SOLAR INTEGRATED REPORTS 2006 FINANCIAL RESULTS AND PROVIDES CORPORATE UPDATE

London, UK and Los Angeles, California, May 8, 2007 – Solar Integrated Technologies, Inc. (AIM:SIT.LN), a leading provider of building integrated photovoltaic (BIPV) roofing systems, announced today its financial results for the twelve months ended December 31, 2006 and highlights of recent corporate activities.  Unless otherwise noted, all amounts are reported in U.S. dollars.  This press release contains both GAAP and non-GAAP financial information.

2006 Financial Highlights

• On a non-GAAP basis, after adjusting for unabsorbed production and other costs:
• 2006 gross margin of 10.6%
• 2006 H2 gross margin of 12.7%, compared to 7.5% for 2006 H1
• 2006 H2 gross margin of 19.3%, excluding U.S. Financed Solar projects
• Net loss of $22.6 million (2005: $17.3 million)
• SG&A costs of $18.3 million, including non-recurring SG&A costs of $2.5 million and non-cash costs of $1.6 million
• Implemented cost reduction program expected to yield annualized overhead cost savings in excess of $2.5 million
• Closed placement of 33,333,333 common shares for aggregate gross proceeds of $19.5 million in December 2006
• Amended senior credit facility to provide for increased borrowing base

2006 Operational Highlights

• 49 solar projects completed, representing 4.2 MW of installed solar systems
• Celebrated landmark achievement of over 10 MW of installed solar systems since the Company’s inception, with over 110 reference sites and an impressive list of customers
• Signed a new multi-year supply and cooperation agreement with United Solar Ovonic
• Reduced inventory position to better align with sales and production requirements

2006 Organizational Highlights

• New board composition, including appointment of Brian E. Caffyn as non-executive Chairman and David R.W. Potter continuing as non-executive director
• Bruce M. Khouri, founder, continues as non-executive director and advisor to management
• Completed management team, including appointments of R. Randall MacEwen as President & CEO, John M. Palumbo as Chief Financial Officer, and Robert W. Campbell as Executive Vice President, Sales & Marketing
• Completed in-housing of installation work-force
• Rationalized employee headcount by 10%

2007 Outlook

• 2007 revenue guidance in the range of $60 million to $80 million
• 2007 full year consolidated gross margin guidance in excess of 15%
• Revenue and gross margin contribution heavily weighted in 2007 H2
• Signed preferred supply agreement with UPC Solar to pursue U.S. solar project development market

Commenting on the results, R. Randall MacEwen, President & CEO, said:

“With a cash liquidity crisis, 2006 was a difficult period for Solar Integrated.  While our financial results reflect this, we have made important and measured steps to improve the Company’s business fundamentals.  With the completion of our equity capital raise in December 2006, a growing order book of profitable business, a high organizational focus on gross margin, and disciplined management of our overhead costs and working capital, we are well positioned to improve our financial performance in 2007.”

“We have a product and service capability that is increasingly capturing the BIPV market’s attention.  We have developed a solid reputation in the market based on our building-integrated, ‘no compromise’ approach to our customer’s solar roofing requirements.  Our recent commercial wins confirm the market acceptance of our product and installation approach.”

The Company will host a conference call on Tuesday, May 8th, 2007 at 1:00 pm London time/8:00 am ET/5:00 am PT.  Investors and analysts can participate in the call by dialing +44.20.8974.7900 with access code 689300.

About Solar Integrated:
Solar Integrated Technologies, Inc. (SIT: AIM.LN) is a Los Angeles-based company that manufactures, designs and installs building integrated photovoltaic (BIPV) roofing systems for non-residential, low-slope rooftops.  We are a leader in the development of an innovative and proprietary BIPV roofing system that combines flexible thin-film solar modules with a single-ply roofing membrane for large-scale commercial and industrial applications.  Our BIPV roofing system enables our customers to transform a traditional rooftop into a value-generating asset.  Our customers include Coca-Cola Enterprises, Frito-Lay, Honeywell, ProLogis, San Diego Unified School District, Tesco, Toyota, U.S. Air Force, U.S. GSA, U.S. Navy, Wal-Mart and Westfield. 

For more information, please contact:

Solar Integrated Investor Contacts:
Solar Integrated Technologies, Inc.                            Solar Integrated Technologies, Inc.
R. Randall MacEwen                                                  John M. Palumbo
President & Chief Executive Officer                            Chief Financial Officer
Los Angeles, California, USA                                      Los Angeles, California, USA
+1.562.299.0136                                                         +1.562.299.0121

Solar Integrated Media Contacts:
Gavin Anderson & Company                                     
Ken Cronin or Deborah Walter                                              
London, UK                                                                
+44.20.7554.1400

Solar Integrated Nominated Adviser:
KBC Peel Hunt Ltd.                                        
Julian Blunt or Oliver Stratton                                    
London, UK                                                                
+44.20.7418.8900

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2006 Financial Highlights

On a GAAP basis, Solar Integrated reported revenue for 2006 of $38.2 million, gross margin of 7.2%, an operating loss of $20.7 million and a net loss of $22.6 million resulting in a loss per share of $0.61.

In the second half of 2006, the Company slowed production and certain other business activities during its cash liquidity crisis and restructuring phase.  During this period, the Company determined to maintain its production staff and certain other business activities, resulting in unabsorbed production and other costs, which negatively impacted the Company’s gross margin in the second half of 2006.

On a non-GAAP basis, adjusted to exclude $1.3 million of costs related to unabsorbed production and other costs and an inventory write-down, gross margin for 2006 H2 was 12.7%, compared to 7.5% in 2006 H1, and 10.6% for the full year.
Management reviews revenue and gross margin performance of the business in four market segments:

• Europe Solar:  The Company manufactures its BIPV roofing panels for projects in Europe where customers purchase the systems for installation by others.
• U.S. Direct Solar:  The Company manufactures and installs its BIPV roofing systems for projects in the United States where customers purchase the systems on a turnkey basis.
• U.S. Financed Solar:  The Company manufactures and installs its BIPV roofing systems for projects in the United States where the end customer prefers to purchase solar generated electricity under a long term power purchase agreement rather than purchase, own and operate the solar energy system directly.
• Roofing and Maintenance:  The Company installs and maintains for select clients energy-efficient roofing systems in Southern California.  The Company can install these roofing systems pre-wired for potential future solar retrofit.  The Company believes this strategy maintains and strengthens its customer relationships, positions the Company to capture additional business for its BIPV roofing systems, provides additional margin-generating revenue, and provides for smoothing of labor deployment.  The Company expects this market segment to decline as a percentage of revenue over time.

The Company’s revenue and gross margin performance for 2006 H1, 2006 H2 and 2006 full year for these four market segments are as follows:

Revenue & Gross Margin by Market Segment (in $000's)

	Rev, H1 2006	% of H1 Rev.	Gross Margin H1 2006	Gross Margin % H1 2006	Rev. H2 2006	% of H2 Rev.	Gross Margin H2 2006	Gross Margin % H2 2006	Rev. FY 2006	% of FY Rev.	Gross Margin FY 2006	Gross Margin% FY2006
Europe Solar	$2,839	18.3%	$412	14.5%	$4,351	19.2%	$646	14.8%	$7,190	18.8%	$1,058	14.7%
U.S. Direct Solar	1,488	9.6%	261	17.5%	6,050	26.7%	1,351	22.3%	7,538	19.7%	1,612	21.4%
U.S. Financed Solar	8,648	55.6%	(70)	-0.8%	7,333	32.3%	(92)	-1.3%	15,981	41.8%	(162)	-1.0%
Roofing & Maint	2,577	16.6%	560	21.7	4,948	21.8%	966	19.5%	7,525	19.7%	1,526	20.3%
ADJUSTED TOTALS	15,522	100.0%	$1,163	7.5%	$22,682	100%	$2,871	12.7%	$38,234	100.0%	$4,034	10.6%
Adjustments	-		-		-		(1,271)		-		(1,271)
U.S. GAAP	$15,522	100.0%	$1,163	7.5%	22,682	100%	$1,600	7.1%	$38,234	100.0%	$2,763	7.2%

 

On a non-GAAP basis, adjusted to exclude $1.3 million of costs related to unabsorbed product and other costs and an inventory write-down, and adjusted to exclude the U.S. Financed Solar market segment, gross margin for 2006 H2 was 19.3%.

The margin performance for the U.S. Financed Solar segment was negatively impacted primarily as a result of lower than expected sales revenue and related financing.  As a result of this gross margin performance, the Company engaged in a strategic review of the Company’s approach to this market segment.  During this review period and given the challenging working capital environment, the Company continued to complete additional U.S. Financed Solar projects in the second half of 2006 in order to turn inventory into capital.  Strategically, the Company determined that there was a need to continue to access this customer base while effectively managing the Company’s risk profile and cash flow.  The Company also determined that it should approach this market segment in a way that aligns with the Company’s core competencies and resource constraints.

Beyond raising equity capital, one of Solar Integrated’s primary objectives when the Company was reviewing strategic alternatives last year was to strengthen the Company’s platform to effectively compete for and profitably close business for U.S. Financed Solar.  As part of the Company’s December 2006 financing, Brian E. Caffyn joined Solar Integrated as non-executive Chairman of the board of directors.  Mr. Caffyn brings significant experience to Solar Integrated in profitably structuring and developing renewable energy projects in the United States and Europe.  Mr. Caffyn is the chairman and majority owner of UPC Solar, a developer of solar energy projects in the United States, which is part of Mr. Caffyn’s UPC Energy group of companies.  UPC Solar has an experienced team of renewable energy project development professionals that are actively engaged in U.S. solar project development.

In April 2007, the Company announced that it had entered into a preferred supply and cooperation agreement with UPC Solar.  Under the agreement, Solar Integrated will be the preferred supplier to UPC Solar of BIPV roofing systems and certain other thin film solar products, solar roofing installation services, and renewable energy management software systems for solar installations.  UPC Solar will be Solar Integrated’s preferred developer for solar energy projects in the United States where the end customer prefers to purchase solar generated electricity under a long term power purchase agreement rather than purchase, own and operate the solar energy system directly.

With this new arrangement with UPC Solar, the Company believes it can achieve gross margins in excess of 15% for its U.S. Financed Solar market segment in 2007.

Selling, General and Administrative expenses for 2006 were $18.3 million, including $2.5 million in non-recurring costs for professional and advisory fees, sales and marketing expenses, information technology expenses, a write-down in the value of certain renewable energy credits owned by the Company, and other non-recurring expenses, $1.0 million in non-cash stock based compensation, and $0.3 million in non-cash depreciation.  In the second half of 2006, the Company implemented a cost reduction program, including a reduction in excess of 10% in the Company’s headcount, which is expected to yield annualized cost savings in excess of $2.5 million.  These cost savings will be partially offset by recent staff hires in sales and estimating to support increased sales activity.  In connection with this cost reduction program, the Company recorded a severance charge of $1.9 million in 2006.  2006 SG&A expenses adjusted to exclude non-recurring costs and non-cash stock based compensation and depreciation was $14.5 million.

In 2006, as a prudent accounting matter, the Company recorded an impairment of its $3.3 million receivable from SCR Group, Inc.  Under the terms of a separation agreement with Bruce M. Khouri, a co-founder and non-executive director of the Company, Mr. Khouri has provided the Company a personal guarantee pursuant to which he has agreed, conditional upon any future sale by Mr. Khouri of his holding of common shares of the Company, to direct the first use of net proceeds from such sale to re-pay the $3.3 million receivable from SCR to the Company.

The Company had $20.5 million in inventory as at June 30, 2006.  During the second half of 2006, the Company temporarily reduced its intake of inventory to better align with sales and production requirements.  The Company’s inventory was $14.0 million as at December 31, 2006.

In August 2006, the Company obtained a waiver from its breach of certain covenants under the Company’s revolving line of credit with an affiliate of GE Energy Financial Services.  The credit facility was also amended to provide access to more capital under the borrowing base eligibility criteria and to provide the Company with more flexibility relating to the facility’s financial covenants.

In December 2006, the Company completed an equity financing with the issuance of 33,333,333 common shares at a price per share for aggregate gross proceeds of $19.5 million.  After repaying its senior credit facility and aged payables from the net proceeds of the placing, the Company had $7.0 million in cash as at December 31, 2006.

The auditor’s report accompanying the Company’s 2005 Annual Report and Accounts included a going concern emphasis paragraph relating to, among other things, the Company’s liquidity challenges and the importance of obtaining additional financing.  The auditor has advised the Company that the audit report for Solar Integrated’s 2006 Annual Report and Accounts will not include a “going concern” emphasis paragraph.

2007 Outlook

The Company confirms its prior 2007 revenue guidance in the range of $60 million to $80 million and 2007 full year consolidated gross margin guidance in excess of 15%.

Consistent with prior periods, the Company expects to book a higher level of revenue and gross profit in 2007 H2 than in 2007 H1.  First half revenue is, and typically has been, lower than the second half revenue in large part as a result of the seasonality of the business, including the rainy season in Southern California, the winter season in Germany, and the budget and construction cycles of the Company’s target customers.  As the Company is involved in a construction, project-based business, the Company may experience lumpiness from period to period.

Mr. MacEwen stated:  “We recently announced our first solar ground-mount contract win, a $10 million project in Italy, as well as the completion of our first solar carport project in California.  In addition to effectively responding to the strong market interest in our BIPV roofing systems, we continue to demonstrate our ability to innovate and expand our product portfolio to meet customer requirements.  In 2007, we will also continue to focus our organization and partners on product cost reduction to support our long term strategic goal of achieving cost-parity with peak retail electric rates.”

John M. Palumbo, Chief Financial Officer, added:  “While we have more work to do in 2007, we have made significant improvement in the quality of our accounting records and the timing for the closing of our books.  We are continuing to improve internal controls and the reporting capabilities of the organization.”

Non-GAAP Measures:
To supplement the consolidated financial results prepared under U.S. GAAP, Solar Integrated uses non-GAAP measures which are adjusted from the most directly comparable GAAP results to exclude items related to unabsorbed production and other expenses and an inventory write-down.  Management does not consider these charges in evaluating the core operational activities of the Company.  Management uses these non-GAAP measures internally to make strategic decisions, forecast future results and evaluate the Company's current performance.  Given management's use of these non-GAAP measures, Solar Integrated believes these measures are important to investors in understanding the Company's current and future operating results as seen through the eyes of management.  In addition, management believes these non-GAAP measures are useful to investors in enabling them to better assess changes in Solar Integrated’s core business across different time periods.  These non-GAAP measures are not in accordance with or an alternative for GAAP financial data and may be different from non-GAAP measures used by other companies.

Forward-Looking Statement:
This release includes forward-looking statements which are based on certain assumptions and reflect management’s current expectations as contemplated under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995.  These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations.  Some of these factors include:  the availability and cost of capital; uncertainty as to whether our strategies, partnerships and business plans will yield the expected benefits; general global economic conditions; general industry and market conditions and growth rates; increasing competition; the ability to identify, develop and achieve commercial success for new products, services and technologies; changes in technology; changes in laws and regulations, including government incentive programs; intellectual property rights; our ability to secure and maintain strategic relationships, including key supply relationships; and the availability of, and our ability to retain, key personnel.  Additional factors are discussed in our public disclosure materials from time to time.  We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Consolidated Balance Sheets

ASSETS

(U.S. Dollars) (in thousands)

	December, 31
	2006	2005
		(Restated)
Current assets
Cash and cash equivalents	$6,984	$2,194
Restricted cash	740	307
Trade receivables, net	8,915	8,611
Lease receivables	1,551	253
Amount due from related party, net	-	2,245
Inventories	14,029	20,853
Contracts in process	5,685	1,754
Prepaid expenses and other current assets	548	522
Total current assets	38,452	36,739
Non-current assets
Lease receivables, net of current	20,562	11,082
Plant and equipment, net	2,830	3,433
Solar systems under operating leases	3,276	3,276
Loan fees, net of amortization	5,639	8,447
Deposits and other assets	429	1,439
Total assets	$71,188	$64,416

The accompanying notes are an integral part of these statements.

Consolidated Balance Sheets

LIABILITIES AND SHAREHOLDERS’ EQUITY

(U.S. Dollars) (in thousands except per share data)

	December, 31
	2006	2005
		(Restated)
Current liabilities
Trade and other payables	$3,626	$8,085
Warranty accrual	1,706	1,743
Other accrued expenses	4,150	3,418
Progress billings	5,553	537
Structured financing – current	2,418	383
Total current liabilities	17,453	14,166
Non-current liabilities
Convertible debentures – face amount	31,080	33,000
Discounts on convertible debentures	(2,901)	(3,905)
Convertible debentures, net of discounts	28,179	29,095
Embedded derivatives in convertible debentures	2,207	3,905
Warrants	2,567	5,647
Deferred revenue	2,109	2,109
Unearned income, net of current	3,647	2,510
Structured financing, net of current	13,954	7,585
Total liabilities	70,116	65,017
Shareholders’ equity (deficit)
Common stock: $0.0001 par value
Authorized shares-250,000 at December 31, 2006 and 50,000 at
December 31, 2005
Issued and outstanding-69,463 and 34,642 at
December 31, 2006 and 2005, respectively	7	4
Additional paid in capital	48,866	24,639
Accumulated deficit	(47,801)	(25,244)
Shareholders’ equity (deficit)	1,072	(601)
Total liabilities and shareholders’ equity (deficit)	$71,188	$64,416

The accompanying notes are an integral part of these statements.

Consolidated Statements of Operations

 (U.S. Dollars) (in thousands except per share data)

	Years Ended
	December, 31
	2006	2005
		(Restated)
Revenue	$38,234	$33,537
Cost of sales	35,471	30,698
Gross profit	2,763	2,839
Selling, general, and administrative expenses	18,266	14,499
Impairment – related party receivable	3,273	-
Severance costs	1,893	-
Loss from operating activities	(20,669)	(11,660)
Other expenses (income)	(15)	-
Change in fair value of warrants	(3,946)	173
Change in fair value of embedded derivatives	(1,698)	(430)
Interest expense, net	7,547	3,980
Loss from investment	-	1,949
Net loss	$(22,557)	$(17,332)
Basic and diluted loss per share	$(0.61)	$(0.52)
Weighted average number of shares outstanding
(basic and diluted)	36,856	33,605

The accompanying notes are an integral part of these statements.

 

Consolidated Statement of Shareholders’ Equity

31 December 2006 and 2005

(U.S. Dollars) (in thousands)

	Common Stock		Paid in Capital	Accumulated
	Shares	Amount	Amount	Deficit	Total
Balance at January 1, 2005	33,463	$4	$ 20,639	$(7,912)	$12,731
Issuance of common stock
on note conversion	1,179	-	4,000	-	4,000
Net loss for the year ended
December 31, 2005, as restated	-	-	-	(17,332)	(17,332)
Balance at December 31, 2005, as restated	34,642	4	24,639	(25,244)	(601)
Issuance of common stock
on note conversions	566	-	1,920	-	1,920
Proceeds of option exercise	200	-	431	-	431
Warrant exercise	722	-	2,909	-	2,909
Stock based compensation	128	-	1,022	-	1,022
Issuance of common stock	33,205	3	19,507	-	19,510
Expenses incurred in connection
with the issuance of common
Stock	-	-	(856)	-	(856)
Warrant expense incurred in
connection with the issuance
of common stock	-	-	(706)	-	(706)
Net loss for the year ended
December 31, 2006	-	-	-	(22,557)	(22,557)
Balance at December 31, 2006	69,463	$ 7	$48,866	$(47,801)	$1,072

The accompanying notes are an integral part of these statements.

Consolidated Statement of Cash Flows

(U.S. Dollars) (in thousands)

	Years ended
	December, 31
	2006	2005
Cash flows from  operating activities:		(restated)
Loss from operating activities	$(22,557)	$(17,332)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation	785	741
Amortization of loan fees and debt discounts	3,699	2,452
Write-off of inventory	175	712
Impairment - related party receivable	3,273	-
Impairment - capitalized legal fees	974	-
Stock based compensation	1,022	-
Change in fair value of warrant liability	(3,946)	173
Change in fair value of embedded derivatives	(1,698)	(430)
Increase in warranty provision	305	2,042
Loss on sale of investment in German company	-	1,949
Changes in assets and liabilities:
Accounts receivable	(307)	(2,736)
Lease receivable	(10,776)	(11,335)
Inventories	6,649	(12,511)
Contracts in process	(3,931)	5,384
Prepaid expenses and other assets	787	(983)
Trade and other payables	(4,458)	2,124
Accrued expenses	196	3,218
Deferred revenue	5,016	2,109
Unearned Income	1,331	2,520
Net cash used in operating activities	(23,461)	(22,855)
Cash flows from  investing activities:
Capitalized solar systems	-	(3,276)
Acquisition of plant and equipment	(182)	(362)
Investment in minority interest in German company	-	(1,949)
Loans to related party	(1,028)	(1,229)
Restricted cash deposits	(432)	(307)
Net cash used in investing activities	(1,642)	(7,123)

The accompanying notes are an integral part of these statements.

Consolidated Statement of Cash Flows

(U.S. Dollars)(in thousands)

	Years ended
	December, 31
	2006	2005
		(restated)
Cash flows from financing activities:
Repayment of line of credit	$ -	$(6,000)
Repayments of loans payable	-	(2,566)
Cash paid for loan origination and structured finance fees	(297)	(4,042)
Proceeds of structured finance payable	15,981	16,049
Repayment of structured finance payable	(7,083)	(8,707)
Proceeds of convertible note and bridge loan	-	37,000
Proceeds from exercise of warrants	2,207	-
Proceeds from exercise of options	431	-
Issuance of common stock, net of costs of $856	18,651	-
Net cash provided by financing activities	29,893	31,734
Net increase in cash and cash equivalents	4,790	1,756
Cash and cash equivalents at beginning of period	2,194	438
Cash and cash equivalents at end of period	$6,984	$2,194
Supplemental disclosure of cash flow information
Cash paid during the period:
Interest	$3,440	$434
Income taxes	-	-
Disclosure of non-cash investing and financing activities
Conversion of convertible debentures to equity	$1,920	$4,000
Increase to loan fees due to re-pricing of warrants	861	-
Conversion of warrant liability to equity	702	-
Warrants issued in connection with issuance of common stock	706	-

The accompanying notes are an integral part of these statements.

Notes to Consolidated Financial Statements

(U.S. Dollars) December 31, 2006 and 2005

Note 1: Description of Business
Solar Integrated Technologies, Inc. (the “Company”) was established and incorporated in the State of Delaware in the United States of America on January 24, 2002.  The Company designs, manufactures and installs building-integrated photovoltaic, or BIPV, roofing systems for customers with non-residential buildings that have flat or low-slope rooftops.  The Company provides its customers with an integrated BIPV roofing solution that meets both their roofing and their onsite solar power generation requirements.  The Company is based in Los Angeles, California and maintains offices in the London, United Kingdom and Mainz, Germany.  The Company’s customers are primarily located in the United States and Europe.

Note 2: Summary of Significant Accounting Policies

Basis of Presentation

In fiscal 2005, the Company began preparing its financial statements in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). Prior to fiscal 2005, the Company was reporting under International Financial Reporting Standards (“IFRS”).  The accompanying financial statements for the years ended December 31, 2006 and 2005 have been presented in accordance with US GAAP.  These financial statements are presented in U.S. dollars as that is the currency in which the majority of the Company’s transactions are denominated.  The consolidated financial statements for the year ended December 31, 2005 have been restated to correct the accounting for warrants issued by the Company and derivative instruments contained in the convertible note instruments.

Principles of Consolidation

These consolidated financial statements include the accounts of the Company and its subsidiaries which are wholly-owned.  All inter-company transactions and balances have been eliminated on consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 reporting period.  Actual results could differ from those estimates.  Significant estimates made by the Company include allowances for potentially uncollectible accounts receivable, warranty provisions, provisions for obsolete inventory and valuation allowances.

Fair Values of Financial Instruments

The fair value of a financial instrument is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.  At the balance sheet date, the fair values of the Company’s financial assets and financial liabilities approximate their carrying values.

Cash and Cash Equivalents

Cash and cash equivalents comprise current bank accounts and other bank deposits free of encumbrances and having original maturities of less than three months.

Restricted Cash and Other Assets

In connection with the structured financing arrangement with GE Commercial Finance Energy Financial Services (“GE EFS”), a unit of General Electric Capital Corporation, the Company was required to deposit a portion of the proceeds from the borrowings with GE EFS.  If necessary, GE EFS may use such amounts to offset any shortfall in payments required from the Company under the structured finance arrangement.  In addition, payments received from customers under sales type lease agreements are deposited directly into restricted bank accounts.  Amounts deposited into restricted bank accounts are used to fund the debt owed under the structured finance arrangement with GE EFS.  At December 31, 2006, the Company held approximately $740,000 in restricted cash.  See Note 9: Long-Term Debt.

Foreign Currency Translation

For the Company’s foreign operations, the local currency is the functional currency.  Monetary assets and liabilities denominated in currencies other than the U.S. dollar are translated into U.S. dollars at the period-ending exchange rate.  Non-monetary assets are translated at historic rates of exchange.  Revenues and expense items denominated in currencies other than the U.S. dollar are translated into U.S. dollars at the average rate of exchange for the year, except for depreciation and amortization which are translated at historic rates.  Resultant gains and losses are included in the results of operations, and have no material impact on results as of December 31, 2006 and 2005.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk are primarily limited to receivables.  The Company performs credit evaluations of its customers’ financial condition whenever deemed necessary and generally does not require collateral.  The Company maintains an allowance for doubtful accounts receivable based upon the expected collectibility of all accounts receivable, which takes into consideration an analysis of historical bad debts, specific customer creditworthiness and current economic trends.

Inventories

Raw materials are valued at the lower of cost, determined on a first-in first-out basis, and replacement cost.  Finished goods and work-in-progress are carried at the lower of cost, determined on a first-in first-out basis, and net realizable value.  Cost comprises invoice value plus applicable landing charges in the case of raw materials, packing materials, spares and consumables.  Finished goods comprise cost of materials plus attributable labor and overhead charges that have been incurred in bringing the inventories to their present location and condition.  Net realizable value is based on estimated selling price less estimated costs to completion of sale.

Plant and Equipment

Plant and equipment are carried at cost less accumulated depreciation.  Plant and equipment are depreciated using the straight-line method over their respective estimated useful lives as follows:

Machinery and equipment	7 Years
Furniture, fixtures and office equipment	5 Years

Depreciation is charged on these assets from the date on which they are placed in service.

Solar Systems Under Operating Leases, net of Accumulated Depreciation

Solar Systems under operating leases are recorded at cost and depreciated over the lease term of twenty years using the straight-line method. No depreciation was recorded in fiscal 2006 as the asset was not placed into service.  The lease payments will commence when the assets are placed in service which is expected to be in 2007.

Long-Lived Assets

Long-lived assets are reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.  Long-lived assets are grouped at the lowest level for which identifiable cash flows are largely independent, when testing for and measuring impairment.  Impairment losses are recorded when the carrying amount of long-lived assets exceed the sum of undiscounted cash flows expected to result from their use and eventual disposition and are measured as the amounts by which the long-lived assets’ carrying amounts exceed their fair value.  There were no adjustments to the carrying value of long-lived assets during the year ended December 31, 2005.  In 2006, the Company wrote off the value of certain legal costs that had been capitalized in setting up the structured finance program totaling $973,000.

Revenue Recognition

Revenue is recognized when there is persuasive evidence of an agreement, the goods have been delivered, the fee is fixed or determinable, and collection is reasonably assured. 

Installed BIPV Systems and Traditional Roofing: The Company has recorded revenue under the completed contract method for both BIPV installed systems and traditional roofing projects.  The completed contract method was not an acceptable revenue recognition method under IFRS; accordingly, the Company previously recognized revenue under the percentage of completion method for both installed BIPV systems and traditional roofing projects.  For sales where the customer has contracted for the Company to supply and install its BIPV roofing system, revenue is typically recognized when the installation of the system is complete.  When customer acceptance clauses are considered to be substantive, recognition of revenue is deferred until customer acceptance is received.  The Company capitalized $5,685,000 and $1,754,000 for costs incurred from uncompleted contracts as of December 31, 2006 and 2005, respectively.  For sales of BIPV systems where the customer does not contract the Company to install the system, revenue is typically recognized at time of shipment according to the contractual arrangements with the customer. 

Sales Type Lease: The Company offers a structured finance offering (See Note 9: Long-Term Debt) that is considered a leasing type transaction for certain BIPV system projects. These transactions transfer substantially all of the risks and rewards of ownership to the customer and are classified as sales-type leases and are recorded as equipment revenue as a result of meeting the criteria established in Statement on Financial Accounting Standard (SFAS) No. 13 “Accounting for Leases”.  The revenue associated with sales-lease type transactions is equal to the total lease receivable net of unearned income.  During the period ended December 31, 2006, $16 million of the Company’s revenue was recognized under this arrangement.   

Operating Lease: In December 2005, the Company entered into two lease agreements for BIPV systems that did not meet the criteria of a sales type lease.  These two leases are classified as operating leases.  No revenue has been recorded on these two lease arrangements as the equipment has not been placed into service.  The amount of the payments due from the customers under these two lease agreements will vary depending upon a cost savings formula included in the lease arrangement. Customers will be billed monthly in accordance with the stipulated cost saving formula in the agreement.  Due to the variability in projecting the future minimum lease payments, rental income will be recorded into income on a monthly basis as the amount due under the lease formula becomes determinable.  In connection with these two installations, the Company collected rebates from local utility agencies for renewable energy construction totaling $2,109,000 in December 2005. 

Income Taxes

In May 2004, the Company filed an election to be taxed as a C corporation.  Therefore, the Company is subject to federal and local taxes on corporate income for periods after May 6, 2004.  The Company has experienced large net operating losses and has recorded a full valuation allowance against the deferred tax asset.  The need for the valuation allowance is due to the start-up nature of the Company and lack of historical profits.

Warranty Provisions 

The Company typically provides a 20-year roof warranty, a 20-year power warranty and 5-year warranty on inverters.  These warranties are typically matched by back-to-back warranties from suppliers.  The warranty provision represents management’s best estimate of the liability under warranties granted on transactions to date.  Provisions for warranty costs are recognized at the date of sale of the relevant products, at management’s best estimate of the expenditure required to settle the liability, taking into account the specific arrangements of the transaction and past history.  The activity for the years ended December 31, 2006 and 2005 was as follows:

	December, 31
	($000)
Balance at January 1, 2005	$50
Warranty expense	2,042
Amounts charged against the warranty provision	349
Balance at December 31, 2005	1,743
Balance at January 1, 2006	1,743
Warranty expense	305
Amounts charged against the warranty provision	342
Balance at December 31, 2006	$1,706

Research and Development

Research and development costs incurred by the Company are expensed.

Stock-Based Compensation

Effective January 1, 2006, the Company adopted SFAS No. 123R using the modified prospective transition method. SFAS No. 123R revises SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees . SFAS No. 123R is supplemented by SEC Staff Accounting Bulletin (“SAB”) No. 107, Share Based Payment . SAB No. 107 expresses the SEC staff’s views regarding the interaction between SFAS No. 123R and certain SEC rules and regulations including the valuation of share-based payment arrangements.

The Company recognizes the cost of all employee and director stock options on a straight-line attribution basis over their respective vesting periods, net of estimated forfeitures. Since the Company has selected the modified prospective method of transition, the prior periods have not been restated. Prior to adopting SFAS No. 123R, the Company applied APB Opinion No. 25, and related Interpretations in accounting for its stock-based compensation plans. All stock options were granted at or above the grant date market price. Accordingly, no compensation cost was recognized for stock option grants prior to 2006.

Under this transition method, stock based compensation cost recognized for the year ended December 31, 2006 includes: (i) compensation cost for all stock-based payments granted prior to, but not yet vested, as of January 1, 2006, and (ii) compensation cost for all stock-based payments granted or modified subsequent to January 1, 2006. The stock-based compensation expense recorded in accordance with FAS 123R was $681,000 for the year ended December 31, 2006 recorded in selling, general and administrative expense caption of the Company’s Consolidated Statement of Income.

Also, in November 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. FAS 123R-3 (“FSP 123R-3”), Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards.  FSP 123R-3 provides an elective alternative transition method for calculating the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to the adoption of FAS 123R. The Company elected not to adopt the alternative transition method provided in the FASB Staff Position and followed the original guidance in SFAS No. 123R for calculating the pool of excess tax benefits.

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123R during the prior periods presented. For the purposes of this pro forma disclosure, the value of the options is estimated using a Black-Scholes option-pricing model and amortized to expense over the options’ vesting periods.

	December, 31
	2005
	($000)
Net loss, as reported:	$(17,332)
Less: Total stock-based compensation expense determined using the Black-Scholes option-pricing model, net of related tax effects	(2,009)
Pro forma net loss	$(19,341)
Loss per share:
Basic and Diluted —as reported	$(0.52)
Basic and Diluted —pro forma	$(0.58)

Note 3: Trade Receivables

	December, 31
	2006	2005
	($000)	($000)
Trade receivables	$8,927	$8,930
Less:  Allowance for doubtful accounts	(12)	(319)
Trade receivables, Net	$8,915	$8,611

At December 31, 2006, 33% of the Company’s trade receivable balance was due from six customers while at December 31, 2005, 43% of the trade receivable balance was due from two customers.  Based on the Company’s knowledge of the financial condition of its customers, an allowance for uncollectible balances was established at December 31, 2006.
Trade receivables have been pledged as security under the Company’s credit facility (See Note 8: Credit Facilities).

Note 4: Lease Receivables

Sales Type Leases

	December, 31
	2006	2005
	($000)	($000)
Total minimum lease payments receivable	$22,113	$11,335
Less: Unearned income	3,851	2,520
Net investment in sales type leases	$18,262	$8,815

Executory costs included in total minimum lease payments were not significant.  In addition, no value was assigned to the estimated residual value of the leased equipment due to the twenty year lease term.  Future minimum receivables under all non-cancelable sales type leases as of December 31, 2006 are as follows:

	December, 31
	($000)
2007	$1,551
2008	946
2009	965
2010	984
2011	1,003
Thereafter	16,664
Total	$22,113

Solar Systems Under Operating Leases

Monthly lease payments due under the operating leases vary depending upon the energy output from the solar system and a cost savings formula included in the lease agreements.  Due to the variability in projecting the future minimum lease payments, rental income will be recorded into income on a monthly basis as the amount due under the lease formula becomes determinable.

 Note 5: Inventories

	December, 31
	2006	2005
	($000)	($000)
Raw materials	$921	$7,148
Work-in-progress	618	426
Finished goods	12,490	13,279
	$14,029	$20,853

Inventories have been pledged as security under the Company’s credit facility (See Note 9: Long-Term Debt). 

Note 6: Related Party Transactions

SCR Group, Inc.

At the time of the Company’s formation and subsequent admission to AIM in May 2004, SCR Group, Inc. (“SCR”) was a well established provider of energy efficient roofing systems for a wide range of commercial and industrial buildings.  The Company’s co-founders, Bruce M. Khouri and Edward J. Stevenson, were and remain the joint owners of SCR.  Bruce M. Khouri is currently the Company’s largest shareholder and a non-executive director of the Company’s board of directors.  He retired as the Company’s President and Chief Operating Officer in December 2006.  Edward J. Stevenson retired as the Company’s Chief Executive Officer in February 2005.  On January 31, 2006, Mr. Stevenson sold all of the 12,466,500 common shares of the Company held by him at $5.34 (£3.00) per share to a group of institutional investors.  In connection with this sale, Mr. Stevenson resigned as a member of the Company’s board of directors.

SCR was initially a valuable source of pre-qualified customers for the Company’s products and services.  SCR’s established track record provided the credit history which was used to arrange for early credit arrangements entered into by the Company.  Typically, where either the Company or SCR entered into material credit arrangements, the relevant creditor sought a cross-guarantee from the other company, as well as personal guarantees from Bruce M. Khouri and Edward J. Stevenson in certain circumstances.

In January 2005, the Company entered into an asset-based $15 million line of credit agreement with a bank with a maturity date of December 31, 2005.  In addition to the loan agreement, the Company’s bank lender also provided the Company with an equipment finance loan with a $3 million term note.  Both the line of credit and equipment term loan were guaranteed by SCR.  In turn, the Company provided a cross-guaranty to the bank lender for certain bank debt of SCR.

In November 2005, the Company used part of the net proceeds of its US $37 million private placement of convertible notes to repay the full outstanding amount of $9.2 million under the Company’s line of credit with the bank, an additional $2.2 million under the equipment term loan, and an additional amount of US $2.1 million of senior bank debt owed by SCR under the terms of the cross-guarantee provided by the Company.

As consideration for the Company paying off such amount, SCR provided the Company a promissory note