Applied Solar, Inc. (fka APSOQ)

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Liquidity and Capital Resources

We have incurred losses since our inception totaling approximately $111,085,000 through November 30, 2008. In the past, we sold our products at a negative margin to gain market share. We are unsure when, if ever, our new licensing strategy will start generating significant revenues, and we are unsure if and when we will become profitable.

As of November 30, 2008, we had cash and cash equivalents of $1,465,000 and negative working capital of $6,360,000. For the six months ended November 30, 2008, we used $3,678,000 of cash in operations. Financing activities provided $4,816,000 of cash during the quarter, with $1,950,000 in gross proceeds resulting from the sale of promissory notes, and $4,200,000 in cash proceeds from the sale of warrants.

During the six months ended November 30, 2008, we funded our operations through proceeds from the sale of equity and debt securities. We have no unused sources of liquidity. Thus, we will need to raise additional capital through equity or debt financing in the near future to continue operations and implement our business strategy.

In September 2008, we entered into a forbearance and repayment agreement with our largest supplier, Suntech. The forbearance agreement provided for a payment plan for approximately $3 million of payables due as of the agreement date with interest at 12% per annum. Pursuant to the forbearance agreement, we paid $1 million on September 19, 2008, and agreed to pay $500,000 on or prior to January 15, 2009 and six payments of $297,558 on a monthly basis beginning on March 15, 2009, until the entire amount is paid in full.

To date, we have been unable to meet forecasted sales and margin projections and as a result have experienced significant negative cash flow for an extended period of time. Based on our current cash usage rate, we estimate that we currently have adequate cash to fund operations through the end of March 2009. Our ability to continue as a going concern is dependent on obtaining additional financing to support our working capital requirements. Management is pursuing a number of possible debt and equity financing opportunities in an effort to address these requirements. However, we cannot currently predict the likelihood of being able to raise additional debt or equity financing in an amount, nature or on terms that would be acceptable to us and if we are unable to obtain additional financing or grow our revenues and increase profitability, we may not have sufficient cash to satisfy all ongoing capital requirements and previously incurred liabilities and will have to substantially curtail or cease operations.

http://sec.gov/Archives/edgar/data/1176193/000101968709000232/oegyob_10q-113008.htm