provision for product warranties will be adjusted in future periods. Such differences may be significant.

Accrued warranty is included in other accrued expenses on the Company’s Consolidated Balance Sheets. The following is a summary of the Company’s accrued warranty activity for the following periods:

	Three Months Ended						Six Months Ended
	March 31, 2012			March 31, 2011
	June 30, 2012			June 30, 2011			June 30, 2012			June 30, 2011
Balance at beginning of period	$	5,~~318~~347,~~738~~895		$	4,~~000~~375,~~081~~898		5,318,738			$	4,000,081
Provision	~~424~~289,~~308~~333			~~810~~502,~~023~~655			713,641			1,312,678
Usage	(~~395~~411,~~151~~807		)	(~~434~~389,~~206~~190		)	(806,958		)	(823,396		)
Balance at end of period	$	5,~~347~~225,~~895~~421		$	4,~~375~~489,~~898~~363		$	5,225,421		$	4,489,363

Note K. Warrant Liabilities

Warrants Issued in Connection with the July 2006 Financing

In connection with the July 19, 2006 private placement of $12.0 million aggregate principal amount of senior secured convertible notes (which notes were subsequently retired by cash redemption in November 2007), the Company issued the following Warrant As, Warrant Bs, Warrant Cs and Placement Agent Warrants:

Warrant As

The Warrant As originally entitled the holders thereof to purchase up to an aggregate of 3454,~~636,368~~546 shares of the Company’s common stock at a price of $114.~~815~~52 per share for a period beginning six months from the date of such warrants and ending on the seventh anniversary of the date of such warrants. The period prior to six months from the date of the warrants is hereinafter referred to as the “non-exercise period.” The exercise price and the number of shares underlying these warrants are subject to adjustment for stock splits, stock dividends, combinations, distributions of assets or evidence of indebtedness, mergers, consolidations, sales of all or substantially all assets, tender offers, exchange offers, reclassifications or compulsory share exchanges.

If a change of control of the Company occurs, as defined, the holders may elect to require the Company to purchase the Warrant As for a purchase price equal to the Black-Scholes value of the remaining unexercised portion of each Warrant A.

For so long as any Warrant As remain outstanding, the Company may not issue any common stock or common stock equivalents at a price per share less than $113.6520. In the event of a breach of this provision, the holders may elect to require the Company to purchase the Warrant As for a purchase price equal to the Black-Scholes value of the remaining unexercised portion of each Warrant A. As a result of the November 8, 2007 and December 20, 2007 preferred stock financing, as described in Note L below, the holders were entitled for a limited period of time (45 days after each issuance) to exercise this right. During fiscal 2007, the Company paid approximately $1.4 million to redeem Warrant As representing 1155,~~242,426~~303 shares of common stock. During 2008, the Company paid approximately $0.4 million to redeem Warrant As representing ~~303~~37,~~031~~879 shares of common stock. (See table below for assumptions used in valuing the warrants redeemed). During the ~~three~~six month period ended ~~March 31~~June 30, 2011, warrants to purchase ~~580~~72,~~303~~538 shares of common stock were exercised. As of ~~March 31~~June 30, 2012 and December 31, 2011, Warrant As to purchase ~~556~~69,~~061~~508 shares of common stock were outstanding, respectively.

If the closing bid price per share of common stock for any 20 consecutive trading days exceeded 200% of the exercise price, then, if certain conditions were satisfied, including certain equity conditions, the Company had the right to require the holders of the Warrant As to exercise up to 50% of the unexercised portions of such warrants (as discussed below, this right was exercised in 2010

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and 2011). If the closing bid price per share of common stock for any 20 consecutive trading days exceeds 300% of the exercise price, then, if certain equity conditions are satisfied, the Company may require the holders of the Warrant As to exercise all or any part of the unexercised portions of such warrants.

Warrant Bs

The Warrant Bs entitled the holders thereof to purchase up to an aggregate of 3454,~~636,368~~546 shares of the Company’s common stock at a price of $113.6844 per share for a period of 90 trading days beginning six months from the date of such warrants. As a result of an amendment, the expiration date of the Warrant Bs was extended to August 31, 2007.

On July 17, 2007, the holders of the Warrant Bs exercised such warrants in full, acquiring 3454,~~636,638~~546 shares of common stock at $110.3148 per share. The Company received proceeds of approximately $4.8 million. To entice the holders of the Warrant Bs to exercise such warrants the Company reduced the exercise price from $113.6844 to $110.3148 per share. As a result of reducing the exercise price the Company recorded a charge to operations in 2007 related to the warrant modification of approximately $0.9 million to change in fair value of the Convertible Notes and warrants on the accompanying statement of operations. Pursuant to the original terms of the Warrant Bs, upon exercise of the Warrant Bs, the warrant holders were entitled to receive additional warrants (“Warrant Cs”) to purchase a number of shares of common stock equal to 50% of the number of shares of common stock purchased upon exercise of the Warrant Bs. As a result of the full exercise of the Warrant Bs, the holders received Warrant Cs to purchase 1227,~~818,187~~273 shares of common stock at an exercise price of $114.~~815~~52 per share for a period beginning six months from the date of such warrants and ending on the seventh anniversary of the date of such warrants.

Warrant Cs

As discussed above, upon the exercise of the Warrant Bs, the holders were entitled to receive additional warrants (the “Warrant Cs”). The Warrant Cs originally entitled the holders thereof to purchase up to an aggregate of 1227,~~818,187~~273 ~~shares~~ of our common stock at a price of $114.~~815~~52 per share for a period beginning six months from the date of such warrants and ending on the seventh anniversary of the date of such warrants. The period prior to six months from the date of the warrants is hereinafter referred to as the “non-exercise period.” The exercise price and the number of shares underlying these warrants are subject to adjustment for stock splits, stock dividends, combinations, distributions of assets or evidence of indebtedness, mergers, consolidations, sales of all or substantially all assets, tender offers, exchange offers, reclassifications or compulsory share exchanges. If a change of control of the Company occurs, as defined, the holders may elect to require the Company to purchase the Warrant Cs for a purchase price equal to the Black-Scholes value of the remaining unexercised portion of each Warrant C.

For so long as any Warrant Cs remain outstanding, the Company may not issue any common stock or common stock equivalents at a price per share less $113.6520. In the event of a breach of this provision, the holders may elect to require the Company to purchase the Warrant Cs for a purchase price equal to the Black-Scholes value of the remaining unexercised portion of each Warrant C. As a result of the November 8, 2007 and December 20, 2007 preferred stock financing, as described in Note L below, the holders were entitled for a limited period of time (45 days after each issuance) to exercise this right. During 2007, the Company paid approximately $0.7 million to redeem Warrant Cs representing ~~621~~77,~~215~~652 shares of common stock. During 2008, the Company paid approximately $0.2 million to redeem Warrant Cs representing ~~151~~18,~~516~~940 shares of common stock. (See table below for assumptions used in valuing the warrants redeemed). As of ~~March 31~~June 30, 2012 and December 31, 2011, Warrant Cs to purchase ~~348~~43,~~485~~561 shares of common stock were outstanding, respectively.

If the volume weighted average price per share of the Company’s common stock for any 20 consecutive trading days exceeded 200% of the exercise price, then, if certain conditions were satisfied, the Company had the right to require the holders of the Warrant Cs to exercise up to 50% of the unexercised portions of such warrants. If the volume weighted average price per share of the Company’s common stock for any 20 consecutive trading days exceeds 300% of the exercise price, then, if certain equity conditions are satisfied, the Company may require the holders of the Warrant Cs to exercise all or any part of the unexercised portions of such warrants.

During 2010, the Company notified the holders of the outstanding Warrant As and Warrant Cs that the holders were required to exercise 50% of their un-exercised warrants. As a result of this notification by the Company holders of Warrant As exercised warrants to purchase ~~469~~58,~~699~~712 shares of common stock and holders of Warrant Cs exercised warrants to purchase ~~234~~29,~~849~~356 shares of common stock. During ~~the three month period ended March 31,~~ 2011, an additional ~~580~~72,~~303~~538 Warrant As and ~~265~~33,~~152~~144 Warrant Cs were exercised, as noted above, as a result of notification sent out to the remaining holders of the Warrant As and Warrant Cs.

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The table below summarizes Black-Scholes option pricing model range of assumptions that were used in valuing the warrants redeemed for both the Warrant As and Warrant Cs.

Assumptions:	Warrant As	Warrant Cs
Expected life	5.68 years to 5.69 years	6.67 years to 6.68 years
Expected volatility ranging from	83.0%	85.0%
Dividends	none	none
Risk-free interest rate	3.75% - 3.84%	3.85% - 3.93%

Placement Agent Warrants

First Albany Capital (“FAC”) acted as placement agent in connection with the July 19, 2006 private placement. In addition to a cash transaction fee, FAC or its designees were entitled to receive five-year warrants to purchase ~~218~~27,~~182~~273 shares of the Company’s common stock at an exercise price of $114.8796 per share. The Placement Agent warrants were exercised in full during 2011 resulting in the Company issuing ~~218~~27,~~182~~273 shares of common stock.

Accounting for the Warrants

Upon issuance, the Warrant As, Warrant Bs and Warrant Cs, along with the Placement Agent Warrants (together the “Warrants”), did not meet the requirements for equity classification, because such warrants (a) must be settled in registered shares, (b) are subject to substantial liquidated damages if the Company is unable to maintain the effectiveness of the resale registration of the shares and (c) provide a cash-out election using a Black-Scholes valuation under various circumstances. Therefore these Warrants are required to be accounted for as freestanding derivative instruments. Changes in fair value are recognized as either a gain or loss in the statement of operations under the caption “Change in fair value of warrant liabilities.”

Upon issuance, the Company allocated $2.7 million of the initial proceeds to the Warrants and immediately marked them to fair value resulting in a derivative liability of $4.9 million and a charge to other expense of $2.2 million. As of ~~March 31~~June 30, 2012 and December 31, 2011, the remaining outstanding Warrants have been marked to fair value resulting in a derivative liability of $5022,000 and $0.1 million, respectively.

The credit to change in fair value of warrant liabilities, for the three and six months ended ~~March 31~~June 30, 2012 and 2011 was $8128,000 and $109,530 and $~~123~~1.4 million and $1.5 million,~~561,~~ respectively, related to Warrant As, Bs and Cs and placement agent warrants.

A summary of the changes in the fair value of the warrant liabilities:

Balance at December 31, 2010	$	5,454,109
Fair value adjustment (1)	(~~123~~1,~~561~~497,183		)
Warrants exercised	(2,786,274		)
Balance at March, 2011	$	2,544,274
Balance at June 30, 2011	$	1,170,652
Balance at December 31, 2011	$	131,530
Fair value adjustment (1)	(81109,530		)
Balance at March, 2012	$	50,000
Balance at June 30, 2012	$	22,000

(1) Amounts included in change in fair value of convertible note and warrants on the consolidated statement of operations.

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Valuation - Methodology and Significant Assumptions

The valuation of derivative instruments utilizes certain estimates and judgments that affect the fair value of the instruments. Fair values for the Company’s derivatives are estimated by utilizing valuation models that consider current and expected stock prices, volatility, dividends, forward yield curves and discount rates. Such amounts and the recognition of such amounts are subject to significant estimates which may change in the future. (See Note C for valuation related the 2007 Financing Warrants).

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In estimating the fair value of the Warrants the following methods and significant input assumptions were applied:

Methods

· An intrinsic value was utilized to estimate the fair value of Warrant As and Warrant Cs upon their respective exercise dates during 2010 and 2011. According to options theory, the value of an option equals the sum of its intrinsic value and time value and as it approaches exercise/expiration date, time value approaches zero. On the date of the exercise/expiration, time value of a warrant becomes zero and the value of the option equals its intrinsic value. Intrinsic value, for in-the-money options, represents the difference between the strike price and the price of the underlying asset as of expiration/exercise date. Gain/(loss) as of exercise date is determined based on the difference between the option’s intrinsic value and its fair value as of last measurement/reporting date, with any decrease (increase) in value representing a gain (loss).

· A binomial lattice model was utilized to estimate the fair value of Warrant As and Warrant Cs on the dates in the corresponding table below, as well as the fair value of the Placement Agent Warrants on the dates in the corresponding table below. The binomial model considers the key features of the Warrants, and is subject to the significant assumptions discussed below. First, a discrete simulation of the Company’s stock price was conducted at each node and throughout the expected life of the instrument. Second, an analysis of the higher of a holding position (i.e., fair value of a future node value discounted using an applicable discount rate) or exercise position was conducted relative to each node, which considers the non-exercise period, until a final fair value of the instrument is concluded at the node representing the valuation date. This model requires the following key inputs with respect to the Company and/or instrument:

Warrant As
Input	Dec. 31, 2010			Mar. 31, 2011			Dec. 31, 2011			Mar. 31, 2012			June 30, 2012
Quoted Stock Price	$	4.50		$	3.86		$	0.60		$	0.36
Quoted Stock Price (1)	$	36.00		$	30.88		$	4.80		$	2.88		$	1.832
Exercise Price	$	1.815		$	1.815		$	1.815		$	1.815
Exercise Price (1)	$	14.52		$	14.52		$	14.52		$	14.52		$	14.52
Time to Maturity (in years)	2.6			2.3			1.55			1.30			1.05
Stock Volatility	70		%	80		%	100		%	105		%	120		%
Risk-Free Rate	0.84		%	0.95		%	0.19		%	0.23		%	0.22		%
Dividend Rate	0		%	0		%	0		%	0		%	0		%
Non-Exercise Period	N/A			N/A			N/A			N/A			N/A

Warrant Cs
Input	Dec. 31, 2010			Mar. 31, 2011			Dec. 31, 2011			Mar. 31, 2012
Quoted Stock Price	$	4.50		$	3.86		$	0.60		$	0.36
Exercise Price	$	1.815		$	1.815		$	1.815		$	1.815
Time to Maturity (in years)	3.6			3.3			2.55			2.30
Stock Volatility	70		%	85		%	90		%	95		%
Risk-Free Rate	1.29		%	1.43		%	0.31		%	0.38		%
Dividend Rate	0		%	0		%	0		%	0		%
Non-Exercise Period	N/A			N/A			N/A			N/A

(1) adjusted for the effect of the reverse stock split effective on July 19, 2012.

Warrant Cs

Input	Dec. 31, 2010			Mar. 31, 2011			Dec. 31, 2011			Mar. 31, 2012			June 30, 2012
Quoted Stock Price (1)	$	36.00		$	30.88		$	4.80		$	2.88		$	1.832
Exercise Price (1)	$	14.52		$	14.52		$	14.52		$	14.52		$	14.52
Time to Maturity (in years)	3.6			3.3			2.55			2.30			2.05
Stock Volatility	70		%	85		%	90		%	95		%	105		%
Risk-Free Rate	1.29		%	1.43		%	0.31		%	0.38		%	0.33		%
Dividend Rate	0		%	0		%	0		%	0		%	0		%
Non-Exercise Period	N/A			N/A			N/A			N/A			N/A

(1) adjusted for the effect of the reverse stock split effective on July 19, 2012.

(1) A Black-Scholes option pricing model was utilized to estimate the fair value of Placement Agent Warrants on the dates in the corresponding table shown below. A change in method from the binomial to Black-Scholes was warranted because the warrants’ non-exercise period ended prior to the valuation date and all required inputs were fixed. This model requires the following key inputs with respect to the Company and/or instrument:

Input	Dec. 31, 2009			Mar. 31, 2010			Dec. 31, 2010			Mar. 31, 2011			June 30, 2011
Quoted Stock Price (1)	$	22.56		$	19.36		$	36.00		$	30.88		$	19.12
Exercise Price (1)	$	14.96		14.96			14.96			14.96			14.96
Time to Maturity (in years)	1.55			1.30			0.55			0.30			0.05
Stock Volatility	75		%	75		%	60		%	90		%	80		%
Risk-Free Rate	0.84		%	0.59		%	0.20		%	0.11		%	0.01		%
Dividend Rate	0		%	0		%	0		%	0		%	0		%
Non-Exercise Period	N/A			N/A			N/A			N/A			N/A

(1) adjusted for the effect of the reverse stock split effective on July 19, 2012.

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~~(1) A~~The ~~Black-Scholes option pricing model was utilized to estimate the fair value of~~ Placement Agent ~~Warrants on the dates in the corresponding table shown below. A change in method from the binomial to Black-Scholes was warranted because the~~ warrants’ ~~non-exercise period ended prior to the valuation date and all required inputs~~ were ~~fixed.~~exercised ~~This~~in ~~model~~full ~~requires~~on ~~the~~July 15, ~~following key inputs with respect to the Company and/or instrument:~~2011.

Input	Dec. 31, 2009			Mar. 31, 2010			Dec. 31, 2010			Mar. 31, 2011
Quoted Stock Price	$	2.82		$	2.42		$	4.50		$	3.86
Exercise Price	$	1.87		$	1.87		$	1.87		$	1.87
Time to Maturity (in years)	1.55			1.30			0.55			0.30
Stock Volatility	75		%	75		%	60		%	90		%
Risk-Free Rate	0.84		%	0.59		%	0.20		%	0.11		%
Dividend Rate	0		%	0		%	0		%	0		%
Non-Exercise Period	N/A			N/A			N/A			N/A

(1) The Placement Agent warrants were exercised in full on July 15, 2011.

Significant Assumptions:

· Stock volatility was estimated by annualizing the daily volatility of the Company’s stock price during the historical period preceding the respective valuation dates and measured over a period corresponding to the remaining life of the instruments. Historic stock prices were used to estimate volatility as the Company did not have traded options as of the valuation dates;

· The volume weighted average price for the 20 trading days preceding a payment date was reasonably approximated by the average of the simulated stock price at each respective node of the binomial model;

· Based on the Company’s historical operations and management expectations for the near future, the Company’s stock was assumed to be a non-dividend-paying stock;

· The quoted market price of the Company’s stock was utilized in the valuations because the authoritative guidence requires the use of quoted market prices without consideration of blockage discounts. The quoted market price may not reflect the market value of a large block of stock; and

Note L. Series C Convertible Preferred Stock and Warrants

On November 8, 2007, the Company entered into a Stock and Warrant Purchase agreement with Rockport Capital Partners II, L.P. and NGP Energy Technology Partners, L.P. (the “Investors”). Under this purchase agreement, the Investors agreed to purchase in a private placement 25,000 shares of the Company’s Series C convertible preferred stock (the “Series C Preferred Stock”) and warrants to purchase up to 192,~~711~~463,~~539~~942 shares of common stock, for an aggregate gross purchase price of $25.0 million. Each share of Series C Preferred Stock, with a face value of $1,000 per share, plus accumulated dividends, was initially convertible into common stock at a price equal to $18.0432 per share.

On October 27, 2010, the holders of all of the outstanding shares of Series C Preferred Stock converted their shares, including accumulated dividends, into common stock, resulting in the issuance of 273,~~526~~440,~~244~~781 shares of common stock. To induce the Series C Preferred Stockholders to convert their shares, the Company paid them an aggregate $1.25 million in cash upon conversion. On October 27, 2010, the date the Series C Preferred Stock was converted to common shares, the company accelerated the accretion of $1,587,755 to account for the difference between the carrying value of the Series C Preferred Shares on that date and their conversion value.

The private placement occurred in two closings. The first closing occurred on November 8, 2007. At the first closing, the Company issued 10,000 shares of Series C Preferred Stock at $1,000 per share for an aggregate gross purchase price of $10.0 million. The Company also issued warrants to purchase an aggregate of 151,~~262~~907,~~072~~759 shares of common stock (the “Tranche I Warrants”). These warrants are exercisable for a seven-year term and had an initial exercise price of $111.4452 per share and were not exercisable until May 8, 2008. As a result of stockholder approval of the second closing and related matters on December 20, 2007, as described below, the exercise price of these warrants was reduced to $110.250 per share. The Company considered this a cancellation and reissuance of new warrants and accounted for the change in the fair value of the warrants in the allocation of net proceeds associated with the second closing and treated it as a deemed dividend to the Series C Preferred Stock holders. See “Accounting for the Series C Preferred Stock” below. As of June 30, 2012 and December 31, 2011, Tranche I Warrants to purchase 953,880 shares of common stock were outstanding, respectively.

At the second closing, which occurred on December 20, 2007, following stockholder approval, the Company issued 15,000 shares of Series C Preferred Stock for an aggregate gross purchase price of $15.0 million, of which $10.0 million was paid through the cancellation of the promissory notes previously issued to the Investors on November 7, 2007. At this closing, the Company also

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~~with~~issued warrants (the ~~second~~“Tranche ~~closing~~II ~~and~~Warrants”) ~~treated~~to itpurchase asan aaggregate ~~deemed~~of ~~dividend~~556,183 toshares ~~the~~of ~~Series C~~common ~~Preferred~~stock ~~Stock~~at ~~holders~~an exercise price of $10.0 ~~See~~per ~~“Accounting~~share. These warrants are exercisable for ~~the~~a ~~Series C~~seven-year ~~Preferred~~term ~~Stock”~~and ~~below~~are exercisable immediately. As of ~~March~~June 3130, 2012 and December 31, 2011, Tranche III Warrants to purchase 7524,~~631,036~~486 shares of common stock were outstanding, respectively.

AtIn the ~~second~~purchase ~~closing~~agreement, ~~which occurred on December 20, 2007, following stockholder approval,~~ the Company ~~issued~~also ~~15,000~~agreed ~~shares~~to ofissue ~~Series C~~the ~~Preferred~~Investors ~~Stock~~additional ~~for~~warrants anin ~~aggregate~~the ~~gross~~event ~~purchase~~that ~~price~~the ofholders ~~$15.0 million,~~ of ~~which~~certain ~~$10.0~~existing ~~million~~warrants ~~was~~(none ~~paid~~of ~~through~~whom ~~the~~are ~~cancellation~~affiliated ofwith the ~~promissory~~Investors) ~~notes~~exercise ~~previously~~those ~~issued~~warrants toin the ~~Investors on November 7, 2007~~future. AtUpon ~~this~~such ~~closing~~exercises, the Company ~~also~~will ~~issued~~issue ~~warrants~~to (the ~~“Tranche~~Investors IIadditional ~~Warrants”)~~warrants to purchase ancommon ~~aggregate~~stock equal to one-half of ~~4,449,467~~the number of shares of common stock atissued anupon exercise ~~price~~ of ~~$1.25~~these ~~per~~existing ~~share~~warrants. ~~These~~The ~~warrants~~exercise ~~are~~price ~~exercisable~~of ~~for~~these awarrants ~~seven-year~~will ~~term~~be ~~and are exercisable immediately~~$13. As28 ofper ~~March 31, 2012 and December 31, 2011, Tranche II Warrants to purchase 4,195,887 shares of common stock were outstanding, respectively~~share.

InDuring the ~~purchase~~six ~~agreement~~months ended June 30, ~~the~~2011, ~~Company~~as ~~also~~a ~~agreed~~result toof ~~issue~~warrant exercises, the ~~Investors~~Company ~~additional~~issued warrants into ~~the~~purchase ~~event~~an ~~that~~aggregate ~~the holders~~ of ~~certain~~52,841 ~~existing~~shares ~~warrants (none~~ of ~~whom~~common ~~are~~stock ~~affiliated~~to ~~with~~ the Investors); ~~exercise~~these ~~those~~ warrants inexpire ~~the~~on ~~future~~March 31, 2018. ~~Upon~~The ~~such exercises, the~~ Company ~~will~~valued ~~issue to~~ the ~~Investors additional~~ warrants toissued ~~purchase~~in ~~common~~March 2011 ~~stock~~using ~~equal~~a ~~to one~~Black-~~half~~Scholes ofoption ~~the~~pricing ~~number~~model ofwith ~~shares~~the ofassumptions ~~common~~detailed ~~stock~~below ~~issued~~with ~~upon~~fair ~~exercise~~value of ~~these~~approximately ~~existing~~$1.3 ~~warrants~~million. ~~The~~There ~~exercise~~were ~~price~~no ofwarrants ~~these~~issued ~~warrants~~for ~~will~~the beperiod ~~$1.66~~ended ~~per~~June 30, ~~share~~2012.

During the three months ended March 31, 2011, as a result of warrant exercises, the Company issued warrants to purchase an aggregate of 422,727 shares of common stock to the Investors; these warrants expire on March 31, 2018. The Company valued the warrants issued in March 2011 using a Black-Scholes option pricing model with the assumptions detailed below with fair value of approximately $1.3 million. There were no warrants issued for the period ended March 31, 2012.

Input	June 30, 2011
Quoted Stock Price	$	30.88
Exercise Price	$	13.28
Time to Maturity (in years)	7.00
Stock Volatility	72.0		%
Risk-Free Rate	2.0		%
Dividend Rate	0		%

Input	March 31, 2011
Quoted Stock Price	$	3.86
Exercise Price	$	1.66
Time to Maturity (in years)	7.00
Stock Volatility	72.0		%
Risk-Free Rate	2.0		%
Dividend Rate	0		%

As of June 30, 2012, if all of the remaining existing warrants are exercised, the Company would need to issue warrants to purchase an additional 56,534 shares of common stock to the Investors.

As of March 31, 2012, if all of the remaining existing warrants are exercised, the Company would need to issue warrants to purchase an additional 452,273 shares of common stock to the Investors.

The Company designated the warrants issued in connection with the Series C Preferred Stock as equity instruments.

Note M. Stock Option Plans

Stock Option Plans

Under the Company’s 2002 and 2005 Stock Option Plans (collectively, the “Plans”), both qualified and non-qualified stock options may be granted to certain officers, employees, directors and consultants to purchase shares of the Company’s common stock. At ~~March 31~~June 30, 2012, 41,~~754~~131,~~077~~432 shares are available for future grants under the Plans.

The Plans are subject to the following provisions:

· The aggregate fair market value (determined as of the date the option is granted) of the Company’s common stock that any employee may purchase in any calendar year pursuant to the exercise of qualified options may not exceed $100,000. No person who owns, directly or indirectly, at the time of grant of a qualified option to him or her, more than 10% of the total combined voting power of all classes of stock of the Company shall be eligible to receive any qualified options under the Plans unless the exercise price is at least 110% of the fair market value of the Company’s common stock subject to the option, determined on the date of grant. Non-qualified options are not subject to this limitation.

· Qualified options are issued only to employees of the Company, while non-qualified options may be issued to non-employee directors, consultants and others, as well as to employees of the Company. Options granted under the Plans cannot exceed ~~500~~62,~~000~~500 shares in any year and may not be granted with an exercise price less than 100% of fair value of the Company’s common stock, as determined by the Board of Directors on the grant date.

· Options under the Plans must be granted within 10 years from the effective date of the Plan. Qualified options granted under the Plans cannot be exercised more than 10 years from the date of grant, except that qualified options issued to 10% or greater stockholders are limited to five-year terms.

· Generally, the options vest and become exercisable ratably over a four-year period.

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· The Plans contain antidilutive provisions authorizing appropriate adjustments in certain circumstances.

· Shares of the Company’s common stock subject to options that expire without being exercised or that are canceled as a result of the cessation of employment are available for future grants.

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The following table summarizes the Company’s stock option activity (both under the Plans and outside of the Plans) since December 31, 2011:

	Options Outstanding
	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)	Aggregate Intrinsic Value
	Number of		Weighted Average		Weighted Average Remaining Contractual Term	Aggregate Intrinsic
Outstanding at December 31, 2011	14,246,004		$	2.36	6.98	$	400
	Shares		Exercise Price		(years)	Value
Grants	60,500		$	0.48
Outstanding at December 31, 2011	1,779,418		$	18.8163	6.98	$	400
Grants	7,563		$	3.81
Exercises	—		—
Cancellations	(~~494~~61,~~065~~162	)	$	222.8151
Outstanding at March 31, 2012	131,~~812~~725,~~439~~819		$	218.3362	6.8752	$	—
Vested or expected to vest at March 31, 2012	13,521,400		$	2.32	6.82	$	—
Grants	286,065		$	2.99
Exercisable at March 31, 2012	9,110,773		$	2.09	6.03	$	—
Exercises	—		—
Exercisable at December 31, 2011	8,748,714		$	2.08	6.01	$	—
Cancellations	(81,626	)	$	18.44
Outstanding at June 30, 2012	1,930,258		$	16.31	6.98	$	831
Vested or expected to vest at June 30, 2012	1,873,578		$	16.45	6.91	$	831
Exercisable at June 30, 2012	1,236,893		$	16.83	6.05	$	831
Exercisable at December 31, 2011	1,093,586		$	16.60	5.85	$	—

Information relating to stock options outstanding (both under the Plans and outside of the Plans) (after giving effect to the reverse stock split, which occurred on July 19, 2012) as of ~~March~~June 3130, 2012 is as follows:

				~~Options Outstanding~~	Options Outstanding				~~Options Exercisable~~	Options Exercisable
Range of Exercise Prices				~~Number of Shares~~	~~Weighted~~Number ~~Average~~of ~~Remaining Contractual Life (years)~~Shares	Weighted Average ~~Exercise~~Remaining ~~Price~~Contractual Life (years)		Weighted Average Exercise Price	~~Exercisable Number of Shares~~	Exercisable ~~Weighted~~Number ~~Average~~of ~~Exercise Price~~Shares		Exercisable Weighted Average Exercise Price
$0.44	to	$1.73		2,000,511	6.34	$	1.2268		1,314,950	$	1.2923
$	1.79	to	$	3.68	283,815	9.51		$	3.01	16,625		$	1.79
$1.78	to	$1.89		148,500	7.49	$	1.8357		82,250	$	1.8336
$	4.16	to	$	15.12	256,790	6.12		$	10.31	178,057		$	10.58
$1.90	to	$1.90		4,801,020	6.08	$	1.9000		4,499,707	$	1.9000
$	15.20	to	$	15.20	599,933	5.84		$	15.20	599,933		$	15.20
$1.91	to	$2.35		2,139,814	6.47	$	2.2838		1,409,878	$	2.2652
$	15.28	to	$	19.68	321,683	6.67		$	18.66	242,843		$	18.62
$2.39	to	$2.99		3,013,000	7.77	$	2.7747		1,315,972	$	2.5562
$	20.00	to	$	25.84	275,768	7.67		$	23.23	129,181		$	22.44
$3.08	to	$4.98		1,704,594	8.55	$	4.1306		486,766	$	4.1763
$	25.92	to	$	39.84	191,644	7.44		$	33.55	70,058		$	33.65
$5.13	to	$5.13		5,000	8.80	$	5.1300		1,250	$	5.1300
$	41.04	to	$	41.04	625	8.55		$	41.04	196		$	41.04
$0.44	to	$5.13		13,812,439	6.87	$	2.33		9,110,773	$	2.09
$	1.79	to	$	41.04	1,930,258	6.98		$	16.31	1,236,893		$	16.83

No options to purchase shares of common stock were exercised during the three and six month period ended ~~March~~June 3130, 2012. Options to purchase ~~152~~20,~~873~~672 and 39,783 shares were exercised during the three and six month period ended ~~March~~June 3130, 2011, and these options had an intrinsic value of approximately $0.43 million and $0.6 million, respectively, on the date of exercise.

During 2008, as an inducement to his joining the Company, the Company granted its new Chief Executive Officer an option to acquire 4599,~~796,020~~503 shares of common stock at a price per share equal to $115.9020, the closing price of the common stock on May 1, ~~2008, the date his employment commenced. The option vests over four years, with the first 25% vesting on May 1, 2009 and the~~

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2008, the date his employment commenced. The option vests over four years, with the first 25% vesting on May 1, 2009 and the balance vesting in equal quarterly installments over the following three years. The option was issued outside of the Company’s 2005 Incentive Compensation Plan. As of ~~March~~June 3130, 2012 and December 31, 2011, this option was outstanding and is included in the tables above.

During 2010, as an inducement to his joining the Company, the Company granted its then Chief Financial Officer options to acquire 1125,000~~,000~~ shares of common stock at a price per share equal to $218.3364 , the closing price of the common stock on March 15, 2010, the date his employment commenced. The option was scheduled to vests over four years, with the first 25% vesting on March 15, 2011 and the balance vesting in equal quarterly installments over the following three years. Of these options, one option to purchase ~~500~~62,~~000~~500 shares was issued under the Company’s 2005 Plan and one option to purchase ~~500~~62,~~000~~500 shares was issued outside of the 2005 Plan. In May 2011 the Company terminated the employment of its then Chief Financial Officer, at which time options to purchase ~~250~~31,~~000~~250 shares of common stock had vested. Pursuant to the terms of the former Chief Financial Officer’s employment agreement, these vested options ~~will~~remained ~~remain~~ exercisable for one year from the date of his termination. As of ~~March~~June 3130, 2012 ~~and~~these options expired unexercised. At December 31, 2011, options to acquire ~~250~~31,~~000 shares and~~ 250~~,000~~ shares, ~~respectively,~~ were outstanding and are included in the tables above.

Note N. Warrants

A summary of the status of the Company’s warrants as of the ~~three~~six months ended ~~March~~June 3130, 2012 and ~~March~~June 3130, 2011 and the changes for these periods are presented below. The Company received proceeds of $1.5 million related to the 2011 exercises. All share information presented is after giving effect to the reverse stock split, which occurred on July 19, 2012.

	Three Months Ended March 31, 2012			Three Months Ended March 31, 2011
	Six Months Ended June 30, 2012			Six Months Ended June 30, 2011
	Number of Shares	Weighted Average Price		Number of Shares		Weighted Average Price
Outstanding at beginning of period	151,~~442~~930,~~350~~294	$	110.5696	151,~~974~~966,~~171~~771	(2)	$	111.5713
Granted (1)	—	—		~~422~~52,~~727~~841		113.6628
Exercised	—	—		(~~845~~105,~~455~~682	)	114.8252
Outstanding at end of period	151,~~442~~930,~~350~~294	$	110.5696	151,~~551~~943,~~443~~930		$	110.4264

(1) The Company issued warrants to purchase ~~422~~52,~~727~~841 shares of common stock during 2011, at $113.6628 per share to the Investors as a result of warrant exercises during the ~~three~~six months ended ~~March~~June 3130, 2011. These warrants are immediately exercisable upon their issuance and have a 7 year life.

(2) On June 30, 2011, the Company modified the terms of warrants to purchase 73,965 shares of common stock issued to its subordinated debt holders to lower the exercise price from $19.44 to $16.00 per share.

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Note O. Segment Disclosures

The Company operates in one business segment, Renewable Energy Solutions.

The Company operates and markets its services and products on a worldwide basis with its principal markets as follows:

	Three Months Ended				Six Months Ended
	March 31, 2012		March 31, 2011
	June 30, 2012		June 30, 2011		June 30, 2012		June 30, 2011
Revenue by geographic region based on location of customer:
Revenue by geographic region based on location of customer (1):
United States	$	2219,~~974~~934,~~286~~019	$	4526,~~035~~312,~~125~~657	$	42,908,304	$	71,284,289
China	~~40,000~~—		92,~~350,000~~324		40,000		9,352,324
Taiwan	~~790~~3,~~100~~077,500		—3,374,676		3,867,600		3,541,388
India	—136,971		41,~~100~~804,000		136,971		5,904,000
Canada	361,050		1,898,995
Czech Republic	126,380		305,142		154,827		360,542
Italy	41,602		717,608
Canada	163,643		10,125,828		524,693		12,024,823
France	1,524		557,166
Germany	13,961		316,326		58,505		316,326
Greece	—		156,637
Belgium	17,908		58,080		18,414		58,080
Rest of World	79,952		189,406
Italy	38,031		56,018		79,633		773,626
Total Revenue	$	24,288,514	$	62,004,937
France	2,351		3,696		3,875		560,862
Australia	—		250,896		—		250,896
Greece	—		2,854,861		—		3,011,498
Rest of World	156,344		32,532		162,800		63,319
Total Revenue	$	23,667,108	$	45,497,036	$	47,955,622	$	107,501,973

	At March 31, 2012		At December 31, 2011
	At June 30, 2012		At December 31, 2011
Long-lived assets by geographic region based on location of operations:
United States	$	8,~~229~~555,~~937~~793	$	8,612,505
China	~~392~~277,~~032~~720		387,831
Canada	1,~~943~~667,~~675~~031		2,091,574
Total long-lived assets	$	10,~~565~~500,~~644~~544	$	11,091,910

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Note P. Restructuring Costs

During the quarter ended ~~March~~June 3130, 2012, the Company ~~reduced~~completed ~~its~~restructuring ~~workforce~~efforts bythat 5began ~~employees~~in December 2011. During ~~The~~the ~~reductions~~period ~~were~~the ~~approved~~Company byvacated ~~management~~its ~~based~~Canadian ~~upon~~manufacturing ~~business~~facility, ~~needs~~turning inover to the ~~employee’s~~landlord ~~respective~~the ~~locations.~~entire facility. As a result, of the ~~reduction~~Company we recorded approximately $~~323~~330,000 ofin ~~payroll-~~restructuring related ~~costs,~~to ofthe ~~which~~remaining ~~$184~~rent on the facility. In addition,~~000~~ ~~was~~during ~~paid~~the asperiod the Company reduced its workforce by approximately 17 employees. As a result of ~~March 31~~the reductions in our workforce the Company recorded approximately $283,000 ~~2012~~of payroll-related costs.

InDuring ~~December~~the quarter ended March ~~2011~~31, 2012, the Company ~~implemented~~reduced aits ~~plan~~workforce ofby ~~reorganization,~~5 ~~which~~employees. ~~was~~The reductions were approved by management, ~~and~~based isupon ~~scheduled~~business toneeds bein ~~completed during~~ the ~~first~~employee’s ~~quarter~~respective ~~of 2012~~locations. As a result of the ~~actions~~reduction ~~taken in December 2011,~~ the Company recorded approximately $~~1.7 million~~323,000 inof payroll-related costs. Upon the completion of the restructuring in 2012 the restructuring will reduce the workforce prior to the initiation of the plan by approximately 35%. None of the terminated employees were required to provide any service to the Company subsequent to their receiving notification of termination. During the quarter ended March 31, ~~2012, the Company revised the amounts recorded for the workforce reduction taken in the fourth quarter~~ of ~~2011.~~which ~~The adjustment was a result of finalizing negotiations for foreign employee termination payments. As a result the Company recorded a credit of approximately~~ $31250,000, ~~which~~was ispaid ~~recorded~~ as ~~restructuring charges in our consolidated statement~~ of ~~operations~~June 30, 2012.

OnIn ~~June~~December ~~30,~~ 2011, the Company ~~completed~~implemented a plan of reorganization, ~~approved~~which, byas ~~management.~~noted above, was completed during the quarter ended June 30, 2012. As a result of the ~~restructuring~~actions taken in December 2011, the Company recorded approximately $1.17 million in payroll-related costs. ~~relating~~The torestructuring anreduced ~~approximately~~the ~~15%~~workforce ~~reduction~~prior into the ~~Company’s~~initiation ~~workforce~~of the plan by approximately 35%. None of the terminated employees were required to provide any service to the Company subsequent to their receiving notification of termination. AsDuring ofthe quarter ended March 31, 2012, the Company revised the amounts recorded for the workforce reduction taken in the fourth quarter of 2011. The adjustment was a result of finalizing negotiations for foreign employee termination payments. As a result the Company recorded a credit of approximately $031,000, which is recorded as restructuring charges in our consolidated statement of operations.9 During ~~million~~the ~~remains~~quarter toended beJune 30, ~~paid~~2012, onthe ~~both~~Company ~~current~~also revised the 2011 accrual and ~~prior~~recorded ~~year~~a ~~restructurings~~credit of approximately $34,000.

On June 30, 2011, the Company completed a plan of reorganization approved by management. As a result of the restructuring, the Company recorded approximately $1.1 million in payroll-related costs relating to an approximately 15% reduction in the Company’s workforce. None of the terminated employees were required to provide any service to the Company subsequent to their receiving notification of termination. As of June 30, 2012, approximately $0.9 million remains to be paid on both current and prior year restructurings.

The following is a summary of the Company’s accrued restructuring activity for the following periods:

	March 31, 2012			March 31, 2011
	June 30, 2012			June 30, 2011
Balance at beginning of period	$	1,543,830		$	49,203
Provision	~~292~~873,~~221~~821			—1,134,254
Payments	(~~939~~1,~~766~~525,465		)	(49151,~~203~~141		)
Balance at end of period	$	~~896~~892,~~285~~186		$	—1,032,316

Note Q. Recent Accounting Pronouncements

In September 2011, the FASB amended ASC 350, Intangibles—Goodwill and Other. This amendment is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities an option to perform a qualitative assessment to determine whether further impairment testing is necessary. The amended provisions are effective for reporting periods beginning on or after December 15, 2011. However, early adoption is permitted if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The adoption of the provisions of ASU No. 2011-04 ~~will~~did not have an effect on our consolidated financial position, results of operations or cash flows as the Company has no goodwill.

In ~~June~~May 2011, the FASB ~~amended~~issued ~~ASC~~ASU ~~220~~No. 2011-04, ~~Comprehensive~~Fair ~~Income.~~Value ~~This~~Measurement ~~amendment~~(Topic ~~was~~820) ~~issued~~Amendments to ~~enhance~~Achieve ~~comparability~~Common ~~between~~Fair ~~entities~~Value ~~that~~Measurement ~~report under GAAP~~ and ~~International~~Disclosure ~~Financial~~Requirements ~~Reporting~~in ~~Standards~~U.S. GAAP ~~(IFRS)~~ and toIFRS ~~provide~~(ASU ~~a more consistent method of presenting non~~No. 2011-~~owner transactions that affect an entity’s equity~~04). The ~~amendment~~amendments ~~requires~~in ~~companies~~this toupdate ~~present~~apply ~~the~~to ~~components~~all ofreporting ~~net~~entities ~~income~~that ~~and~~are ~~other~~required ~~comprehensive~~or ~~income~~permitted ~~either~~to asmeasure ~~one continuous statement~~ or asdisclose ~~two separate but consecutive statements. It eliminates~~ the ~~option~~fair tovalue ~~report other comprehensive income and its components as part~~ of ~~the~~an ~~statement of changes in shareholders’ equity. The amended provisions are effective for fiscal years~~asset, ~~and~~a ~~interim periods within those years~~liability, ~~beginning~~or ~~after December 15, 2011. Early adoption is permitted, and full retrospective application is required. This amendment impacts presentation and disclosure only, and therefore adoption did not have~~ an ~~impact on the Company’s consolidated financial position, results of operations or cash flows.~~

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (ASU No. 2011-04). The amendments in this update apply to all reporting entities that are required or permitted to measure or disclose the fair value of an asset, a liability, or an instrument classified in a reporting entity’s shareholders’ equity in the financial statements. ASU No. 2011-04 does not extend the use of fair value accounting, but provides guidance on how it should be applied where its use is already required or permitted by other standards within U.S. GAAP or IFRS. ASU No. 2011-04 changes the wording used to describe many requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Additionally, ASU No. 2011-04 clarifies the FASB’s intent about the application of existing fair value measurements. The amendments in this update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011.

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instrument classified in a reporting entity’s shareholders’ equity in the financial statements. ASU No. 2011-04 does not extend the use of fair value accounting, but provides guidance on how it should be applied where its use is already required or permitted by other standards within U.S. GAAP or IFRS. ASU No. 2011-04 changes the wording used to describe many requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Additionally, ASU No. 2011-04 clarifies the FASB’s intent about the application of existing fair value measurements. The amendments in this update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The adoption of the provisions of ASU No. 2011-04 did not have a material effect on our consolidated financial position, results of operations or cash flows.

Note R. Employee Benefit Plan

During 2010, the Company implemented its employee stock purchase plan (“ESPP”). Under the ESPP, qualified employees may purchase shares of ~~Common~~common stock by payroll deduction at a 15% discount from the market price. 2250,000~~,000~~ shares of Common stock have been reserved for this purpose. During the three and six month periods ended ~~March~~June 2131, 2012 and 2011, ~~166~~19,~~209~~322 and 9840,~~041~~098 and 19,355 and 31,610 shares of Common stock were issued under the ESPP, respectively. As of ~~March~~June 3130, 2012, 1114,~~072,604~~754 shares of ~~Common~~common stock were available for distribution under the ESPP. The Company recorded non-cash stock-based compensation expense of approximately $~~103~~70,000 and $~~134~~172,000 and $290,000 and $424,000 for the three and six month ~~period~~periods ended ~~March~~June 3130, 2012 and 2011, respectively.

Note S. Subsequent Events

The Company has evaluated all events or transactions through the date of this filing. During this period, the Company did not have any material subsequent events that impacted its consolidated financial statements or disclosures, other than the 1 — for — 8 reverse stock split of the Company’s common stock effected on July 19, 2012 (as described in more detail in Note A).

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

You should read the following discussion and analysis in conjunction with our consolidated financial statements and notes in Item 1 of this report and with our audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

This report contains or incorporates by reference forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts, included or incorporated in this report regarding our strategy, future operations, financial position, future revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Examples of forward-looking statements include statements concerning our expected financial results; the competitive nature of the markets in which we compete; the demand for our products; our ability to introduce new products and technologies; our ability to effectively manage growth; and our ability to obtain sufficient capital to expand our business. We cannot guarantee that we actually will achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. There are a number of important factors that could cause our actual results to differ materially from those indicated by these forward-looking statements. These important factors include the factors set forth in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011 and in Part II, Item 1A of our Quarterly Reports, including this Quarterly Report, which identify certain risks and uncertainties that may have an impact on our future earnings and the direction of our Company.

These risks include, among others, the following: our history of operating losses; our cash and liquidity position which has been reduced below the level that our primary lender will require to be in place as of September 15, 2012 and we are likely to need to raise additional capital or obtain a waiver from such lender to avoid being in default under the agreements with such lender; our ability to ~~maintain~~regain compliance with Nasdaq Marketplace Rules for continued listing on Nasdaq, as we are currently not in compliance and subject to delisting; the demand for our products; the availability of third-party financing arrangements for our customers; our ability to maintain our technological expertise in design and manufacturing processes; our ability to protect our intellectual property; our ability to attract and retain highly qualified personnel; our success against our competitors; our dependence on third-party suppliers; our exposure to losses from fixed price engineering contracts; our ability to manage our growth; product liability claims; environmental laws and regulations; demand for alternative energy solutions; the risks associated with international operations; the credit risks associated with some of our customers; our ability to meet our debt obligations; and the availability of sufficient funds for our corporate needs.

Forward-looking statements contained in this Quarterly Report speak only as of the date of this report. Subsequent events or circumstances occurring after such date may render these statements incomplete or out of date. We undertake no obligation and expressly disclaim any duty to update such statements.

Overview

Satcon Technology Corporation (“Satcon” or “Company”) is a leading clean energy technology provider of utility-grade power conversion solutions for the renewable energy market. We design and deliver advanced power conversion solutions that enable large-scale producers of renewable energy to convert clean energy into grid-connected, efficient and reliable electrical power.

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Our power conversion solutions boost total system power production through systems intelligence, advanced command and control capabilities, industrial-grade engineering and total lifecycle performance optimization. Our power conversion solutions feature the widest range of power ratings in the industry. We also offer system design services and solutions for management, monitoring, and performance measurement to maximize capital investment and improve overall quality and performance over the entire lifespan of an installation.

Reverse Stock Split

Effective July 19, 2012, we effected a 1-for-8 reverse stock split of our common stock, reducing the number of outstanding shares of common stock from approximately 144.2 million to approximately 18.0 million, and proportionately reduced the number of authorized shares of our common stock to 37.5 million. This Form 10-Q, including the accompanying consolidated financial statements and all related notes, reflect the results of the reverse stock split as if effected as of the first date presented.

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Critical Accounting Policies and Significant Judgments and Estimates

Our discussion and analysis of our financial condition and results of our operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported revenue and expenses during the reporting periods. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, receivable reserves, inventory reserves, contract losses, warranty reserves, long lived assets, and income taxes. Management bases its estimates on historical experience and on various other factors that are 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. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting estimates were discussed with our Audit Committee.

The significant accounting policies that management believes are most critical to aid in fully understanding and evaluating our reported financial results include the following:

Revenue Recognition

We recognize revenue from product sales when there is persuasive evidence of an arrangement, the fee is fixed or determinable, delivery of the product to the customer has occurred and we have determined that collection of the fee is probable. Title to the product passes upon shipment of the product, as the products are typically shipped FOB shipping point, except for certain foreign shipments. If the product requires installation to be performed by us, all revenue related to the product is deferred and recognized upon the completion of the installation. If the product requires specific customer acceptance, revenue is deferred until customer acceptance occurs or the acceptance provisions lapse, unless we can objectively and reliably demonstrate that the criteria specified in the acceptance provisions are satisfied. When appropriate, we provide for a warranty reserve at the time the product revenue is recognized. If a contract involves the provision of multiple elements and the elements qualify for separation, total estimated contract revenue is allocated to each element based on the relative selling price of each element provided. The amount of revenue allocated to each element is limited to the amount that is not contingent upon the delivery of another element in the future. Revenue is recognized on each element as described above.

Cost of product revenue includes material, labor and overhead.

Deferred revenue consists of payments received from customers in advance of services performed, product shipped or installation completed. When an item is deferred for revenue recognition purposes, the deferred revenue is recorded as a liability and the deferred costs are recorded as a component of inventory in our consolidated balance sheets. Deferred revenue also consists of cash received for extended product warranties.

Contract Losses

When the current estimates of total contract revenue for a customer order indicates a loss, a provision for the entire loss on the contract is recorded. At ~~March~~June 3130, 2012 and December 31, 2011, there were no amounts accrued related to contract losses. The excess costs over projected revenues are recorded as a component of both cost of sales and research and development expense.

Accounts Receivable

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Inventory

We value our inventory at the lower of actual cost to purchase and/or manufacture the inventory or the current estimated market value of the inventory, and costs are determined based on the first-in, first-out method of accounting and include material, labor and manufacturing overhead costs. We periodically review inventory quantities on hand and record a provision for excess and/or obsolete inventory within cost of product revenue based primarily on our historical usage, as well as based on estimated forecast of product demand. A significant decrease in demand for our products could result in a short-term increase in the cost of inventory purchases and an increase of excess inventory quantities on hand. In addition, our industry is characterized by rapid technological change, frequent new product development, and rapid product obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand. Therefore, although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and our reported operating results.

Warranty

We offer warranty coverage for our products for period of 5 years after shipment. We estimate the anticipated costs of repairing products under warranty based on the historical or expected cost of the repairs and expected failure rates. The assumptions used to estimate warranty accruals are re-evaluated quarterly, at a minimum, in light of actual experience and, when appropriate, the accruals or the accrual percentage is adjusted based on specific estimates of project repair costs and quantity of product returns. Our determination of the appropriate level of warranty accrual is based on estimates of the percentage of units affected and the repair costs. Estimated warranty costs are recorded at the time of sale of the related product, and are recorded within cost of sales in the consolidated statements of operations.

Fair Value of Financial Instruments

Our financial instruments consist of cash equivalents, accounts receivable, unbilled contract costs and fees, warrants to purchase shares of common stock, accounts payable, ~~subordinated~~note ~~notes~~ payable, subordinated convertible ~~notes~~note and the line of credit. The estimated fair values have been determined through information obtained from market sources and management estimates. Our warrant liability and subordinated convertible notes are recorded at fair value. The carrying value of the ~~subordinated~~note ~~notes~~ payable, as of ~~March 31~~June 30, 2012, is not materially different from the fair value of the ~~notes~~note. The estimated fair values of the remaining financial instruments approximate their carrying values at ~~March 31~~June 30, 2012 and December 31, 2011. The amounts outstanding under our ~~Line~~line of credit and ~~subordinated~~note ~~notes~~ payable are not measured at fair value in our accompanying consolidated balance sheets. We determine the fair value of the amount outstanding under our line of credit and ~~subordinate~~ notes payable using a discounted ~~cashlow~~cash flow approach based on current market interest rates for debt issues with similar remaining years to maturity. Our line of credit and ~~subordinated~~note ~~notes~~ payable are valued using level 2 inputs. There were no assets measured at fair value on a recurring basis as of ~~March 31~~June 30, 2012.

Warrant Liabilities

We determined the fair values of the investor warrants and placement agent warrants using valuation models we consider to be appropriate. Our stock price has the most significant influence on the fair value of the warrants. An increase in our common stock price would cause the fair values of warrants to increase, because the exercise prices of such instruments are fixed at $114.~~815~~52 per share, and result in a charge to our statement of operations. A decrease in our stock price would likewise cause the fair value of the warrants to decrease and result in a credit to our statement of operations.

Income Taxes

The preparation of our consolidated financial statements requires us to estimate our income taxes in each of the jurisdictions in which we operate, including those outside the United States, which may be subject to certain risks that ordinarily would not be expected in the United States. The income tax accounting process involves estimating our actual current exposure together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in the recognition of deferred tax assets and liabilities. We must then record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized.

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against deferred tax assets. We have recorded a full valuation allowance against our deferred tax assets of approximately $86.4 million as of December 31, 2011, due to uncertainties related to our ability to utilize these assets. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these ~~estimates in future periods we may need to adjust our valuation allowance which could materially impact our financial position and results of operations.~~

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~~allowance~~estimates ~~against~~in ~~net~~future ~~deferred~~periods ~~tax~~we ~~assets~~may ~~if,~~need ~~based~~to ~~upon~~adjust ~~the~~our ~~available~~valuation ~~evidence,~~allowance itwhich iscould ~~more~~materially ~~likely~~impact ~~than~~our ~~not~~financial ~~that~~position ~~some~~and orresults ~~all~~ of ~~the deferred tax assets will not be realized~~operations.

We account for income taxes utilizing the asset and liability method for accounting and reporting for income taxes. Under this method, deferred tax assets and deferred tax liabilities are recognized based on temporary differences between the financial reporting and income tax basis of assets and liabilities using statutory rates. In addition, we are required to establish a valuation allowance against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

The tax years 1996 through 2011 remain open to examination by major taxing jurisdictions to which we are subject, which are primarily in the United States, as carry forward attributes generated in years past may still be adjusted upon examination by the Internal Revenue Service or state tax authorities if they are or will be used in a future period. We are currently not under examination by the Internal Revenue Service or any other jurisdiction for any tax years. We did not recognize any interest and penalties associated with unrecognized tax benefits in the accompanying financial statements. We would record any such interest and penalties as a component of interest expense. We do not expect any material changes to the unrecognized benefits within 12 months of the reporting date.

Subordinated Convertible Note

The subordinated convertible notes include features that qualify as embedded derivatives, such as (i) the holder’s right to convert, (ii) our option to force conversion into shares of common stock of the Company, and (iii) the holder’s prepayment options. We have elected to measure the subordinated convertible notes and the embedded derivatives in their entirety at fair value with changes in fair value recognized as either a gain or loss recorded in the statement of operations. This election was made by us after concluding that several of the derivatives cannot be reliably measured nor reliably associated with another derivative that can be reliably measured and determining that the aggregate fair value of the notes to be more meaningful in the context of our financial statements than if separate fair values were assigned to each of the multiple embedded instruments contained such notes.

Recent Accounting Pronouncements

See Note Q of our Notes to Consolidated Financial Statements for information regarding recently issued accounting pronouncements.

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Results of Operations

Three Months Ended March 31, 2012 (“2012”) Compared to Three Months Ended March 31, 2011 (“2011”)

Revenue. Total revenue for the 2012 decreased approximately $37.7 million, or 61%, from $62 million in the 2011 to $24.3 million in the 2012.

	Three Months Ended
	March 31,		March 31,
(Amounts in Millions)	2012		2011		Change $		% Change
Product Revenue
Renewable Energy Solutions	$	24.3	$	62.0	(37.7	)	(61	)%
Total Revenue	$	24.3	$	62.0	(37.7	)	(61	)%

Renewable Energy Solutions revenue decreased by approximately $37.7 million, or 61%, from approximately $62.0 million in 2011 to approximately $24.3 million in the 2012. The decrease in product revenue is a due to a reduction in sales in Europe as a result of the deterioration in the European market.

Gross Margin. Gross margin decreased from 24% in 2011 to 0.5% in 2012. The decline in gross margin was primarily due to the continued reduction in market pricing, lower overall revenue, the mix of products sold as compared to 2011. This decrease is partially offset by our continued material cost reduction programs, and the continued transfer of a significant portion of our inverter manufacturing to our contract manufacturers in the United States and China.

Research and development expenses. We expended approximately $3.2 million on research and development in 2012 compared with $6.1 million spent in 2011. The decrease in spending during 2012 was driven by a planned decrease in costs associated with the reductions in workforce taken in 2011. We also saw a reduction in product development and certification costs comparatively, as in the first quarter of 2011 we ramped up for certification of new products and continued new product development for new products, features and customer solutions.

Selling, general and administrative expenses. Selling, general and administrative expenses decreased by approximately $0.2 million, or 2%, from $10.2 million in 2011 to $10.0 million in 2012. Approximately $0.4 million of the decrease is directly attributable to a reduction in compensation and travel costs related to the European sales office. As a result of the Company’s efforts to keep costs in line with business needs, marketing and trade shows spend decreased quarter over quarter by approximately $0.5 million and travel spend decreased $0.3 million. These decreases were offset by an increase of $1.0 million in our provision for bad debt.

Restructuring costs. In 2012, we reviewed the current business needs and as a result reduced the workforce by five employees and recorded restructuring expense of $323,000 related to compensation expenses. In addition, we reviewed the restructuring charge taken in 2011 as compared to the future payments and determined that a reduction of the accrual was needed for approximately $31,000. This reduction offset the expense provided for in the first quarter of 2012.

Change in fair value of convertible note and warrants. The change in fair value of the warrants for 2012 was a credit of approximately $0.1 million. This credit related to the change in valuation of our Warrant As and Warrant Cs in 2012. The change in fair value of the warrants for 2011 was a credit of approximately $0.1 million. This credit related to the change in valuation of our Warrant As and Warrant Cs and placement agent warrants in 2010. The change in fair value of our convertible note was approximately $0.4 million for the period ended March 3,2012.

Other income (expense). Other income was approximately $0.1 million for 2012 compared to other expense of approximately $0.2 million for 2011. Other income for 2012 consists primarily of approximately $53,000 of foreign currency translation gains and other fees relating to fees for past due payments from customers. Other expense for 2011 consists primarily of $28,000 of foreign currency translation losses, $196,000 in non-income tax payments, fees relating to consulting services for the valuation of our warrant liability as well as other expenses not related to ongoing operations offset by other income not related to operations.

Interest expense. Interest expense increased in 2012 to $0.9 million as compared to $0.6 million for 2011. Interest expense for 2012 includes approximately $0.2 million related to our subordinated debt, approximately $0.4 million related to our Subordinated Convertible Note and approximately $0.2 million related to our line of credit. Interest expense for 2011 includes approximately $0.5 million related to our subordinated debt and $0.1 million related to our line of credit.

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~~Deferred~~Results ~~Revenue. Deferred revenue was approximately $30.7 million at March 31, 2012 as compared to $31.5 million at December 31, 2011, a decrease~~ of approximately $0.8 million. We record deferred revenue (i) when a customer is invoiced or pays in advance or (ii) when provisions for revenue recognition on items shipped have not been achieved or the items have not yet been received by the customer due to shipping terms such as FOB destination. When an item is deferred for revenue recognition purposes, the deferred revenue is recorded as a liability and the deferred costs are recorded as a component of inventory in our consolidated balance sheets. Deferred revenue also consists of cash received for extended product warranties. Currently deferred revenue is composed of approximately $3.1 million related to pre-payments on orders currently being manufactured and $27.5 million on deferred revenue related to extended warranties sold to customers that purchased our products.Operations

Three Months Ended June 30, 2012 (“2012”) Compared to Three Months Ended June 30, 2011 (“2011”)

Revenue. Total revenue for the 2012 decreased approximately $19.5 million, or 43%, from $45.5 million in 2011 to $26.0 million in 2012.

	Three Months Ended
	June 30,		June 30,
(Amounts in Millions)	2012		2011		Change $		% Change
Product Revenue
Renewable Energy Solutions	$	23.7	$	45.5	(21.8	)	(47.9	)%
Total Revenue	$	23.7	$	45.5	(21.8	)	(47.9	)%

Renewable Energy Solutions revenue decreased by approximately $21.8million, or 47.9%, from approximately $45.5 million in 2011 to approximately $23.7 million in the 2012. The decrease in product revenue is a due to a reduction in sales in Europe as a result of the continued deterioration in the European market, offset in part by increases in product revenue in the China market.

Gross Margin. Gross margin increased from 8% in 2011 to 19.9% in 2012. The increase in gross margin was primarily due to continued material cost reduction programs and the successful shutdown of our manufacturing facility in Canada. The increase in gross margins was offset by slight reduction in market pricing, and lower overall revenue as compared to 2011. In addition, during the quarter ended June 30, 2012, we sold approximately $2.0 million of products to our customers for which the cost of these products had been either fully or partially reserved for in 2011. As a result, had our product costs not been partially or fully reserved for our gross margin would have been approximately 12.7% for the three month period ended June 30, 2012.

Research and development expenses. We expended approximately $2.6 million on research and development in 2012 compared with $9.7 million spent in 2011. The decrease in spending during 2012 was driven by a planned decrease in costs associated with the reductions in workforce taken in 2011 and 2012. We also saw a reduction in product development and certification costs comparatively, as in the first and second quarters of 2011 we ramped up for certification of new products and continued new product development for new products, features and customer solutions.

Selling, general and administrative expenses. Selling, general and administrative expenses decreased by approximately $4.9 million, or 37.8% from $12.9 million in 2011 to $8.0 million in 2012. Approximately $1.1 million of the decrease is directly attributable to a reduction in compensation and travel costs related to the European sales office. In connection with the restructuring efforts that began in 2011, compensation costs associated with our North American sales group were reduced by $0.9 million and as a result of our efforts to keep costs in line with business needs, marketing and trade shows spending decreased quarter over quarter by approximately $0.3 million and travel spending decreased approximately $0.5 million. The decrease is also attributable to improved collection efforts resulted in a lower provision for bad debt of $0.4 million and vesting of employee stock options which resulted in lower stock-based compensation of $0.5 million.

Restructuring costs. During the quarter ending June 30, 2012, we reviewed the current business model and as a result reduced our workforce by thirteen employees and recorded restructuring expense of approximately $582,000 related to compensation expenses and the facilities closure in Canada. In 2011, we eliminated certain positions across the organization in accordance with a plan of reorganization approved by the senior management. As a result we recorded approximately $1.1 million in payroll and related costs for 2011. As of June 30, 2012, approximately $0.9 million of the 2012 restructuring remains outstanding to be paid. None of the terminated employees were required to provide services subsequent to their receiving notification of termination.

Change in fair value of convertible note and warrants. The change in fair value of the convertible note and warrants for 2012 was a credit of approximately $1.7 million. This credit related to the change in valuation of our Warrant As and Warrant Cs in 2012 and approximately $1.6 million related to the change in fair value of our Convertible Note. The change in fair value of the warrants for 2011 was a credit of approximately $1.0 million consisting primarily of a credit related to the change in valuation of convertible notes and our Warrant As, Warrant Cs and placement agent warrants of $1.4 million and a charge of $0.4 million related to our convertible note.

Loss on extinguishment of debt. Loss on extinguishment of debt was approximately $1.1 million. The loss was the result of a modification to the terms of the Subordinated Convertible Notes on April 20, 2012. (see Note I-Commitments and Contingencies).

Other income (expense). Other income was approximately $0.2 million for 2012 compared to other expense of approximately $0.3 million for 2011. Other income for 2012 consists primarily of approximately $0.2 of foreign currency translation losses and other fees relating to fees for past due payments from customers. Other expense for 2011 consists primarily of $0.2 million of foreign currency translation losses, as well as other expenses not related to ongoing operations offset by other income not related to operations.

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Interest expense. Interest expense decreased in 2012 to $0.6 million as compared to $2.0 million for 2011. Interest expense for 2012 includes approximately $0.2 million related to our subordinated debt, approximately $0.1 million related to our Convertible Note and approximately $0.3 million related to our line of credit. Interest expense for 2011 includes approximately $1.1 million in transaction costs related to our Convertible Note, $0.5 million related to our subordinated debt and $0.4 million related to our line of credit.

Deferred Revenue. Deferred revenue was approximately $35.7 million at June 30, 2012 as compared to $31.5 million at December 31, 2011, an increase of approximately $4.2 million. We record deferred revenue (i) when a customer is invoiced or pays in advance or (ii) when provisions for revenue recognition on items shipped have not been achieved or the items have not yet been received by the customer due to shipping terms such as FOB destination. When an item is deferred for revenue recognition purposes, the deferred revenue is recorded as a liability and the deferred costs are recorded as a component of inventory in our consolidated balance sheets. Deferred revenue also consists of cash received for extended product warranties. Currently deferred revenue is composed of approximately $5.4 million related to pre-payments on orders currently being manufactured and $30.4 million on deferred revenue related to extended warranties sold to customers that purchased our products.

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Six Months Ended June 30, 2012 (“2012”) Compared to Six Months Ended June 30, 2011 (“2011”)

Revenue. Total revenue for 2012 was $48.0 million, a decrease of approximately $59.5 million, or 55.3%, from $107.5 million in 2011.

	Six Months Ended
	June 30,		June 30,
(Amounts in Millions)	2012		2011		$ Change			% Change
Product Revenue
Renewable Energy Solutions	$	48.0	$	107.5	$	(59.5	)	(55.3	)%
Total Product Revenue	$	48.0	$	107.5	$	(59.5	)	(55.3	)%

Renewable Energy Solutions revenue decreased by approximately $59.5 million, or 55.3%, from approximately $107.5 million in 2011 to approximately $48.0 million in 2012. The decrease in product revenue is a due to a reduction in sales in North America of approximately $42.0.0 million, approximately $9.0 million in China, and to a lesser extent, $4.9 million in Europe as a result of the continued deterioration in the European market.

Gross Margin. Gross margin declined from 17.2% in 2011 to 10.2% in 2012. The decline in gross margin is directly attributable to the lower revenue for the period, offset by cost saving initiatives in the component cost of our products and the closure of our manufacturing facility in Canada. In addition, during the six months ended June 30, 2012, we sold approximately $2.8 million of products to our customers for which the cost of these products had been either fully or partially reserved for in 2011. As a result, had our product costs not been partially or fully reserved for our gross margin would have been approximately 4.6% for the six month period ended June 30, 2012.

Research and development expenses. We expended approximately $5.8 million on research and development in 2012 compared with $15.9 million spent in 2011. The decrease in spending during 2012 was largely attributable to lower spending on product certifications and reductions in staffing levels as compared to that of 2011.

Selling, general and administrative expenses. Selling, general and administrative expenses decreased by approximately $5.2 million, or 22.6%, from $23.1 million in 2011 to $18.0 million in 2012. Approximately $1.7 million of the decrease is directly attributable to a reduction in compensation and travel costs related to the European sales office. In connection with the restructuring efforts that began in 2011, compensation costs associated with our North American sales group were reduced by $1.3 million and as a result of our efforts to keep costs in line with business needs, marketing and trade shows spending decreased quarter over quarter by approximately $0.4 million and travel spending decreased approximately $0.8 million. The decrease is also attributable to the vesting of employee stock options which resulted in lower stock-based compensation of $0.5 million.

Restructuring costs. In 2012, we reviewed the current business needs and as a result reduced the workforce by eighteen employees and recorded restructuring expense of $0.9 million related to compensation expenses and the facilities closure in Canada. In 2011, we eliminated certain positions across the organization in accordance with a plan of reorganization approved by the senior management. As a result we recorded approximately $1.1 million in payroll and related costs. None of the terminated employees were required to provide services subsequent to their receiving notification of termination. As of June 30, 2012 $0.9 remained to be paid to the terminated employees.

Change in fair value of convertible note and warrants. The change in fair value of our convertible note was a credit of approximately $2.1 million for the six month period ended June 30, 2012. The change in fair value of the warrants for 2012 was a credit of approximately $0.1 million. This credit related to the change in valuation of our Warrant As and Warrant Cs in 2012. The change in fair value of the convertible note and warrants for 2011 was a credit of approximately $1.1 million. The change in fair value of the convertible note and warrants consists primarily of a credit related to the change in valuation of our Warrant As, Warrant Cs and placement agent warrants in of $1.5 million and a charge of $0.4 million related to our Convertible Note.

Loss on extinguishment of debt. Loss on extinguishment of debt was approximately $1.1 million. The loss was the result of a modification to the terms of the convertible note on April 20, 2012. (see Note I-Commitments and Contingencies).

Other Income (expense). Other expense was approximately $0.1 million for 2012 compared to other income of approximately $0.5 million for 2011. Other income for 2012 consists primarily of approximately $0.1 of foreign currency translation losses and other fees relating to fees for past due payments from customers. Other expense for 2011 consists primarily of $0.2 million of foreign currency translation as well as expenses not related to ongoing operations.

Interest expense. Interest expense decreased in 2012 to $1.5 million as compared to $2.6 million for 2011. Interest expense for 2012 includes approximately $0.7 million related to our subordinated debt, approximately $0.3 million related to our Convertible

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Note and approximately $0.4 million related to our line of credit. Interest expense for 2011 includes approximately $0.5 million related to our subordinated debt and $0.1 million related to our line of credit. Interest expense for 2011 includes approximately $1.1 million in transaction costs related to our Convertible Note, $0.5 million related to our line of credit during the period, approximately $1.0 million of interest and amortization of the deferred financing costs related to our subordinated debt, and to a lesser extent fees for professional services for the valuation of our warrant instruments as well as other expenses not related to ongoing operations.

Liquidity and Capital Resources

As of ~~March 31~~June 30, 2012, we had approximately $153.9 0 million of cash.

Based upon our current working capital position, current operating plans and expected business conditions, we believe that our ~~current~~business ~~cash~~will ~~and~~generate ~~our~~sufficient ~~asset~~cash ~~based~~to ~~financing~~enable ~~options~~us ~~will be adequate~~ to fund ~~our~~ operations through ~~March 31~~at least June 30, 2013. ~~Beyond~~As ~~2012,~~discussed wein ~~expect~~Note toI, ~~fund~~ our ~~working~~lending ~~capital~~arrangement ~~needs~~with ~~and~~Silicon ~~other~~Valley ~~commitments~~Bank ~~primarily~~requires ~~through~~us ~~our~~to ~~operating~~have ~~cash~~$15.0 ~~flow,~~million ~~which~~in wecash ~~expect~~plus toavailability ~~improve~~under as the ~~impact~~line of ~~our~~credit ~~December 2011~~on ~~restructuring~~September ~~take effect~~15, ~~significantly~~2012. ~~lowering~~Absent ~~our~~a ~~operating~~cash ~~costs~~infusion from ~~those~~a incapital ~~prior~~raising ~~years~~transaction, ~~the~~we ~~continued~~do ~~decrease~~not inanticipate ~~our~~that ~~product~~we ~~costs~~will ~~and~~be ~~the~~able ~~continued~~to ~~growth~~meet ofthat ~~our~~requirement ~~unit~~and ~~volumes.~~would Weneed ~~also~~to ~~expect~~seek toa ~~use~~waiver ~~our~~from ~~credit~~Silicon ~~facility~~Valley toBank ~~fund~~in aorder ~~portion~~not ofto ~~our~~be ~~capital~~in ~~needs~~default ~~and~~under ~~other~~our ~~commitments~~line of credit.

We have retained an investment banker to advise us in exploring strategic options for the Company. Our funding plans for our working capital needs and other commitments may be adversely impacted if we fail to realize our underlying assumed levels of revenues and expenses, or if we fail to remain in compliance with the covenants of our bank line (minimum liquidity, defined as cash on hand and availability under the line in excess of $15.0 million aton ~~any~~and ~~time~~after September 15, 2012), subordinated debt or subordinated convertible note. If any of these events were to occur, we may need to raise additional funds in order to sustain operations by selling equity or taking other actions to conserve our cash position, which could include selling of certain assets, delaying capital expenditures and incurring additional indebtedness, subject to the restrictions in the credit facility with Silicon Valley Bank, our subordinated debt and the subordinated convertible note. Such actions would likely require the consent of Silicon Valley Bank, the lender of our subordinated debt and/or the holder of our subordinated convertible note, and there can be no assurance that such consents would be given. Furthermore, there can be no assurance that we will be able to raise such funds if they are required.

If additional funds are raised in the future through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders will be reduced and our stockholders will experience additional dilution. The terms of additional funding may also limit our operating and financial flexibility. There can be no assurance that additional financing of any kind will be available to us on terms acceptable to us, or at all. Failure to obtain future funding when needed or on acceptable terms would materially, adversely affect our results of operations.

We have incurred significant costs to develop our technologies and products. These costs have exceeded total revenue. As a result, we have incurred losses in each of the past five years. As of ~~March 31~~June 30, 2012, we had an accumulated deficit of approximately $~~341~~347.02 million. Since inception, we have financed our operations and met our capital expenditure requirements primarily through the sale of private equity securities and convertible debt, public security offerings, borrowings under our lines of credit and capital equipment leases.

As of ~~March 31~~June 30, 2012, our cash and cash equivalents were $153.90 million; this represents a decrease in our cash and cash equivalents of approximately $518.76 million from the $21.6 million on hand at December 31, 2011. Cash provided by operating activities from continuing operations for the ~~three~~six ~~months~~month period ended ~~March 31~~June 30, 2012 was $93.52 million as compared to a use of cash of $1133.7 0 million for the ~~three~~six ~~months~~month period ended ~~March 31~~June 30, 2011. Cash provided by operating activities from continuing operations during the ~~three~~six ~~months~~month period ended ~~March 31~~June 30, 2012 was primarily attributable to improved cash collections which reduced accounts receivable by $1214.0 million, payments received on our note receivable of $4.0 million and a reduction of inventory of $56.51 million, offset by a reduction in our provision for excess and obsolete inventory by $7.3 million and accounts payable $6.8 million and our net loss of $1320.72 million.

Cash used in investing activities during the ~~three~~six ~~months~~month period ended ~~March 31~~June 30, 2012 was $~~30,522~~0.7 million as compared to cash used in investing activities of $15.87 million for the ~~three~~six ~~months~~month period ended ~~March 31~~June 30, 2011. Cash used in investing activities for 2012 and 2011 was for capital expenditures.

Cash used byin financing activities for the ~~three~~six ~~months~~month period ended ~~March 31~~June 30, 2012 was approximately $1521.1 million as compared to cash provided by financing activities of $1737.10 million for the ~~three~~six ~~months~~month period ended ~~March 31~~June 30, 2011. The $1521.01 million of net cash used byin financing activities was attributable to the $1419.23 million of payments towards the line of credit, $0.2 million from the purchase of stock through the employee Stock Purchase Plan, and $12.0 million of payments against the note payable. Net cash provided by financing activities during 2011 primarily related to the proceeds of our borrowings under our line of credit of $1520.0 million, approximately $01.62 million from the exercise of employee stock options and from the Employee Stock Purchase Plan and approximately $114.59 million related to the ~~exercise~~proceeds from the issuance of ~~warrants~~convertible note.

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Payments Due Under Contractual Obligations

The following table summarizes the payments due under our contractual obligations at ~~March 31~~June 30, 2012, and the effect such obligations are expected to have on liquidity and cash flow in future periods:

Calendar Years Ending December 31,	Principal and Interest Payments on Subordinated Note Payable		~~Operating~~Net ~~Leases~~Lease Commitments		Principal and Interest Payments on Subordinated Convertible Note		Non-Cancellable Purchase Orders		Total
2012	$	42,~~451~~592,~~693~~239	$	2953,~~004,758~~472	$	76,~~135~~280,~~885~~476	$	1710,~~450~~135,~~000~~829	$	3119,~~042~~962,~~336~~016
2013	5,184,478		21,~~237~~876,~~841~~476		~~2,018,767~~—		—		97,~~441~~060,~~086~~954
2014	432,040		2,~~234~~113,~~471~~984		—		—		2,~~666~~546,~~510~~024
2015	—		1,680,105		—		—		1,680,105
2016	—		1,526,255		—		—		1,526,255
Thereafter	—		890,315		—		—		890,315
Total	$	108,~~068~~208,~~211~~757	$	109,~~573~~040,~~745~~607	$	96,~~154~~280,~~652~~476	$	1710,~~450~~135,~~000~~829	$	4733,~~246~~665,~~607~~669

We lease furniture, equipment and office space under non-cancellable operating leases. In addition, in June 2010 we entered into a $12.0 million subordinated note payable and in June 2011 we entered into a $16.0 million subordinated convertible note agreement. The future minimum principal and interest payments under the subordinated note payable, the subordinated convertible note and the future minimum rental payments, net of contractual sublease income of $0.7 million as of ~~March 31~~June 30, 2012 are included in the table above. Our non-cancellable purchase orders are for the purchase of materials form several of our key vendors.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The following discussion about our market risk disclosures involves forward-looking statements. Actual results could differ materially from those discussed in the forward-looking statements. See “Forward-Looking Statements” above in Management’s Discussion and Analysis of Financial Condition and Results of Operations. We are exposed to market risk related to changes in interest rates and foreign currency exchange rates. We do not use derivative financial instruments for speculative or trading purposes.

Interest Rate Risk

We are exposed to market risk from changes in interest rates primarily through our investing and financing activities. In addition, our ability to fund working capital requirements may be impacted if we are not able to obtain appropriate financing at acceptable rates.

To manage interest rage exposure our strategy is to invest in short-term, highly liquid investments. Our investment policy also requires investment in approved instruments with an initial maximum allowable maturity of twelve months. At ~~March 31~~June 30, 2012, we had no short-term investments.

At ~~March 31~~June 30, 2012 we had a revolving line-of-credit available to us of up to $35.0 million, of which $2015.54 million was outstanding. Our revolving line-of-credit bears an interest rate of the Bank’s prime rate plus 0.5% per annum, which resulted in a rate of 4.5% at ~~March 31~~June 30, 2012.

The effect of interest rate fluctuations on outstanding borrowings as of ~~March 31~~June 30, 2012 over the next twelve months is quantified and summarized as follows:

	Interest Expense
	Increase
Interest rates increase by 100 basis points	$	350,000
Interest rates increase by 200 basis points	$	700,000

Foreign Currency Risk

We face exposure to movements in foreign currency exchange rates whenever we, or any of our subsidiaries, enter into transactions with third parties that are denominated in currencies other than ours, or its, functional currency. Intercompany transactions between entities that use different functional currencies also expose us to foreign currency risk. During the ~~period~~three and six month periods ended June 30, 2012, the net impact of foreign currency changes on transactions was a loss of $0.2 million and $0.1

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~~March 31~~million, ~~2012, the net impact of foreign currency changes on transactions was a loss of $53,130~~respectively. We have not historically used a significant amount of derivative financial instruments or other financial instruments to hedge such economic exposures.

On occasion, we use foreign currency contracts to manage our exposure to changes in foreign currency exchange rates associated with our foreign currency denominated receivables. We primarily hedge foreign currency exposure to the Euro. We do not engage in trading, market making or speculative activities in the derivatives markets. The foreign currency contracts utilized by us do not qualify for hedge accounting treatment, and as a result, any fluctuations in the value of these foreign currency contracts are recognized in other loss (income) in our consolidated statements of operations as incurred. The fluctuations in the value of these foreign currency contracts do, however, largely offset the impact of changes in the value of the underlying risk that they are intended to economically hedge.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our chief executive officer and interim chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of ~~March~~June 3130, 2012. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of ~~March~~June 3130, 2012, our chief executive officer and our chief financial officer concluded that, as of such date, our disclosure controls and procedures were not effective due to the material weaknesses in our internal control over financial reporting as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011 and continue to exist as of ~~March~~June 3130, 2012.

As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on March 15, 2012, we identified two material weaknesses in our internal control over financial reporting. We intend to take appropriate and reasonable steps to make necessary improvements to our internal control over financial reporting. We expect that our remediation efforts, including design, implementation and testing will continue throughout fiscal year 2012, although the material weakness will not be considered remediated until our controls are operational for a period of time, tested, and management concludes that these controls are operating effectively.

Changes in Internal Controls. No changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarterly period ended ~~March~~June 3130, 2012 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

Except as set forth below, there have been no material changes or additions to the legal proceedings disclosed in Part I, Item 3. “Legal Proceedings,” of our Annual Report on Form 10-K for the fiscal year ending December 31, 2011.

SynQor, Inc. On August 23, 2011, SynQor, Inc. instituted suit against the Company seeking approximately $5,000,000 in damages arising out of the Company’s alleged failure to pay SynQor for products supplied to the Company and for allegedly inducing SynQor to purchase raw materials on the Company’s behalf. Subsequent to the filing of the suit the Company has paid SynQor for all open invoices for goods that SynQor has supplied to the Company. The Company does not believe that the Company has any liability to SynQor for inducing them to buy raw materials on the Company’s behalf and the Company intends to defend this matter vigorously. SynQor and the Company agreed to submit this matter to non-binding mediation and a mediation session which took place in March 2012. Following the mediation session, the Company and SynQor have continued to discuss the possibility of settling the case. The parties have ~~tentatively~~settled ~~proposed, subject to~~ the ~~negotiation of formal settlement documents, settling the~~ matter for a payment by the Company of $0.8 million. The Company initially expensed $0.5 million during the year ended December 31, 2011. For the ~~quarter~~six month period ended ~~March~~June 3130, 2012, the Company ~~has~~ expensed the additional $0.3 million. The settlement is to be paid out in 12 monthly installments beginning in July 2012.

Item 1A. Risk Factors.

~~There~~Except as set forth below, there have been no material changes from the risk factors previously disclosed in Part I, Item 1A. “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ending December 31, 2011.

We are not in compliance with Nasdaq’s continued listing requirements. Accordingly, our stock could be delisted from the Nasdaq Stock Market at any time. If delisting occurs, it would adversely affect the market liquidity of our common stock and harm our business.

Our common stock is currently traded on the Nasdaq Stock Market under the symbol “SATC.” Because we fail to meet the continued listing standards of the Nasdaq Stock Market, our common stock could be delisted from the Nasdaq Stock Market at any time.

On June 19, 2012, we received a delisting determination letter from the staff of the Nasdaq Stock Market due to our failure to regain compliance with the Nasdaq Capital Market’s minimum bid price requirement for continued listing, as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Rule”). In response to this delisting determination we (i) appealed the Nasdaq Staff’s determination and (ii) effected a 1-for-8 reverse stock split in an attempt to regain compliance with the Minimum Bid Price Rule.

On July 26, 2012, we presented our case to the Nasdaq hearing as to why we believe our common stock should continue to be listed on The Nasdaq Stock Market, notwithstanding the determination by the Nasdaq Staff that we currently fail to comply with the applicable bid price requirements in the Nasdaq Marketplace Rules. The hearing panel has not issued a written decision as yet and the Nasdaq Staff has advised us orally that the hearing panel will continue to monitor the price of our common stock for a period of 30 days from August 2, 2012 to determine whether we have regained compliance. Pending the decision of the hearing panel, the delisting of the Company’s common stock will be stayed, and the common stock will continue to trade on the Nasdaq Capital Market. The panel’s decision could result in the immediate suspension and delisting of our common stock from the Nasdaq Stock Market.

The delisting of our common stock from Nasdaq Capital Market would likely reduce the trading liquidity of common stock and make it more difficult to raise additional capital. Further, the delisting of our common stock from the Nasdaq Capital Market would violate a covenant under our convertible note potentially entitling the holder of such convertible note to substantial penalties (in cash or additional shares of our common stock) which we could not pay.

Our bank line of credit requires us to have $15.0 million in cash and unused availability on September 15, 2012 and we do not anticipate that we will be able to comply with this covenant absent a capital raising transaction or obtaining a waiver from our bank lender.

Our bank line of credit requires us to have $15.0 million in cash and unused availability on September 15, 2012. Based on our anticipated business, we do not expect to be able to meet that requirement absent a capital raising transaction. There can be no assurance that we will be able to complete a capital raising transaction on or before September 15, 2012. Therefore, unless we can obtain a waiver from our bank lender of this requirement, we may be in default under our bank line of credit on September 15, 2012

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which would entitle such lender to cease further lending and commence collection of their loans. In such circumstances, we would seek to obtain such a waiver, but there can be no assurance that the lender will be willing to grant it. If our bank lender were to cease lending to us or to commence collection of its loans we would be unable to operate our business in the ordinary course.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Not applicable.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

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Item 5. Other Information.

On June 28, 2012, the Company entered into a term sheet (the “Term Sheet”) with Silicon Valley Bank (the “Bank”) regarding proposed amendments to the Company’s loan agreement with Bank (the “Loan Agreement”). Although the Term Sheet is subject to the execution of formal documentation, which has been drafted and is currently being reviewed by the Company, the Company and the Bank have informally abided by the portions of the Term Sheet which (i) reduced the size of the credit facility from $35.0 million to $25.0 million; (ii) removed inventory from the borrowing base calculation; (iii) eliminated the minimum liquidity requirement until September 15, 2012, at which time the minimum liquidity requirement will return to $15.0 million and continue at that level through maturity; and (iv) with respect to the interest rate, tied the “applicable margin” to liquidity levels. Interest on outstanding indebtedness under the Loan Agreement accrues at an annual rate equal to (a) the higher of (i) the prime rate and (ii) the federal funds effective rate plus one-half of one percent (0.5%) plus (b) the applicable margin. If the Company’s liquidity is less than $10 million, the applicable margin is 4.0%; if the Company’s liquidity is less than $20 million (but not less than $10 million), the applicable margin is 2.0%; if the Company’s liquidity is less than $35 million (but not less than $20 million), the applicable margin is 1.0%; and if the Company’s liquidity is more than $35 million, the applicable margin is 0.5%. As of June 30, 2012, the Company’s liquidity was $6.8 million; accordingly, the applicable margin is currently 4%.

In connection with the amendments contemplated by the Term Sheet, the Company agreed to pay the Bank an accommodation fee of $200,000, with $100,000 payable at close and $100,000 payable upon the earlier of (i) default, (ii) December 15, 2012, (iii) the date on which the Company consummates a new equity or subordinated debt raise or (iv) any transaction that results in a change in control.

Prior to the execution of the Term Sheet, which eliminated the liquidity covenant until September 15, 2012 (as described above), in May 2012, the Company received a waiver from the Bank, temporarily reducing the liquidity covenant to $10.0 million from $15.0 million. The waiver expired on June 28, 2012.

Item 6. Exhibits.

The exhibits listed in the Exhibit Index immediately preceding the exhibits are filed as part of this Quarterly Report on Form 10-Q.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	SATCON TECHNOLOGY CORPORATION
Date: May 10, 2012	By:
Date: August 9, 2012	By:
		/s/ Aaron M. Gomolak
		Aaron M. Gomolak Chief Financial Officer and Treasurer

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EXHIBIT INDEX

Exhibit Number		Exhibit
10.1	**	~~Contract~~First ~~Manufacturing~~Amendment ~~Agreement~~to bythe ~~and between Perfect Galaxy International Limited and~~ Satcon Technology Corporation, ~~dated~~2010 ~~February~~Employee 6,Stock ~~2012.~~Purchase Plan
10.2		Second Amendment to the Satcon Technology Corporation 2010 Employee Stock Purchase Plan
10.3		Satcon Technology Corporation Amended and Restated 2005 Incentive Compensation Plan is incorporated by reference to Appendix III to the Company’s Definitive Proxy Statement on Schedule 14A filed May 22, 2012 (File No. 1-11512).
10.4		Term sheet between Satcon Technology Corporation and Silicon Valley Bank dated June 27, 2012.
31.1		Certification by Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification by Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	*	The following materials from Satcon Technology Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended ~~March~~June 3130, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of ~~March~~June 3130, 2012 and December 31, 2011; (ii) Consolidated Statements of Operations for the three and six months ended ~~March~~June 3130, 2012 and ~~March~~June 3130, 2011; (iii) Consolidated Statement of Changes in Stockholders’ Equity ~~and Comprehensive Loss~~ for the three and six months ended ~~March~~June 3130, 2012,; (iv) Consolidated Statements of Cash Flows for the three and six months ended ~~March~~June 3130, 2012 and ~~March~~June 3130, 2011; and (v) Notes to Interim Consolidated Financial Statements.

* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. As permitted by Rule 405(a)(2) of Regulation S-T, the Company will furnish the XBRL Interactive Data Files with detailed tagging as Exhibit 101 in an amendment to this report within 30 days of the filing of this report.

** Portions of this Exhibit have been omitted pursuant to a request for confidential treatment.53

Fair Value Measurements as of

Balance Sheet Location

June 30, 2011

Liability Derivatives:

Foreign currency hedge

Other current liabilities

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