ASTROPOWER INC, S-3, 2000-11-03

ASTROPOWER INC
S-3, 2000-11-03
SEMICONDUCTORS & RELATED DEVICES

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As filed with the Securities and Exchange Commission on November 3, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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Form S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933

ASTROPOWER, INC.
(Exact name of registrant as specified in its charter)

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Delaware 3674 51-0315869
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
Incorporation or Classification Code
organization) Number)

AstroPower, Inc. Dr. Allen M. Barnett, President
Solar Park AstroPower, Inc.
Newark, Delaware 19716-2000 Solar Park
(302) 366-0400 Newark, Delaware 19716-2000
(302) 366-0400
(Name, address, including zip code and (Name, address, including zip code and
telephone number, including area code, telephone number, including area code,
of registrant's principal executive of agent for service)
office)

Copies to:
Peter Landau, Esq. Peter B. Tarr, Esq.
Foreht Last Landau Miller & Katz, LLP Stuart R. Nayman, Esq.
415 Madison Avenue, 16th Floor Hale and Dorr LLP
New York, New York 10017 405 Lexington Avenue
(212) 935-8880 New York, New York 10174
(212) 937-7200

Approximate date of commencement of proposed sale to public: as soon as
practicable after effective date of Registration Statement.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement numbers of the earlier
effective registration statement for the same offering. [_]

If this form is a post-effective amendment filed pursuant to 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed
Maximum
Aggregate Proposed Maximum
Title of Each Class of Securities Amount to be Offering Price Aggregate Proposed Maximum
to be Registered Registered Per Share(1) Offering Price(1) Registration Fee
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock $0.01 par 2,300,000 $46.57 $107,111,000 $28,278
value................. Shares
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</TABLE>
(1) Estimated solely for the purpose of computing the amount of registration
fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended,
based on the average of the high and low prices of the Common Stock as
reported on the Nasdaq National Market, on November 1, 2000.

The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.

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<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any jurisdiction where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

SUBJECT TO COMPLETION, DATED NOVEMBER 3, 2000

PROSPECTUS

2,000,000 Shares

[LOGO OF ASTROPOWER]

Common Stock

This is an offering of common stock by AstroPower, Inc.

-----------------------------------------

Our common stock is quoted on the Nasdaq National Market under the symbol
APWR. On November 2, 2000, the last reported sale price of our common stock on
the Nasdaq National Market was $41.875 per share.

-----------------------------------------

<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public offering price........................................... $ $
Underwriting discounts and commissions..........................
Proceeds to AstroPower, before expenses.........................
</TABLE>

We and the selling stockholders named in this prospectus have granted the
underwriters an option for a period of 30 days to purchase up to 300,000
additional shares of common stock.

-----------------------------------------

Investing in the common stock involves a high degree of risk.
See "Risk Factors" beginning on page 5.

-----------------------------------------

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.

Chase H&Q Credit Suisse First Boston

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CIBC World Markets FAC/Equities

, 2000
<PAGE>

SunChoice(TM) Systems

Our SunChoice(TM) systems are standardized systems designed for residential and
small commercial rooftops. These systems are designed to operate in parallel
with the utility grid, and typically generate between 50% and 75% of a home's
yearly electricity needs. Most SunChoice(TM) systems include a storage battery
that allows the system to provide back-up power to selected circuits during a
utility outage. SunChoice systems:

* Supply high reliability power to critical loads for a residence or small
business

* Sell power into utility grid during periods of peak summer demand

* Require no fuel or maintenance, contain no moving parts, generate no noise or
emissions.

[GRAPHIC]

<TABLE>
<CAPTION>
<S> <C> <C>
Solar Panels Combiner Box
convert sunlight instantly Located near the solar
into DC electric power. modules, the combiner box
provides easy access to
array circuitry.

Inverter converts DC power into
standard household AC power for
use in the home and synchronizes
with utility power.

Utility Meter actually spins backwards Utility Power is automatically Existing Electrical Panel
when solar power production exceeds provided at night and during distributes solar electricity
house demand, selling power back to the day when your demand and utility power to loads
the utility at the same price. exceeds your solar production. in the house. These circuits
will not, however, operate
during a utility outage.

New Electrical Panel Battery Storage provides energy
holds circuits pulled from existing to the inverter to operate essential
panel for essential loads. loads during a utility outage, day or night.
These circuits are powered during These sealed batteries are recharged during
normal utility operation and also an outage by the solar modules, and are
during outages, automatically. kept fully charged during normal utility
operation.
</TABLE>
<PAGE>

Silicon-Film(TM) Technology

Most solar cells are made using wafers of silicon sliced from large blocks or
ingots. This type of process was developed originally for the microchip
industry, and is expensive and time consuming.

Silicon-Film(TM) is AstroPower's proprietary and patented continuous, high-speed
process that produces sheets of silicon in minutes. Similar to modern low-cost
techniques for making plate glass and sheet steel, our Silicon-Film(TM) process
has several key advantages:

* Low-cost silicon feedstock

* High materials utilization

* Reduced capital costs

* Large-area wafers

[Picture of Silicon Production Machine Working]
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................................................... 1

Risk Factors.......................................................... 5

Forward-Looking Statements............................................ 14

Use of Proceeds....................................................... 15

Dividend Policy....................................................... 15

Market Price of Our Common Stock...................................... 15

Capitalization........................................................ 16

Selected Financial Data............................................... 17

Management's Discussion and Analysis of
Financial Condition and Results of Operations....................... 18

Business.............................................................. 24

Management............................................................ 40

Principal Stockholders................................................ 43

Description of Capital Stock.......................................... 45

Underwriting.......................................................... 47

Legal Matters......................................................... 49

Experts............................................................... 49

Incorporation of Certain Information By Reference..................... 49

Where You Can Find More Information About Us.......................... 50

Index to Consolidated Financial Statements............................ F-1
</TABLE>

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Silicon-FilmTM, SunChoiceTM and APexTM are our trademarks. All
other brand names and trademarks appearing in this prospectus are
the property of their respective holders.
<PAGE>

PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this
prospectus. This summary may not contain all of the information that you should
consider before investing in our common stock. You should read the entire
prospectus carefully, including "Risk Factors" and the financial statements,
before making an investment decision.

Our Company

We develop, manufacture, market and sell a range of solar electric power
generation products, including solar cells, modules, panels and our SunChoiceTM
pre-packaged systems for the global marketplace. Solar cells are the core
component inside every solar electric power system. Our products provide an
environmentally friendly, reliable energy solution at the point of use and are
sold for both off-grid and on-grid applications. In off-grid applications, our
products provide the primary source of electric power for rural homes and
villages and supply power for equipment in the telecommunications and
transportation industries. In on-grid applications, our products provide a
renewable source of alternative or supplemental electric power and provide
reliable back-up power in the event of a utility outage. In addition to our
solar power generation product offerings, we sell wholesale solar electric
power under long-term purchase agreements through a joint venture with GPU
International, Inc.

We currently manufacture our products at our Solar Park and Pencader
facilities in Newark, Delaware and through a joint venture with Atersa, S.A., a
leading Spanish module assembler and systems integrator. Our innovative and
proprietary technologies and processes for the manufacture of solar cells have
allowed us to significantly reduce our production costs. Our proprietary
Silicon-FilmTM manufacturing technology enables us to produce large area
silicon sheets in minutes versus the traditional time consuming ingot-based
methods. We sell our products through our direct sales force in the United
States and in several selected international markets including Germany, Spain,
Japan, China and South Africa.

For the nine months ended September 30, 2000, our product revenues were
$33.3 million, compared to $22.1 million for the same period in 1999, and our
net income for the nine months ended September 30, 2000 was $2.7 million,
compared to $1.4 million for the same period in 1999.

Our Market Opportunity

The electric power industry comprises one of the largest segments of the
global economy, with annual electric power revenues of approximately $1
trillion. We believe that structural changes within the electric power industry
are changing the traditional model of vertically integrated electric utility
monopolies in favor of a deregulated, competitive industry. These structural
changes are driven by:

. increased competition and consumer choice;

. increasing demand for quality and reliable power;

. capacity constraints in the electric power grid and shrinking capacity
reserve margins;

. environmental concerns and regulations; and

. technological advancements reducing the costs and enhancing the
performance of distributed generation systems.

1
<PAGE>

We believe that distributed generation technologies, such as solar electric
power, capitalize on the structural changes within the electric power industry.
Sales of distributed generation systems, which generate power at the point of
use, account for approximately 10% of the estimated $200 billion spent annually
on power generation and delivery equipment. Solar electric power offers several
benefits relative to other distributed generation technologies, such as fuel
cells, microturbines and diesel generators, including:

. superior reliability;

. modular products and scalable solutions;

. zero emissions;

. renewable energy source; and

. no fuel infrastructure required.

According to PV Energy Systems, an independent solar energy market research
firm, the solar electric power industry sold approximately 200 megawatts of
power generating capacity in 1999, which represented approximately $2.6 billion
in equipment sales. Since 1996, industry shipments have increased at a compound
annual growth rate of 31%. PV Energy Systems forecasts growth for solar
electric power shipments of 25% per year over the next five years. We currently
have capacity to produce approximately 35 megawatts of solar electric power
generating products per year. We expect to increase our production capacity to
65 megawatts by the end of 2001 and plan to continue to increase both our
production capacity and capacity utilization to meet the rapidly growing demand
for solar electric power products.

Our Strategy

Our goal is to become the leading global solar electric power company. To
achieve this, we intend to:

. maintain our manufacturing and product advantages by continuing to
enhance our manufacturing processes and technologies;

. build on our history of innovation through the continued introduction
of new products;

. rapidly expand our manufacturing capacity by a combination of organic
growth and potential acquisitions;

. become a leading supplier of residential and commercial "premium power"
on-grid solutions by aggressively marketing our SunChoiceTM systems;

. expand relationships with module assemblers and offer assemblers
additional products and services, including factory design, equipment
selection, process training and quality assurance; and

. continue to pursue strategic relationships to introduce new
technologies and products, enter new geographic markets, attract new
customers and pursue additional revenue opportunities.

Corporate Information

We were incorporated in Delaware in 1989 as a successor to a business that
was organized in 1983. Our executive offices are located at Solar Park, Newark,
Delaware 19716-2000, and our telephone number at that address is (302) 366-
0400. Our Web site is located at http://www.astropower.com. Information
contained on our Web site is not part of this prospectus.

2
<PAGE>

THE OFFERING

Common stock offered by us.......... 2,000,000 shares

Common stock to be outstanding
after this offering.................
13,678,006 shares

Use of proceeds..................... Expansion of manufacturing capacity,
research and development, working
capital and other general corporate
purposes, including possible
acquisitions.

Nasdaq National Market Symbol....... APWR

--------------------

The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of September 30, 2000. This
information excludes:

. 2,448,064 shares of common stock subject to options outstanding at
September 30, 2000 at a weighted average exercise price of $11.08 per
share; and

. 310,647 shares of common stock reserved for future grant or issuance
under our option plans.

Unless otherwise noted, the information in this prospectus assumes that the
over-allotment option granted to the underwriters has not been exercised.

3
<PAGE>

Summary Financial Information

You should read the following summary financial information in conjunction
with our financial statements and their related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in this prospectus. The statement of operations data for the years
ended December 31, 1997, 1998 and 1999 are derived from, and are qualified by
reference to, our audited financial statements included in this prospectus. The
statement of operations data for the years ended December 31, 1995 and 1996
have been derived from audited financial statements not included in this
prospectus. The statement of operations data for the nine-month periods ended
September 30, 1999 and 2000 and the balance sheet data as of September 30, 2000
labeled "Actual" are derived from, and qualified by reference to, our unaudited
interim financial statements included in this prospectus.

<TABLE>
<CAPTION>
Nine Months
Ended September
Year Ended December 31, 30,
---------------------------------------- ---------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------- -------
(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>

The as adjusted balance sheet information summarized below gives effect to
the receipt of the estimated net proceeds from the sale of 2,000,000 shares of
common stock offered by us in this offering at an assumed public offering price
of $41.875 per share, after deducting underwriting discounts and commissions
and estimated offering expenses payable by us.

<TABLE>
<CAPTION>
September 30, 2000
-------------------
As
Actual Adjusted
-------- ----------
(unaudited)
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................................... $ 26,178 $ 105,231
Working capital............................................. 50,308 129,361
Total assets................................................ 73,441 152,494
Total stockholders' equity.................................. 66,329 145,382
</TABLE>

4
<PAGE>

RISK FACTORS

You should carefully consider the risks described below before making an
investment decision. If any of the following circumstances described in these
risk factors occur, our business, results of operations or financial condition
could be materially and adversely affected. In that event, the trading price of
our shares could decline, and you may lose all or part of your investment.

Our failure to manage our manufacturing operations to meet increased capacity
requirements will significantly limit our sales and revenue growth.

We currently manufacture all of our products at our Solar Park and Pencader
facilities in Newark, Delaware. Our Solar Park and Pencader facilities each
have solar cell fabrication lines. Our module assembly operation is located at
Pencader. Our Silicon-FilmTM wafers are manufactured at Solar Park and
Pencader. We are currently experiencing manufacturing capacity constraints and
are in the process of expanding our manufacturing capacity. The failure to
achieve increased levels of productivity could materially and adversely affect
our business, results of operations and financial condition.

We plan to increase our annual production capacity from approximately 35
megawatts currently to approximately 65 megawatts by the end of the year 2001
by adding new equipment, upgrading our existing equipment and improving
productivity.

The successful completion of these expansion projects is subject to
significant risks, including the following:

. cost overruns and delays;

. timely delivery and integration of new equipment;

. hiring and training additional employees; and

. equipment breakdowns.

We are dependent on the acceptance of our Silicon-FilmTM products in the solar
electric power market, and our failure to achieve acceptance of it with our
customers would adversely affect our business.

We currently plan that our capacity additions will employ our Silicon-
FilmTM technology. We believe we can produce our Silicon-FilmTM solar cells at
a lower cost per watt than other currently available competing solar cell
technologies because of the continuous nature of our Silicon-FilmTM
manufacturing process, our use of inexpensive raw materials and our elimination
of costly manufacturing steps that must be used in other competing
technologies. We believe that the anticipated lower cost per watt of solar
cells produced by our Silicon-FilmTM process will provide us with cost
advantages over current technologies. The failure of our Silicon-FilmTM
products to achieve market acceptance, cost advantage or both would materially
and adversely affect our business, results of operations and financial
condition.

Our ability to sell Silicon-FilmTM products at a lower price per watt than
conventional solar cells and the market acceptance of our Silicon-FilmTM
products may be affected by:

. our inability to produce Silicon-FilmTM at projected costs;

. a more rapid decline in prices for competing solar cells than is
currently anticipated;

. lower energy conversion efficiency and power of Silicon-FilmTM
compared to competing products;

. the size, appearance and quality of Silicon-FilmTM solar cells; and

. the acceptance of module products and systems assembled by
manufacturers over which we have no control.

5
<PAGE>

We need to effectively manage our growth, and our failure to do so could cause
our business to suffer.

Any failure to implement and improve our operational, financial and
management systems or to attract, hire, train or retain employees could have a
material adverse effect on our business, results of operations and financial
condition.

During 1998 and 1999 and the first nine months of 2000, we grew rapidly, in
both manufacturing capacity and number of employees. We have grown from 163
employees as of December 31, 1997 to 402 employees as of September 30, 2000. We
currently plan to further expand our manufacturing facilities in phases. We
plan to expand our sales and marketing organizations in addition to increasing
the number of manufacturing employees and adding to our operating and financial
management team. Our ability to compete effectively and manage future growth
will require us to:

. continue to implement and improve operational, financial and
management information systems on a timely basis; and

. efficiently and effectively attract, hire, train and retain additional
technical, managerial, financial, sales and marketing and support
personnel.

We are dependent on a small number of customers, the loss of one or more of
which would have a significant adverse effect on our business.

Historically, it has been our strategy to market our products to a limited
number of significant customers. We have no long-term volume purchase
commitments from any of our significant customers.

We cannot be certain that we will retain our current customers or that we
will be able to recruit additional or replacement customers. If we were to lose
one or more significant customers to a competitor, our business, results of
operations and financial condition would be materially adversely affected.

Our five largest customers accounted for, in the aggregate, approximately
63.6%, 65.8% and 59.1% of our product sales in 1998, 1999 and for the nine
months ended September 30, 2000, respectively. Our product sales accounted for
approximately 87.2%, 90.7% and 93.1% of total revenues in 1998, 1999 and for
the nine months ended September 30, 2000, respectively. The remainder of our
total revenues for these periods was derived from government-related research
and development contracts.

We anticipate that sales of our products to a limited number of key
customers will continue to account for a significant portion of our total
revenues. As a result, any one of the following events may have a material
adverse effect on our business, results of operations and financial condition:

. reduction, delay or cancellation of orders from one or more of our
significant customers;

. development by one or more of our significant customers of other
sources of supply;

. selection by one or more of our significant customers of devices
manufactured by one of our competitors for inclusion in future
products;

. loss of one or more of our significant customers or a disruption in
our sales and distribution channels; or

. failure of one of our significant customers to make timely payment of
our invoices.

6
<PAGE>

We rely on our customers to distribute or resell our products to end users as
part of integrated systems, and any disruptions in our relationships with these
customers may have a significant adverse effect on our business.

Our marketing strategy has been to sell our products primarily to marketing
intermediaries selected to provide access to certain important market segments
and regions around the world. Our customers are generally not end users of our
products but are usually distributors, module assemblers or system integrators
who either resell our products to other customers or package our products into
systems for resale to end users. These marketing intermediaries are not under
our control. Therefore, we have no control over the ability of these customers
to market and sell to end users. In addition, we have no control over the
financial performance of these customers, which may affect the ability of these
customers to purchase and pay for our products.

If our current customers do not continue to place orders with us, if orders
by existing customers do not continue at the levels of previous periods, if
existing customers do not pay our invoices or if we are not able to obtain
orders from new customers, any such disruption in our relationships with our
current customers may have a material adverse effect on our business, results
of operations and financial condition.

Our industry is highly competitive, which may affect our ability to grow our
customer base and generate sales.

The markets for our products are intensely competitive and characterized by
changing technology. We currently experience competition from numerous
companies in each of the markets in which we participate. Our competition
consists of major energy and chemical companies and specialized electronics
firms in the United States, Germany, Japan, Australia and other parts of Asia
and Europe, and foreign government-sponsored companies. Many of our competitors
are more established, benefit from greater market recognition and have
substantially greater financial, development, manufacturing and marketing
resources than we have.

There are a variety of competing technologies currently under development,
any one of which could achieve manufacturing costs per watt lower than our
Silicon-FilmTM technology.

We believe the principal competitive factors in the market for solar
electric power components are:

. price per watt;

. long-term stability and reliability;

. conversion efficiency and other performance measures;

. ease of handling and installation;

. product quality;

. reputation; and

. environmental factors.

If we do not compete successfully with respect to these or other factors,
it could materially adversely affect our business, results of operations, and
financial condition.

The growth of the solar electric power market is uncertain, and its failure to
continue to grow would materially and adversely affect our business.

The market for solar electric power products has grown steadily in the
past. PV Energy Systems, an independent solar energy market research firm,
reports that the shipment volume of solar electric power products has grown at
a compound annual rate of approximately 31% since 1996. Our strategy of
significantly increasing manufacturing capacity is based in part on the

7
<PAGE>

assumption of continuing market growth. Should the overall solar electric power
market fail to achieve continued growth, or should growth cease in particular
market segments and geographic sales regions where we sell the majority of our
products, a material adverse effect on our business, results of operations and
financial condition may occur.

There are risks associated with international sales, which could have a
significant effect on our business.

International sales accounted for approximately 78.4% of our product sales
for the year ended December 31, 1998, 64.0% for the year ended December 31,
1999 and 79.7% for the nine months ended September 30, 2000. We expect that
international sales will continue to represent a significant portion of our
product sales, but we cannot be certain that we will be able to maintain our
international sales at current levels. If our international sales were to
decline significantly, our business, results of operations and financial
condition could be materially adversely affected. Our international sales are
subject to a number of risks, including the following:

. changes in foreign government regulations and technical standards;

. difficulty of protecting intellectual property;

. export license requirements, tariffs, taxes and other trade barriers;

. requirements or preferences of foreign nations for domestic products;

. fluctuations in currency exchange rates relative to the U.S. dollar;

. difficulties in collecting accounts receivable;

. extended accounts receivable cycles;

. political and economic instability; and

. potentially adverse tax consequences.

Our success depends on protection of our intellectual property, and our failure
to do so could adversely affect our competitive advantage, our brand
recognition and our business.

The success and competitiveness of our products depend in part upon our
ability to protect our current and future technology, manufacturing processes
and brand names through a combination of patent, trademark, trade secret and
unfair competition laws.

Patent applications in the United States are maintained in secrecy until
patents issue, and the publication of discoveries in the scientific literature
tends to lag behind actual discoveries. Therefore, we cannot be certain that we
were the first creator of inventions covered by pending patent applications or
the first to file patent applications on these inventions. Patent applications
filed in foreign countries are subject to laws, rules and procedures which
differ from those of the United States. We cannot ensure that:

. patents will issue from pending or future applications;

. our existing patents or any new patents will be sufficient in scope or
strength to provide meaningful protection or any commercial advantage
to us;

. foreign intellectual property laws will protect our intellectual
property; or

. others will not independently develop similar products, duplicate our
products or design around any patents issued to us.

8
<PAGE>

We enter into confidentiality and non-disclosure of intellectual property
agreements with our employees, consultants and certain vendors and generally
control access to and distribution of our proprietary information. Despite
these precautions, it may be possible for a third party to copy or otherwise
obtain and use our proprietary information without authorization or to develop
similar information independently.

Policing unauthorized use of intellectual property is difficult. The laws
of other countries may afford little or no effective protection of our
technology. We cannot assure you that the steps we have taken will prevent
misappropriation of our technology or that agreements entered into for that
purpose will be enforceable. In addition, litigation may be necessary in the
future to enforce our intellectual property rights, to protect our trade
secrets or to determine the validity and scope of the proprietary rights of
others. Litigation may result in substantial costs and diversion of resources,
either of which could have a material and adverse effect on our business,
results of operations and financial condition.

We may acquire other companies, product lines or technology, and our failure to
integrate any acquisition could have an adverse effect on our business.

As part of our growth strategy, we may pursue acquisitions that could
provide new technologies, products or businesses. Future acquisitions may
involve the use of significant amounts of cash, potentially dilutive issuances
of equity securities, incurrence of debt or amortization of expenses related to
goodwill and other intangible assets.

In addition, acquisitions involve numerous risks, including:

. difficulties in the assimilation of the operations, technologies,
products and personnel of the acquired company;

. the diversion of management's attention from other business concerns;

. risks of entering markets in which we have no or limited prior
experience; and

. the potential loss of key employees of ours or of the acquired
company.

We currently have no commitments with respect to any acquisition. In the
event that such an acquisition does occur and we are unable to successfully
integrate businesses, products, technologies or personnel that we acquire, our
business, results of operations and financial condition could be materially
adversely affected.

A decrease in the availability of system financing for off-grid electric power
applications could have a material adverse effect on our business.

Solar electric power is used in many applications and has proven to be a
cost-effective source of electric power where the electric power grid is
unavailable. Solar electric power has also proven to be cost-effective in
competition with diesel generators and other alternative forms of distributed
generation technologies. We estimate that remote electric power applications
currently comprise approximately 69% of the market for solar electric power.
Because of the high capital costs of solar electric power systems, users may
not have sufficient resources or credit to acquire such systems, particularly
in developing countries. We believe that the availability of financing, such as
loans and lease arrangements, could have a significant effect on the rate of
growth of off-grid solar electric power. Our plans for increased sales of solar
electric power products include increased sales within this market segment. The
lack of increased availability of system financing or the elimination of
existing system financing programs could have a material adverse effect on our
business, results of operations and financial condition.

9
<PAGE>

Any reduction or elimination of government subsidies and economic incentives
for on-grid applications could adversely affect our business.

Approximately 31% of the market for solar electric power is for on-grid
applications, according to PV Energy Systems. Today, the total cost of solar
electric power systems substantially exceeds the cost of power furnished by the
conventional electric utility grid. Governmental bodies in many countries,
notably the United States, Germany and Japan, have provided subsidies in the
form of cost reductions, tax write-offs and other incentives to end users,
distributors, systems integrators and manufacturers of solar electric power
products to promote the use of solar energy in on-grid applications and to
reduce dependency on other forms of energy. On-grid applications are generally
predicted by third party market research firms to be among the most rapidly
growing solar electric power market segments in the future. The growth of the
market for solar electric power products depends in part on government programs
for solar electric power subsidies and consumer incentives. Any reduction or
elimination of government subsidies could have a material adverse effect on our
business, results of operations and financial condition.

We are dependent on key third party suppliers of silicon wafers and other raw
materials, which may cause delays in manufacturing and increase costs.

We manufacture all of our products using materials procured from third-
party suppliers. We purchase and recycle silicon wafers from the semiconductor
industry for use in our single crystal solar cell manufacturing process and
have generally been successful in obtaining sufficient quantities of quality
wafers from a variety of sources. Other required raw materials, including
silicon, are available in adequate quantities from multiple sources, although
for economic and quality control reasons we use single sources of supply for
certain materials. Increased demand for silicon wafers and improvements in
recycling by the semiconductor industry could reduce the supply of silicon
wafers and increase their cost to us.

If we are unable to obtain a sufficient supply of raw materials from our
current sources, we could experience difficulties in obtaining alternative
sources quickly or in altering product design to use alternative materials.
Resulting delays or reductions in product shipments could damage customer
relationships. Furthermore, a significant increase in the price of one or more
of these materials may not be able to be passed on to our customers if we are
to remain competitively priced. Delays and an inability to pass on increased
costs would reduce profits which in turn could have a material adverse effect
on our business, results of operations and financial condition.

Our future operating results are likely to fluctuate, which may adversely
affect the market price of our common stock.

Our quarterly and annual operating revenues, expenses and operating results
may fluctuate due to a variety of factors, many of which are beyond our
control, including:

. the timing of orders from, and shipments to, significant customers;

. the timing of new product introductions by us or our competitors;

. delays in the planned Silicon-FilmTM manufacturing expansion;

. variations in the mix of products sold by us or our competitors;

. the timely payment of our invoices;

. possible decreases in average selling prices of our products in
response to competitive pressures;

. market acceptance of new and enhanced versions of our products;

10
<PAGE>

. the availability and cost of key raw materials;

. requirements for cost sharing on government contracts;

. fluctuations in general economic conditions; and

. negotiation of final government contract overhead rates.

Due to all of the foregoing factors, we do not believe that period-to-
period comparisons of our historical results of operations are indications of
future performance. Furthermore, it is possible that in some future quarters
our results of operations may fall below the expectations of securities
analysts and investors. In such event, the price of our stock on the Nasdaq
National Market will likely be materially and adversely affected.

Our inability to find additional appropriate strategic alliances or maintain
existing relationships could adversely affect market penetration.

To date we have leveraged, and plan to continue to leverage, our resources
in manufacturing technology, marketing and sales of solar electric power
products through collaborative agreements with corporate partners and
customers. Such strategic alliances may include cooperative agreements for
sharing of information, cooperative marketing agreements, or other business
relationships such as equity investments or joint ventures. We have developed
several strategic alliances to assist in commercializing our Silicon-FilmTM
technology.

Our current alliances with GPU International and Atersa are intended to
facilitate our entry into the grid-connected supply of bulk quantities of solar
electric power and to expand our relationships with module assemblers
worldwide, respectively.

The terms of such alliances may require us and our partners to share
revenues and expenses from certain activities or for us to grant to our
partners licenses to manufacture, market and sell products based upon our
Silicon-FilmTM technology. Our current alliances provide for cost sharing and
technology sharing with respect to jointly developed technologies. Such terms
could be part of any future strategic alliance and could materially impact our
business, results of operations and financial condition.

We may be unable to find appropriate future strategic alliances in markets
in which we have little experience, which could prevent us from bringing our
products to these markets in a timely manner, or at all. If we do not enter
into effective alliances, our products may not achieve this significant market
penetration, reducing our revenues and profitability, which could lower the
demand for and reduce market acceptance for our products, which could
materially adversely affect our business, results of operations and financial
condition.

We must keep pace with technological changes. Our failure to do so may result
in the loss of customers and revenue opportunities, which could seriously
affect our business.

Our failure to develop and introduce new products in a timely fashion could
materially adversely affect our business, results of operations and financial
condition. The markets for our solar electric power products are characterized
by changing technology. While we believe we have developed a new technology for
solar electric power applications, our future success will depend in large part
on our ability to keep pace with advancing solar electric power technology.

In addition to our Silicon-FilmTM technology, we believe that there are a
variety of competing technologies under active development by other companies,
including amorphous silicon, cadmium telluride and copper indium diselenide, as
well as advanced concepts for the manufacture of bulk (ingot based), ribbon and
thin film crystalline silicon. Any of these competing technologies could

11
<PAGE>

achieve lower manufacturing costs than those expected to be achieved by
Silicon-FilmTM products we are developing. There is the risk that our
development efforts will be rendered obsolete by technological advances of
others or that other materials will prove more advantageous for the
commercialization of solar electric power products. We believe that to remain
competitive in the future, we will need to invest significant financial
resources in research and development.

Our contracts with federal and state governments subject us to certain risks
including termination and audit. The United States government has filed an
action against us.

We intend to continue our policy of selectively pursuing contract research
programs funded by various agencies of the United States government and state
governments to complement and enhance our own resources.

The percentage of our total revenues derived from government-related
contracts was approximately 12.8%, 9.3% and 6.9% for 1998 and 1999 and for the
nine months ended September 30, 2000, respectively. Contracts involving the
United States government are subject to various risks, including the risk of
termination at the convenience of the government. To date, the government has
not terminated any of our contracts. Other risks include potential disclosure
of our confidential information to third parties, audits and the exercise of
"march-in" rights by the government. March-in rights refer to the right of the
United States government or a government agency to exercise its non-exclusive,
royalty-free, irrevocable worldwide license to any technology developed under
contracts funded by the government if the contractor fails to continue to
develop the technology.

There is no certainty that the United States government will continue its
commitment to programs to which our development projects are applicable or that
we can compete successfully to obtain funding available pursuant to these
programs. A reduction or discontinuance of the government's commitment to these
programs or of our participation in these programs could have a material
adverse effect on our business, results of operations and financial condition.

Substantially all of our revenues from government contracts, including
overhead rates, are subject to audit under various federal statutes. In October
2000, the United States government filed a civil action against us alleging
overbilling of $2.3 million on government contracts. The suit also seeks treble
damages and penalties. The government alleges that for the periods from 1991
through 1995, we charged the government for costs of our commercial operations.
The central issue is the allocation of the costs of our pilot manufacturing
line to our government contracts. We have been in a dispute about overhead
rates with the government since 1996 and have, to date, been unable to resolve
the differences. An unfavorable outcome in this action could have a material
adverse effect on our operating results and cash flows in the quarter in which
this action is resolved. In addition, defending this action may be costly and
may divert our management's attention.

There are risks associated with our use of hazardous materials, and our failure
to control their use could result in substantial financial liabilities.

12
<PAGE>

are ongoing. If we fail to control the use of, or to restrict adequately the
discharge of, hazardous substances, we could be subject to substantial
financial liabilities which could have a material adverse effect on our
business, results of operations and financial condition.

We are dependent on key personnel, and our business would be disrupted if we
are unable to retain and expand our management team.

The loss of any key employees or principal members of management would be
disruptive and could have a material adverse effect on our business and
operating results. Due to the nature of our business, we are highly dependent
on the continued service of, and on the ability to attract and retain,
qualified engineering, technical, manufacturing, sales, marketing and senior
management personnel. The competition for such personnel is intense. If we are
unable to hire additional qualified personnel as needed, we may not be able to
adequately manage and implement our plans for expansion and growth. We may not
be able to continue to attract and retain the qualified personnel necessary for
the development of our business. Our failure to do so could harm our business.

None of our personnel is covered by an employment contract other than Allen
M. Barnett, our President and Chief Executive Officer. Any other officer or
employee of our company can terminate his or her relationship with us at any
time. None of our employees is subject to non-competition agreements which
would survive termination of employment. We do not have "key person" insurance
coverage for the loss of any of our employees other than a $500,000 insurance
policy on the life of Dr. Barnett.

Our stock price is volatile.

The market for securities of high technology companies, including ours, has
been highly volatile. The market price of our common stock has fluctuated
between $5.875 and $63.922 from February 13, 1998 to November 2, 2000. The last
sale price on November 2, 2000 was $41.875 per share. It is likely that the
price of our common stock will continue to fluctuate widely in the future.
Factors affecting the trading price of our common stock include:

. responses to quarter-to-quarter variations in operating results;

. announcements of technological innovations or new products by us or
our competitors;

. failure to meet securities analysts' estimates;

. changes in financial estimates by securities analysts;

. conditions, trends or announcements in the solar electric power
industry;

. announcements of significant acquisitions, strategic alliances, joint
ventures or capital commitments by us or our competitors;

. additions or departures of key personnel;

. sales of common stock;

. accounting pronouncements or changes in accounting rules that affect
our financial statements; and

. other factors and events beyond our control.

In addition, the stock market in general, and the market for technology-
related stocks in particular, has experienced extreme volatility that often has
been unrelated to the operating performance of particular companies. These
broad market and industry fluctuations may adversely affect the trading price
of our common stock, regardless of our actual operating performance.

13
<PAGE>

Purchasers may be unable to resell their shares of our common stock at or
above the offering price. In the past, companies that have experienced
volatility in the market price of their stock have been the subject of
securities class action litigation. If we were the subject of securities class
action litigation, it could result in substantial costs, a diversion of
management's attention and resources and a material adverse effect on our
business, results of operation and financial condition.

FORWARD-LOOKING STATEMENTS

This prospectus contains and incorporates by reference forward-looking
statements that are made pursuant to the Safe Harbor provisions of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements involve
risks, uncertainties and assumptions as described in "Risk Factors," elsewhere
in this prospectus and in the documents incorporated by reference in this
prospectus. All statements, other than statements of historical facts, which
address our expectations of sources of capital or which express our expectation
for the future with respect to financial performance or operating strategies
can be identified as forward-looking statements. As a result, there can be no
assurance that our future results will not be materially different from those
described herein as "believed", "anticipated", "estimated" or "expected", which
reflect our current views with respect to future events. We caution readers
that these forward-looking statements speak only as of the date hereof. Except
as required by law, we hereby expressly disclaim any obligation or undertaking
to release publicly any updates or revisions to any such statements to reflect
any changes in our expectations or any change in events, conditions or
circumstances on which such statement is based.

14
<PAGE>

USE OF PROCEEDS

We will receive net proceeds of approximately $79.1 million from the sale
of 2,000,000 shares of common stock (and an additional $7.9 million from the
sale of 200,000 shares if the underwriters' over-allotment option is exercised
in full) at an assumed public offering price of $41.875 per share after
deducting underwriting commissions and discounts and estimated offering
expenses payable by us. We will not receive any of the proceeds from the sale
of 100,000 shares by the selling stockholders if the underwriters exercise
their over-allotment option.

We intend to use approximately $52 million of the net proceeds of this
offering for the expansion of manufacturing capacity, including the purchase of
equipment, fit-up costs and training expenses. We intend to use the remaining
net proceeds from this offering for research and development, working capital
and other general corporate purposes. In addition, in the ordinary course of
business we may evaluate potential acquisitions of, or joint ventures with,
complementary businesses, products and technologies. Although we have no
current commitments or agreements with respect to any acquisition, we might in
the future use a portion of the remaining proceeds for acquisitions.

Pending such uses, we will invest the net proceeds of this offering in
short-term, investment grade, interest-bearing instruments.

The amount we actually spend for these purposes may vary significantly and
will depend on a number of factors, including future revenue and cash generated
by operations and the other factors described under "Risk Factors." Therefore,
we will have broad discretion in the way we use the net proceeds.

DIVIDEND POLICY

We have never declared nor paid any cash dividends on shares of our stock.
We currently intend to retain future earnings, if any, to finance our growth
and do not anticipate paying any cash dividends in the foreseeable future. The
terms of our bank debt agreements prohibit us from paying cash dividends
without the consent of the lender.

MARKET PRICE OF OUR COMMON STOCK

Our common stock began trading on the Nasdaq National Market on February
13, 1998 under the symbol APWR. The following table sets forth for the
indicated periods, the high and low sales price per share of our common stock
as reported on the Nasdaq National Market.

<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
1998
First Quarter (from February 13, 1998)....................$10.88.$ 6.00
Second Quarter.......................................... 10.25 7.63
Third Quarter........................................... 9.75 6.13
Fourth Quarter.......................................... 9.88 5.88
1999
First Quarter........................................... 14.25 8.50
Second Quarter.......................................... 18.50 10.88
Third Quarter........................................... 17.25 11.75
Fourth Quarter.......................................... 14.25 10.88
2000
First Quarter........................................... 49.38 12.88
Second Quarter.......................................... 32.88 13.13
Third Quarter........................................... 47.75 18.19
Fourth Quarter (through November 2, 2000)............... 63.92 37.88
</TABLE>

On November 2, 2000, the last reported sale price of our common stock on
the Nasdaq National Market was $41.875 per share.

15
<PAGE>

CAPITALIZATION

The following table sets forth our cash and cash equivalents and our
capitalization as of September 30, 2000:

. on an actual basis; and

. on an as adjusted basis to give effect to the receipt of the estimated
net proceeds from the sale of 2,000,000 shares of common stock offered
by us in this offering at an assumed public offering price of $41.875
per share, after deducting underwriting discounts and commissions and
estimated offering expenses payable by us.

The table excludes:

. 2,448,064 shares of common stock subject to options outstanding at
September 30, 2000 at a weighted average exercise price of $11.08 per
share; and

. 310,647 shares of common stock reserved for future grant or issuance
under our option plans.

<TABLE>
<CAPTION>
September 30, 2000
--------------------
Actual As Adjusted
------- -----------
(unaudited)
(in thousands)
<S> <C> <C>
Cash and cash equivalents................................. $26,178 $105,231
======= ========
Current portion of long-term debt......................... -- --
Long-term debt............................................ -- --
Stockholders' equity
Preferred stock, $0.01 par value: 5,000,000 shares
authorized; no shares issued and outstanding.......... -- --
Common stock, $0.01 par value: 50,000,000 shares
authorized; 11,678,006 shares issued and outstanding
(actual); 13,678,006 shares issued and outstanding
(as adjusted)......................................... 117 137
Additional paid-in capital.............................. 63,854 142,887
Unearned compensation................................... (74) (74)
Retained earnings....................................... 2,432 2,432
------- --------
Total stockholders' equity............................. 66,329 145,382
------- --------
Total capitalization................................. $66,329 $145,382
======= ========
</TABLE>

16
<PAGE>

SELECTED FINANCIAL DATA

You should read the following selected financial information in conjunction
with our financial statements and their related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in this prospectus. The statement of operations data for the years
ended December 31, 1997, 1998 and 1999 and the balance sheet data as of
December 31, 1998 and 1999 are derived from, and are qualified by reference to,
our audited financial statements included in this prospectus. The statement of
operations data for the years ended December 31, 1995 and 1996 and the balance
sheet data as of December 31, 1995, 1996 and 1997 have been derived from
audited financial statements not included in this prospectus. The statement of
operations data for the nine-month periods ended September 30, 1999 and 2000
and the balance sheet data at September 30, 2000 are derived from, and
qualified by reference to, our unaudited interim financial statements included
in this prospectus.

<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December 31, September 30,
------------------------------------------- ---------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------- -------
(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>

Statement of Operations
Data:
Revenues:
Product sales.......... $ 5,356 $ 6,237 $13,095 $20,206 $31,428 $22,135 $33,264
Research contracts..... 4,589 4,346 3,512 2,953 3,216 2,349 2,453
------- ------- ------- ------- ------- ------- -------
Total revenues........ 9,945 10,583 16,607 23,159 34,644 24,484 35,717
Cost of revenues:
Product sales.......... 4,483 6,896 9,311 14,942 22,588 16,042 23,054
Research contracts..... 3,029 2,580 2,540 2,297 2,264 1,789 1,790
------- ------- ------- ------- ------- ------- -------
Total cost of
revenues............. 7,512 9,476 11,851 17,239 24,852 17,831 24,844
------- ------- ------- ------- ------- ------- -------
Gross profit.......... 2,433 1,107 4,756 5,920 9,792 6,653 10,873
Operating expenses:
Product development
expenses.............. 314 776 1,007 1,392 2,139 1,541 2,264
General and
administrative
expenses.............. 1,469 1,859 1,972 2,496 3,505 2,156 3,141
Selling expenses....... 444 660 854 951 1,578 989 2,444
Professional fees
related to overhead
dispute............... -- -- -- -- 62 52 326
------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations........... 206 (2,188) 923 1,081 2,508 1,915 2,698
------- ------- ------- ------- ------- ------- -------
Other income
(expense)............. (108) (175) (251) 346 353 46 955
------- ------- ------- ------- ------- ------- -------
Income (loss) before
income tax expense
(benefit)............. 98 (2,363) 672 1,427 2,861 1,961 3,653
Income tax expense
(benefit)............. -- -- 20 (985) 594 588 954
------- ------- ------- ------- ------- ------- -------
Net income (loss)...... $ 98 $(2,363) $ 652 $ 2,412 $ 2,267 $ 1,373 $ 2,699
======= ======= ======= ======= ======= ======= =======
Net income (loss) per
share:
Basic.................. $ 0.03 $ (0.64) $ 0.18 $ 0.30 $ 0.25 $ 0.16 $ 0.24
Diluted................ $ 0.02 $ (0.64) $ 0.13 $ 0.28 $ 0.22 $ 0.14 $ 0.21
Number of shares used
in net income (loss)
per share calculation:
Basic.................. 3,697 3,700 3,710 7,956 9,208 8,653 11,444
Diluted................ 5,362 3,700 6,220 9,572 10,133 9,613 12,870
<CAPTION>
December 31,
------------------------------------------- Sept. 30,
1995 1996 1997 1998 1999 2000
------- ------- ------- ------- ------- ---------------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents........... $ 29 $ 25 $ 4,908 $ 6,545 $25,338 $26,178
Working capital
(deficiency).......... 1,420 (970) 5,608 14,839 46,131 50,308
Total assets........... 8,615 7,887 15,115 28,366 63,507 73,441
Short-term debt........ 812 955 316 -- -- --
Long-term debt......... 651 528 6,277 -- -- --
Total liabilities...... 3,894 4,948 11,356 5,103 6,014 7,111
Redeemable convertible
preferred stock....... 5,798 5,798 5,798 -- -- --
Total stockholders'
equity (deficit)...... (1,077) (2,860) (2,039) 23,263 57,493 66,329
</TABLE>

17
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following Management's Discussion and Analysis of
Financial Condition and Results of Operations in conjunction with our financial
statements and their related notes included in this prospectus. Our discussion
contains forward-looking statements based upon current expectations that
involve risks and uncertainties, such as our plans, objectives, expectations
and intentions. Actual results and the timing of events could differ materially
from those anticipated in these forward-looking statements as a result of a
number of factors, including those set forth under "Risk Factors," "Business"
and elsewhere in this prospectus.

Overview

We currently generate product revenues from the sale of solar cells,
modules, panels and pre-packaged systems. While the predominant source of our
product revenues to date has been recycled wafer products, we are continuing a
significant expansion of our Silicon-FilmTM manufacturing capacity. We
recognize product sales revenue upon shipment. Product sales represented 93.1%
of total revenues for the nine months ended September 30, 2000 and 90.7% for
the year ended December 31, 1999. Solar cell prices and manufacturing costs
vary depending upon supply and demand in the market for solar cells and
modules, order size, yields, the costs of raw materials, particularly reclaimed
silicon wafers recycled from the semiconductor industry, and other factors.

We also generate revenue from contracts with various federal government
agencies to conduct research on advanced Silicon-FilmTM products and
optoelectronic devices. Generally, these contracts last from six months to
three years. We recognize research contract revenue at the time costs
benefiting the contracts are incurred, which approximates the percentage of
completion method.

For the nine months ended September 30, 2000, 79.7% of our product revenues
were generated by sales to customers located outside of the United States. We
believe that international sales will continue to account for a significant
portion of our product sales for the foreseeable future. Current sales are
denominated in U.S. dollars and foreign exchange rate fluctuations have not had
an impact on our results of operations.

Solar cells that we manufacture are sold to original equipment
manufacturers that assemble the solar cells into modules. In addition, we
assemble and sell modules to distributors and value-added resellers. We have
also begun to sell our SunChoiceTM systems. The sale of modules and systems
results in substantially more revenue to us than the sale of solar cells due to
the incremental value of the additional materials, labor and overhead.
Accordingly, our product sales are affected not just by changes in total solar
cells produced, but by changes in the sales mix among solar cells, modules and
systems. The gross margin percentages for modules and systems are generally
less than those of solar cells. As a result, changes in the product sales mix
may also affect total product gross margin.

18
<PAGE>

Substantially all of our revenues from government contracts are subject to
audit under various federal statutes. We have been in a dispute about indirect
cost rates with the government since 1996 and have, to date, been unable to
resolve our differences. In October 2000, the United States government filed a
civil action against us in the U.S. District Court for the District of
Delaware, to recover damages and penalties with respect to the submission of
invoices and Incurred Cost Submissions in connection with contracts with the
U.S. Department of Defense and U.S. Department of Energy. The allegations in
the complaint involve our Incurred Cost Submissions, which are used to
determine indirect cost rates, for the period from 1991 through 1995, and
invoices submitted between July 1994 and January 1996. The government had
previously audited and accepted our indirect cost rate structure for 1991
through 1993. The complaint alleges that we falsely claimed that certain costs
were properly allocable to the government contracts when those costs were
attributable to a commercial venture, resulting in overpayments to us of at
least $2.3 million and seeks treble damages and penalties aggregating
approximately $7.9 million. Our proposed final indirect cost rates for 1996
have been submitted but have not yet been audited. This dispute does not affect
our indirect cost rates for 1997, 1998 and 1999, inasmuch as we revised our
methodology for determining those rates.

This action is in the early procedural stages. Accordingly, we cannot
predict the timetable on which this action will proceed. We disagree with the
allegations in the complaint and believe that we have valid defenses to the
government's claims. We intend to defend this action vigorously. However,
because litigation is subject to uncertainties, it is not possible for us to
predict the outcome of this action. An unfavorable outcome could have a
material adverse effect on our operating results and cash flows in the quarter
in which this action is resolved, but we do not expect that an unfavorable
outcome would have a material adverse effect on our business or financial
condition. In addition, defending this action may be costly.

Results of Operations

The following table sets forth selected financial data as a percentage of
total revenues for the periods indicated:
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, September 30,
------------------- --------------
1997 1998 1999 1999 2000
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales........................... 78.9% 87.2% 90.7% 90.4% 93.1%
Research contracts...................... 21.1 12.8 9.3 9.6 6.9
----- ----- ----- ------ ------
Total revenues....................... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ------ ------
Cost of revenues:
Product sales........................... 56.1 64.5 65.2 65.5 64.5
Research contracts...................... 15.3 9.9 6.5 7.3 5.0
----- ----- ----- ------ ------
Total cost of revenues............... 71.4 74.4 71.7 72.8 69.5
----- ----- ----- ------ ------
Gross profit......................... 28.6 25.6 28.3 27.2 30.5
Operating expenses:
Product development expenses............ 6.1 6.0 6.2 6.3 6.3
General and administrative expenses..... 11.9 10.8 10.1 8.9 8.9
Selling expenses........................ 5.1 4.1 4.6 4.0 6.8
Professional fees related to overhead
dispute............................... -- -- 0.2 0.2 0.9
----- ----- ----- ------ ------
Total operating expenses............. 23.1 20.9 21.1 19.4 22.9
----- ----- ----- ------ ------
Income from operations.................... 5.5 4.7 7.2 7.8 7.6
Other income (expense).................... (1.5) 1.5 1.0 0.2 2.7
----- ----- ----- ------ ------
Income before income tax expense
(benefit)............................... 4.0 6.2 8.2 8.0 10.3
Income tax expense (benefit).............. 0.1 (4.2) 1.7 2.4 2.7
----- ----- ----- ------ ------
Net income................................ 3.9% 10.4% 6.5% 5.6% 7.6%
===== ===== ===== ====== ======
</TABLE>

19
<PAGE>

Comparison of Nine Months Ended September 30, 2000 and 1999

Revenues. Our total revenues were $35.7 million for the nine months ended
September 30, 2000, an increase of $11.2 million or 45.9% from 1999. Product
sales were $33.3 million for the nine months ended September 30, 2000, an
increase of $11.1 million or 50.3% from 1999. Our increase in product sales was
due to higher production volumes, resulting from both manufacturing capacity
expansion and improvements in manufacturing productivity, as well as continued
strong demand for our products. Research contract revenues were $2.5 million
for the nine months ended September 30, 2000, an increase of $100,000 or 4.4%
from 1999.

Gross profit. Our gross profit was $10.9 million for the nine months ended
September 30, 2000, an increase of $4.2 million or 63.4% from 1999. Product
gross profit for 2000 was $10.2 million, an increase of $4.1 million or 67.6%
from 1999. Our product gross margin was 30.7% for the nine months ended
September 30, 2000. In the similar 1999 period, the product gross margin was
27.5%. The increase in product gross margins was due to continued improvements
in productivity as well as increased production volumes and revenue
contribution from our second manufacturing plant which came on-line in the
second quarter of 1998. Our gross profit on research contracts for the nine
months ended September 30, 2000 was $663,000, an increase of $104,000 or 18.5%
from the 1999 period.

Product development expenses. Our product development expenses for the nine
months ended September 30, 2000 were $2.3 million, up $724,000 or 47.0% from
1999. The increase is due to a higher level of development activity for our
Silicon-FilmTM products and other new products.

General and administrative expenses. Our general and administrative
expenses for the nine months ended September 30, 2000 were $3.1 million, an
increase of $985,000 or 45.7% from the similar 1999 period. The increase is
primarily due to higher levels of salaries as a result of additional positions
to support our growth, professional fees, insurance expenses and certain costs
of being a public company such as annual report, proxy solicitations and other
related costs.

Selling expenses. Our selling expenses for the nine months ended September
30, 2000 were $2.4 million, an increase of $1.5 million or 147.1% from 1999.
The increase is due to higher salary costs and relocation costs as a result of
additions to the sales and marketing staff, increased advertising expenditures
and higher travel costs.

Professional fees related to overhead dispute. Our professional fees
incurred in connection with our overhead dispute for the nine months ended
September 30, 2000 were $326,000, an increase of $274,000 from the similar 1999
period. This increase is due to the high level of activity, and related
professional fees, related to the dispute during the third quarter of 2000.

Interest income. Our interest income for the nine months ended September
30, 2000 was $1.1 million, as compared with $69,000 in the 1999 period. The
increase was due to higher cash balances available for investment, as a result
of our public offering in the fourth quarter of 1999.

Equity in losses of joint ventures. Equity in the losses of joint ventures
was $88,000 for the nine months ended September 30, 2000. There was no
comparable amount in the same period in 1999. The ventures did not have
significant operations until the fourth quarter of 1999.

Income taxes. Income taxes for the nine months ended September 30, 2000
were $954,000, as compared with $588,000 in 1999. The effective tax rate for
the 2000 period was 26.1% as compared with 30.0% in the 1999 period. Our
effective tax rate is lower than the statutory rates principally as a result of
research and experimentation tax credits and the benefit of a Foreign Sales
Corporation. The reduction in the effective tax rate is due to a higher
percentage of international sales in 2000 as compared to 1999, as well as
higher levels of research and experimentation tax credits.

20
<PAGE>

Comparison of Years Ended December 31, 1999 and 1998

Revenues. Our total revenues for the year ended December 31, 1999 were
$34.6 million, an increase of $11.5 million or 49.6% from $23.2 million for the
year ended December 31, 1998. Product sales for the year ended December 31,
1999 were $31.4 million, an increase of $11.2 million or 55.5% from $20.2
million for the year ended December 31, 1998. Our increase in product sales was
due to increased levels of production from both of our manufacturing
facilities, as well as continued strong customer demand. Research contract
revenue for the year ended December 31, 1999 was $3.2 million, an increase of
$263,000 or 8.9% from $3.0 million for the year ended December 31, 1998.

Gross profit. Our gross profit for the year ended December 31, 1999 was
$9.8 million, an increase of $3.9 million or 65.4% from $5.9 million for the
year ended December 31, 1998. Gross profit on product sales was $8.8 million,
an increase of $3.6 million or 67.9% from $5.3 million for the year ended
December 31, 1998. Gross profit margin on product sales for the year ended
December 31, 1999 was 28.1%, as compared with 26.1% for the year ended December
31, 1998. The increase in product gross margin was due to increases in
manufacturing volumes and productivity, which reduced product unit costs.

Gross profit on research contracts for the year ended December 31, 1999 was
$952,000, an increase of $296,000 or 45.1% from the year ended December 31,
1998. Gross profit margin on research contracts for the year ended December 31,
1999 was 29.6% as compared to 22.2% for the year ended December 31, 1998. The
increase in gross profit and gross margin in 1999 was due to higher effective
overhead rates.

Product development expenses. Product development expenses for the year
ended December 31, 1999 were $2.1 million, an increase of $747,000 or 53.7%
from $1.4 million for the year ended December 31, 1998. The increase in product
development expenses was attributable to increased levels of engineering and
manufacturing support dedicated to the development of our Silicon-FilmTM
production process.

General and administrative expenses. Our general and administrative
expenses for the year ended December 31, 1999 were $3.6 million, an increase of
$1.1 million or 42.9% from $2.5 million in 1998. The increase was due to higher
levels of bad debt expense, staffing, professional services and insurance
costs.

Selling expenses. Our selling expenses for the year ended December 31, 1999
were $1.6 million, an increase of $627,000 or 65.9% from $951,000 for the year
ended December 31, 1998. The increase was due to higher levels of staffing,
travel and advertising expenses.

Interest expense. Interest expense for the year ended December 31, 1999 was
$16,000, a decrease of $236,000 or 93.7% from $252,000 for the year ended
December 31, 1998. The decrease was due to lower levels of debt outstanding in
1999 as a result of the repayment of a convertible note in the fourth quarter
of 1998.

Interest income. Interest income for the year ended December 31, 1999 was
$338,000, a decrease of $261,000 or 43.6% from $599,000 for the year ended
December 31, 1998. The decrease was due to a lower level of cash balances
during 1999. However, in the fourth quarter of 1999, we completed a follow-on
equity financing, raising net proceeds of $30.2 million.

Equity in earnings of joint ventures. Equity in the earnings of joint
ventures was $63,000 for the year ended December 31, 1999. There was no
comparable amount in 1998. One of the ventures was formed in 1999, and the
other venture did not have significant operations until 1999.

21
<PAGE>

Income taxes. Income tax expense for the year ended December 31, 1999 was
$594,000, as compared to a benefit of $985,000 for the year ended December 31,
1998. The effective tax rate is lower than the statutory rates principally as a
result of research and experimentation tax credits and the benefit of a Foreign
Sales Corporation. The 1998 benefit represents the change in the valuation
allowance pertaining to the Company's net operating loss carryforward. Net
operating loss carryforwards totaling approximately $3.9 million are available
through 2011 to reduce federal and state taxable income as of December 31,
1999.

Comparison of Years Ended December 31, 1998 and 1997

Revenues. Our total revenues for the year ended December 31, 1998 were
$23.2 million, an increase of $6.6 million, or 39.5%, from $16.6 million for
the year ended December 31, 1997. Product sales for the year ended December 31,
1998 were $20.2 million, an increase of $7.1 million, or 54.3%, from $13.1
million for the year ended December 31, 1997. Our increase in product sales was
due to increased levels of production from the addition of a second
manufacturing facility in the first half of 1998 as well as improvements in
manufacturing technology and manufacturing productivity, allowing us to satisfy
a greater percentage of backlog orders. Research contract revenue for the year
ended December 31, 1998 was $3.0 million, a decline of $559,000, or 15.9%, from
$3.5 million for the year ended December 31, 1997. The decline in research
contract revenue, which was expected, was primarily attributable to continued
reduction of our contract overhead rates as a result of the ongoing
transformation from a government contractor to a manufacturing company.

Gross profit. Our gross profit for the year ended December 31, 1998 was
$5.9 million, an increase of $1.2 million, or 24.5% from $4.8 million for the
year ended December 31, 1997. Gross profit on product revenues for the year
ended December 31, 1998 was $5.3 million, an increase of $1.5 million from $3.8
million for the year ended December 31, 1997. Gross profit margin on product
revenues for the year ended December 31, 1998 was 26.1%, as compared to 28.9%
for the year ended December 31, 1997. The change in product gross margin was
affected by our expansion into a second manufacturing facility. During the
first half of 1998, we incurred start-up costs such as the hiring and training
of new employees and facility operating costs but generated little revenue to
offset such costs. In the second half of 1998, the quantities of product
manufacturing increased and generated revenues, but the gross margins remained
below those of our other manufacturing facility. Product gross margins in the
fourth quarter were also affected by disruptions to the manufacturing process
caused by the installation of new manufacturing equipment, the qualification of
new vendors and the large numbers of new employees required to be hired and
trained.

Gross profit on research contract revenues for the year ended December 31,
1998 was $656,000, a decrease of $316,000, or 32.5%, from $972,000 for the year
ended December 31, 1997. Gross profit margin on research contracts revenue for
the year ended December 31, 1998 was 22.2% as compared to 27.7% for the year
ended December 31, 1997. The decrease in gross profit and gross profit margin
was attributable to a reduction in our contract overhead rates as a result of
our ongoing transition to a manufacturing company, which reduces the amount of
overhead expenses that we previously allocated and billed to government
contracts.

Product development expenses. Our product development expenses for the year
ended December 31, 1998 were $1.4 million, an increase of $385,000, or 38.3%,
from $1.0 million for the year ended December 31, 1997. The increase in product
development expenses was attributable to increased levels of engineering and
manufacturing support dedicated to the development of our Silicon-FilmTM
production process.

General and administrative expenses. Our general and administrative
expenses for the year ended December 31, 1998 were $2.5 million, an increase of
$524,000, or 26.6%, from $2.0 million in 1997. The increase was due to
increased salary expense due to additional positions to support our

22
<PAGE>

growth and the costs of being a public company (legal and accounting fees,
liability insurance, printing, stockholders communications) but were offset by
a lower level of bonuses.

Selling expenses. Our selling expenses for the year ended December 31, 1998
were $951,000, an increase of $97,000, or 11.4%, from $854,000 for the year
ended December 31, 1997. The increase in selling expenses was due to increased
salary, advertising and travel expenses offset by the elimination of sales
commissions paid to third parties.

Interest expense. Interest expense for the year ended December 31, 1998 was
$252,000, a decrease of $117,000, or 31.7% from $369,000 for the year ended
December 31, 1997. The decline in interest expense was attributable to a
reduction in our level of indebtedness, including the repayment of bank debt in
March 1998 and the repayment of a $5.0 million convertible promissory note in
October 1998.

Interest income. Interest income (principally net interest income) for the
year ended December 31, 1998 was $599,000 as compared with interest income of
$114,000 for the year ended December 31, 1997. The increase was attributable to
increased cash balances and related levels of interest income as a result of
the proceeds of our initial public offering.

Income taxes. An income tax benefit of $985,000 was recorded for the year
ended December 31, 1998 as compared with $20,000 of expense for the year ended
December 31, 1997. The 1998 benefit represents the change in the valuation
allowance pertaining to our net operating loss carry forwards. The 1997 expense
represents our alternative minimum tax liability.

Liquidity and Capital Resources

At September 30, 2000, we had cash of $26.2 million, as compared with $25.3
million at December 31, 1999. Cash provided by operating activities of $3.7
million for the nine months ended September 30, 2000 was principally due to
decreases in accounts receivable balances. Cash used in operating activities
for the nine months ended September 30, 1999 of $4.0 million was principally
due to increases in accounts receivable and inventory.

Cash used in investing activities of $5.6 million and $2.9 million for the
nine months ended September 30, 2000 and 1999, respectively, was principally
due to capital expenditures for the increase of manufacturing capacity.

Net cash provided from financing activities of $2.8 million and $768,000
for the nine months ended September 30, 2000 and 1999, respectively, was
principally due to the exercise of stock options.

Our sources of liquidity as of September 30, 2000 consist principally of
cash of $26.2 million and available bank credit lines of $4 million. Any
borrowings under our bank facilities will be secured by accounts receivable,
inventory and machinery and equipment.

We expect that our available cash balance, together with our proceeds from
this offering, our projected cash generated from operations and available bank
credit lines will be sufficient to fund our activities for at least the next
two years.

Qualitative and Quantitative Disclosures About Market Risk

We develop products in the United States and market our products in North
America as well as in the Europe and Asia Pacific and Africa regions. As a
result, our financial results could be affected by factors such as changes in
foreign currency exchange rates or weak economic conditions in foreign markets.
Because all of our revenues are currently denominated in U.S. dollars, a
strengthening of the dollar could make our products less competitive in foreign
markets. Our interest income is sensitive to changes in the general level of
U.S. interest rates, particularly since the majority of our investments are in
short-term instruments. Due to the short-term nature of our investments, we
believe that there is not a material risk exposure.

23
<PAGE>

BUSINESS

Overview

We sell our products in the United States as well as in several selected
international markets such as Germany, Spain, Japan, China and South Africa.
According to PV Energy Systems, the solar electric power industry sold
approximately 200 megawatts of power generating capacity in 1999, which
represented approximately $2.6 billion in equipment sales. PV Energy Systems
forecasts growth for solar electric power shipments of 25% per year over the
next five years. We currently have capacity to produce approximately 35
megawatts of solar electric power generating products per year. We expect to
increase our production capacity to 65 megawatts by the end of 2001 and plan to
continue to increase both our production capacity and capacity utilization to
meet this rapidly growing demand.

We believe that our products are cleaner, have superior reliability, are
less costly to operate and are more easily scaled to any size application
compared with other distributed generation technologies. Additionally, we
believe our focus on silicon wafer sourcing, equipment and process engineering,
and product design has allowed us to reduce production costs and increase the
mechanical and electrical yields of our products.

The Electric Power Industry

The electric power industry comprises one of the largest segments of the
global economy, with annual electric power revenues of approximately $1
trillion. Approximately $200 billion is spent annually on power generation and
delivery equipment, of which approximately 90% is utilized for centralized
power plants where electricity is generated at a large scale and distributed to
end users through a network of transmission cables. Currently, approximately
10% of the overall power equipment market comprises distributed generation
systems sold to customers located in remote or rural areas or for use in back-
up or standby duty to improve power quality and reliability.

Structural Change within the Electric Power Industry

The electric power industry is currently undergoing significant changes to
its basic structure and operating models. Governments in the United States and
other countries are changing the model of vertically integrated local electric
utility monopolies, whose prices are directed by regulators, in favor of a
deregulated, competitive industry structure. Furthermore, new power generation
technologies have expanded users' options for procuring electric power.

We believe that these regulatory changes will promote greater consumer
choice and facilitate increased use of distributed generation technologies as
electric power providers increasingly will seek to differentiate their product
offerings on the basis of cost, reliability and power generation source.

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<PAGE>

Deregulation of the electric power industry is occurring globally, and the
rules which govern this process differ significantly among countries. In the
United States, deregulation is proceeding on a state-by-state basis. Currently,
there are 23 states that have passed legislation and opened their retail
electric power markets to competition, and an additional 20 states have formal
deregulation procedures underway.

As part of the deregulation process, governments in Europe, Japan and the
United States are implementing legislation and introducing various economic
incentives. Renewable energy providers and users benefit from the following
types of governmental assistance:

. portfolio standards mandating the use of renewable energy sources;

. direct purchase subsidies to end users to offset up-front capital
costs; and

. net metering laws which allow end users to sell electric power back
into the grid at full retail prices.

The combination of some or all of these types of governmental assistance
provides an attractive market opportunity for our solar electric power
products. In Europe and Japan, we estimate that these programs have stimulated
the installation of more than 64,000 solar electric power residential systems
from 1995 through 1999. In California, which was the first state to fully
deregulate its electric power industry, the legislature set aside $54 million
in 1998 for solar electric power programs, including a five-year direct subsidy
program for homeowners who purchase solar electric power systems.

The Adoption of Distributed Generation

An increasingly competitive power industry, coupled with increased consumer
demand for high quality, reliable, accessible, competitively priced and
environmentally friendly sources of electric power, is creating opportunities
for new technologies for electric power generation, transmission and
distribution. We believe that distributed generation technologies will
capitalize on these new opportunities based on the following factors:

. Increasing Demand for High Quality and Reliable Power. The
proliferation of Internet communications and the associated digital
communications infrastructure has resulted in a significant increase
in the demand for high quality and reliable power sources. According
to the Electric Power Research Institute, an electric utility
sponsored research collaborative, the cost of power disruptions in the
United States is approximately $50 billion per year. For this reason,
many technology and communications businesses are installing highly
reliable, grid parallel on-site generation systems. We believe that
power quality and reliability will become increasingly important
factors for customers involved with all aspects of technology and
communications applications, and that distributed generation
technologies such as solar electric power will be favored due to their
ability to deliver high quality power at high levels of service
reliability.

. Capacity Constraints. We believe that expansion of the existing
electric power infrastructure may not reliably meet growth in the
demand for electric power. According to the United States Department
of Energy, peak summer demand for electric power has increased by 25%
since 1990, while power supply capacity has increased by only 6% over
the same period. Also, according to industry sources, capacity reserve
margins, which represent the amount of excess generation capacity
available during peak usage periods, have decreased in the United
States from 33% in 1982 to 14% in the summer of 1999. Increasing the
existing and aging infrastructure to meet capacity constraints will be
capital intensive, time consuming and may be restricted by
environmental concerns. We believe

25
<PAGE>

that distributed generation products, in particular solar electric
power products, offer the best solutions for overcoming many of the
obstacles associated with providing additional capacity for energy
customers.

. Environmental Concerns and Regulations. Several countries, including
Japan, Germany and the United States, have introduced economic
incentives geared towards the commercialization and expansion of
renewable energy sources. We believe that continuing public and
governmental concern regarding environmental issues such as global
warming and air pollution, alongside continued development of cost-
competitive, environmentally friendly alternatives, will encourage
additional legislative initiatives in support of distributed
generation solutions.

. Technological Advancement. We believe that advances in technology,
design and manufacturing processes will continue to reduce the cost
and enhance the performance characteristics of distributed generation
products, which should ultimately make distributed generation
attractive to a broader market of consumers.

We believe that installing distributed generation technologies, such as
solar power, is one of the most promising strategies for addressing these new
electric power generation transmission and distribution opportunities.

The Solar Power Advantage

Although a number of new technologies, including fuel cells and
microturbines, can generate electric power in a distributed or point-of-use
fashion, solar electric power offers several benefits relative to other
distributed generation technologies:

. Reliable and low maintenance. With no moving parts, solar power
systems reliably power some of the world's most sensitive
applications, from space satellites to microwave stations in
mountainous and other remote, harsh environments.

. Modular and scalable. Solar electric power is highly scalable and can
be deployed in many sizes and configurations, from hand-held devices
to large power generating facilities almost anywhere in the world.

. Zero emission. Solar power is the only method of distributed
generation that produces no emissions.

. Renewable. Solar power is the only distributed generation technology
that utilizes a renewable energy source. Solar electric power systems
can provide the advantages of other distributed generation systems
without the need for fuel or regular maintenance.

. No fuel infrastructure. Solar electric power converts energy from the
sun and therefore is not dependent on the existence, development or
maintenance of a fuel delivery infrastructure.

Additionally, the power output from a solar electric power system is well-
matched to periods of peak load demand, typically occurring during hot summer
days. We believe that this factor will become increasingly significant as time-
of-day pricing or other variable pricing mechanisms are implemented to respond
to delivery constraints during periods of high demand.

The Solar Power Industry

Solar electric power addresses the needs of three major market segments:

. On-grid. In this application, solar electric power is used as an
environmentally preferred source of alternative or supplemental
electric power for customers already connected to the utility grid and
to provide reliable back-up power in the event of a utility outage.

26
<PAGE>

Primarily concentrated in Europe, Japan and the United States, this
application has represented the fastest-growing segment of the solar
electric power market since 1996.

. Rural electrification. Many of the estimated two billion people still
without electric power live in geographic areas not conducive to
electrification by means of the utility grid. For these people, solar
electric power can be a cost effective and rapid way in which to gain
access to electrical supply.

. Telecommunications and transportation industries. Solar electric power
is used for a wide variety of applications related to the
telecommunications and transportation industries. Examples of these
applications include cellular telephone base stations, fiber-optic and
radio repeaters, telemetry and data acquisition systems, traffic
information signs, warning displays and emergency call boxes.

PV Energy Systems estimated 1999 worldwide solar electric power industry
shipments at 201 megawatts, which represents approximately $2.6 billion in
equipment sales. Since 1996, industry shipments have increased at a compound
annual growth rate of 31%. During this period, the fastest-growing solar
electric power market segment has been for on-grid applications, where
consumers already connected to the utility grid are choosing solar electric
power as an alternative to conventional on-grid sources. Since 1996, on-grid
shipments have grown at a compound annual growth rate of 90% and now account
for 31% of the total market in 1999. We believe that growth in the on-grid
market segment is being driven by customer preference for environmentally
friendly electric power technologies and by the worldwide trend toward
deregulation within the electric utility industry.

The chart below highlights the growth and market share of worldwide on-grid
and off-grid solar electric power shipments.

[GRAPH]

On-Grid Off-Grid

1996 9 80
1997 29 97
1998 37 115
1999 65 137

27
<PAGE>

PV Energy Systems predicts that solar electric power shipments will
continue to increase at a compound annual growth rate of 25% through 2005, and
that on-grid shipments and off-grid shipments will grow at compound annual
rates of 35% and 18%, respectively. According to this forecast, the on-grid
segment will be approximately 51% of the total solar electric power market
by 2005.

The Solar Power Challenge

Solar electric power is often the most cost-effective source of electric
power in selected off-grid applications. While governmental assistance and
enhanced consumer choice have accelerated the use of solar electric power for
on-grid applications, the widespread utilization of solar electric power by
customers connected to the utility grid has been limited principally by
production costs. The ability to reduce production costs is driven by three
primary factors:

. Materials sourcing. Reducing raw materials cost must be achieved
without compromising product quality or reliability.

. Equipment and process engineering. Increased process throughput must
be achieved while maintaining or improving product performance.

. Product design. Optimized product design must be achieved to capture
economies of scale and lower production cost per kilowatt.

Most of the solar electric power technologies that have been commercialized
to date have not adequately reduced costs while maintaining the requisite
levels of performance and reliability. These technologies fall into two basic
categories--technologies based on ingots of crystalline silicon and
technologies based on thin films of semiconductors other than crystalline
silicon. The manufacture of ingot-based silicon wafers requires expensive
equipment, consumes large amounts of electricity, wastes a significant portion
of raw materials and takes several days to complete. Although thin films appear
to offer the potential to reduce cost, low efficiency, poor stability and high
capital costs have hampered the commercialization of thin-film solar electric
power technologies to date.

Our Technology Solution

We have developed an innovative and proprietary set of technologies and
processes for the manufacture of solar cells which optimizes several stages in
the manufacturing process to progressively reduce production costs while
increasing mechanical and electrical yields. We have also introduced several
solar cell design features that allow us to generate more power per solar cell
which ultimately reduces the cost per kilowatt. Our manufacturing and design
innovations address the primary challenges in solar cell production. These
include:

. Silicon wafer formation and sourcing. We have developed two
proprietary manufacturing processes that allow us to significantly
reduce silicon wafer cost. Our recycled semiconductor wafer technology
recycles silicon wafers from the semiconductor industry for the
production of solar cells. Our Silicon-FilmTM technology does not
require high-purity silicon and produces large area silicon sheets in
a fraction of the time of traditional ingot-based wafer manufacturing.
Both of our processes are based on crystalline silicon and build on
this material's established track record of performance and
reliability.

. Equipment and process engineering. We have designed a range of
proprietary equipment and processes that allow us to increase our
manufacturing productivity and to generate a higher level of power
output per production asset. For example, our Silicon-FilmTM
technology is a continuous, high-speed production process that
produces silicon wafers in minutes. In contrast, traditional ingot-
based silicon wafer manufacturing requires

28
<PAGE>

expensive wafer formation and sawing equipment and takes several days
to produce the same quantity of solar power.

. Product design. Our technology will allow us to produce solar cells in
sizes up to 12 inches, with corresponding power output of up to 10
watts per solar cell. This is approximately three times more powerful
than the largest solar cell currently available. More powerful solar
cells reduce the cost per watt for module assembly and installation
because the fixed costs of these operations can be amortized over more
watts. Our next-generation Silicon-FilmTM solar cell, currently under
development, also incorporates integrated circuit design concepts that
further increase functionality and reduce cost.

Our focus on silicon wafer sourcing, equipment and process engineering and
product design has allowed us to significantly reduce our production cost per
watt and has provided us with significant operating leverage to grow our
business.

Strategy

Our goal is to become the leading global solar electric power company. To
achieve this, we intend to:

Maintain our manufacturing and technology advantage

We intend to continue to enhance our manufacturing processes and
technologies and to introduce innovative solar electric power products. We
intend to leverage our recycled semiconductor wafer and Silicon-FilmTM
technology platforms in order to further reduce solar cell manufacturing costs
and increase market share. We have consistently introduced new products to
provide our customers with improved levels of functionality, price and
performance and to access new market opportunities. We plan to build on this
history of innovation through the continued introduction of new products,
including solar cells, modules, panels, systems and wholesale solar electric
power.

Rapidly expand manufacturing capacity

We intend to capitalize on our manufacturing expertise and replicable
method of expanding manufacturing capacity. Over the past two years we have
approximately tripled our manufacturing output. We plan to use a portion of the
net proceeds from this offering to further expand our manufacturing capacity by
a combination of organic growth and potential acquisitions.

Become a leading supplier of residential and commercial "premium power" on-
grid solutions

We believe that the deregulation of the energy industry is creating a
favorable environment to market residential and commercial rooftop solar
systems to domestic on-grid customers. We believe that power reliability will
become increasingly important to customers, and that solar electric power
systems are one way for consumers to increase the reliability of their
electricity supply. We have begun to sell our SunChoiceTM systems to customers
in states such as California, Arizona, New York and New Jersey that are
implementing favorable legislation, introducing economic incentives and
promoting consumer choice.

Expand relationships with module assemblers

In international markets, local module assemblers are often best positioned
to deliver customized solutions and to compete for local business. We intend to
expand our relationships with selected module assemblers and to offer
additional products and services, including factory design, equipment
selection, process training and quality assurance. We believe that this
strategy will allow

29
<PAGE>

us to broaden our international reach and to penetrate new markets. In July
1999, we formed a joint venture with Atersa, S.A., a leading Spanish module
assembler and systems integrator, to provide these services.

Pursue strategic relationships

We intend to continue to pursue strategic relationships to introduce new
technologies and products, enter new geographic markets, attract new customers
and pursue additional revenue opportunities. These relationships may take
various forms, including cooperative marketing agreements, joint ventures and
strategic alliances. Through our GPU Solar joint venture, we have developed the
capability to generate and sell wholesale solar electric power in selected
markets in the United States.

Products

We currently sell five classes of products: solar cells, modules, panels,
systems and wholesale solar electric power.

. Solar cells are semiconductor devices that convert sunlight directly
into electricity by means of a solid-state process known as the
photovoltaic effect.

. Modules are assemblies of solar cells connected together and
encapsulated in a weatherproof package.

. Panels are assemblies of several modules wired together in our factory
and mounted on a common support structure. Panels are typically used
to reduce field assembly cost in systems where hundreds or thousands
of individual modules are required.

. Systems typically include a group of modules or panels, a storage
battery and electronic equipment for power conditioning and control.
Our SunChoiceTM pre-packaged systems are designed for use on
residential and small commercial rooftops.

. Wholesale solar electric power is produced and sold through our GPU
Solar joint venture under long-term purchase agreements.

Solar cells. Solar cells are the core component inside every solar electric
power system. We sell most of the solar cells we produce to independent module
assembly companies. These customers assemble our solar cells into modules and
sell the modules under their own brand name for a variety of local market
applications. We believe that our solar cells are preferred by module assembly
company customers over other manufacturers' solar cells for several reasons:

. our solar cells are the largest and most powerful solar cells on the
market today;

. our solar cells are significantly thicker than most solar cells,
leading to lower rates of breakage during soldering and packaging; and

. our solar cells have specially prepared electrical contacts for ease
of soldering.

One of our key strategies has been to capture economies of scale by
increasing the size of our solar cells. With our recycled semiconductor wafer
process, utilizing single crystal silicon wafers, we capitalized on the
movement of the computer chip industry to larger wafer sizes. In 1993, we were
one of the first companies to introduce a 5" square single crystal solar cell,
which has gradually replaced the earlier 4" solar cell as the industry
standard. In 1995, we were the first company to introduce a 6" square single
crystal solar cell, and we are still one of only two companies offering a
product of this size. In 1998, we introduced our first solar cell made using
our Silicon-FilmTM technology which we branded under the name APexTM. This
solar cell is identical in size and layout

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<PAGE>

to our 6" single crystal solar cell, which makes it easy for customers whose
equipment is already configured for this size to add an APexTM module to their
product line. In early 2000 we introduced an 8", 4-watt single crystal solar
cell that is approximately 25% more powerful than any other solar cell
currently on the market.

We plan to continue to exploit the economies of scale inherent in the
processing and packaging of large solar cells in order to reduce costs further
and to differentiate us from our competitors. We also plan to capitalize on the
unique large area capability of our Silicon-FilmTM technology to introduce 8"
and 12" square APexTM solar cells rated for 4.5 watts and 10 watts,
respectively.

Our Product Evolution

<TABLE>
<CAPTION>
Product Power Introduction
Name Dimensions Cell Type (Watts) Date
------- ---------- -------------- ------- ------------
<S> <C> <C> <C> <C>
AP-104 4" square Single Crystal 1.3 1991
AP-105 5" square Single Crystal 2.1 1993
AP-106 6" square Single Crystal 3.2 1995
APx-6 6" square APexTM 2.5 1998
AP-108 8" round Single Crystal 4.0 2000
APx-8 8" square APexTM 4.5 2001
APx-12 12" square APexTM 10.0 2002
</TABLE>

Modules. Modules are assemblies of solar cells that can be electrically
interconnected to achieve virtually any combination of required electric power
output. We manufacture modules with power ratings ranging from 30 to 150 watts.
Modules at the lower end of this power range are typically used individually to
provide small quantities of energy for non-electrified homes and for a variety
of small industrial applications in the telecommunications and transportation
industries. Higher power modules are typically used in larger arrays. Most of
our module sales are at the higher power ratings. These modules capitalize on
our ability to make larger and more powerful cells than our competitors.

Panels. For systems requiring hundreds or thousands of individual modules,
we sell fully assembled panels. Panels are assemblies of high-power unframed
modules adhesively bonded to a common support structure and electrically
interconnected and tested in our factory. Panels are typically shipped to the
job site in reusable shipping racks. The advantage of this product is that we
perform much of the electrical and mechanical integration in our factory under
controlled conditions, thereby lowering our customers' on-site labor costs and
reducing the probability of wiring errors. We believe that we are the only
solar electric power company to offer fully assembled panels as a standard
product.

Systems. Our SunChoiceTM systems are standardized systems designed for
residential and small commercial rooftops. These systems are designed to
operate in parallel with the utility grid and typically generate between 50%
and 75% of a home's annual electric power needs. Solar electric power not
consumed on the premises is sold back into the utility grid. Most SunChoiceTM
systems include a storage battery that allows the system to provide back-up
power to selected circuits during a utility outage. We are finding significant
customer interest in backup or emergency power. We believe that this interest
reflects broad concern by customers about the reliability of the electric power
network.

Wholesale solar electric power. Through GPU Solar, we construct, own, and
operate solar electric power plants and sell electric power on a wholesale
basis to power marketing companies for resale to end customers. In this case,
our product is wholesale electric power, which we sell under long-term power
purchase contracts with power markets and electric utilities.

31
<PAGE>

Contract Research and Development

We selectively pursue contract research programs funded by third parties to
help support the development of new technical capabilities and products. These
programs have been selected to complement and enhance our long-term development
strategy under conditions that permit us to retain the technology developed. We
have received substantial third party funding from various agencies of the
United States government. Total sums expended for research, development and
manufacturing engineering in the years ended December 31, 1997, 1998 and 1999
and the nine months ended September 30, 2000 were $3.5 million, $3.7 million,
$4.4 and $4.1 million, respectively. Of those amounts, approximately $2.5
million, $2.3 million, $2.3 million and $1.8 million, respectively, were
externally funded and are a component of contract revenue.

Manufacturing

We currently manufacture our products in two facilities in Newark,
Delaware, one located in Solar Park and the other in nearby Pencader Corporate
Center. We believe that our recent experience of building and operating our
Pencader plant has allowed us to develop a formal, replicable model for
capacity expansion and that this process reduces the risks associated with
further capacity expansion. Some of the key elements contributing to this low
risk approach are:

. utilization of previously proven processes and equipment;

. increases in solar cell size which allow for greater power output with
existing production processes; and

. flexible manufacturing which enables us to run multiple product
configurations through the same line.

Our manufacturing facilities include a full complement of equipment for
wafer, solar cell and module manufacturing and are regularly upgraded to
improve capacity and product quality. Included in both facilities are equipment
to condition wafers by mechanical and chemical means, furnaces for diffusion,
printing and firing equipment for applying electrical contacts to solar cells,
equipment for applying anti-reflection coatings on solar cells and solar cell
testers. Our Pencader facility contains equipment for assembling and testing
modules.

The research and development portion of our Solar Park facility is equipped
with standard semiconductor device development, fabrication and evaluation
equipment, including wafer polishing facilities, seven liquid phase epitaxial
growth systems for silicon and compound semiconductor devices and furnaces for
diffusion, oxidation, alloying and heat treatment, photolithography equipment,
vacuum deposition for metals and anti-reflection coatings, plating baths for
obtaining low resistance contacts and standard process evaluation equipment
including a scanning electron microscope with energy dispersive spectroscopy
capability.

Sales and Marketing

We pursue both direct and indirect sales and marketing strategies according
to the dynamics of each targeted market. We currently sell solar cells and
modules in selected international on-grid, rural and telecommunications and
transportation markets through our direct sales force. We have begun to sell
complete systems in selected on-grid markets through indirect channels,
including value added resellers, distributors, independent agents and
contractors. We currently have relationships with several indirect channel
partners which allow us to penetrate selected global markets efficiently.
Direct sales to certain customer classes and applications afford us a higher
level of control and increased participation in downstream margin
opportunities, while our cooperation with indirect partners gives us coverage
of certain international markets which would be difficult or impossible for us
to access directly. The table below explains the relationship between market
segments, product types, customer types, sales channels and applications as
they relate to our business.

32
<PAGE>

<TABLE>
<CAPTION>
On-Grid Off-Grid
---------------------------------------- ---------------------------------------
Residential and
Commercial Telecommunications Rural
Market Buildings Wholesale Power and Transportation Electrification
------------- ------------------- -------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Our Products . Solar Cells . Wholesale Solar . Modules . Solar Cells
. Modules Electric Power . Modules
. Complete Systems Generated with
Our Technology

Customer . Residential and . Power Marketers . Original . Module Assemblers
Commercial . Electric Utilities Equipment and Systems
Building Owners, Manufacturers Integrators
Distributors, and and Systems
Module Assemblers Integrators

Sales Channel . Direct Sales, . Joint Ventures . Direct Sales, . Direct Sales
Internet, Agents,
Home Builders and Distributors and
Electricians Value Added
Resellers

Applications . Solar electric . Wholesale solar . Repeater stations . Solar home
power systems power from . Monitoring and systems often
providing a solar electric telemetry systems located in
supplemental power plants for highways, developing
environmentally which is typically railroads and countries to
friendly power sold to power pipelines provide basic
source that can marketers . Emergency call services such as
be resold back through long-term boxes on highways light, radio,
into the purchase . Portable warning television and
utility grid agreements signs used at communications
. Roof panels . Blended highway . Wireless pay
for single electricity construction telephones
family homes products sites . Pumps for
. Roof panels or drinking water
exterior panels . Schools and
for commercial health clinics
buildings . Vacation cabins
</TABLE>

The domestic on-grid market. We believe that the deregulation of the energy
industry provides a favorable climate for marketing solar electric power and
solar systems to domestic on-grid customers. In order to focus our marketing
efforts, we have developed a methodology to identify promising near-term target
markets. Factors which we consider in this methodology include:

. the addition of renewable energy sources to portfolio standards;

. the existence and extent of direct subsidies or tax benefits for solar
electric power systems;

. the existence of net metering laws;

. local retail electricity prices; and

. the quality of the regional sunlight resource.

We have an office in Concord, California that focuses on "premium power"
on-grid sales. We plan to increase our direct marketing efforts to promote our
sales to homeowners in targeted regions, and we are developing a web-based
online shopping tool to allow customers to choose and purchase the system that
meets their requirements. We believe that power quality and reliability will
become an increasingly important factor for customers involved with all aspects
of the Internet and other computer applications, and that distributed
generation technologies such as solar electric power will be favored due to
their ability to deliver high levels of quality and service reliability.

The international on-grid market. The international on-grid market has
developed more rapidly than the domestic on-grid market, particularly in Europe
and Japan. We serve the international on-grid market primarily through the sale
of solar cells, which are assembled into modules and panels

33
<PAGE>

by our module assembly customers. These products are incorporated into systems
and sold directly to homeowners and building owners or sold through
intermediaries such as local electricians and homebuilders. Several of our
customers have also established subsidiaries to build, own and operate solar
electric power plants and to sell the electricity from these power plants to
power marketers and end customers.

Our on-grid module assembly customers have typically established strong
brand identity within their regional markets and have in some cases developed
unique products that incorporate solar cells into building materials such as
roof tiles and curtain-wall glazing systems. These products are growing in
popularity in Europe.

We believe that customers in Europe and Japan are strongly motivated by
environmental concerns and that their governments will continue to support
renewable energy sources. Therefore, we believe that the international on-grid
market will continue to comprise a major portion of our product revenue for the
foreseeable future.

The rural electrification market. This market segment addresses the large
number of people throughout the world who are not yet served with electric
power. Within this market segment, we typically sell modules directly to
original equipment manufacturers who assemble their own complete systems and to
systems integrators who design and build systems for end users.

The telecommunications and transportation markets. These market segments
include a wide variety of telecommunications, transportation and related
industrial applications. Within these segments, we typically sell modules to
assemblers who manufacture and sell completed modules and to value-added
resellers and systems integrators who design and build systems for end users.

Customers

We use a customer acquisition and growth strategy aimed at acquiring new
key customers while growing volume with existing customers. First, we target
new customers who provide access to high growth market segments while
maintaining geographical diversity. Often we enter into a new supply
relationship with such a customer as a secondary product supplier. Once a
successful supply relationship has been established, our objective is to become
the primary product supplier to each new key customer and to grow volume within
each account.

Sales to our ten largest product customers accounted for approximately
68.0%, 73.0%, 73.7% and 71.4% of total revenues in 1997, 1998, 1999 and the
nine months ended September 30, 2000, respectively. During 1997, sales to Solar
Fabrik, an independent module assembler based in Germany, Golden Genesis (now
Kyocera Solar), a systems integrator located in Arizona, and Atersa, accounted
for 17.0%, 12.6% and 12.0% of our total revenues, respectively. During 1998,
sales to Atersa and Solar Fabrik accounted for 17.6% and 14.3% of our total
revenues, respectively. During 1999, Solar Fabrik, Atersa and Kyocera Solar
accounted for 23.7% and 13.6% and 10.3% of our total revenues, respectively.
During the nine months ended September 30, 2000, sales to Solar Fabrik and
Malarkey Products accounted for 20.7% and 10.0% of our total revenues,
respectively. No other product customers represented 10% or more of our total
revenues for any such periods. We expect that sales of our products to a
limited number of customers will continue to result in a high concentration of
sales for the foreseeable future and that the loss of certain of these
customers could have a material adverse effect on our business, results of
operations and financial condition.

34
<PAGE>

A large percentage of our product revenues are from international
customers. For the year ended December 31, 1999 and the nine months ended
September 30, 2000, the approximate geographic breakdown of product revenues is
shown in the table below:

Regional Product Revenues Distribution
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, September 30,
Region 1999 2000
------ ------------ -------------
<S> <C> <C>
North America................................. 36% 20%
Europe........................................ 54 57
Asia.......................................... 6 13
Africa........................................ 4 10
</TABLE>

We anticipate that international customers will continue to account for the
majority of product revenues for the foreseeable future.

Strategic Alliances

GPU Solar. GPU Solar, Inc., is our 50 percent owned joint venture with GPU
International. We believe that industry restructuring is creating a market for
solar electric power and we plan to develop projects to sell wholesale solar
electric power into this market through GPU Solar. We believe that this product
will appeal to customers who are interested in solar electric power, but who
may not choose or be able to install a solar electric power system on their
home. In states with retail electric power choice programs, such customers may
choose to purchase their electric power from a supplier who offers solar
electric power. GPU Solar's business strategy is to:

. identify sites where we can build solar electric power plants of up to
several megawatts of capacity including commercial factory rooftops,
parking structures or undeveloped land;

. construct power plants utilizing our panels;

. enter into long-term purchase agreements (typically 15 to 20 years)
with power marketers to buy electric power generated by the plant; and

. operate the power plants using subcontracted operating and maintenance
services.

In July 1999, GPU Solar signed its first power purchase agreement with
Green Mountain Energy Resources, one of the leading national environmentally
friendly power marketers. The contract calls for Green Mountain Energy
Resources to purchase at a fixed rate the entire electrical output of a 132
kilowatt power plant located in Northern California through July 2014.
Construction of this plant was completed and power generation began in
September 1999. During the first year of operation, the plant produced 163,500
kilowatt hours of electric power.

In April 2000, GPU Solar signed a letter of intent with Green Mountain
Energy Resources to build a second solar electric power plant in Berkeley,
California. This second plant, currently under construction, is rated at 100
kilowatts, and is scheduled for completion prior to December 31, 2000.

AstraSolar. In July 1999, we and Atersa, one of our ten largest product
customers, formed AstraSolar, a joint venture for the purpose of manufacturing
and supplying solar cells to module assemblers worldwide for the off-grid
market segment. AstraSolar started solar cell production in February, 2000
utilizing silicon wafers supplied by us. In addition to producing solar cells,
AstraSolar

35
<PAGE>

has developed, and is marketing worldwide, standardized module assembly lines.
We believe that assembly of solar cells into modules by local companies offers
significant political and economic advantages.

Atersa manufactures modules based exclusively on our solar cells,
integrates these modules into systems and markets systems primarily in Europe,
Africa and Latin America. As one of the leading systems integrators, Atersa has
developed significant expertise in designing, bidding, winning and implementing
off-grid projects and programs. Atersa also designs, manufactures and sells
module manufacturing equipment and components.

Quality Assurance

We intend to maintain our reputation as a manufacturer and supplier of
quality products and to continuously improve the quality of our products and
services. Quality testing starts with the wafer, is continued at several steps
during solar cell and module manufacturing and is implemented at each solar
cell and module manufacturing step by the staff directly responsible for the
daily operation of the manufacturing line. Each operator is trained to
recognize and report on the quality of his or her work. Process control issues
are communicated to technicians, engineering personnel, supervisors and co-
workers, and this team works together to effect an immediate corrective action
and eliminate the cause of the problem.

Quality assurance measures have enabled us to achieve international and
domestic product certifications for many of our modules. In June 1996, the
Commission of European Communities issued Qualification Certificates for
environmental stability and performance for our AP-1106, AP-1206, AP-6105 and
AP-7105 modules. In August 1997, we received the Underwriters Laboratory (UL)
listing for Silicon-FilmTM module products which confirms that representative
samples of these products have been evaluated by UL and meet applicable UL
standards and requirements. We intend to submit all new module products for
such approval.

Competition

The market for solar electric power components and systems is intensely
competitive. We believe that this market will continue to be intensely
competitive, particularly if products with significant cost and performance
attributes are developed. We also believe that while a single technology,
crystalline silicon, has been dominant throughout the industry's approximately
20 year history, this market will be characterized by future technological
change.

A number of large U.S., Japanese and European companies are actively
engaged in the development, manufacturing and marketing of solar electric power
components and systems. These include BP Solar, Siemens Solar Industries,
Kyocera Corporation, Sanyo Electric Co., Sharp Corp., Shell Solar Energy B.V.,
ASE GmbH and Canon. All of these companies have significantly greater resources
to devote to research, development, manufacturing and marketing than we do.
There are also a large number of smaller companies involved in both the
development of, as well as the ongoing manufacturing and marketing of, solar
electric power components and systems.

There are a variety of competing technologies currently under active
development by a large number of organizations. These technologies include
amorphous silicon, cadmium telluride and copper indium diselenide as well as
advanced concepts for both bulk ingot-based and thin film crystalline silicon.
Any of these competing technologies could theoretically achieve manufacturing
costs per watt lower than the Silicon-FilmTM technology developed by us.

36
<PAGE>

We believe that the principal competitive factors in the market for solar
electric power components are:

. price per watt;

. product reliability, quality and reputation;

. product performance, primarily conversion efficiency; and

. ease of handling and installation.

In addition to direct competition from other solar electric power product
manufacturers, we face competition from companies using alternative
technologies in the distributed generation and wholesale electric power
markets. In distributed generation, competing technologies include diesel
generators, microturbines and fuel cells. Other wholesale electric power market
technologies are based on fuels such as natural gas, coal and uranium as well
as renewable resources such as hydro, geothermal and wind. We believe that our
products and services will compete successfully with these alternative
technologies in our selected target markets.

Patents and Proprietary Technology

Our success and ability to compete are significantly dependent on our
proprietary technology. Our policy is to protect our technologies by filing
patent applications with respect to technology considered important to business
development. We also rely upon unpatented know-how, continuing technological
innovation and the pursuit of licensing opportunities in order to develop and
maintain our competitive position. We have been awarded 14 U.S. patents in the
field of photovoltaics and had three patent applications pending as of
September 30, 2000. Ten of the 14 U.S. patents that have been issued and two of
the applications that are pending relate to our Silicon-FilmTM product design
and manufacturing process. Of the remaining four patents that have been issued,
three protect the design of high performance solar cells using compound
semiconductors, and one protects the design of an optical sensor using a
compound semiconductor that provides for sensor operation at temperatures much
higher than can be employed with conventional elemental materials. The
remaining pending application covers the utilization of a design for mounting
photovoltaic modules to building structures.

We decide on a case-by-case basis whether and in what countries we will
file foreign counterparts of a U.S. patent application. International
counterparts of four issued patents have been filed under the Patent
Cooperation Treaty. We will continue to file other U.S. and international
patent applications to protect technology we consider important in providing a
market advantage for our products. We believe that our patents offer us a
competitive advantage, but there can be no assurance that any patents, issued
or pending, will not be intentionally circumvented or infringed upon by others.

In addition to patent protection, we rely on the law of unfair competition
and trade secrets to protect our proprietary rights, including our proprietary
rights in our Silicon-FilmTM technology. We consider several elements of the
Silicon-FilmTM manufacturing process to be trade secrets. We attempt to protect
our trade secrets and other proprietary information through non-disclosure
agreements with our customers and suppliers and limit the dissemination of
information to a need-to-know basis. Although we seek to protect our
proprietary information, it is possible that others will independently either
develop the same or similar information or obtain access to information that we
believe is proprietary.

All of our employees and consultants are required to sign confidential
information non-disclosure agreements upon the commencement of their employment
with us. Our non-disclosure agreements provide that all confidential
information developed or made known to the individual

37
<PAGE>

during the course of the individual's relationship with us is to be kept
confidential and not disclosed to third parties except in specific
circumstances. These agreements also provide that all inventions made by the
individual shall be our exclusive property. However, these agreements may not
provide meaningful protection for our trade secrets or adequate remedies in the
event of unauthorized use or disclosure of such information.

Silicon-FilmTM, SunChoiceTM and APexTM are our trademarks.

Environmental Regulations

We use, generate and discharge toxic, volatile or otherwise hazardous
chemicals and wastes in our research and development and manufacturing
activities. Therefore, we are subject to a variety of federal, state and local
governmental regulations related to the storage, use and disposal of these
materials. We believe that we have all the permits necessary to conduct our
business. However, failure to comply with present or future regulations could
result in fines being imposed on us, suspension of production or a cessation of
operations. We believe that we have properly handled our hazardous materials
and wastes and have not contributed to any contamination at any of our
premises. We are not aware of any environmental investigation, proceeding or
action by federal or state agencies involving our premises. However, under
certain federal and state statutes and regulations, a governmental agency may
seek recovery and response costs from both operators and owners of property
where releases of hazardous substances have occurred or are ongoing. Any
failure by us to control the use of, or to restrict adequately the discharge
of, hazardous substances could subject us to substantial financial liabilities
and could have a material adverse effect on our business, result of operations
and financial condition.

Employees

As of September 30, 2000, we had 402 full-time employees, of whom 48 were
engaged in research and development, 303 in manufacturing, 23 in sales and
marketing and 28 in administration. None of our employees is covered by a
collective bargaining agreement. We have experienced no work stoppages and
believe that our employee relations are good.

To date, we have been able to attract the scientific, engineering,
technical and other personnel required by our business. Thirty-four of our
management and professional employees have advanced degrees, including six
Ph.Ds. Such experienced professionals are in demand, and we must compete for
their services with other organizations which may be able to offer more
favorable salary and benefits. Historically, turnover among technical and
professional employees has been low.

Facilities

From July 1991 through January 1998, all of our administrative, research
and manufacturing facilities were located in a 40,000 square foot building
leased from University of Delaware, Newark, Delaware. The initial term of the
lease expires in June 2011. However, we may exercise an option to cancel the
lease beginning in July 2000. The annual cash rental payment for 1999 was
$220,800 and increases approximately 6% each year.

In January 1998, we entered into a lease for a 60,300 square foot facility
to house our Pencader plant. This facility is part of a 130,000 square foot
building located in Newark, Delaware, which is approximately six miles from our
Solar Park facility. The term of the lease is 10 years with two five-year
renewal options. In January 1999, we entered into an agreement for an
additional 20,100 square feet in this facility. The commencement date for the
amended lease was June 15, 1999. In June 2000 we entered into a new for lease
the remaining 50,000 square feet of the building, giving us an aggregate of
130,000 square feet of space all in one facility. The initial term expires
September 30, 2010 with all existing prior leases extended to become
coterminous with the new lease. We expect to take occupancy of this contiguous
space on or about January 1, 2001 at which

38
<PAGE>

time the annual rental payment for the first year of the amended lease for
130,000 square feet will be $608,220 and increases an average of approximately
2% each year. In addition, we are responsible for annual operating expenses of
the building presently estimated at $132,000. The lease also provides for
rights to purchase the entire building if the owner decides to sell it.

In June 1999, our subsidiary, AstroPowerWest, LLC, entered into a lease
with Allied Investments for a 3,000 square foot facility in Concord, California
for office and warehouse space. The term of the lease is for three years
commencing July 1, 1999 at an annual rent of $28,728 and increases
approximately 2.5% each year.

Legal Proceedings

In October 2000, the United States government filed a civil action against
us in the U.S. District Court for the District of Delaware, to recover damages
and penalties with respect to the submission of the invoices and Incurred Cost
Submissions in connection with contracts with the U.S. Department of Defense
and U.S. Department of Energy. The allegations in the complaint involve our
Incurred Cost Submissions, which are used to determine indirect cost rates, for
the period from 1991 through 1995, and invoices submitted between July 1994 and
January 1996. The complaint alleges that we falsely claimed that certain costs
were properly allocable to the government contracts when those costs were
attributable to a commercial venture, resulting in overpayments to us in excess
of at least $2.3 million and seeks treble damages and penalties aggregating
approximately $7.9 million. We have been in a dispute with respect to our
indirect cost rates with the government since 1996 and this action follows our
inability to resolve our differences. The government had previously audited and
accepted our indirect cost rate structure for 1991 through 1993.

We are not party to any other material litigation and we are not aware of
any other pending or threatened litigation against us that could have a
material adverse effect upon our business, operating results or financial
condition.

39
<PAGE>

MANAGEMENT

Executive Officers and Directors

Our executive officers and directors, and their respective ages and
positions as of September 30, 2000, are as follows:

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Allen M. Barnett.......... 60 President, Chief Executive Officer and Director
Peter C. Aschenbrenner.... 45 Senior Vice President, Marketing and Sales
Robert B. Hall............ 59 Senior Vice President and Chief Scientist
Richard K. McDowell....... 60 Senior Vice President, Manufacturing
Thomas J. Stiner.......... 46 Senior Vice President, Secretary and Chief
Financial Officer
George S. Reichenbach(1).. 70 Director
Charles R. 64 Director
Schaller(1)(2)..........
Clare E. Nordquist(1)(2).. 64 Director
George W. Roland.......... 60 Director
Gilbert H. 69 Director
Steinberg(1)(2).........
</TABLE>
---------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee

Dr. Allen M. Barnett is a founder of the Company and has served as its
President and Chief Executive Officer and as a director since the Company's
incorporation as a separate entity in 1989. From 1983 to 1989 Dr. Barnett
served as General Manager of the AstroPower Division of Astrosystems, Inc. From
1976 to 1993 Dr. Barnett was a Professor of Electrical Engineering at the
University of Delaware. From 1976 to 1979 Dr. Barnett served as Director of the
Institute of Energy Conversion at the University of Delaware. Dr. Barnett is a
technical expert in thin-film materials and devices and has been active in
photovoltaic research and development since 1975, during which time he has been
awarded 21 U.S. patents, authored or co-authored numerous technical
publications and garnered several professional awards. Dr. Barnett is a member
of the Board of Directors of the Solar Energy Industries Association and serves
on a number of national and international committees in the field. Dr. Barnett
received a B.S. and M.S. in Electrical Engineering from the University of
Illinois, and a Ph.D. in Electrical Engineering from Carnegie Institute of
Technology.

Peter C. Aschenbrenner was elected Senior Vice President, Marketing and
Sales in January 2000. He served as Vice President, Marketing and Sales since
1995 and from 1994 to 1995 Mr. Aschenbrenner served as Director of Marketing of
the Company. Prior to this, Mr. Aschenbrenner served in a number of capacities
with Siemens Solar Industries, LP, including Director of Marketing from 1992 to
1994 and Director of Technology Development from 1991 to 1992. From 1988 to
1990 Mr. Aschenbrenner served as Co-Managing Director of Photovoltaic Electric
GmBH, a joint venture between Siemens AG and Arco Solar, Inc. He served in
various positions with Arco Solar from 1978 to 1988. Mr. Aschenbrenner received
a B.A. in Product Design from Stanford University.

Dr. Robert B. Hall has served as Vice President and Chief Scientist since
joining the AstroPower Division of Astrosystems, Inc. in 1983. Dr. Hall's
responsibilities include research and development of thin-film crystalline
materials and ceramic structures for thin-film polycrystalline devices. From
1974 to 1983 Dr. Hall served as Manager, Device Development at the Institute of
Energy Conversion at the University of Delaware. Dr. Hall has more than 18
years of solar cell development experience. His accomplishments include
development of the first copper sulfide/cadmium sulfide CdS thin film solar
cell with greater than 10.0% conversion efficiency, development of the first
zinc phosphide solar cell and the development of a reliable deposition and

40
<PAGE>

process for copper indium selenide solar cells. Dr. Hall received a B.A. in
Physics from Gettysburg College and an M.S. and Ph.D. in Physics from the
University of Delaware.

Richard K. McDowell was elected Senior Vice President, Manufacturing in
January 2000 after serving as Vice President, Manufacturing since March, 1998.
Prior to joining us in 1996, Mr. McDowell served in various managerial
positions with Unisys Corporation including Director of Operations and Plant
Manager. Mr. McDowell received a B.S. in Physics from Lasalle College.

Thomas J. Stiner has served as our Chief Financial Officer since December
1997 and was elected Senior Vice President in January, 2000. From June 1993 to
November 1997, Mr. Stiner served as Controller and Treasurer. Mr. Stiner was
elected Vice President in 1995 and Secretary in August 1999. From 1984 to 1993
Mr. Stiner served as a Senior Manager at KPMG Peat Marwick, LLP. Mr. Stiner is
a Certified Public Accountant and received a B.S. in Business Administration
from Bloomsburg University.

Dr. George S. Reichenbach has served as a director of the Company since
1989. Dr. Reichenbach was a Senior Vice President of Advent International
Corporation, a venture capital firm from 1987 to 1998. He serves as a director
of Progressive Systems Technology, a semiconductor capital equipment
manufacturer. Previously, Dr. Reichenbach worked at the Massachusetts Institute
of Technology where has served as an Assistant Professor and Associate
Professor of Mechanical Engineering. Dr. Reichenbach received a B.S. in
Mechanical Engineering from Yale University and a Ph.D. in Mechanical
Engineering from the Massachusetts Institute of Technology. Dr. Reichenbach is
a member of our Compensation Committee.

Charles R. Schaller has served as director of the Company since 1989 and as
Secretary from 1989 through March 1998. Mr. Schaller is a management consultant
specializing in the petrochemicals industry and a venture developer
concentrating in the area of specialty materials. Mr. Schaller also serves as a
member of the Board of Directors of Medarex Inc., a publicly held biotechnology
firm. From 1985 to 1989, Mr. Schaller served as President and Chief Operating
Officer of Essex Vencap, Inc., a venture development subsidiary of Essex
Chemical Corporation. Mr. Schaller received a B.E. in Chemical Engineering from
Yale University and is a graduate of the Harvard Business School Program for
Management Development. Mr. Schaller is a member of our Audit and Compensation
Committees.

Clare E. Nordquist has served as a director of the Company since 1995. Mr.
Nordquist is the Managing General Partner of Material Ventures Associates LP, a
venture capital partnership specializing in advanced technology materials
companies and serves as a director of Leading Edge Ceramics, LLC, a
manufacturer and distributor of ceramic powders and shapes; and Viox
Corporation, a custom producer of electronic grade, high purity glass powders
utilized primarily in electronics applications. Mr. Nordquist received a B.S.
in Ceramic Engineering from the University of Washington and an M.B.A. from the
University of Denver. Mr. Nordquist is a member of our Audit and Compensation
Committees.

Dr. George W. Roland has served as a director since 1997. Previously he
served as President and Chief Executive Officer of our Solar Power Business
from 1996 to December 31, 1998 at which time he retired as an officer and
employee and has served as a director since 1997. From 1995 to 1996, Dr. Roland
served as Vice President and General Manager of the Company's Solar Power
Business. From 1993 to June 1995 Dr. Roland served as President of Siemens
Solar Industries, LP, an affiliate of Siemens Corporation (USA). Prior to that,
Dr. Roland served in various positions, including Vice President and Division
Manager of the Metalworking Systems Division, at Kennametal, Inc. Dr. Roland
began his industry career in 1968 as a research and development engineer at
Westinghouse Electric Corporation's Research and Development Center in
Pittsburgh, Pennsylvania. Dr. Roland has been awarded 15 U.S. patents and has
authored numerous technical publications

41
<PAGE>

throughout his career. Dr. Roland received a B.S. in Geology from Acadia
University and a Ph.D. in Geological Science from Lehigh University.

Gilbert H. Steinberg has served as a director of the Company since 1989.
Mr. Steinberg served as Vice President and Chief Financial Officer of
Astrosystems, Inc., which was a manufacturer of electronic, electromechanical
and power conversion devices until February, 1996. Mr. Steinberg is the founder
of Mentortech, Inc., a publicly held company specializing in software
development and computer training consulting. Mr. Steinberg received a B.S. in
Industrial Engineering at the Massachusetts Institute of Technology and an M.S.
in Mathematics from Adelphi College. Mr. Steinberg is a member of our Audit and
Compensation Committees.

42
<PAGE>

PRINCIPAL STOCKHOLDERS

The beneficial ownership table set forth below provides information
regarding beneficial ownership of our common stock as of September 30, 2000 and
as adjusted to reflect the sale of the common stock by us in this offering by:

. each person or entity who is known by us to own beneficially more than
five percent of our common stock, including our Chief Executive
Officer;

. each of our four most highly compensated executive officers in
addition to our Chief Executive Officer;

. each of our directors; and

. all of our directors and executive officers as a group.

The beneficial ownership table assumes no exercise of the underwriters'
over-allotment option, which includes the following number of shares being
offered by the selling stockholders:

<TABLE>
<S> <C>
Allen M. Barnett..........................
Robert B. Hall............................
Thomas J. Stiner..........................
Clare E. Nordquist........................
Louis C. DiNetta..........................
-------
100,000
=======
</TABLE>

These selling stockholders will participate proportionately in any sales
pursuant to a partial exercise of the over-allotment option.

<TABLE>
<CAPTION>
Percentage
Beneficially Owned(1)
------------------------
Name and Address of Number of Shares Prior to After
Beneficial Owner Beneficially Owned(1) Offering Offering
------------------- --------------------- ---------- ----------
<S> <C> <C> <C>
Allen M. Barnett(2)......... 1,508,456 12.3% 10.6%
Brown Investment Advisory &
Trust Company(3).......... 680,641 5.8 5.0
19 South Street
Baltimore, MD 21202
Peter C. Aschenbrenner(4)... 65,823 * *
Robert B. Hall(5)........... 78,871 * *
Richard K. McDowell(6)...... 10,185 * *
Thomas J. Stiner(7)......... 88,308 * *
Clare E. Nordquist(8)....... 13,000 * *
George S. Reichenbach(9).... 18,000 * *
George W. Roland(10)........ 13,000 * *
Charles R. Schaller(11)..... 18,000 * *
Gilbert H. Steinberg(12).... 20,000 * *
All directors and executive
officers as a group (ten
persons)(13).............. 1,833,643 14.9 12.8
</TABLE>
---------------------
* Less than 1 percent.
(1) The beneficial ownership is calculated based on 11,678,006 shares of our
common stock outstanding as of September 30, 2000. Beneficial ownership is
determined in accordance with the rules and regulations of the Securities
and Exchange Commission and includes shares over which the indicated
beneficial owner exercises voting and/or investment power. In computing
the number of shares beneficially owned by a person in the first column
and the percentage

43
<PAGE>

ownership of that person, shares of common stock subject to options held
by that person that were exercisable at or within 60 days of the date
hereof are deemed outstanding. These shares, however, are not deemed
outstanding for the purpose of computing the percentage ownership of any
other person. Except as indicated in the footnotes to this table and
pursuant to applicable community property laws, each stockholder named in
the table has sole voting and investment power with respect to the shares
set forth opposite such stockholder's name. The address of each of the
executive officers and directors is care of AstroPower, Inc., Solar Park,
Newark, Delaware 19716-2000.
(2) Includes 1,150,114 shares held by a family trust of which Dr. Barnett is
a beneficiary and also 285,625 shares subject to options exercisable
within 60 days from the date hereof. Dr. Barnett disclaims beneficial
ownership of the shares held by the trust except to the extent of his
pecuniary interest therein. Does not include 20,000 shares owned by his
wife as to which Dr. Barnett disclaims beneficial ownership.
(3) As reported in a Schedule 13G dated February 14, 2000, Brown Investment
Advisory and Trust Company, a bank, has sole power to vote or direct the
voting with respect to 273,645 shares and has sole power to dispose or to
direct the disposition with respect to 290,970 shares. Brown Advisory
Incorporated, a registered investment adviser and a wholly owned
subsidiary of Brown Investment Advisory and Trust Company has sole power
to vote or direct the voting with respect to 389,671 shares and has the
sole power to dispose or direct the disposition with respect to 389,671
shares.
(4) Includes 65,823 shares subject to options exercisable within 60 days from
the date hereof.
(5) Includes 18,120 shares subject to options exercisable within 60 days from
the date hereof.
(6) Includes 10,185 shares subject to options exercisable within 60 days from
the date hereof.
(7) Includes 73,308 shares subject to options exercisable within 60 days from
the date hereof.
(8) Includes 13,000 shares subject to options exercisable within 60 days from
the date hereof.
(9) Includes 18,000 shares subject to options exercisable within 60 days from
the date hereof.
(10) Includes 13,000 shares subject to options exercisable within 60 days from
the date hereof.
(11) Includes 18,000 shares subject to options exercisable within 60 days from
the date hereof.
(12) Includes 20,000 shares subject to options exercisable within 60 days from
the date hereof.
(13) Includes an aggregate of 639,436 shares held by all directors and
officers that are subject to options exercisable within 60 days from the
date hereof. See Notes (2) and (4) through (12) above.

44
<PAGE>

DESCRIPTION OF CAPITAL STOCK

General

We are authorized to issue up to 50,000,000 shares of common stock, par
value $.01 per share, and 5,000,000 shares of preferred stock, par value $.01
per share. Upon consummation of this offering, no shares of preferred stock
will be outstanding. The following description of our capital stock is based
upon, and is qualified in its entirety by reference to our amended and restated
certificate of incorporation and amended and restated by-laws.

Common Stock

As of September 30, 2000, there were 11,678,006 shares of common stock
outstanding. As of that same date, there were also outstanding options to
purchase an aggregate of 2,448,064 shares of common stock at a weighted average
exercise price of $11.08 per share.

Holders of our common stock are entitled to one vote per share for each
share held on all matters submitted to a vote of stockholders. We do not have
cumulative voting rights in the election of directors, and accordingly, holders
of a majority of the shares voting may elect all of the directors standing for
election. Subject to preferential rights with respect to any outstanding
preferred stock, holders of our common stock are entitled to receive ratably
such dividends as may be declared by the board of directors out of funds
legally available and are entitled to share ratably in our available assets,
after payments of all debts and other liabilities, for distribution to its
stockholders in the event of our liquidation, dissolution or winding up.
Holders of our common stock have no preemptive, subscription, redemption or
conversion rights. All outstanding shares of our common stock are, and the
shares of our common stock offered hereby, will, upon completion of the
offering, be, validly issued, fully paid and non-assessable. The rights,
preferences and privileges of holders of our common stock are subject to and
may be adversely affected by, the rights of the holders of shares of any series
of preferred stock, which we may designate and issue in the future.

Preferred Stock

Under the terms of our amended and restated certificate of incorporation,
our board of directors is authorized to issue shares of preferred stock in one
or more series without stockholder approval. Our board of directors has the
discretion to determine the rights, preferences, privileges and restrictions,
including voting rights, dividend rights, conversion rights, redemption
privileges and liquidation preferences, of each series of preferred stock.

The purpose of authorizing our board of directors to issue preferred stock
and determine its rights and preferences is to eliminate delays associated with
a stockholder vote on specific issuances. The issuance of preferred stock,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could have the effect of making it more difficult
for a third party to acquire, or could discourage a third party from acquiring,
a majority of our outstanding voting stock. We have no present plans to issue
any shares of preferred stock.

Delaware law and certain charter and by-law provisions

We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. Section 203 prohibits certain publicly held Delaware
corporations from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an "interested stockholder," unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sales and

45
<PAGE>

other transactions resulting in a financial benefit to the interested
stockholder. Subject to certain exceptions, an "interested stockholder" is a
person or entity who, together with affiliates and associates, owns or within
the three years prior to the date on which the determination of whether such
person is an interested stockholders is being made, did own 15% or more of the
corporation's voting stock. This statute contains provisions enabling a
corporation to avoid the statute's restrictions if the stockholders holding a
majority of the corporation's voting stock approve an amendment to the
corporation's Certificate of Incorporation or By-Laws. Parallel provisions
have been included in our amended and restated certificate of incorporation.
These provisions may make it more difficult for a third party to acquire, or
discourage acquisition bids for us.

Our amended and restated certificate of incorporation and amended and
restated by-laws contain provisions that may have the effect of discouraging a
third party from making an acquisition proposal for us. The amended and
restated certificate of incorporation and amended and restated by-laws, among
other things, (i) classify the board of directors into three classes, with
directors of each class serving for a staggered three-year period, (ii)
provide that directors may be removed only for cause and only upon the
affirmative vote of the holders of at least 80% of the outstanding shares of
our common stock entitled to vote for such directors, (iii) permit the board
of directors, but not our stockholders, to fill vacancies and newly created
directorships on the board of directors and (iv) provide that any action
required or permitted to be taken by our stockholders must be effected at an
annual or special meeting of stockholders and not by any consent in writing by
our stockholders. Only the board of directors may call special meetings of our
stockholders. Such provisions would make the removal of incumbent directors
more difficult and time-consuming and may have the effect of discouraging a
tender offer or other takeover attempt not previously approved by the board of
directors.

Our amended and restated certificate of incorporation also incorporates
certain provisions permitted under the General Corporation Law of Delaware
relating to the liability of directors. The provisions eliminate a director's
liability for monetary damages for a breach of fiduciary duty, including gross
negligence, except in circumstances involving certain wrongful acts, such as
the breach of a director's duty of loyalty or acts or omissions which involve
intentional misconduct or a knowing violation of law. These provisions do not
eliminate a director's duty of care nor do they prevent recourse against
directors through equitable remedies such as injunctive relief. Moreover, the
provisions do not apply to claims against a director for violations of certain
laws, including federal securities laws.

Our amended and restated certificate of incorporation also contains
provisions to indemnify the directors, officers, employees or other agents to
the fullest extent permitted by the General Corporation Law of Delaware. These
provisions may have the practical effect in certain cases of eliminating the
ability of our stockholders to collect monetary damages from directors. We
believe that these provisions will assist us in attracting or retaining
qualified individuals to serve as directors.

Transfer Agent and Registrar

The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company. Its address is 40 Wall Street, New York, New York
10005, and its telephone number at this address is 212-936-5100.

Listing

Our common stock is traded on the Nasdaq National Market under the trading
symbol APWR.

46
<PAGE>

UNDERWRITING

Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives, Chase Securities Inc,
Credit Suisse First Boston Corporation, CIBC World Markets Corp. and
FAC/Equities, a division of First Albany Corporation, have severally agreed to
purchase from us the following respective number of shares of common stock:

<TABLE>
<CAPTION>
Number of
Name Shares
---- ---------
<S> <C>
Chase Securities Inc...............................................
Credit Suisse First Boston Corporation.............................
CIBC World Markets Corp............................................
FAC/Equities, a division of First Albany Corporation...............
---------
Total.............................................................. 2,000,000
=========
</TABLE>

The underwriting agreement provides that the obligations of the
underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in our business and the receipt of certain
certificates, opinions and letters from us, our counsel and the independent
auditors. The underwriters are committed to purchase all of the shares of
common stock offered by us if they purchase any shares, other than those shares
covered by the over-allotment option described below.

The following table shows the per share and total underwriting discounts
and commissions we and the selling stockholders will pay to the underwriters.
Such amounts are shown assuming both no exercise and full exercise of the
underwriters' over-allotment option to purchase additional shares.

Underwriting Discounts and Commissions

<TABLE>
<CAPTION>
Paid by the
Selling
Paid by Us Stockholders
----------------- -----------------
No Full No Full
Exercise Exercise Exercise Exercise
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Per Share........................... $ $ $ -- $
Total............................... --
</TABLE>

We estimate that the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately $300,000.

The underwriters initially propose to offer the shares of common stock
directly to the public at the public offering price set forth on the cover page
of this prospectus and to certain dealers at that price less a concession not
in excess of $ per share. The underwriters may allow and such dealers may
reallow a concession not in excess of $ per share to certain other dealers.
After the initial offering of the shares, the offering price and other selling
terms may be changed by the underwriters.

We and the selling stockholders have granted to the underwriters an option,
exercisable no later than 30 days after the date of this prospectus, to
purchase up to 300,000 additional shares of common stock at the public offering
price, less the underwriting discount set forth on the cover page of this
prospectus. To the extent that the underwriters exercise this option, each of
the underwriters

47
<PAGE>

will have a firm commitment to purchase approximately the same percentage
thereof which the number of shares of common stock to be purchased by it shown
in the above table bears to the total number of shares of common stock offered
hereby. We and the selling stockholders will be obligated, pursuant to the
option, to sell shares to the underwriters to the extent the option is
exercised. The underwriters may exercise this option only to cover over-
allotments made in connection with the sale of shares of common stock offered
by this prospectus.

The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.

We and the selling stockholders have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act,
and to contribute to payments the underwriters may be required to make in
respect of these liabilities.

Our executive officers and directors have agreed that they will not,
without the prior written consent of Chase Securities Inc. and Credit Suisse
First Boston Corporation, offer, sell or otherwise dispose of any shares of
capital stock, options or warrants to acquire shares of capital stock or
securities exchangeable for or convertible into shares of capital stock owned
by them for a period of 90 days following the date of this prospectus. We have
agreed that we will not, without the prior written consent of Chase Securities
Inc. and Credit Suisse First Boston Corporation, offer, sell or otherwise
dispose of any shares of capital stock, options or warrants to acquire shares
of capital stock or securities exchangeable for or convertible into shares of
capital stock for a period of 90 days following the date of this prospectus,
except that we may issue shares of common stock or grant options under our
employee benefit plans, qualified stock plans or other employee compensation
plans existing as of the date of this prospectus.

Persons participating in this offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the common stock at levels above those which might otherwise prevail in the
open market, including by entering stabilizing bids, effecting syndicate
covering transactions, imposing penalty bids or engaging in passive market
making. A stabilizing bid means the placing of any bid or effecting of any
purchase, for the purpose of pegging, fixing or maintaining the price of the
common stock. A syndicate covering transaction means the placing of any bid on
behalf of the underwriting syndicate or the effecting of any purchase to reduce
a short position created in connection with the offering. A penalty bid means
an arrangement that permits the underwriters to reclaim a selling concession
from a syndicate member in connection with the offering when shares of common
stock sold by the syndicate member are purchased in syndicate covering
transactions. Certain underwriters and selling group members (if any) who are
qualified market makers on the Nasdaq National Market may engage in passive
market making transactions in our common stock on the Nasdaq National Market in
accordance with Rule 103 of Regulation M under the Securities Exchange Act of
1934, as amended. In general, a passive market maker must display its bid at a
price not in excess of the highest independent bid of such security; if all
independent bids are lowered below the passive market maker's bid, however,
such bid must then be lowered when certain purchase limits are exceeded. Such
transactions may be effected on the Nasdaq National Market, in the over-the-
counter market, or otherwise. Such stabilizing, if commenced, may be
discontinued at any time.

The underwriters may create a syndicate short position by making short
sales of the shares and may purchase the shares on the open market to cover
syndicate short positions created by short sales. Short sales involve the sale
by the underwriters of a greater number of shares than they are required to
purchase in the offering. Short sales can be either covered or naked. Covered
short sales are sales made in an amount not greater than the underwriters'
over-allotment option to purchase additional shares. Naked short sales are
sales in excess of the over-allotment option. A naked short

48
<PAGE>

position is more likely to be created if the underwriters are concerned that
there may be downward pressure on the price of the shares in the open market
after pricing that could adversely affect investors who purchase in the
offering. If the underwriters create a syndicate short position, they may
choose to reduce or cover this position by either exercising the over-allotment
option or by engaging in syndicate covering transactions. The underwriters may
close out any covered short position by either exercising their over-allotment
option or purchasing shares in the open market. The underwriters must close out
any naked short position by purchasing shares in the open market. In
determining the source of shares to close out the covered short position, the
underwriters will consider, among other things, the price of shares available
for purchase in the open market as compared to the price at which they may
purchase shares through the over-allotment option.

One or more members of the underwriting selling group may make copies of
the preliminary prospectus available over the Internet to customers or though
its or their Web sites. Credit Suisse First Boston Corporation may effect an
online distribution through DLJdirect, an online broker-dealer, as a selling
group member.

LEGAL MATTERS

The validity of the shares of common stock offered hereby is being passed
upon for us by Foreht Last Landau Miller & Katz, LLP, New York, New York.
Certain legal matters with respect to the offering are being passed upon for
the underwriters by Hale and Dorr LLP, New York, New York. A partner of Foreht
Last Landau Miller & Katz, LLP owns 85,000 shares of our common stock and has
options to purchase an additional 20,000 shares.

EXPERTS

Our consolidated financial statements and schedule as of December 31, 1999
and 1998, and for each of the years in the three-year period ended December 31,
1999, have been included herein and in the registration statement in reliance
upon the reports of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.

INCORPORATION OF CERTAIN INFORMATION BY REFERENCE

The SEC allows us to "incorporate by reference" the information we file
with the SEC, which means:

. incorporated documents are considered part of this prospectus;

. we can disclose important information to you by referring you to those
documents; and

. information that we file later with the SEC will automatically update
and supersede this information.

We incorporate by reference the documents listed below which we filed with
the SEC under the Securities and Exchange Act of 1934:

. Our Annual Report on Form 10-K for the fiscal year ended December 30,
1999;

. Quarterly Reports on Form 10-Q for the quarterly periods ended March
31, June 30 and September 30, 2000; and

. the description of our common stock contained in our registration
statement on Form 8-A, filed with the SEC on January 23, 1998.

49
<PAGE>

We also incorporate by reference any documents we file with the SEC under
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act on or after the date of
the filing of the registration statement of which this prospectus forms a part
or after the date of this prospectus but before all the common stock offered by
this prospectus has been sold.

You may request a copy of these filings, at no cost, by writing or
telephoning Thomas J. Stiner, Senior Vice President and Chief Financial
Officer, AstroPower, Inc., Solar Park, Newark, Delaware 19716-2000, (302) 366-
0400.

WHERE CAN YOU FIND MORE INFORMATION ABOUT US

We have filed with the Securities and Exchange Commission in Washington,
D.C. a registration statement on Form S-3 under the Securities Act with respect
to the shares of common stock offered in this prospectus. This prospectus does
not contain all the information set forth in the registration statement and the
exhibits and schedules thereto. For further information about us and our common
stock, we refer you to the registration statement and to the exhibits and
schedules filed with it. Statements contained in this prospectus as to the
contents of any contract or other document referred to are not necessarily
complete; we refer you to those copies of contracts or other documents that
have been filed as exhibits to the registration statement, and statements
relating to such documents are qualified in all respects by such reference.
Anyone may inspect a copy of the registration statement without charge at the
SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.
You may obtain copies of all or any portion of the registration statement by
writing to the SEC's Public Reference Room, 450 Fifth Street, N.W., Washington,
D.C. 20549, and paying prescribed fees. You may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0300. In
addition, the SEC maintains a Web site at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
companies such as ours that file electronically with the SEC.

We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended, and therefore we file reports, proxy statements and
other information with the SEC. You can inspect and copy the reports, proxy
statements and other information that we file at the public reference
facilities maintained by the SEC at the Public Reference Room, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the SEC's regional offices located
at 7 World Trade Center, Suite 1300, New York, New York, 10048 and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You can also obtain copies
of such material from the SEC's Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. The SEC also makes
electronic filings publicly available on its Web site within 24 hours of
acceptance. Our common stock is quoted on the Nasdaq National Market under the
trading symbol APWR. Reports, proxy and information statements and other
information about us may be inspected at the National Association of Securities
Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006.

50
<PAGE>

ASTROPOWER, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report............................................... F-2

Consolidated Balance Sheets................................................ F-3

Consolidated Statements of Income.......................................... F-5

Consolidated Statements of Stockholders' Equity (Deficit).................. F-6

Consolidated Statements of Cash Flows...................................... F-7

Notes to Consolidated Financial Statements................................. F-8
</TABLE>

F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
AstroPower, Inc.

We have audited the accompanying consolidated balance sheets of AstroPower,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity (deficit), and cash
flows for each of the years in the three-year period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of AstroPower,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted
accounting principles.

/s/ KPMG LLP

Wilmington, DE
February 21, 2000

F-2
<PAGE>

ASTROPOWER, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
December 31,
------------------------ September 30,
ASSETS 1998 1999 2000
------ ----------- ----------- -------------
(unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............. $ 6,545,095 $25,338,239 $26,178,399
Accounts receivable:
Trade, net of allowance for doubtful
accounts of $70,695 in 1998 and
$651,726 in 1999 and $649,844 in
2000 (unaudited)................... 6,531,144 14,106,031 12,100,714
Employee receivables................. 84,121 102,604 112,658
Other, including amounts due from
stockholder........................ 32,113 315,570 268,130
Inventories........................... 3,596,676 7,823,382 11,510,092
Prepaid expenses...................... 159,948 747,828 725,860
Deferred tax asset.................... 1,796,338 2,280,373 5,077,340
----------- ----------- -----------
Total current assets.............. 18,745,435 50,714,027 55,973,193
----------- ----------- -----------
INVESTMENT IN JOINT VENTURES........... -- 662,838 822,294
PROPERTY AND EQUIPMENT:
Machinery and equipment............... 10,448,628 12,360,339 16,847,559
Furniture and fixtures................ 334,186 458,320 521,314
Leasehold improvements................ 917,698 978,209 1,024,642
Construction in progress.............. 1,575,163 2,963,202 3,852,116
----------- ----------- -----------
13,275,675 16,760,070 22,245,631
Less accumulated depreciation and
amortization........................ (3,654,796) (4,629,442) (5,600,348)
----------- ----------- -----------
9,620,879 12,130,628 16,645,283
----------- ----------- -----------
Total assets...................... $28,366,314 $63,507,493 $73,440,770
=========== =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE>

ASTROPOWER, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
December 31,
------------------------ September 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1999 2000
------------------------------------ ----------- ----------- -------------
(unaudited)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable........................... $ 2,629,068 $ 3,349,921 $ 4,605,941
Accrued payroll and payroll taxes (includes
$185,910 in 1998 and $187,758 in 1999 and
$9,423 in 2000 (unaudited) due to the
Company's President and Chief Executive
Officer)................................. 963,243 1,050,525 699,639
Accrued expenses........................... 313,640 182,571 359,841
----------- ----------- -----------
Total current liabilities.............. 3,905,951 4,583,017 5,665,421
OTHER LIABILITIES:
Deferred tax liability..................... 801,452 1,270,587 1,270,587
Deferred compensation and other (including
amounts due to officers and a
stockholder)............................. 396,027 160,881 175,347
----------- ----------- -----------
1,197,479 1,431,398 1,445,934
----------- ----------- -----------
Total liabilities...................... 5,103,430 6,014,415 7,111,355
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' EQUITY:
Common stock, 25,000,000 shares authorized;
8,572,455 in 1998, 11,227,095 in 1999 and
11,678,006 in 2000 (unaudited) shares
issued and outstanding, $.01 per share
par value................................ 85,725 112,271 116,780
Additional paid-in capital................. 25,956,474 57,795,387 63,854,525
Unearned compensation...................... (245,718) (147,693) (74,174)
Retained earnings (deficit)................ (2,533,597) (266,887) 2,432,284
----------- ----------- -----------
Total stockholders' equity............. 23,262,884 57,493,078 66,329,415
----------- ----------- -----------
Total liabilities and stockholders'
equity............................... $28,366,314 $63,507,493 $73,440,770
=========== =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>

ASTROPOWER, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------------------- ------------------------
1997 1998 1999 1999 2000
REVENUES: ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Product sales......... $13,094,871 $20,205,913 $31,428,418 $22,134,613 $33,263,756
Research contracts.... 3,511,898 2,953,196 3,215,659 2,349,191 2,453,418
----------- ----------- ----------- ----------- -----------
Total revenues..... 16,606,769 23,159,109 34,644,077 24,483,804 35,717,174
COST OF REVENUES:
Product sales......... 9,311,140 14,942,121 22,587,865 16,041,732 23,054,263
Research contracts.... 2,539,915 2,296,895 2,264,124 1,789,448 1,789,916
----------- ----------- ----------- ----------- -----------
Total cost of
revenues......... 11,851,055 17,239,016 24,851,989 17,831,180 24,844,179
----------- ----------- ----------- ----------- -----------
Gross profit....... 4,755,714 5,920,093 9,792,088 6,652,624 10,872,995
OPERATING EXPENSES:
Product development
expenses............ 1,006,979 1,392,251 2,139,322 1,540,470 2,263,505
General and
administrative
expenses............ 1,972,144 2,495,838 3,505,560 2,155,992 3,140,863
Selling expenses...... 853,812 951,249 1,578,045 989,239 2,444,038
Professional fees
related to overhead
dispute............. -- -- 61,700 51,781 326,188
----------- ----------- ----------- ----------- -----------
Total operating
expenses......... 3,832,935 4,839,338 7,284,627 4,737,482 8,174,594
----------- ----------- ----------- ----------- -----------
Income from
operations....... 922,779 1,080,755 2,507,461 1,915,142 2,698,401
OTHER INCOME (EXPENSE):
Interest expense...... (369,233) (252,200) (15,951) (10,406) (13,967)
Interest income....... 113,730 598,624 337,939 69,290 1,069,319
Other income
(expense)........... 4,550 3 (31,895) (12,758) (12,363)
Equity in earnings
(losses) of joint
ventures............ -- -- 62,787 -- (88,096)
----------- ----------- ----------- ----------- -----------
Total other income
(expense)........ (250,953) 346,427 352,880 46,126 954,893
----------- ----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAX
EXPENSE (BENEFIT)..... 671,826 1,427,182 2,860,341 1,961,268 3,653,294
INCOME TAX EXPENSE
(BENEFIT)............. 20,000 (984,632) 593,631 588,380 954,123
----------- ----------- ----------- ----------- -----------
NET INCOME.............. $ 651,826 $ 2,411,814 $ 2,266,710 $ 1,372,888 $ 2,699,171
=========== =========== =========== =========== ===========
NET INCOME DATA:
Net income per
share--basic........ $ 0.18 $ 0.30 $ 0.25 $ 0.16 $ 0.24
=========== =========== =========== =========== ===========
Net income per
share--diluted...... $ 0.13 $ 0.28 $ 0.22 $ 0.14 $ 0.21
=========== =========== =========== =========== ===========
Weighted average
shares
outstanding--
basic............... 3,710,258 7,956,221 9,207,782 8,653,102 11,443,598
=========== =========== =========== =========== ===========
Weighted average
shares
outstanding--
diluted............. 6,220,161 9,572,194 10,132,844 9,612,795 12,870,475
=========== =========== =========== =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>

ASTROPOWER, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Retained
----------------- ------------------- Paid-in Note Unearned Earnings
Shares Amount Shares Amount Capital Receivable Compensation (Deficit) Total
-------- ------- ---------- -------- ----------- ---------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER
31, 1996.......... 328,909 $ 3,289 3,701,775 $ 37,018 $ 2,697,396 $ -- $ -- $(5,597,237) $(2,859,534)
Issuance of Series
B Convertible
Preferred Stock.. 11,250 112 -- -- 89,888 -- -- -- 90,000
Purchase and
retirement of
Series B
Convertible
Preferred
Stock........... (3,750) (37) -- -- (29,963) -- -- -- (30,000)
Common Stock
issued........... -- -- 67,997 680 113,471 (79,125) -- -- 35,026
Stock options
granted.......... -- -- -- -- 417,225 -- (417,225) -- --
Amortization of
unearned
compensation..... -- -- -- -- -- -- 73,482 -- 73,482
Net income........ -- -- -- -- -- -- -- 651,826 651,826
-------- ------- ---------- -------- ----------- -------- --------- ----------- -----------
BALANCE, DECEMBER
31, 1997.......... 336,409 3,364 3,769,772 37,698 3,288,017 (79,125) (343,743) (4,945,411) (2,039,200)
Conversion of
Series A
Convertible
Preferred Stock.. -- -- 1,309,626 13,096 5,785,629 -- -- -- 5,798,725
Conversion of
Series B
Convertible
Preferred Stock.. (336,409) (3,364) 336,409 3,364 -- -- -- -- --
Common Stock
issued........... -- -- 3,156,648 31,567 16,781,488 -- -- -- 16,813,055
Amortization of
unearned
compensation..... -- -- -- -- -- -- 98,025 -- 98,025
Stock options
granted.......... -- -- -- -- 101,340 -- -- -- 101,340
Repayment of note
receivable....... -- -- -- -- -- 79,125 -- -- 79,125
Net income........ -- -- -- -- -- -- -- 2,411,814 2,411,814
-------- ------- ---------- -------- ----------- -------- --------- ----------- -----------
BALANCE, DECEMBER
31, 1998.......... -- -- 8,572,455 85,725 25,956,474 -- (245,718) (2,533,597) 23,262,884
-------- ------- ---------- -------- ----------- -------- --------- ----------- -----------
Common Stock
issued........... -- -- 2,654,640 26,546 31,240,826 -- -- -- 31,267,372
Tax benefit from
stock options
exercised........ -- -- -- -- 598,087 -- -- -- 598,087
Amortization of
unearned
compensation..... -- -- -- -- -- -- 98,025 -- 98,025
Net income........ -- -- -- -- -- -- -- 2,266,710 2,266,710
-------- ------- ---------- -------- ----------- -------- --------- ----------- -----------
BALANCE, DECEMBER
31, 1999.......... -- -- 11,227,095 112,271 57,795,387 -- (147,693) (266,887) 57,493,078
Common stock
issued
(unaudited)...... -- -- 450,911 4,509 2,786,654 -- -- -- 2,791,163
Tax benefit from
stock options
exercised
(unaudited)...... -- -- -- -- 3,272,484 -- -- -- 3,272,484
Amortization of
unearned
compensation
(unaudited)...... -- -- -- -- -- -- 73,519 -- 73,519
Net income
(unaudited)...... -- -- -- -- -- -- -- 2,699,171 2,699,171
-------- ------- ---------- -------- ----------- -------- --------- ----------- -----------
BALANCE, SEPTEMBER
30, 2000
(unaudited)....... -- $ -- 11,678,006 $116,780 $63,854,525 $ -- $ (74,174) $ 2,432,284 $66,329,415
======== ======= ========== ======== =========== ======== ========= =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>

ASTROPOWER, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------------------- ------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income............. $ 651,826 $ 2,411,814 $ 2,266,710 $ 1,372,888 $ 2,699,171
Adjustments to
reconcile net income
to net cash provided
by (used in)
operating activities:
Deferred income taxes.. -- (994,886) 551,946 588,380 475,517
Depreciation and
amortization......... 545,066 796,601 1,078,559 735,787 970,906
Equity in (earnings)
losses of joint
ventures............. -- -- (62,787) -- 88,096
Common stock issued for
services............. 18,500 -- -- -- --
Stock options issued
for services......... -- 50,670 -- -- --
Amortization of
unearned
compensation......... 73,482 98,025 98,025 73,519 73,519
Loss from disposition
of property and
equipment............ -- -- 31,465 -- --
Changes in working
capital items:
Accounts receivable... (1,313,264) (3,285,306) (7,876,827) (4,144,570) 2,042,703
Inventories........... (388,133) (1,994,355) (4,226,706) (3,509,447) (3,686,710)
Prepaid expenses...... (291,201) 190,523 (587,880) (698,446) 21,968
Accounts payable and
accrued expenses.... 719,000 233,649 589,784 1,929,713 1,433,290
Accrued payroll and
payroll taxes....... 313,736 (15,013) 87,282 (120,730) (350,886)
Advance from
customer............ 277,355 (610,891) -- 3,646 --
Deferred compensation
and other........... (16,562) (16,822) (226,924) (216,711) 14,536
----------- ----------- ----------- ----------- -----------
Net cash provided by
(used in) operating
activities............ 589,805 (3,135,991) (8,277,353) (3,985,971) 3,782,110
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Capital expenditures... (893,920) (5,474,689) (3,596,825) (2,394,742) (5,485,561)
Investment in joint
ventures.............. -- -- (600,050) (490,000) (247,552)
----------- ----------- ----------- ----------- -----------
Net cash used in
investing activities.. (893,920) (5,474,689) (4,196,875) (2,884,742) (5,733,113)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from issuance
of long-term debt.... 6,033,076 -- -- -- --
Net repayments from
line of credit....... (327,843) (203,357) -- -- --
Repayment of long-term
debt................. (594,396) (6,390,174) -- -- --
Proceeds from issuance
of common stock--
stock options........ 16,525 229,049 869,957 643,855 2,745,933
Proceeds from issuance
of common stock--
public offering...... -- 16,612,080 30,182,594 -- --
Proceeds from issuance
of stock--401(k)
plan................. -- -- 214,821 124,466 45,230
Proceeds from issuance
of preferred stock... 90,000 -- -- -- --
Repurchase of preferred
stock................ (30,000) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net cash provided by
financing activities.. 5,187,362 10,247,598 31,267,372 768,321 2,791,163
----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS........... 4,883,247 1,636,918 18,793,144 (6,102,392) 840,160
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF PERIOD... 24,930 4,908,177 6,545,095 6,545,095 25,338,239
----------- ----------- ----------- ----------- -----------
CASH AND CASH
EQUIVALENTS AT END OF
PERIOD................ $ 4,908,177 $ 6,545,095 $25,338,239 $ 442,703 $26,178,399
=========== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE:
Interest paid.......... $ 160,544 $ 597,190 $ 14,296 -- 13,011
=========== =========== =========== =========== ===========
Taxes paid............. $ -- $ 31,000 $ 96,700 66,200 40,800
=========== =========== =========== =========== ===========
</TABLE>

OTHER NONCASH FINANCING AND INVESTING ACTIVITIES:
--During 1997, the Company issued 34,213 shares of common stock in exchange for
a 6% promissory note in the amount of $79,125, with a maturity date of August
15, 1998.
--On February 19, 1998, the Company converted all shares of its Series A and
Series B Convertible Preferred Stock into 2,194,709 shares of common stock on
a one-for-one basis.
--During 1998, the Company issued stock options for 119,000 shares of common
stock to Corning Incorporated.

See accompanying notes to consolidated financial statements.

F-7
<PAGE>

ASTROPOWER, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)Summary of Significant Accounting Policies

Description of Business

The Company operates in only one business segment, as substantially all of
its combined revenues, net income and assets are derived from the development,
manufacturing, marketing and sale of PV solar cells, modules and panels for
generating solar electric power. Solar cells are semiconductor devices which
convert sunlight directly into electricity. Solar electric power is used off
the electric utility grid for many applications in the communications and
transportation industries and in remote villages and homes. Solar electric
power is also used in on-grid applications by existing electric utility
customers to provide a clean, renewable source of alternative or supplementary
electric power. Availability of silicon wafers, a significant raw material in
the Company's manufacturing process, is subject to market conditions in the
semiconductor industry, however, the Company is not dependent on a single
supplier or only a few suppliers. See Note 12.

The Company owns 50% interests in two joint ventures. Such investments are
accounted for under the equity method.

Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly-owned. Significant intercompany
accounts and transactions have been eliminated in consolidation.

Cash Equivalents

For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments with an original maturity of three months or
less to be cash equivalents.

Fair Value of Financial Instruments

The Company's financial instruments consist primarily of cash, accounts
receivable, accounts payable and accrued expenses. The carrying values of cash,
accounts receivable, accounts payable and accrued expenses are considered to be
representative of their respective fair values because of the short-term nature
of these balances.

Inventories

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

Property and Equipment

Property and equipment is recorded at cost. Depreciation is computed using
the straight-line method based on the assets' estimated useful lives, ranging
from 5 to 15 years. Maintenance, repairs and minor renewals are charged to
expense as incurred.

Included in machinery and equipment at December 31, 1998 and 1999 were
$8,175,354 and $8,934,133, respectively, representing self-constructed assets.
In costing the equipment, the Company uses a full cost approach whereby direct
material, direct labor and related overhead costs are capitalized. The total
labor and overhead costs of self-constructed assets capitalized for the years
ended December 31, 1997 and 1998 and 1999, were $176,397, $828,009 and
$834,640, respectively.

F-8
<PAGE>

ASTROPOWER, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Revenue Recognition

Revenue from product sales is recognized when products are shipped. Revenue
related to the Company's fixed price, cost-plus and cost-sharing research
contracts are recognized at the time costs benefiting the contracts are
incurred, which approximates the percentage of completion method. Provisions
for estimated losses are made in the period in which losses are determined.
Accounts receivable includes unbilled accounts receivable consisting of
material, labor and overhead expended on contracts.

Product Development Expenses

Product development expenses represent the material, labor and overhead
costs incurred to develop processes in support of the Company's Silicon-FilmTM
wafer, solar cell and module engineering effort which are not funded by
research contracts.

Income Taxes

The Company accounts for income taxes in accordance with the asset and
liability method of accounting for income taxes. Under the asset and liability
method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
revenues and expense, and the disclosure of contingent assets and liabilities.
Actual results could differ from those estimates.

(2)Interim Financial Information (unaudited)

The interim financial statements of the Company for the nine months ended
September 30, 1999 and 2000, included herein, have been prepared by the
Company, without audit, pursuant to the rules and regulations of the SEC.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principals
have been condensed or omitted pursuant to the rules and regulations relating
to interim financial statements.

(3)Inventories

A summary of inventories is as follows:

<TABLE>
<CAPTION>
December 31, September 30,
--------------------- -------------
1998 1999 2000
---------- ---------- -------------
(unaudited)
<S> <C> <C> <C>
Raw materials............................... $2,995,166 $5,014,912 $ 8,842,748
Work-in-process............................. 138,927 550,069 405,815
Finished goods.............................. 462,583 2,258,401 2,261,529
---------- ---------- -----------
$3,596,676 $7,823,382 $11,510,092
========== ========== ===========
</TABLE>

F-9
<PAGE>

ASTROPOWER, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(4)Debt

The Company has a $1 million line of credit agreement with a financial
institution, secured by accounts receivable and bearing interest at the prime
rate and a $3 million revolving line of credit facility with a financial
institution. Security for the facility, which bears interest at the prime rate,
is accounts receivable, inventory and property and equipment. These facilities
expire in September 2001. There were no borrowings against these facilities at
December 31, 1999 or September 30, 2000 (unaudited).

(5)Income Taxes

Income tax expense (benefit) differed from the amounts computed by applying
the U.S. federal income tax rate of 34% to pretax income from operations as a
result of the following:

<TABLE>
<CAPTION>
December 31,
---------------------------------
1997 1998 1999
--------- ----------- ---------
<S> <C> <C> <C>
Computed "expected" tax expense............. $ 228,421 $ 485,242 $ 972,516
Utilization of net operating loss
carryforwards............................. (17,685) (205,266) --
State income tax expense (benefit), net of
federal................................... 20,761 (80,651) 32,208
Change in valuation allowance............... 135,928 (1,809,315) --
Change in tax rates......................... -- 242,107 --
Foreign sales corporation................... -- -- (144,777)
Tax credits................................. -- -- (132,462)
Tax liability in excess (less-than)
provision................................. (347,425) 185,579 (182,826)
Other....................................... -- 197,672 48,972
--------- ----------- ---------
Actual tax expense (benefit)................ $ 20,000 $ (984,632) $ 593,631
========= =========== =========

Income tax expense (benefit) for the years 1997, 1998 and 1999 consists of:

<CAPTION>
1997 1998 1999
--------- ----------- ---------
<S> <C> <C> <C>
Current:
Federal................................... $ 20,000 $ 10,254 $ 41,685
State..................................... -- -- --
Deferred:
Federal................................... -- (872,688) 504,465
State..................................... -- (122,198) 47,481
--------- ----------- ---------
Total income tax expense (benefit)....... $ 20,000 $ (984,632) $ 593,631
========= =========== =========
</TABLE>

F-10
<PAGE>

ASTROPOWER, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1997 1998 1999
----------- ---------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Deferred revenue...................... $ 242,780 $ -- $ --
Advances from customer and accrued
expenses............................ 323,698 417,159 416,436
Federal and state net operating loss
carry forward....................... 2,021,628 1,301,454 1,469,650
Tax credits........................... -- -- 284,449
Other................................. -- 77,725 109,838
----------- ---------- -----------
Total gross deferred tax assets...... 2,588,106 1,796,338 2,280,373
Less valuation allowance............. (1,809,315) -- --
----------- ---------- -----------
Net deferred tax assets................. 778,791 1,796,338 2,280,373
Deferred tax liabilities:
Plant and equipment, due to
differences in depreciation methods
and basis........................... (778,791) (801,452) (1,223,572)
Other................................. -- -- (47,015)
----------- ---------- -----------
Net deferred amount..................... $ -- $ 994,886 $ 1,009,786
=========== ========== ===========
</TABLE>

The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income and tax planning
strategies in making this assessment. The reversal of the valuation allowance
in 1998 resulted from management's assessment that it was more likely than not
that the deferred tax assets would be realized. At December 31, 1999, the
Company has net operating loss carryforwards for federal income tax purposes of
approximately $3.9 million which are available to offset future federal and
state taxable income, if any, through 2011.

(6)Operating Lease Obligations

The Company leases a 40,000 square foot building from the University of
Delaware (the "University"). Although the lease agreement is for a term of 20
years (expiring June 30, 2011), the Company may cancel the lease after nine
years (June 30, 2000) with twelve months notice of cancellation. Accordingly,
only payments through June 30, 2001 have been included below. In January 1998,
the Company entered into an operating lease agreement for a 60,300 square foot
facility for its second manufacturing facility. In January 1999, the Company
entered into an agreement for an additional 20,000 square feet in this
facility. The scheduled cash payments over the next five years differ from
rental expense calculated under the straight-line method. The following
summarizes expected charges to rent expense contrasted with expected cash
outflow as required by the lease agreements for all facilities (which includes
the University lease payments through June 2001):

<TABLE>
<CAPTION>
Annual Rent Expected
Expense Cash Payments
----------- -------------
<S> <C> <C>
December 31, 2000..................................... $ 37,392 $ 659,592
December 31, 2001..................................... 624,606 602,646
December 31, 2002..................................... 490,290 476,472
December 31, 2003..................................... 475,212 469,434
December 31, 2004 and thereafter...................... 2,613,666 2,710,914
</TABLE>

Total rent expense charged to operations for the years ended December 31,
1997, 1998 and 1999 amounted to approximately $242,000, $596,000 and $703,000,
respectively.

F-11
<PAGE>

ASTROPOWER, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(7)Related Parties

At December 31, 1998 and 1999, the Company owed its President and Chief
Executive Officer $370,696 and $187,758, respectively, in the form of salary
and automobile reimbursements. The amounts are related to the excess of the
negotiated annual salary and monthly auto allowance under a contract which
ended March 31, 1997 over the amounts actually paid to such person. On December
15, 1997, the Company agreed that one-third of this amount will be paid per
year in each of 1998, 1999 and 2000, with interest on the unpaid balance at 6%
per year from January 1, 1998. At September 30, 2000, all amounts were paid and
$0 balance remained (unaudited).

During the year ended December 31, 1999 the Company's sales to its two
joint ventures totaled $2,135,000. At December 31, 1999 amounts due from these
joint ventures totaled $754,455 and were included in the caption "Accounts
receivable--trade".

(8)Employee Benefit Plan

The Company maintains a defined contribution plan under the provisions of
Internal Revenue Code Section 401(k). Employees having attained the age of 21
and with one month of service are eligible to participate and make voluntary
contributions to the plan. The amount charged to expense for the years ended
December 31, 1997, 1998 and 1999 was $145,000, $150,000 and $140,000
respectively. The Company does not provide any postemployment benefits.

(9)Capital Stock

In the first quarter of 1998, the Company completed an initial public
offering of its common stock, raising net proceeds to the Company of $16.6
million, and converted all the then outstanding shares of Series A and Series B
Preferred Stock into Common Stock so that no shares of Preferred Stock are
currently outstanding. Contemporaneous with the initial public offering, the
Company amended and restated its Certificate of Incorporation to provide for,
among other things, an increase in the number of authorized shares of Common
Stock from 15,000,000 to 25,000,000; authority to issue up to 5,000,000 shares
of one or more series of preferred stock and authorized the Board of Directors
to fix and determine the relative rights, preferences and limitations of each
class or series so authorized without any further vote or action by the
stockholders; and to effect a reverse stock split in the form of three shares
for every four shares outstanding. All share and per share information in the
accompanying financial statements have been retroactively adjusted to give
effect to the reverse stock split.

In the fourth quarter of 1999, the Company completed a follow-on public
offering of its common stock, raising net proceeds to the Company of $30.2
million.

(10)Employee Stock Option Plan

The Company adopted a Stock Option Plan (the "1989 Plan") in 1989 under
which a total of 1,920,000 shares are currently reserved for issuance to
employees including officers and directors who are employees or consultants.
The 1989 Plan expired in December 1999. Options granted pursuant to the 1989
Plan were either incentive stock options or non-qualified stock options. The
Plan was administered by the Board of Directors which selected the employees to
whom the options are granted, determined the number of shares subject to each
option, set the time or times when the options will be granted, determined the
time when the options may be exercised and established the market value of the
shares at the date of grant and exercise date. The Plan provided that the

F-12
<PAGE>

ASTROPOWER, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

purchase price under the option shall be at least 100 percent of the fair
market value of the shares of the Company's Common Stock at the date of grant.
The options are not transferable. There are limitations on the amount of
incentive stock options that an employee can be granted in a single calendar
year. The terms of each option granted under the 1989 Plan are determined by
the Board of Directors, but in no event may such term exceed ten years.
Incentive stock options generally vest over a four-year period, with vesting
occurring 25% per year on the anniversary date of the option award.

In 1998, the Company adopted the 1998 Non-Employee Directors' Stock Option
Plan ("Directors Plan"), under which a total of 160,000 shares are currently
reserved for issuance to non-employee directors. The Directors' Plan is
administered by a committee of the Board of Directors. The Directors' Plan
provides that the purchase price under the option shall be the fair market
value of the shares of common stock on the date of grant. In 1999, the Company
adopted the 1999 Stock Option Plan ("the 1999 Plan'), under which a total of
600,000 shares as of December 31, 1999 (1,100,000 shares as of September 30,
2000 (unaudited)) are reserved for issuance. The principal provisions of the
1999 Plan are similar to those described above for the 1989 Plan, except that
options may be transferred under certain limited circumstances.

In 1999, the Company has granted to an executive officer a separate stock
option for the purchase of 90,000 shares of the Company's common stock at
$12.125 per share. The options vest over a four-year period at 25% per year on
the anniversary date of the option award. In addition, pursuant to separate
stock options, in 1999 the Company has granted to its five outside directors
options to purchase a total of 60,000 shares of the Company's common stock at
$12.125 per share. Of these shares, 15,000 are immediately vested and the
balance vests ratably over the following three years.

In 2000, the Company granted to an executive officer a separate stock
option for the purchase of 302,000 shares of the Company's common stock at
$13.375 per share. The options vest over a five year period on the anniversary
date of the option award (98,500, 23,500, 60,000, 60,000 and 60,000,
respectively) (unaudited).

F-13
<PAGE>

ASTROPOWER, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Stock option transactions during the years ended December 31, 1997, 1998,
1999 and the nine months ended September 30, 2000 under the Company's Plans are
summarized below:

<TABLE>
<CAPTION>
Exercise Weighted
Price Range- Average
Shares Per Share Exercise Price
--------- ------------- --------------
<S> <C> <C> <C>
Balance, December 31, 1996............. 628,912 $0.33-$4.00 $ 3.51
Granted.............................. 546,233 $3.12-$5.33 4.65
Exercised............................ (63,352) $0.33-$4.00 1.51
Cancelled............................ (22,846) $0.67-$4.00 3.89
---------
Balance, December 31, 1997............. 1,088,947 4.00
Granted.............................. 801,875 $6.00-$10.25 8.74
Exercised............................ (45,730) $6.00-$10.00 3.28
Cancelled............................ (35,570) $6.00-$10.00 6.41
---------
Balance, December 31, 1998............. 1,809,522 6.07
Granted.............................. 804,333 $9.38-$17.88 11.91
Exercised............................ (208,195) $0.33-$11.88 4.22
Cancelled............................ (119,154) $0.33-$16.75 8.03
---------
Balance, December 31, 1999............. 2,286,506 8.19
Granted (unaudited).................. 661,841 $13.38-$47.19 17.35
Exercised (unaudited)................ (472,657) $0.33-$24.00 5.67
Cancelled (unaudited)................ (27,626) $4.00-$40.38 12.06
--------- ------
Balance, September 30, 2000
(unaudited).......................... 2,448,064 $11.08
========= ======
</TABLE>

The following table summarizes significant ranges of outstanding and
exercisable options as of December 31, 1999:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------- ----------------------
Weighted
average Weighted Weighted
remaining average average
Range of exercise Prices Shares life in years exercise price Shares exercise price
------------------------ --------- ------------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C>
$0.33-$3.12............. 150,112 3.87 $ 2.98 150,112 $ 2.98
$4.00-$4.00............. 486,236 6.17 4.00 391,262 4.00
$5.33-$8.00............. 392,325 7.83 6.63 121,761 6.29
$8.25-$9.38............. 262,600 8.36 8.59 58,557 8.60
$9.63-$10.00............ 229,708 8.76 9.92 94,883 9.97
$10.00-$10.25........... 80,000 8.37 10.25 40,000 10.25
$10.31-$11.88........... 334,250 9.28 11.83 20,250 11.77
$12.00-$12.13........... 258,200 9.93 12.13 20,000 12.13
$12.25-$17.88........... 93,075 9.58 13.87 4,875 14.80
--------- ---- ------ ------- ------
2,286,506 7.91 $ 8.19 901,700 $ 5.76
========= ==== ====== ======= ======
</TABLE>

Prior to the adoption of the plans, the Company had a compensatory stock
plan for the issuance of shares to employees and consultants. At December 31,
1998, the Company had reserved 39,999 shares for a commitment under this plan.
The balance sheet caption "Accrued payroll and payroll taxes" contains a
provision for these shares.

F-14
<PAGE>

ASTROPOWER, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company applies APB Opinion 25 and related interpretations in
accounting for stock options issued to employees. During the year ended
December 31, 1997, unearned compensation expense with respect to stock options
granted at less than fair market value at the date of grant was $417,225, which
is being amortized to expense over the periods that the options vest (4-5
years). The amount amortized to expense during the years ended December 31,
1997, 1998 and 1999 was $73,482, $98,025 and $98,025, respectively. The
unamortized amount of unearned compensation is classified as a contra equity
account in stockholders' equity.

FASB Statement 123 requires the disclosure of certain proforma information
regarding net income and net income per share. This information is required to
be determined as if the Company had accounted for its stock option plans under
the fair value method of that statement. The fair value of options granted
reported below has been estimated at the date of grant, using a Black-Scholes
option pricing model with the following assumptions:

<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Expected life of options from grant date........................ 5 years 4 years
Risk-free interest rate......................................... 5.5% 5.0%
Volatility...................................................... 0.50 0.66
Assumed dividend yield.......................................... 0.0% 0.0%
</TABLE>

As a private entity at December 31, 1997, the Company used the minimum
value method for "valuing options" and an interest rate of 6.5%.

For purposes of proforma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The
Company's proforma information follows (in thousands, except for per share
information):

<TABLE>
<CAPTION>
1997 1998 1999
----- ------ ------
<S> <C> <C> <C>
Net income as reported..................................... $ 652 $2,412 $2,267
Proforma net income........................................ 464 1,131 569
Proforma basic net income per share........................ 0.13 0.14 0.06
Proforma diluted net income per share...................... 0.07 0.12 0.06
</TABLE>

(11)Government Contracts

During the years ended December 31, 1997, 1998 and 1999, substantially all
of the Company's contract revenues were generated by research and development
contracts, principally with the U.S. government. Orders under government prime
or subcontracts are customarily subject to termination at the convenience of
the government, in which event the contractor is normally entitled to
reimbursement for allowable costs and to a reasonable allowance for profits,
unless the termination of a contract was due to a default on the part of the
contractor. No termination of contracts by the government occurred during the
years ended December 31, 1997, 1998 and 1999.

Substantially all of the Company's revenues from government contracts are
subject to audit under various federal statutes. Although the Company has
received final written acceptance of its overhead rates through 1993, it has
been advised that the Defense Contract Audit Agency is disputing certain
elements of those submissions as well as those overhead rates for 1994 and
1995. The dispute is centered on the effect of the Company's manufacturing
operations on its government contract overhead rates during the years of
transition from a contract research and development organization to commercial
manufacturing. The overhead rates for 1996 have been submitted, but

F-15
<PAGE>

ASTROPOWER, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

have not yet been audited. This dispute does not affect the Company's overhead
rates for 1997, 1998 and 1999, inasmuch as the Company revised its methodology
for determining overhead rates. It is management's opinion that adjustments to
revenue, if any, will not have a material adverse effect on the Company's
business and financial condition, but may impact future results of operations.

In October 2000, the United States government filed a civil action against
the Company in the U.S. District Court for the District of Delaware, to recover
damages and penalties with respect to the submission of invoices and Incurred
Cost Submissions in connection with contracts with the U.S. Department of
Defense and U.S. Department of Energy. The complaint alleges that the Company
falsely claimed that certain costs were properly allocable to the government
contracts when those costs were attributable to a commercial venture, resulting
in overpayments to the Company of at least $2.3 million and seeks treble
damages and penalties aggregating approximately $7.9 million. This action is in
the early procedural stages. Accordingly, the Company cannot predict the
timetable on which this action will proceed. The Company disagrees with the
allegations in the complaint and believes that it has valid defenses to the
government's claims. The Company intends to defend this action vigorously.
Because litigation is subject to uncertainties, it is not possible to predict
the ultimate outcome of this action. Although an unfavorable outcome could have
a material adverse effect on operating results and cash flows in the quarter in
which this action is resolved, the Company does not expect that an unfavorable
outcome would have a material adverse effect on its business or financial
condition. In addition, defending this action may be costly (unaudited).

Certain of the Company's contracts contain retainage provisions. At
December 31, 1998 and 1999 retainage amounts included in accounts receivable
were approximately $170,000 and $174,000, respectively. The Company estimates
that approximately 30% of the retainage amounts at December 31, 1999 will be
collected during 2000. At December 31, 1999 and 1998, unbilled accounts
receivable were approximately $211,000.

(12)Business and Credit Concentrations

The following table shows the percentage of total revenues contributed by
significant customers for the periods presented. A significant customer is
defined as one contributing 10% or more of total revenues:

<TABLE>
<CAPTION>
December 31, September 30,
---------------- -------------
1997 1998 1999 2000
---- ---- ---- -------------
(unaudited)
<S> <C> <C> <C> <C>
Customer A......................................... 21% 13% 9% 6%
Customer B......................................... 12 18 14 7
Customer C......................................... 17 14 24 21
Customer D......................................... 13 -- 10 1
Customer E......................................... -- -- 1 10
Customer F......................................... 7 9 5 10
</TABLE>

Customer A represents the federal government. Research contract revenues
for the year ended December 31, 1999 include a total of 13 contracts
aggregating $3,215,659 administered by six agencies of the U.S. Government,
with contract revenues ranging from 0.1% to 3.2% of total revenues.

During the year ended December 31, 1999, the five largest product sales
customers accounted for approximately 60% of revenues and 66% of product sales.
At December 31, 1999 approximately 66% of accounts receivable were due from the
Company's six largest customers, of which 10%

F-16
<PAGE>

ASTROPOWER, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

represented amounts due from agencies of the U.S. government representing
Customer A and 56% represented amounts due from the Company's five largest
product sales customers in 1999. The loss of one or more of these major
customers could have a material adverse effect on the Company's business,
results of operations and financial condition.

(13)Geographic Distribution of Product Revenues

Total product revenues are summarized as a percentage by geographic area as
follows:

<TABLE>
<CAPTION>
Year Ended
December 31, September 30,
---------------- -------------
1997 1998 1999 2000
---- ---- ---- -------------
(unaudited)
<S> <C> <C> <C> <C>
Domestic.......................................... 27% 22% 36% 19%
Export:
Europe.......................................... 56 63 54 58
Asia............................................ 12 6 6 13
Africa.......................................... 5 9 4 10
</TABLE>

All of the Company's research contract revenues are within the United
States.

(14)Net Income Per Share

Basic net income per share is based on the weighted average number of
common shares outstanding. Diluted net income per share is based on the
weighted average number of common shares outstanding and potentially dilutive
shares. The dilutive effect of employee stock options is included in the
computation of diluted net income per share.

The following table presents the computation of basic and diluted income
per share:

<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------------------------------------
1997 1998 1999
------------------------ ------------------------ ------------------------
Income Average Income Average Income Average
Available to Common Available to Common Available to Common
Common Shares Common Shares Common Shares
Stockholders Outstanding Stockholders Outstanding Stockholders Outstanding
------------ ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Basic................... $651,826 3,710,258 $2,411,814 7,956,221 $2,266,710 9,207,782
Dilutive Effect:
Stock Options.......... -- 344,786 -- 536,609 -- 925,062
Convertible Debt....... 157,377 518,460 239,314 885,448 -- --
Convertible Preferred
Stock................. -- 1,646,657 -- 193,916 -- --
-------- --------- ---------- --------- ---------- ----------
Diluted................. $809,203 6,220,161 $2,651,128 9,572,194 $2,266,710 10,132,844
======== ========= ========== ========= ========== ==========
</TABLE>

The difference between basic and diluted average common shares outstanding
at September 30, 2000, of 1,426,877, relates solely to stock options
(unaudited).

F-17
<PAGE>

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

2,000,000 Shares

[LOGO OF ASTROPOWER]

Common Stock

Chase H&Q
Credit Suisse First Boston
CIBC World Markets
FAC/Equities

, 2000

You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.

No action is being taken in any jurisdiction outside the United States to
permit a public offering of the common stock or possession or distribution of
this prospectus in that jurisdiction. Persons who come into possession of this
prospectus in jurisdictions outside the United States are required to inform
themselves about and to observe any restrictions as to this offering and the
distribution of this prospectus applicable to that jurisdiction.

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 14. Other Expenses of Issuance and Distribution

<TABLE>
<S> <C>
SEC Registration Fee*................................................. $ 28,278
NASD Filing Fee....................................................... 11,212
Accounting Fees....................................................... 50,000
Legal Fees............................................................ 50,000
Printing, Engraving and Mailing....................................... 125,000
Transfer agent and registrar's fees................................... 10,000
Blue Sky fees and expenses............................................ 7,500
Miscellaneous expenses................................................ 18,010
--------
TOTAL............................................................... $300,000
========
</TABLE>
---------------------
*Actual

Item 15. Indemnification of Directors and Officers

Article VIII of the Company's Amended and Restated Certificate of
Incorporation provides in part as follows:

The corporation shall, to the fullest extent permitted by 145 of the
General Corporation Law of the State of Delaware, as the same may be amended
and supplemented, indemnify any and all persons whom it shall have power to
indemnify under said section from and against any and all of the expenses,
liabilities, or other matters referred to in or covered by said section, and
the indemnification provided for herein shall not be deemed exclusive of any
other rights to which those indemnified may be entitled under any By-Law,
agreement, vote of stockholders of disinterested directors or otherwise, both
as to action in his official capacity and as to action in another capacity
while holding such office, and shall continue as to a person who has ceased to
be a director, officer, employee, or agent and shall insure to the benefit of
the heirs, executors and administrators of such a person.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the registrant's By-Laws, Certificate of Incorporation,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission, such indemnifications against public policy
as expressed in the act and is therefore unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer, or
controlling person in connection with the securities being registered), the
Registrant will, unless in the opinion of its counsel, the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.

Item 16. Exhibits, and Financial Statement Schedules

Unless otherwise noted, the following exhibits were filed on December 18,
1997 with a Registration Statement on Form S-1, and amendments thereto,
Commission File No. 333-42591 and are incorporated herein by reference:

II-1
<PAGE>

16(a) Exhibits

<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement
4.1 Specimen certificate representing the common stock of the Registrant
(incorporated by reference to the Registrant's Registration Statement on
Form S-1 (Registration
No. 333-42591))
5.1 Opinion of Foreht Last Landau Miller & Katz, LLP with respect to the
legality of the securities being registered
23.1 Consent of KPMG LLP
23.2 Consent of Foreht Last Landau Miller & Katz, LLP (contained in Exhibit
5.1)
24.1 Power of Attorney (included on signature page)
</TABLE>
---------------------
* To be filed by amendment

(16)(b) Financial Statement Schedules

Schedule II--Valuation and Qualifying Accounts

Other schedules are omitted because of the absence of condition under which
they are required or because the required information is given in the financial
statements or notes thereto.

Item 17. Undertakings

The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act
of 1934) that is incorporated by reference in this Registration Statement shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the registrant's By-Laws, Certificate of Incorporation,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel, the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.

II-2
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Newark, Delaware, on November 3, 2000.

AstroPower, Inc.

/s/ Allen M. Barnett
By: _________________________________
Allen M. Barnett
President, Chief Executive Officer
and Director

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Allen M. Barnett and Thomas J. Stiner,
and each of them, as such person's true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for such person and
in such person's name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments and any related
Registration Statement pursuant to Rule 462(b)) to this Registration Statement,
and to file same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as such person might
or could do in person, hereby ratifying and confirming all that said attorneys-
in-fact and agents, or any of them, or their or his or her substitutes, may
lawfully do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----

<S> <C> <C>
/s/ Allen M. Barnett President, Chief Executive November 3, 2000
______________________________________ Officer and Director
Allen M. Barnett

/s/ Thomas J. Stiner Senior Vice President, November 3, 2000
______________________________________ Chief Financial Officer &
Thomas J. Stiner Principal Accounting
Officer

/s/ Clare E. Nordquist Director November 3, 2000
______________________________________
Clare E. Nordquist

/s/ George S. Reichenbach Director November 3, 2000
______________________________________
George S. Reichenbach

/s/ George W. Roland Director November 3, 2000
______________________________________
George W. Roland

/s/ Charles R. Schaller Director November 3, 2000
______________________________________
Charles R. Schaller

/s/ Gilbert Steinberg Director November 3, 2000
______________________________________
Gilbert Steinberg
</TABLE>

II-3
<PAGE>

ASTROPOWER, INC. AND SUBSIDIARIES

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
Charged
to costs Charged Deductions-
Beginning and to other Accounts Ending
Period Ended Description balance expenses accounts written-off Balance
------------ ----------------------- --------- --------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Dec. 31, 1999........... Allowance for bad debts $(70,695) $(581,031) -- -- $(651,726)
Dec. 31, 1998........... Allowance for bad debts (72,962) (30,000) -- $32,267 (70,695)
Dec. 31, 1997........... Allowance for bad debts (47,836) (52,052) -- 26,926 (72,962)
</TABLE>

<TABLE>
<CAPTION>
Charged to Charged Deductions-
Beginning costs and to other Accounts Ending
Period Ended Description balance expenses accounts written-off Balance
------------ -------------------------------- ----------- ---------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Dec. 31, 1999........... Deferred tax valuation allowance -- -- -- -- --
Dec. 31, 1998........... Deferred tax valuation allowance $(1,809,315) $1,809,315 -- -- --
Dec. 31, 1997........... Deferred tax valuation allowance (1,673,387) (135,928) -- -- $(1,809,315)
</TABLE>

S-1
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
4.1 Specimen certificate representing the common stock of the Registrant
(incorporated by reference to the Registrant's Registration Statement
on Form S-1 (Registration
No. 333-42591))
5.1 Opinion of Foreht Last Landau Miller & Katz, LLP with respect to the
legality of the securities being registered
23.1 Consent of KPMG LLP
23.2 Consent of Foreht Last Landau Miller & Katz, LLP (contained in Exhibit
5.1)
24.1 Power of Attorney (included on signature page)
</TABLE>
---------------------
* To be filed by amendment