10-K 1 form10-k.htm FORM 10-K form10-k.htm
 


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
 
FORM 10-K
_____________________
 
x
 
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
   
For the fiscal year ended December 28, 2008
     
OR
     
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______________ to ______________
 
Commission file number 001-34166
 
SunPower Corporation
(Exact name of registrant as specified in its charter)

Delaware
 
94-3008969
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)

3939 North First Street, San Jose, California 95134
(Address of principal executive offices and zip code)

(408) 240-5500
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
   
Title of each class
Name of each exchange on which registered
Class A Common Stock. $0.001 par value
Nasdaq Global Select Market
Class B Common Stock. $0.001 par value
Nasdaq Global Select Market

Securities registered pursuant to Section 12(g) of the Act:
 
None
(Title of Class)
_____________________

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  x    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of Section 15(d) of the Act. Yes  ¨    No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer  x
Accelerated Filer  ¨
Non-accelerated filer  ¨
(Do not check if a smaller reporting company)
Smaller reporting company  ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x
The aggregate market value of the voting stock held by non-affiliates of the registrant on June 29, 2008 was $2.6 billion. Such aggregate market value was computed by reference to the closing price of the common stock as reported on the Nasdaq Global Market on June 27, 2008. For purposes of determining this amount only, the registrant has defined affiliates as including the executive officers and directors of registrant on June 27, 2008.
The total number of outstanding shares of the registrant’s class A common stock as of February 13, 2009 was 43,971,526.
The total number of outstanding shares of the registrant’s class B common stock as of February 13, 2009 was 42,033,287.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Parts of the registrant’s definitive proxy statement for the registrant’s 2009 annual meeting of stockholders are incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K.
 



 
 
 
 

 
 
   
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- i - 
 

 
 Trademarks

The following terms are our trademarks and may be used in this report: SunPower®, PowerGuard®, SunTile®, PowerTracker®, and PowerLight®. All other trademarks appearing in this report are the property of their holders.

Cautionary Statement Regarding Forward-Looking Statements
 
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are statements that do not represent historical facts. We use words such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” and similar expressions to identify forward-looking statements. Forward-looking statements in this Annual Report on Form 10-K include, but are not limited to, our plans and expectations regarding our ability to obtain financing, future financial results, operating results, business strategies, projected costs, products, competitive positions, management’s plans and objectives for future operations, and industry trends. These forward-looking statements are based on information available to us as of the date of this Annual Report on Form 10-K and current expectations, forecasts and assumptions and involve a number of risks and uncertainties that could cause actual results to differ materially from those anticipated by these forward-looking statements. Such risks and uncertainties include a variety of factors, some of which are beyond our control. Please see “Item 1A: Risk Factors” and our other filings with the Securities and Exchange Commission for additional information on risks and uncertainties that could cause actual results to differ. These forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we are under no obligation to, and expressly disclaim any responsibility to, update or alter our forward-looking statements, whether as a result of new information, future events or otherwise.
 
The following information should be read in conjunction with the Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K. Our fiscal year ends on the Sunday closest to the end of the applicable calendar year. All references to fiscal periods apply to our fiscal quarters or year which ends on the Sunday closest to the calendar month end.
 
 
ITEM 1: BUSINESS
 
We are a vertically integrated solar products and services company that designs, manufactures and markets high-performance solar electric power technologies. Our solar cells and solar panels are manufactured using proprietary processes, and our technologies are based on more than 15 years of research and development. Of all the solar cells available for the mass market, we believe our solar cells have the highest conversion efficiency, a measurement of the amount of sunlight converted by the solar cell into electricity. Our solar power products are sold through our components business segment, or Components Segment. In January 2007, we acquired PowerLight Corporation, or PowerLight, now known as SunPower Corporation, Systems, or SP Systems, which developed, engineered, manufactured and delivered large-scale solar power systems. These activities are now performed by our systems business segment, or our Systems Segment. Our solar power systems, which generate electricity, integrate solar cells and panels manufactured by us as well as other suppliers. For more information about financial condition and results of operations of each segment, please see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8: Financial Statements and Supplementary Data.”
 
Business Segments Overview
 
Components Segment:  Our Components Segment sells solar power products, including solar cells, solar panels and inverters, which convert sunlight to electricity compatible with the utility network. We believe our solar cells provide the following benefits compared with conventional solar cells:
 
superior performance, including the ability to generate up to 50% more power per unit area;
 
superior aesthetics, with our uniformly black surface design that eliminates highly visible reflective grid lines and metal interconnect ribbons; and
 
more efficient use of silicon, a key raw material used in the manufacture of solar cells.
 
We sell our solar components products to installers and resellers, including our global dealer network, for use in residential and commercial applications where the high efficiency and superior aesthetics of our solar power products provide compelling customer benefits. We also sell products for use in multi-megawatt solar power plant applications. In many situations, we offer a materially lower area-related cost structure for our customers because our solar panels require a substantially smaller roof or land area than conventional solar technology and half or less of the roof or land area of commercial solar thin film technologies. We sell our products primarily in North America, Europe and Asia, principally in regions where public policy has accelerated solar power adoption. In fiscal 2008, 2007 and 2006, components revenue represented approximately 43%, 40% and 100%, respectively, of total revenue.

 
As discussed more fully below, we manufacture our solar cells at our two facilities in the Philippines, and are developing a third solar cell manufacturing facility in Malaysia. Almost all of our solar cells are then combined into solar panels at our solar panel assembly facility located in the Philippines. Our solar panels are also manufactured for us by a third-party subcontractor in China.
 
Systems Segment:  Our Systems Segment generally sells solar power systems directly to system owners and developers. When we sell a solar power system, it may include services such as development, engineering, procurement of permits and equipment, construction management, access to financing, monitoring and maintenance. We believe our solar systems provide the following benefits compared with competitors’ systems:
 
superior performance delivered by maximizing energy delivery and financial return through systems technology design;
 
superior systems design to meet customer needs and reduce cost, including non-penetrating, fast roof installation technologies; and
 
superior channel breadth and delivery capability including turnkey systems.
 
Our Systems Segment is comprised primarily of the PowerLight (now known as SP Systems) business we acquired in January 2007. Our customers include commercial and governmental entities, investors, utilities, production home builders and home owners. We work with development, construction, system integration and financing companies to deliver our solar power systems to customers. Our solar power systems are designed to generate electricity over a system life typically exceeding 25 years and are principally designed to be used in large-scale applications with system ratings of typically more than 500 kilowatts. Worldwide, more than 500 SunPower solar power systems have been constructed or are under contract, rated in the aggregate at more than 400 megawatts of peak capacity. In fiscal 2008 and 2007, systems revenue represented approximately 57% and 60%, respectively, of total revenue.
 
We have solar power system projects completed or in the process of being completed in various countries including Germany, Italy, Portugal, South Korea, Spain and the United States. We sell distributed rooftop and ground-mounted solar power systems as well as central-station power plants. In the United States, distributed solar power systems are typically rated at more than 500 kilowatts of capacity to provide a supplemental, distributed source of electricity for a customer’s facility. Many customers choose to purchase solar electricity under a power purchase agreement with a financing company which buys the system from us. In Europe and South Korea, our products and systems are typically purchased by a financing company and operated as a central-station solar power plant. These power plants are rated with capacities of approximately one to twenty megawatts, and generate electricity for sale under tariff to private and public utilities. In 2008, we began serving the utility market in the United States, as regulated utilities began seeking cost-effective renewable energy to meet governmental renewable portfolio standard requirements. Examples include an agreement with Florida Power & Light Company, or FPL, to design and build two solar photovoltaic power plants totaling 35 megawatts in Florida, and another with Pacific Gas and Electric Company, or PG&E, to design and build a 250 megawatt solar power plant in California.
 
We manufacture certain of our solar power system products at our manufacturing facilities in Richmond, California and at other facilities located close to our customers. Some of our solar power system products are also manufactured for us by third-party suppliers.
 
Our Products and Services
 
Products Sold Through Our Components Segment
 
Our solar power products include solar cells and solar panels manufactured using proprietary processes, and our technologies are based on more than 15 years of research and development. We also sell a line of SunPower branded inverters manufactured by third-parties.
 
Solar Cells
 
Solar cells are semiconductor devices that directly convert sunlight into direct current electricity. Our A-300 solar cell is a silicon solar cell with a specified power value of 3.1 watts and a conversion efficiency averaging between 20% and 21.5%. Our A-330 solar cell delivers 3.3 watts with a conversion efficiency of up to 22.7%. The A-330 solar cell started shipping in 2007. Our solar cells are designed without highly reflective metal contact grids or current collection ribbons on the front of the solar cells. This feature enables our solar cells to be assembled into solar panels that exhibit a more uniform appearance than conventional solar panels.
 
 
Solar Panels
 
Solar panels are solar cells electrically connected together and encapsulated in a weatherproof package. We believe solar panels made with our solar cells are the highest efficiency solar panels available for the mass market. Because our solar cells are more efficient relative to conventional solar cells, when our solar cells are assembled into panels, the assembly cost per watt is less because more power can be incorporated into a given size package. Higher solar panel efficiency allows installers to mount a solar power system with more power within a given roof or site area and can reduce per watt installation costs.
 
 Products Sold Through Our Systems Segment
 
Our solar electric power system technology integrates solar cells and solar panels to convert sunlight to electricity. Our systems are principally designed to be used in large-scale utility, commercial, public sector and production home applications.
 
PowerGuard® Roof System
 
Our PowerGuard® Roof System is a roof-mounted solar panel mounting system that delivers reliable, clean electricity while insulating and protecting the roof. PowerGuard® is a proprietary, pre-engineered solar power roofing tile system. Each PowerGuard® tile consists of a solar laminate, lightweight cement substrate and styrofoam base. Designed for quick and easy installation, PowerGuard® tiles fit together with interlocking tongue-and-groove side surfaces. In addition to generating electricity, PowerGuard® roof systems also insulate and protect the roof membrane from ultraviolet rays and thermal degradation. This saves both heating and cooling energy expenses and extends the roof life. The PowerGuard® roof system has been tested and certified by Underwriters Laboratories Inc., or UL, and has received a UL Class B fire rating which we believe facilitates obtaining building permits and inspector approvals.
 
Our PowerGuard® system resists wind uplift without compromising the rooftop’s structural integrity. In comparison, conventional solar power systems typically penetrate the roof. Systems that require drilling many holes into rooftops to install and secure solar panels may compromise the integrity of the roof and reduce its life span. To avoid drilling holes, certain other conventional systems add weight for stability against wind and weather, which may exceed weight limits for some commercial buildings’ roofs.
 
PowerGuard® tiles typically weigh approximately four pounds per square foot, which is supported by most commercial rooftops. Our technology integrates this lightweight construction with a patented pressure equalizing design that has been tested to withstand winds of up to 140 miles per hour. PowerGuard® roof systems have been installed in a broad range of climates, including California, Illinois, Hawaii, Massachusetts, Nevada, New Jersey, New York, Canada and Switzerland and on a wide variety of building types, from rural single story warehouses to urban high rise structures.
 
SunPower® T-10 Commercial Solar Roof Tiles
 
SunPower® T-10 commercial solar roof tiles are pre-engineered solar panels that tilt at a 10-degree angle. Depending on geographical location and local climate conditions, this can allow for the generation of up to 10% more annual energy output than traditional flat roof-mounted systems. These non-penetrating panels interlock for secure, rapid installation on rooftops without compromising the structural integrity of the roof.
 
Similar to our PowerGuard® product, the SunPower® T-10 commercial roof tile is lightweight, weighing less than four pounds per square foot, and is installed without penetrating the roof surface. Sloped side and rear wind deflectors improve wind performance, allowing T-10 arrays to withstand winds up to 120 miles per hour.
 
Whereas PowerGuard® performance is optimized in constrained rooftop environments where it contributes to maximum power density, commercial roof tile performance is optimized for larger roofs with less space constraints as well as underutilized tracks of land, such as ground reservoirs.

SunTile® Roof Integrated System for Residential Market
 
Our SunTile® product is a highly efficient solar power shingle roofing system utilizing our A-300 solar cell technology that is designed to integrate with conventional residential roofing materials. SunTile® solar shingles are designed to replace multiple types of roof panels, including the most common concrete flat, low and high profile “S” tile and composition shingles. We believe that SunTile® is less visible on a roof than conventional solar technology because the solar panel is integrated directly into the roofing material instead of mounted onto the roof. SunTile® has a UL-listed Class A fire rating, which is the highest level of fire rating provided by UL. SunTile® is designed to be incorporated by production home builders into the construction of their new homes.
 
 
Ground Mounted SunPower® Tracker Systems
 
We offer several types of ground-mounted solar power systems using our PowerTracker® technology, now referred to as SunPower® Tracker. SunPower® Tracker is a single-axis tracking system that automatically pivots solar panels to track the sun’s movement throughout the day. We believe this tracking feature increases the amount of sunlight that is captured and converted into energy by up to 30% over flat or fixed-tilt systems depending on geographic location and local climate conditions. A single motor and drive mechanism can control 10 to 20 rows, or more than 200 kilowatts of solar panels. The multi-row feature represents a cost advantage for our customers over dual axis tracking systems, as such systems require more motors, drives, land, and power to operate per kilowatt of capacity. The SunPower® Tracker system can be assembled onsite, and is easily scalable. We have installed ground-mounted systems integrating SunPower® Tracker in a wide range of geographical markets including Arizona, California, Hawaii, Nevada, New Jersey, Germany, Portugal, Spain and South Korea.
 
Fixed Tilt and SunPower® Tracker Systems for Parking Structures
 
We have developed and patented several designs for solar power systems for parking structures in multiple configurations. These dual use systems typically incorporate solar panels into the roof of a carport or similar structure to deliver onsite solar power while providing shade and protection. Aesthetically pleasing, standardized and scalable, they are well suited for parking lots adjacent to facilities. In addition, we have incorporated our SunPower® Tracker technology into certain of our systems for elevated parking structures to provide a differentiated product offering to our customers.
 
Other System Offerings
 
We have other products that leverage our core systems. For example, our metal roof system is designed for sloped-metal roof buildings, which are used in some winery and warehouse applications. This solar power system is designed for rapid installation. We also offer other architectural products such as day lighting with translucent solar panels.

Balance of System Components
 
“Balance of system components” are components of a solar power system other than the solar panels, and include SunPower branded inverters, mounting structures, charge controllers, grid interconnection equipment and other devices depending upon the specific requirements of a particular system and project.

Client Services Sold Through Our Systems Segment
 
We provide our customers and partners with a variety of services, including system design, energy efficiency, financial consulting and analysis, construction management and maintenance and monitoring.
 
System Design
 
We design solar power systems taking into account the customer’s location, site conditions and energy needs. During the preliminary design phase, we conduct a site audit and building assessment for onsite generation feasibility and identify energy efficiency savings opportunities. We model the performance of a proposed system design taking into account variables such as local weather patterns, utility rates and other relevant factors at the customer’s location. We also identify necessary permits and design our systems to comply with applicable building codes and other regulations.
 
Financial Consulting and Analysis
 
We offer financial consulting services to our customers and assist them in developing funding strategies for solar power projects depending on a customer’s size, cash flow and tax status. We have partnered with many financial companies and organizations which provide project development financing and bonding for our customers. To date, we have successfully arranged financing for clients ranging from simple loans and tax-advantaged operating leases to long-term, multi-party power purchase agreements.
 
Construction Management
 
We offer general contracting services and employ project managers to oversee all aspects of system installation, including securing necessary permits and approvals. Subcontractors, typically electricians and roofers, usually provide the construction labor, tools and heavy equipment for solar system installation. We have developed relationships with subcontractors in many target markets, and require subcontractors to be licensed, carry appropriate insurance and adhere to the local labor and payroll requirements. Our construction management services include system testing, commissioning and management of utility network interconnection.
 
 
Maintenance and Monitoring
 
We also offer post-installation services in support of our solar power systems, including:
 
Operations and Maintenance: Our systems have a design life in excess of 25 years. We typically provide our customers with a one-, two-, five- or ten-year parts and workmanship system warranty, after which the customer may extend the period covered by our warranty for an additional fee. We also pass through to customers long-term warranties from the original equipment manufacturers, or OEMs, of certain system components. Warranties of 20 years from solar panel suppliers are standard, while inverters typically carry a two-, five- or ten-year warranty. We offer our customers a comprehensive suite of solar power system maintenance services ranging from preventive maintenance to rapid-response outage restoration and inverter repair. Our Standard Service Agreement includes continuous remote monitoring, system performance reports, and a 24/7 technical support line. Our Plus Level Service Agreement includes all of the Standard Service features plus on-site preventive and corrective maintenance using regionally-located field service technicians.
 
Monitoring: We have developed a proprietary set of advanced monitoring applications built upon the leading electric utility real-time monitoring platform. The monitoring service continuously scans the operational status and performance of the solar system and automatically identifies system outages and performance deficiencies to our 24/7 monitoring technicians. If the monitoring technicians cannot identify the cause of the problem within a predetermined response time, the issue is escalated to our performance engineers for further analysis and diagnostics. If the performance engineers cannot resolve the problem within the service response time, the issue is escalated to our field service team to resolve the problem at our customer’s facility. Customers can access historical or daily system performance data through our customer website (www.sunpowermonitor.com). Some customers choose to install electronic kiosks for flat-panel displays to track performance information at their facility. We believe these displays enhance our brand and educate the public and prospective customers about solar power.

In 2008 we released the SunPower Monitoring System designed primarily for residential customers. This system enables residential customers to view their daily, monthly and annual solar energy production remotely via a web interface as well as in their home with a dedicated display.
 
Energy Efficiency Consulting and Related Services Sold Through Our Systems Segment
 
In addition to our solar power systems, we provide related energy efficiency services designed to increase the total return on investment through an integrated, seamless solution. We provide custom solar power generation and demand side management solutions to minimize facility energy use and demand, improve building operation controls and increase the comfort level of building occupants.
 
Corporate History
 
We were originally incorporated in California in April 1985 by Dr. Richard Swanson to develop and commercialize high-efficiency solar cell technologies. Cypress Semiconductor Corporation, or Cypress, made a significant investment in SunPower in 2002. In November 2004, Cypress acquired 100% ownership of all outstanding shares of our capital stock, excluding unexercised warrants and options. In November 2005, we reincorporated in Delaware, created two classes of common stock and held the initial public offering, or IPO, of class A common stock. After completion of our IPO, Cypress held all the outstanding shares of our class B common stock.  On September 29, 2008, Cypress completed a spin-off of all of its shares of our class B common stock, in the form of a pro rata dividend to the holders of record as of September 17, 2008 of Cypress common stock. As a result, our class B common stock now trades publicly and is listed on the Nasdaq Global Select Market, along with our class A common stock.
  
Research and Development
 
We engage in extensive research and development efforts to improve solar cell efficiency, enhance our Systems Segment products and reduce manufacturing cost and complexity. Our research and development organization works closely with our manufacturing facilities, our equipment suppliers and our customers to improve our solar cell design and to lower cell, panel and system product manufacturing and assembly costs. In addition, we have dedicated employees who work closely with our current and potential suppliers of crystalline silicon, a key raw material used in the manufacture of our solar cells, to develop specifications that meet our standards and ensure the high quality we require, while at the same time controlling costs.

We have government contracts that enable us to more rapidly develop new technologies and pursue additional research opportunities while helping to offset our research and development expense. In the third quarter of 2007, we signed a Solar America Initiative research and development agreement with the U.S. Department of Energy in which we were awarded $10.8 million in the first budgetary period. Total funding for the three-year effort is estimated to be $24.9 million. Our cost share requirement under this program, including lower-tier subcontract awards, is anticipated to be $28.1 million. Payments received under these contracts offset our research and development expense by approximately 25%, 21% and 8% in fiscal 2008, 2007 and 2006, respectively. Our research and development expenditures, net of payments received under these contracts, were approximately $21.5 million, $13.6 million and $9.7 million for fiscal 2008, 2007 and 2006, respectively.
 
 
For more information about these grants, including the government’s limited rights to use technology developed as a result of such grants, please see “Item 1A: Risk Factors” including “–Our reliance on government programs to partially fund our research and development programs could impair our ability to commercialize our solar power products and services.”
 
Manufacturing

The solar cell value chain starts with high purity silicon called polysilicon. Polysilicon is created by refining quartz or sand. Polysilicon is melted and grown into crystalline ingots by companies specializing in ingot growth, such as our joint venture located in South Korea named Woongjin Energy Co., Ltd, or Woongjin Energy. The ingots are sliced and the wafers are processed into solar cells in our own manufacturing facilities and in a joint venture named First Philec Solar Corporation, or First Philec Solar, located in the Philippines, and by other vendors. We also purchase wafers and polysilicon from third-party vendors on a purchase order or contract basis.

We manufacture our solar cells through our subsidiary, SunPower Philippines Manufacturing Limited, in two facilities located near Manila in the Philippines. Our first facility, or FAB1, has 215,000 square feet and began operations in the fall of 2004. We currently operate four solar cell manufacturing lines, with a total rated manufacturing capacity of 108 megawatts per year at this FAB1. In August 2006, we purchased a 344,000 square foot building in the Philippines, or FAB2. This building is approximately 20 miles from FAB1 and was constructed to house up to twelve solar cell manufacturing lines. FAB2 began operations in the summer of 2007 and we currently operate eight solar cell manufacturing lines, with a total rated manufacturing capacity of 306 megawatts per year at this FAB2. By the end of 2009, we plan to operate 16 solar cell manufacturing lines in total with an aggregate manufacturing capacity of 574 megawatts per year. In addition, we plan to begin production in 2010 on the first line of our planned third solar cell manufacturing facility, or FAB3, which will be constructed in Malaysia. FAB3 will be constructed in two phases, with an aggregate manufacturing capacity of more than 500 megawatts per year after the completion of the first phase, and an expected aggregate manufacturing capacity of more than 1 gigawatt per year when the second phase is completed.
 
We manufacture our solar panels at our solar panel assembly facility located in the Philippines. Our solar panels are also manufactured for us by a third-party subcontractor in China. We currently operate seven solar panel manufacturing lines with a rated manufacturing capacity of 210 megawatts of solar panels per year.

Over the past 15 years, we have developed a core competency in processing thin silicon wafers. This proprietary semiconductor processing expertise involves specialized equipment and facilities that we believe allow us to process thin wafers while minimizing breakage and accurately controlling the effect of metallic contaminants and other non-desirable process conditions.
 
We source the balance of system components based on quality, performance and cost considerations using solar cells and solar panels supplied internally as well as from other third-party suppliers. We generally assemble proprietary components, such as cementitious coatings and certain adhesive applications, while we purchase generally available components from third-party suppliers. Certain of our products, such as our PowerGuard® and SunTile® products, are assembled at our or a third-party contractor’s assembly plant prior to shipment to the project location. Other products such as our SunPower® Tracker and SunPower® T-10 commercial roof tiles are field assembled with components shipped directly from suppliers. We currently have the capacity to produce up to an aggregate of twenty megawatts of our PowerGuard® and SunTile® products per year, depending on product mix, in our California assembly plant or third-party contractor’s assembly plant.

Supplier Relationships
 
Crystalline silicon is the leading commercial material for solar cells and is used in several forms, including single-crystalline, or monocrystalline silicon, multicrystalline, or polycrystalline silicon, ribbon and sheet silicon and thin-layer silicon. We believe our supplier relationships and various short- and long-term contracts will afford us the volume of material required to meet our planned output. For more information about risks related to our crystalline silicon, please see “Item 1A: Risk Factors” including “– Limited competition among suppliers has required us in some instances to enter into long-term, firm commitment supply agreements that could result in excess or insufficient inventory and place us at a competitive disadvantage.”
 
With respect to suppliers for our Components Segment, we purchase polysilicon, silicon ingots, inverters, solar panels and a balance of system components on both a contracted and a purchase order basis. We have contracted with some of our suppliers for multi-year supply agreements. Under such agreements, we have annual minimum purchase obligations and in certain cases prepayment obligations.
 
With respect to suppliers for our Systems Segment, we are able to utilize solar panels from various manufacturers depending on power, performance and cost requirements for our construction projects. We historically partnered, and intend to continue to partner, with solar cell and panel manufacturers that offer the most advanced solar panel technologies and the highest quality products.
 
 
Customers
 
Components Customers
 
We currently sell our solar power products to installers and resellers, including our global dealer network. We sell our products in North America, Europe, Asia and Australia, principally in regions where government incentives have accelerated solar power adoption. We currently work with a number of customers who have specific expertise and capabilities in a given market segment or geographic region. As we expand our manufacturing capacity, we anticipate developing additional customer relationships in other markets and geographic regions to continue to decrease our customer concentration and dependence.
 
    We have four components customers that each accounted for more than 10 percent of our total revenue in fiscal 2006, and less than 10 percent of our total revenue in both fiscal 2008 and 2007 as follows:
 
 
Year Ended
 
December 28,
2008
 
December 30,
2007
 
December 31,
 2006
Significant components customers:
         
Conergy AG
*
   
*
 
25%
Solon AG
*
   
*
 
24%
PowerLight**
n.a.
   
n.a.
 
16%
General Electric Company***
*
   
*
 
10%
 
denotes less than 10% during the period
** 
acquired by us on January 10, 2007
*** 
includes its subcontracting partner, Plexus Corporation

International sales comprise the majority of components revenue and represented approximately 67%, 64% and 68% of components revenue in fiscal 2008, 2007 and 2006, respectively. We anticipate that a significant amount of our total revenue will continue to be generated by sales to customers outside the United States. A significant portion of our sales are denominated in Euros and we have entered into foreign currency forward exchange and option contracts to protect against an unfavorable U.S. dollar versus the Euro exchange rate. For more information about risks related to currency fluctuations, please see “Item 1A: Risk Factors” including “– We have significant international activities and customers, and plan to continue these efforts, which subject us to additional business risks, including logistical complexity and political instability.” A table providing total revenue by geography for the last three fiscal years is found in Note 17 to Consolidated Financial Statements in "Item 8: Financial Statements and Supplementary Data."

Systems Customers
 
Our systems customers include commercial and governmental entities, investors, utilities, production home builders and home owners. We work with construction, system integration and financing companies to deliver our solar power systems to the end-users of electricity. In the United States, we often work with financing companies that purchase solar power systems from us, and then sell solar electricity generated from these systems under power purchase agreements to end-users. Under power purchase agreements, the end-users typically pay the financing companies over an extended period of time based on energy they consume from the solar power systems, rather than paying for the full capital cost of purchasing the solar power systems. Worldwide, more than 500 SunPower solar power systems are commissioned or in construction, rated in the aggregate at more than 400 megawatts of peak capacity. In addition, our new homes division and our dealer network have deployed thousands of SunPower rooftop solar systems to residential customers. We have solar power system projects completed or in the process of being completed in various countries, including Germany, Italy, Portugal, South Korea, Spain and the United States.

We have two systems customers that each accounted for more than 10 percent of our total revenue in each of fiscal 2008 and 2007 as follows:
 
 
Year Ended
 
December 28,
2008
 
December 30,
2007
 
Significant systems customers:
       
Naturener Group
18% 
   
*
 
Sedwick Corporate, S.L.
11% 
   
*
 
SolarPack
*
   
18%
 
MMA Renewable Ventures
*
   
16%
 
 
denotes less than 10% during the period
 
 
Domestic and international systems sales represented approximately 38% and 62%, respectively, of our systems revenue in fiscal 2008 and 51% and 49%, respectively, of our systems revenue in fiscal 2007. Installations in California and Spain accounted for 34% and 54%, respectively, of our systems revenue for fiscal 2008. Installations in California, Nevada and Spain accounted for 24%, 22% and 46%, respectively, of our systems revenue for fiscal 2007. In June and July 2008, we energized several large-scale solar power plants in Spain rated at over 40 megawatts in the aggregate. In December 2007, we completed the construction of an approximately 14 megawatt solar power plant at Nellis Air Force Base in Nevada that currently represents our largest installed solar power project in North America.
 
Marketing and Sales
 
We market and sell solar electric power technologies worldwide both through a direct sales force and resellers, including our global dealer network. We have direct sales personnel or representatives in Australia, Germany, Italy, Korea, Singapore, Spain, Switzerland and the United States. And during fiscal 2008, we tripled the size of our dealer network by adding more than 350 dealers worldwide. Approximately 69%, 85% and 73% of our total revenue for fiscal 2008, 2007 and 2006, respectively, were derived through our direct sales force and sales affiliates, with the remainder from resellers. We provide warranty coverage on systems we sell through our direct sales force, sales affiliates and resellers. To the extent we sell through resellers, we may provide system design and support services while the resellers are responsible for construction, maintenance and service.
 
Our marketing programs include conferences and technology seminars, sales training, public relations and advertising. Our marketing group is also responsible for driving many qualified leads to support our sales teams lead generation efforts, assessing the productivity of our lead pipeline, and measuring marketing-generated leads to closed sales. We support our customers through our field application engineering and customer support organizations. We have marketing staff in San Jose and Richmond, California, United States, as well as in Geneva, Switzerland. Please see Note 17 of Notes to our Consolidated Financial Statements for information regarding our revenue by geographic region.
 
Backlog
 
Components Segment:  Our solar cell, solar panel and inverter sales within the Components Segment are typically ordered by customers under standard purchase orders with relatively short delivery lead-times, generally within one to three months. We have entered into long-term supply agreements with certain customers that contain minimum firm purchase commitments. However, specific products that are to be delivered and the related delivery schedules under these long-term contracts are generally subject to revision by our customers.
 
Systems Segment:  Our systems revenue is primarily comprised of engineering, procurement and construction, or EPC, projects which are governed by customer contracts that require us to deliver functioning solar power systems. EPC projects are generally completed within 6 to 36 months from the date of the contract signing. In addition, our Systems Segment also derives revenue from sales of certain solar power products and services that are smaller in scope than an EPC project. Our Systems Segment backlog represents the uncompleted portion of contracted and financed projects. For example, we have more than one gigawatt of contingent customer orders, including our contract with PG&E to design and build a 250 megawatt solar power plant in California. However, this contract is contingent and is not yet a financed project, therefore, it is excluded from backlog as of December 28, 2008. Our contract with FPL to design and build two solar photovoltaic power plants totaling 35 megawatts in Florida is a financed project and is included in backlog as of December 28, 2008. Our EPC projects and contracts in our new homes group are often cancelable by our customers under certain situations. In addition, systems project revenue and related costs are often subject to delays or scope modifications based on change orders agreed to with our customers, or changes in the estimated construction costs to be incurred in completing the project.
 
Management believes that backlog at any particular date is not necessarily a meaningful indicator of future revenue for any particular period of time because our backlog excludes contracts signed and completed in the same quarter and contracts still subject to obtaining project financing. Backlog totaled approximately $1,144 million and $778 million as of December 28, 2008 and December 30, 2007, respectively. Approximately $450 million of our backlog at December 28, 2008 is currently planned to be recognized as revenue during fiscal 2009. 
 
Competition
 
The market for solar electric power technologies is competitive and continually evolving. We expect to face increased competition, which may result in price reductions, reduced margins or loss of market share. Our solar power products compete with a large number of competitors in the solar power market, including, but not limited to, Evergreen Solar, Inc., First Solar, Inc., Q-Cells AG, Sanyo Corporation, Sharp Corporation and Suntech Power Holdings Co., Ltd. We may also face competition from some of our resellers, who may develop products internally that compete with our product and service offerings, or who may enter into strategic relationships with or acquire other existing solar power system providers. To the extent that government funding for research and development grants, customer tax rebates and other programs that promote the use of solar and other renewable forms of energy are limited, we compete for such funds, both directly and indirectly, with other renewable energy providers and customers.

 
In addition, universities, research institutions and other companies have brought to market alternative technologies such as thin films and concentrators, which compete with our technology in certain applications. Furthermore, the solar power market in general competes with conventional fossil fuels supplied by utilities and other sources of renewable energy such as wind, hydro, biomass, concentrated solar power and emerging distributed generation technologies such as micro-turbines, sterling engines and fuel cells. We believe solar power has certain advantages when compared to these other power generating technologies and offers a stable power price compared to utility network power, which typically increases as fossil fuel prices increase. In addition, solar power systems are deployed in many sizes and configurations and do not produce air, water and noise emissions. Most other distributed generation technologies create environmental impacts of some sort. The current high up-front cost of solar relative to utility network power, however, is the primary market barrier for on-grid applications.

In the large-scale on-grid solar power systems market, we face direct competition from a number of companies, including those that manufacture, distribute, or install solar power systems as well as construction companies that have expanded into the renewable sector. In addition, we will occasionally compete with distributed generation equipment suppliers.

We believe that the key competitive factors in the market for solar cells and solar panels include:
 
 
levelized cost of energy, or LCOE, an evaluation of the life-cycle energy costs and life-cycle energy production;

 
power efficiency and performance;
 
 
price;
 
 
aesthetic appearance of solar cells and panels;
 
 
strength of distribution relationships; and
 
 
timeliness of new product introductions.
 
The principal elements of competition in the solar systems market include technical expertise, experience, delivery capabilities, diversity of product offerings, financing structures, marketing and sales, price, product performance, quality, efficiency and reliability, and technical service and support. We believe that we compete favorably with respect to each of these factors, although we may be at a disadvantage in comparison to larger companies with broader product lines and greater technical service and support capabilities and financial resources. For more information about risks related to our competition, please see “Item 1A: Risk Factors” including “– If we fail to successfully develop and introduce new and enhanced products and services, we may not be able to compete effectively, and our ability to generate revenues will suffer.
 
Intellectual Property
 
We rely on a combination of patent, copyright, trade secret, trademark and contractual protections to establish and protect our proprietary rights. “SunPower” is our registered trademark in countries throughout the world for use with solar cells, solar panels and mounting systems. We also hold registered trademarks for PowerLight®, PowerGuard®, PowerTracker® and SunTile® in certain countries. We are seeking and will continue to seek registration of the “SunPower” trademark and other trademarks in additional countries as we believe is appropriate. We require our customers to enter into confidentiality and nondisclosure agreements before we disclose any sensitive aspects of our solar cells, technology or business plans, and we typically enter into proprietary information agreements with employees and consultants.
 
Although we apply for patents to protect our technology, our revenue is not dependent on any particular patent we own. We currently own multiple patents and patent applications which cover aspects of the technology in the solar cells and mounting systems that we currently manufacture and market. Material patents that relate to our systems products and services primarily relate to our rooftop mounting products and ground-mounted tracking products. The remaining lifetimes of such patents range from one to twenty years. We intend to continue assessing appropriate opportunities for patent protection of those aspects of our technology, designs, and methodologies and processes that we believe provide significant competitive advantages to us, and for licensing opportunities of new technologies relevant to our business. We additionally rely on trade secret rights to protect our proprietary information and know-how. We employ proprietary processes and customized equipment in our manufacturing facilities.
 
For more information about risks related to our intellectual property, please see “Item 1A: Risk Factors” including “– We are dependent on our intellectual property, and we may face intellectual property infringement claims that could be time-consuming and costly to defend and could result in the loss of significant rights.” and “– We rely substantially upon trade secret laws and contractual restrictions to protect our proprietary rights, and, if these rights are not sufficiently protected, our ability to compete and generate revenue could suffer.” and “– We may not obtain sufficient patent protection on the technology embodied in the solar cells or solar system components we currently manufacture and market, which could harm our competitive position and increase our expenses.”

 
Public Policy Considerations
 
Different policy mechanisms have been used by governments to accelerate the adoption of solar power. Examples of customer-focused financial mechanisms include capital cost rebates, performance-based incentives, feed-in tariffs, tax credits and net metering. Capital cost rebates provide funds to customers based on the cost and size of a customer’s solar power system. Performance-based incentives provide funding to a customer based on the energy produced by their solar system. Feed-in tariffs pay customers for solar power system generation based on kilowatt-hours produced, at a rate generally guaranteed for a period of time. Tax credits reduce a customer’s taxes at the time the taxes are due. In the United States and other countries, net metering has often been used as a supplemental program in conjunction with other policy mechanisms. Under net metering, a customer can generate more energy than used, during which periods the electricity meter will spin backwards. During these periods, the customer “lends” electricity to the grid, retrieving an equal amount of power at a later time. Net metering encourages customers to size their systems to match their electricity consumption over a period of time, such as monthly or annually, rather than limiting solar generation to matching customers’ instantaneous electricity use.
 
In addition to the mechanisms described above, new market development mechanisms to encourage the use of renewable energy sources continue to emerge. For example, many states in the United States have adopted renewable portfolio standards which mandate that a certain portion of electricity delivered to customers come from a set of eligible renewable energy resources. In certain developing countries, governments are establishing initiatives to expand access to electricity, including initiatives to support off-grid rural electrification using solar power. For more information about risks related to public policies, please see “Item 1A: Risk Factors” including Existing regulations and policies and changes to these regulations and policies may present technical, regulatory and economic barriers to the purchase and use of solar power products, which may significantly reduce demand for our products and services.”

Environmental Regulations
 
We use, generate and discharge toxic, volatile or otherwise hazardous chemicals and wastes in our research and development, manufacturing and construction activities. We are subject to a variety of foreign, federal, state and local governmental laws and regulations related to the purchase, storage, use and disposal of hazardous materials.
 
We believe that we have all environmental permits necessary to conduct our business and expect to obtain all necessary environmental permits for FAB3 and future construction activities. We believe that we have properly handled our hazardous materials and wastes and have appropriately remediated any contamination at any of our premises. We are not aware of any pending or threatened environmental investigation, proceeding or action by foreign, federal, state or local agencies, or third-parties involving our current facilities. 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, operational interruptions and adverse publicity, any of which could materially and adversely affect our business, results of operations and financial condition.
 
Employees
 
As of December 28, 2008, we had approximately 5,400 employees worldwide, including approximately 540 employees located in the United States, 4,710 employees located in the Philippines and 150 employees located in other countries. Of these employees, approximately 4,460 were engaged in manufacturing, 150 employees in construction projects, 150 employees in research and development, 470 employees in sales and marketing and 170 employees in general and administrative. None of our employees are covered by a collective bargaining agreement. We have never experienced a work stoppage and we believe relations with our employees are good.
 
Available Information
 
We make available our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 free of charge on our website at www.sunpowercorp.com, as soon as reasonably practicable after they are electronically filed or furnished to the Securities and Exchange Commission, or the SEC. Additionally, copies of materials filed by us with the SEC may be accessed at the SEC’s Public Reference Room at 100 F Street NE, Washington, D.C. or at the SEC’s website at http://www.sec.gov. For information about the SEC’s Public Reference Room, the public may contact 1-800-SEC-0330. Copies of material filed by us with the SEC may also be obtained by writing to us at our corporate headquarters, SunPower Corporation, Attention:  Investor Relations, 3939 North First Street, San Jose, California 95134, or by calling (408) 240-5500. The contents of our website are not incorporated into, or otherwise to be regarded as a part of, this Annual Report on Form 10-K.
 
 
ITEM 1A: RISK FACTORS
 
Our operations and financial results are subject to various risks and uncertainties, including risks related to our supply chain, sales channels including availability of project financing, liquidity, operations, intellectual property, and our debt and equity securities. Although we believe that we have identified and discussed below the key risk factors affecting our business, there may be additional risks and uncertainties that are not presently known or that are not currently believed to be significant that may also adversely affect our business, financial condition, results of operations, cash flows, and trading price of our class A and class B common stock as well as our 1.25% debentures and 0.75% debentures.
 
Risks Related to Our Supply Chain
 
We will continue to be dependent on a limited number of third-party suppliers for certain raw materials and components for our products, which could prevent us from delivering our products to our customers within required timeframes, which could result in sales and installation delays, cancellations, liquidated damages and loss of market share.
 
We rely on a limited number of third-party suppliers for certain raw materials and components for our solar cells and power systems such as polysilicon and inverters. If we fail to develop or maintain our relationships with our limited suppliers, we may be unable to manufacture our products or our products may be available only at a higher cost or after a long delay, which could prevent us from delivering our products to our customers within required timeframes and we may experience order cancellation and loss of market share. To the extent the processes that our suppliers use to manufacture components are proprietary, we may be unable to obtain comparable components from alternative suppliers. In addition, the current economic environment and credit markets could limit our suppliers’ ability to raise capital if required to expand their production or satisfy their operating capital requirements. As a result, they could be unable to supply necessary raw materials, inventory and capital equipment to us which we would require to support our planned sales operations which would in turn negatively impact our sales volumes and cash flows. The failure of a supplier to supply raw materials or components in a timely manner, or to supply raw materials or components that meet our quality, quantity and cost requirements, could impair our ability to manufacture our products or increase their costs. If we cannot obtain substitute materials or components on a timely basis or on acceptable terms, we could be prevented from delivering our products to our customers within required timeframes, which could result in sales and installation delays, cancellations, liquidated damages and loss of market share, any of which could have a material adverse effect on our business and results of operations.
 
As polysilicon supply increases, the corresponding increase in the global supply of solar cells and panels may cause substantial downward pressure on the prices of such products, resulting in lower revenues and earnings.
 
The scarcity of polysilicon during the past few years has resulted in the underutilization of solar panel manufacturing capacity at many competitors or potential competitors, particularly in China. If additional polysilicon becomes available in the market over the next two years, solar panel production globally could increase. Decreases in polysilicon pricing and increases in solar panel production could each result in substantial downward pressure on the price of solar cells and panels, including SunPower products. Such price reductions could have a negative impact on our revenue and earnings, and materially adversely affect our business and financial condition.
 
Limited competition among suppliers has required us in some instances to enter into long-term, firm commitment supply agreements that could result in excess or insufficient inventory and place us at a competitive disadvantage.
 
Due to the industry-wide shortage of polysilicon experienced during the past few years, we have purchased polysilicon that we resell to third-party ingot and wafer manufacturers who deliver wafers to us that we then use in the manufacturing of our solar cells. Without sufficient polysilicon, some of those ingot and wafer manufacturers would not be able to produce the wafers on which we rely. To match our estimated customer demand forecasts and growth strategy for the next several years, we have entered into multiple long-term supply agreements. Some agreements provide for fixed or inflation-adjusted pricing, substantial prepayment obligations, and firm purchase commitments that require us to pay for the supply whether or not we accept delivery. If such agreements require us to purchase more polysilicon, ingots or wafers than required to meet our actual customer demand over time, the resulting excess inventory could materially and negatively impact our results of operations. In addition, if the prices under our long-term supply agreements result in our paying more for such supplies than the current market prices available to our competitors, we may also be placed at a competitive disadvantage, and our revenues could decline. However, if our agreements provide insufficient inventory to meet customer demand, or if our suppliers are unable or unwilling to provide us with the contracted quantities, we may purchase additional supply at available market prices which could be greater than expected and could materially and negatively impact our results of operations. Such market prices could also be greater than prices paid by our competitors, placing us at a competitive disadvantage and leading to a decline in our revenue. Further, we face significant specific counterparty risk under long-term supply agreements when dealing with suppliers without a long, stable production and financial history. In the event any such supplier experiences financial difficulties, it may be difficult or impossible, or may require substantial time and expense, for us to recover any or all of our prepayments. Any of the foregoing could materially harm our financial condition and results of operations.
 
 
If third-party manufacturers become unable or unwilling to sell their solar cells and panels to us as a direct competitor in some markets, our business and results of operations may be materially negatively affected.

We plan to purchase a portion of our total product mix from third-party manufacturers of solar cells and panels. Such products increase our inventory available for sale to systems customers in some markets. However, such manufacturers may be our direct competitors. If they are unable or unwilling to sell to us, we may not have sufficient products available to sell to systems customers and satisfy our sales commitments, thereby materially and negatively affecting our business and results of operations. 

Risks Related to Our Sales Channels
 
The execution of our growth strategy is dependent upon the continued availability of third-party financing arrangements for our customers, and is affected by general economic conditions.
 
The general economy and limited availability of credit and liquidity could materially and adversely affect our business and results of operations. Many purchasers of our systems projects have entered into third-party arrangements to finance their systems over an extended period of time while many end-customers have chosen to purchase solar electricity under a power purchase agreement, or PPA, with a financing company that purchases the system from us or our authorized dealers. In addition, under our power purchase business model, we often execute PPAs directly with the end-user customer purchasing solar electricity, with the expectation that we will later assign the PPA to a financier. Under such arrangements, the financier separately contracts with us to build and acquire the solar system, and then sells the electricity to the end-user customer under the assigned PPA. When executing PPAs with the end-user customers, we seek to mitigate the risk that a financier will not be available for the project by allowing termination of the PPA in such event without penalty. However, we may not always be successful in negotiating for penalty-free termination rights for failure to secure financing, and certain end-user customers have required substantial financial penalties in exchange for such rights. These structured finance arrangements are complex and may not be feasible in many situations.

Due to the general reduction in available credit to would-be borrowers and the poor state of economies worldwide, customers may be unable or unwilling to finance the cost of our products, or the parties that have historically provided this financing may cease to do so, or only do so on terms that are substantially less favorable for us or our customers, any of which could materially and adversely affect our revenue and growth in all segments of our business. If economic recovery is slow in the United States or elsewhere, we may experience decreases in the demand for our solar power products, which may harm our operating results. In addition, a rise in interest rates would likely increase our customers’ cost of financing our products and could reduce their profits and expected returns on investment in our products. Similarly, the general reduction in available credit to would-be borrowers, the poor state of economies worldwide, and the condition of housing markets worldwide, could delay or reduce our sales of products to new homebuilders and authorized resellers. Collecting payment from customers facing liquidity challenges may also be difficult.

The reduction, modification or elimination of government and economic incentives could cause our revenue to decline and harm our financial results.
 
The market for on-grid applications, where solar power is used to supplement a customer’s electricity purchased from the utility network or sold to a utility under tariff, depends in large part on the availability and size of government mandates and economic incentives because, at present, the cost of solar power exceeds retail electric rates in many locations. Such incentives vary by geographic market. Various government bodies in many countries, most notably Spain, the United States, Germany, Italy, South Korea, Canada, Japan, Portugal, Greece, France and Australia, have provided incentives in the form of feed-in tariffs, rebates, tax credits, renewable portfolio standards, and other incentives and mandates to end-users, distributors, system integrators and manufacturers of solar power products to promote the use of solar energy in on-grid applications and to reduce dependency on other forms of energy. Some of these government mandates and economic incentives are scheduled to be reduced or to expire, or could be eliminated altogether. Because our sales are into the on-grid market, the reduction, modification or elimination of government mandates and economic incentives in one or more of our customer markets would materially and adversely affect the growth of such markets or result in increased price competition, either of which could cause our revenue to decline and harm our financial results.
 
Existing regulations and policies and changes to these regulations and policies may present technical, regulatory and economic barriers to the purchase and use of solar power products, which may significantly reduce demand for our products and services.
 
The market for electricity generation products is heavily influenced by federal, state and local government regulations and policies concerning the electric utility industry in the U.S. and abroad, as well as policies promulgated by electric utilities. These regulations and policies often relate to electricity pricing and technical interconnection of customer-owned electricity generation, and could deter further investment in the research and development of alternative energy sources as well as customer purchases of solar power technology, which could result in a significant reduction in the potential demand for our solar power products. We anticipate that our solar power products and their installation will continue to be subject to oversight and regulation in accordance
 
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with federal, state and local regulations relating to construction, safety, environmental protection, utility interconnection and metering, and related matters. It is difficult to track the requirements of individual states and design equipment to comply with the varying standards. Any new regulations or policies pertaining to our solar power products may result in significant additional expenses to us, our resellers and resellers’ customers, which could cause a significant reduction in demand for our solar power products.
  
We may incur unexpected warranty and product liability claims that could materially and adversely affect our financial condition and results of operations.
 
In our Components Segment, our current standard product warranty for our solar panels includes a 10-year warranty period for defects in materials and workmanship and a 20-year warranty period for declines in power performance as well as a one-year warranty on the functionality of our solar cells. We believe our warranty periods are consistent with industry practice. Due to the long warranty period, we bear the risk of extensive warranty claims long after we have shipped product and recognized revenue. Although we conduct accelerated testing of our solar cells and have several years of experience with our all-back-contact cell architecture, our solar panels have not and cannot be tested in an environment simulating the 20-year warranty period and it is difficult to test for all conditions that may occur in the field. We have sold solar cells since late 2004.

In our Systems Segment, our current standard warranty for our solar power systems differs by geography and end-customer application and includes either a 1-, 2- or 5-year comprehensive parts and workmanship warranty, after which the customer may typically extend the period covered by its warranty for an additional fee. While we generally pass through manufacturer warranties we receive from our suppliers to our customers, we are responsible for repairing or replacing any defective parts during our warranty period, often including those covered by manufacturers’ warranties. If the manufacturer disputes or otherwise fails to honor its warranty obligations, we may be required to incur substantial costs before we are compensated, if at all, by the manufacturer. Furthermore, our warranties may exceed the period of any warranties from our suppliers covering components, such as inverters, included in our systems. Due to the long warranty period, we bear the risk of extensive warranty claims long after we have completed a project and recognized revenues.

Any increase in the defect rate of our products would cause us to increase the amount of warranty reserves and have a corresponding negative impact on our results of operations. Further, potential future product failures could cause us to incur substantial expense to repair or replace defective products, and we have agreed to indemnify our customers and our distributors in some circumstances against liability from defects in our solar cells. A successful indemnification claim against us could require us to make significant damage payments. Repair and replacement costs, as well as successful indemnification claims, could materially and negatively impact our financial condition and results of operations.
 
Like other retailers, distributors and manufacturers of products that are used by customers, we face an inherent risk of exposure to product liability claims in the event that the use of the solar power products into which our solar cells and solar panels are incorporated results in injury. We may be subject to warranty and product liability claims in the event that our solar power systems fail to perform as expected or if a failure of our solar power systems results, or is alleged to result, in bodily injury, property damage or other damages. Since our solar power products are electricity producing devices, it is possible that our products could result in injury, whether by product malfunctions, defects, improper installation or other causes. In addition, since we only began selling our solar cells and solar panels in late 2004 and the products we are developing incorporate new technologies and use new installation methods, we cannot predict whether or not product liability claims will be brought against us in the future or the effect of any resulting negative publicity on our business. Moreover, we may not have adequate resources in the event of a successful claim against us. We have evaluated the potential risks we face and believe that we have appropriate levels of insurance for product liability claims. We rely on our general liability insurance to cover product liability claims and have not obtained separate product liability insurance. However, a successful warranty or product liability claim against us that is not covered by insurance or is in excess of our available insurance limits could require us to make significant payments of damages. In addition, quality issues can have various other ramifications, including delays in the recognition of revenue, loss of revenue, loss of future sales opportunities, increased costs associated with repairing or replacing products, and a negative impact on our goodwill and reputation, which could also adversely affect our business and operating results.
 
If we fail to successfully develop and introduce new and enhanced products and services, we may not be able to compete effectively, and our ability to generate revenues will suffer.
 
The solar power market is characterized by continually changing technology requiring improved features, such as increased efficiency and higher power output and improved aesthetics. Technologies developed by our direct competitors, including thin film solar panels, concentrating solar cells, solar thermal electric and other solar technologies, may provide power at lower costs than our products. We also face competition in some markets from other power generation sources, including conventional fossil fuels, wind, biomass, and hydro. Our failure to further refine our technology and develop and introduce new solar power products could cause our products to become uncompetitive or obsolete, which could reduce our market share and cause our sales to decline. This will require us to continuously develop new solar power products and enhancements for existing solar power products to keep pace with evolving industry standards, competitive pricing and changing customer requirements. As we introduce new or enhanced products or integrate new technology into our products, we will face risks relating to such transitions
 
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including, among other things, technical challenges, disruption in customers’ ordering patterns, insufficient supplies of new products to meet customers’ demand, possible product and technology defects arising from the integration of new technology and a potentially different sales and support environment relating to any new technology. Our failure to manage the transition to newer products or the integration of newer technology into our products could adversely affect our business’ operating results and financial condition.
 
 A limited number of customers are expected to continue to comprise a significant portion of our revenues and any decrease in revenue from these customers could have a significant adverse effect on us.
 
Even though we expect our customer base to increase and our revenue streams to diversify, a substantial portion of our net revenues could continue to depend on sales to a limited number of customers and the loss of sales to or inability to collect from these customers would have a significant negative impact on our business. Our agreements with these customers may be cancelled if we fail to meet certain product specifications or materially breach the agreement or in the event of bankruptcy, and our customers may seek to renegotiate the terms of current agreements or renewals. In addition, the failure by any significant customer to pay for orders, whether due to liquidity issues or otherwise, could materially and negatively affect our results of operations.

We generally do not have long-term agreements with our customers and accordingly could lose customers without warning, which could cause our operating results to fluctuate.
 
In our Components Segment, our solar cells and solar panel products are generally not sold pursuant to long-term agreements with customers, but instead are sold on a purchase order basis. In our Systems Segment, we typically contract to perform large projects with no assurance of repeat business from the same customers in the future. Although we believe that cancellations on our purchase orders to date have been insignificant, our customers may cancel or reschedule purchase orders with us on relatively short notice. Cancellations or rescheduling of customer orders could result in the delay or loss of anticipated sales without allowing us sufficient time to reduce, or delay the incurrence of, our corresponding inventory and operating expenses. In addition, changes in forecasts or the timing of orders from these or other customers expose us to the risks of inventory shortages or excess inventory. These circumstances, in addition to the completion and non-repetition of large systems projects, variations in average selling prices, changes in the relative mix of sales of components versus system products, and the fact that our supply agreements are generally long-term in nature and many of our other operating costs are fixed, in turn could cause our operating results to fluctuate and may result in a material adverse effect in our business.

Our Systems Segment could be adversely affected by seasonal trends and construction cycles.
 
Our Systems Segment is subject to significant industry-specific seasonal fluctuations. Its sales have historically reflected these seasonal trends with the largest percentage of total revenues being realized during the last two calendar quarters. Low seasonal demand normally results in reduced shipments and revenues in the first two calendar quarters. There are various reasons for this seasonality, mostly related to economic incentives and weather patterns. For example, in European countries with feed-in tariffs, the construction of solar power systems may be concentrated during the second half of the calendar year, largely due to the annual reduction of the applicable minimum feed-in tariff and the fact that the coldest winter months are January through March. In the United States, customers will sometimes make purchasing decisions towards the end of the year in order to take advantage of tax credits or for other budgetary reasons. In addition, sales in the new home development market are often tied to construction market demands which tend to follow national trends in construction, including declining sales during cold weather months.

 The competitive environment in which our systems business operates often requires us to undertake post-sale customer obligations, which could materially and adversely affect our financial condition and results of operations if our post-sale customer obligations are more costly than expected.
 
We are often required as a condition of financing or at the request of our end customer to undertake certain post-sale obligations such as:

 
• 
System output performance guaranties;

 
• 
System maintenance;

 
• 
Liquidated damage payments or customer termination rights if the system we are constructing is not commissioned within specified timeframes or other construction milestones are not achieved;
 
 
 
• 
Guaranties of certain minimum residual value of the system at specified future dates; and

 
• 
System put-rights whereby we could be required to buy-back a customer’s system at fair value on specified future dates.
 
 
Such financing arrangements and post-sale obligations involve complex accounting analyses and judgments regarding the timing of revenue and expense recognition and in certain situations these factors may require us to defer revenue recognition until projects are completed, which could adversely affect revenue and profits in a particular period. 

Risks Related to Our Liquidity

Due to the general economic environment and other factors, we may be unable to generate sufficient cash flows or obtain access to external financing necessary to fund our operations and make adequate capital investments as planned.
 
We anticipate that our expenses will increase substantially in the foreseeable future. To develop new products, support future growth, achieve operating efficiencies and maintain product quality, we must make significant capital investments in manufacturing technology, facilities and capital equipment, research and development, and product and process technology. We also anticipate increased costs as we expand our manufacturing operations, hire additional personnel, pay more or make advance payments for raw material, especially polysilicon, increase our sales and marketing efforts, invest in joint ventures and acquisitions, and continue our research and development efforts with respect to our products and manufacturing technologies. We expect total capital expenditures in the range of $350 million to $400 million in 2009 as we continue to increase our solar cell and solar panel manufacturing capacity. These expenditures could be greater if we decide to bring capacity on line more rapidly.

We believe that our current cash and cash equivalents, cash generated from operations, funds available under our facility agreement with the Malaysian government, and, if necessary, borrowings under our credit agreement with Wells Fargo Bank, N.A., or Wells Fargo, and/or potential availability of future sources of funding will be sufficient to fund our capital and operating expenditures over the next 12 months. The uncollateralized revolving credit line and uncollateralized letter of credit subfeature of the Wells Fargo credit agreement are scheduled to expire on July 3, 2009, and we are negotiating another amendment to further extend the expiration date. If we do not agree to amend the credit agreement to futher extend the deadline, all borrowings under the uncollateralized revolving credit line must be repaid by July 3, 2009, and all letters of credit issued under the uncollateralized letter of credit subfeature expire on or before July 3, 2009 unless we provide by such date collateral in the form of cash or cash equivalents in the aggregate amount available to be drawn under letters of credit outstanding at such time. Our cash flows from operations depend primarily on the volume of components sold and systems installed, average selling prices, per unit manufacturing costs and other operating costs.
 
However, if our financial results or operating plans change from our current assumptions, or if the holders of our outstanding convertible debentures elect to convert the debentures into cash or cash and shares of class A common stock, we may not have sufficient resources to support our business plan or pay cash in connection with the redemption of outstanding debentures. If our capital resources are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity securities or debt securities or obtain other debt financing; although, the current economic environment could also limit our ability to raise capital by issuing new equity or debt securities on acceptable terms, and lenders may be unwilling to lend funds on acceptable terms that would be required to supplement cash flows to support operations. Further, following the spin-off of our shares by Cypress on September 29, 2008, our ability to issue equity for financing purposes is subject to limits as described in “Our agreements with Cypress require us to indemnify Cypress for certain tax liabilities. These indemnification obligations and related contractual restrictions may limit our ability to obtain additional financing, participate in future acquisitions or pursue other business initiatives.” We may also seek to sell assets, reduce or delay capital investments, or refinance or restructure our debt.

There can be no assurance that we will be able to generate sufficient cash flows, find other sources of capital or access capital markets to fund our operations and projects, make adequate capital investments to remain competitive in terms of technology development and cost efficiency. If adequate funds and alternative resources are not available on acceptable terms, our ability to fund our operations, develop and expand our manufacturing operations and distribution network, maintain our research and development efforts or otherwise respond to competitive pressures would be significantly impaired. Our inability to do the foregoing could have a material adverse effect on our business and results of operations. 

 If the recent credit market conditions continue or worsen, they could have a material adverse impact on our investment portfolio.
 
Recent U.S. sub-prime mortgage defaults have had a significant impact across various sectors of the financial markets, causing global credit and liquidity issues. During fiscal 2008, the net asset value of the Reserve Primary Fund and the Reserve International Liquidity Fund fell below $1.00. We had $8.2 million invested in the Reserve Funds on December 28, 2008, and we have estimated our loss to be approximately $1.0 million based on an evaluation of the fair value of the securities held by the Reserve Funds and the net asset value that was last published by the Reserve Funds before the funds suspended redemptions.

While we expect to receive substantially all of our current holdings in the Reserve Funds within the next nine months, it is possible we may encounter difficulties in receiving distributions given the current credit market conditions. If market conditions were to deteriorate even further such that the current fair value were not achievable, we could realize additional losses in our holdings with the Reserve Funds and distributions could be further delayed. There can be no assurance that our other investments, particularly in this unfavorable market and economic environment, will not face similar risks of loss.
 
Additionally, beginning in February 2008, the auction rate securities market experienced a significant increase in the number of failed auctions, resulting from a lack of liquidity, which occurs when sell orders exceed buy orders, and does not necessarily signify a default by the issuer. Of the $26.1 million invested in auction rate securities on December 28, 2008, we have estimated the loss to be approximately $2.5 million and we recorded an impairment charge of $2.5 million in “Other, net” in our
 
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Consolidated Statements of Operations thereby establishing a new cost basis of $23.6 million for the auction rate securities. All five auction rate securities invested in at December 28, 2008 have failed to clear at auctions. For failed auctions, we continue to earn interest on these investments at the maximum contractual rate as the issuer is obligated under contractual terms to pay penalty rates should auctions fail. Even if we need to access these funds, we will not be able to do so until a future auction is successful, the issuer redeems the securities, a buyer is found outside of the auction process, or the securities mature. If these auction rate securities are unable to successfully clear at future auctions or issuers do not redeem the securities, we may be required to further adjust the carrying value of the securities and record an impairment charge which could materially adversely impact our results of operations and financial condition.

If our investment portfolio decreases in value or if we are unable to access funds held as auction rate securities, we may have insufficient liquidity to fund our planned operations and capital requirements, which may materially and negatively affect our financial condition and results of operations.

Our current tax holidays in the Philippines will expire within the next several years.
 
We currently benefit from income tax holiday incentives in the Philippines in accordance with our subsidiary’s registration with the Philippine Economic Zone Authority, which provide that we pay no income tax in the Philippines. Our current income tax holidays expire within the next several years beginning in 2010, and we intend to apply for extensions and renewals upon expiration. However, these tax holidays may or may not be extended. We believe that as our Philippine tax holidays expire, (a) gross income attributable to activities covered by our Philippine Economic Zone Authority registrations will be taxed at a 5% preferential rate, and (b) our Philippine net income attributable to all other activities will be taxed at the statutory Philippine corporate income tax rate, currently 32%. An increase in our tax liability could materially and negatively affect our financial condition and results of operations.

Because we self-insure for certain indemnities we have made to our officers and directors, potential claims could materially and negatively impact our financial condition and results of operations.
 
Our certificate of incorporation, by-laws and indemnification agreements require us to indemnify our officers and directors for certain liabilities that may arise in the course of their service to us. We primarily self-insure with respect to potential indemnifiable claims. Although we have insured our officers and directors against certain potential third-party claims for which we are legally or financially unable to indemnify them, we intend to primarily self-insure with respect to potential third-party claims which give rise to direct liability to such third-party or an indemnification duty on our part. If we were required to pay a significant amount on account of these liabilities for which we self-insure, our business, financial condition and results of operations could be materially harmed.

Our substantial indebtedness and other contractual commitments could adversely affect our business, financial condition and results of operations, as well as our ability to meet any of our payment obligations under the debentures and our other debt.
 
We currently have a significant amount of debt and debt service requirements that could have material consequences on our future operations, including:
 
•  making it more difficult for us to meet our payment and other obligations under the debentures and our other outstanding debt;
 
•  resulting in an event of default if we fail to comply with the financial and other restrictive covenants contained in our debt agreements, which event of default could result in all of our debt becoming immediately due and payable;
 
•  reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general corporate purposes, and limiting our ability to obtain additional financing for these purposes;
 
•  subjecting us to the risk of increased sensitivity to interest rate increases on our indebtedness with variable interest rates, including borrowings under our new credit facility;
 
•  limiting our flexibility in planning for, or reacting to, and increasing our vulnerability to, changes in our business, the industry in which we operate and the general economy; and
 
•  placing us at a competitive disadvantage compared to our competitors that have less debt or are less leveraged.

Any of the above-listed factors could have an adverse effect on our business, financial condition and results of operations and our ability to meet our payment obligations under the debentures and our other debt. In addition, we also have significant contractual commitments for the purchase of polysilicon, some of which involve prepayments, and we may enter into additional, similar long-term supply agreements in the future. Further, if the holders of our outstanding debentures convert their debentures, the principal amount must be settled in cash and to the extent that the conversion obligation exceeds the principal amount of any
 
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debentures converted, we must satisfy the remaining conversion obligation of the 1.25% debentures in shares of our class A common stock, and we maintain the right to satisfy the remaining conversion obligation of the 0.75% debentures in shares of our class A common stock or cash. During the fourth quarter of fiscal 2008, holders of $1.4 million in aggregate principal amount of the 1.25% debentures converted their debentures. Future conversions could materially and adversely affect our liquidity and our ability to meet our payment obligations under our debt.
    
Our credit agreements contain covenant restrictions that may limit our ability to operate our business.
 
We may be unable to respond to changes in business and economic conditions, engage in transactions that might otherwise be beneficial to us, and obtain additional financing, if needed because our credit agreement with Wells Fargo and facility agreement with the Government of Malaysia contain, and any of our other future debt agreements may contain, covenant restrictions that limit our ability to, among other things:
 
•  incur additional debt, assume obligations in connection with letters of credit, or issue guarantees;
 
•  create liens;
 
•  make certain investments or acquisitions;
 
•  enter into transactions with our affiliates;
 
•  sell certain assets;
 
•  redeem capital stock or make other restricted payments;
 
•  declare or pay dividends or make other distributions to stockholders; and
 
•  merge or consolidate with any person.
 
Our ability to comply with these covenants is dependent on our future performance, which will be subject to many factors, some of which are beyond our control, including prevailing economic conditions. In addition, our failure to comply with these covenants could result in a default under the debentures and our other debt, which could permit the holders to accelerate such debt. If any of our debt is accelerated, we may not have sufficient funds available to repay such debt, which could materially and negatively affect our financial condition and results of operation.
 
Risks Related to Our Operations
 
We may not be able to increase or sustain our recent growth rate, and we may not be able to manage our future growth effectively.
 
We may not be able to continue to expand our business or manage future growth. We plan to significantly increase our production capacity between 2009 and 2010, which will require successful execution of

 
expanding our existing manufacturing facilities and developing new manufacturing facilities, which would increase our fixed costs and, if such facilities are underutilized, would negatively impact our results of operations;

 
ensuring delivery of adequate polysilicon and ingots;

 
developing more efficient wafer-slicing methods;

 
enhancing our customer resource management and manufacturing management systems;

 
implementing and improving additional and existing administrative, financial and operations systems, procedures and controls, including the need to update and integrate our financial internal control systems in SP Systems and in our Philippines facility with those of our San Jose, California headquarters;

 
hiring additional employees;

 
expanding and upgrading our technological capabilities;
 
 
manage multiple relationships with our customers, suppliers and other third-parties;

 
maintaining adequate liquidity and financial resources; and

 
continuing to increase our revenues from operations.

 
Our recent expansion has placed, and our planned expansion and any other future expansion will continue to place, a significant strain on our management, personnel, systems and resources. Expanding our manufacturing facilities or developing facilities may be delayed by difficulties such as unavailability of equipment or supplies or equipment malfunction. Ensuring delivery of adequate polysilicon and ingots is subject to many market risks including scarcity, significant price fluctuations and competition. Maintaining adequate liquidity is dependent upon a variety of factors including continued revenues from operations and compliance with our indentures and credit agreements. In addition, following the spin-off of our shares by Cypress on September 29, 2008, our ability to issue equity for financing purposes will be restricted by our tax sharing agreement with Cypress. If we are unsuccessful in any of these areas, we may not be able to achieve our growth strategy and increase production capacity as planned during the foreseeable future. If we are unable to manage our growth effectively, we may not be able to take advantage of market opportunities, develop new solar cells and other products, satisfy customer requirements, execute our business plan or respond to competitive pressures.
 
We have significant international activities and customers, and plan to continue these efforts, which subject us to additional business risks, including logistical complexity and political instability.
 
In fiscal 2008, 2007 and 2006, a substantial portion of our sales was made to customers outside of the United States, and a substantial portion of our supply agreements is with supply and equipment vendors located outside of the United States. Historically, we have had significant sales in Austria, Germany, Italy, Spain and South Korea. Currently our solar cell production lines are located at our manufacturing facilities in the Philippines, and we plan to construct another manufacturing facility in Malaysia. In addition, a majority of our assembly functions have historically been conducted by a third-party subcontractor in China. Risks we face in conducting business internationally include:
 
 
multiple, conflicting and changing laws and regulations, export and import restrictions, employment laws, regulatory requirements and other government approvals, permits and licenses;
 
 
difficulties and costs in staffing and managing foreign operations as well as cultural differences;

 
potentially adverse tax consequences associated with our permanent establishment of operations in more countries;

 
relatively uncertain legal systems, including potentially limited protection for intellectual property rights, and laws, regulations and policies which impose additional restrictions on the ability of foreign companies to conduct business in certain countries or otherwise place them at a competitive disadvantage in relation to domestic companies;
 
 
inadequate local infrastructure and developing telecommunications infrastructures;
 
 
financial risks, such as longer sales and payment cycles and greater difficulty collecting accounts receivable;

 
currency fluctuations and government-fixed foreign exchange rates and the effects of currency hedging activity or inability to hedge currency fluctuations; and
 
 
political and economic instability, including wars, acts of terrorism, political unrest, boycotts, curtailments of trade and other business restrictions.

If we are unable to successfully manage any such risks, any one or more could materially and negatively affect our business, financial condition and results of operations.

Our operating results will be subject to fluctuations and are inherently unpredictable.
 
To maintain our profitability, we will need to generate and sustain higher revenue while maintaining reasonable cost and expense levels. We do not know if our revenue will grow, or if it will grow sufficiently to outpace our expenses, which we expect to increase as we expand our manufacturing capacity. We may not be able to sustain or increase profitability on a quarterly or an annual basis. Our quarterly revenue and operating results will be difficult to predict and have in the past fluctuated from quarter to quarter. In particular, our Systems Segment is difficult to forecast and is susceptible to large fluctuations in financial results. The amount, timing and mix of sales of our Systems Segment, often for a single medium or large-scale project, may cause large fluctuations in our revenue and other financial results. Further, our revenue mix of high margin material sales versus lower margin projects in the Systems Segment can fluctuate dramatically quarter to quarter, which may adversely affect our revenue and financial results in any given period. Finally, our ability to meet project completion schedules for an individual project and the corresponding revenue impact under the percentage-of-completion method of recognizing revenue, may similarly cause large fluctuations in our revenue and other financial results. This may cause us to miss any future guidance announced by us.

 
We base our planned operating expenses in part on our expectations of future revenue, and a significant portion of our expenses will be fixed in the short-term. If revenue for a particular quarter is lower than we expect, we likely will be unable to proportionately reduce our operating expenses for that quarter, which would harm our operating results for that quarter. This may cause us to miss any guidance announced by us.

If we experience interruptions in the operation of our solar cell production lines or are unable to add additional production lines, it would likely result in lower revenue and earnings than anticipated.
 
We currently have twelve solar cell manufacturing lines in production which are located at our manufacturing facilities in the Philippines. If our current or future production lines were to experience any problems or downtime, we would be unable to meet our production targets and our business would suffer. If any piece of equipment were to break down or experience downtime, it could cause our production lines to go down. We have started operations in our second solar cell manufacturing facility nearby our existing facility in the Philippines and we plan to construct another manufacturing facility in Malaysia. This expansion has required and will continue to require significant management attention, a significant investment of capital and substantial engineering expenditures and is subject to significant risks including:
 
 
we may experience cost overruns, delays, equipment problems and other operating difficulties;
 
 
we may experience difficulties expanding our processes to larger production capacity;
 
 
our custom-built equipment may take longer and cost more to engineer than planned and may never operate as designed; and
 
 
we are incorporating first-time equipment designs and technology improvements, which we expect to lower unit capital and operating costs, but this new technology may not be successful.
 
If we experience any of these or similar difficulties, we may be unable to complete the addition of new production lines on schedule in order to expand our manufacturing facilities and our manufacturing capacity could be substantially constrained. If this were to occur, our per-unit manufacturing costs would increase, we would be unable to increase sales or gross margins as planned and our earnings would likely be materially impaired.

If we do not achieve satisfactory yields or quality in manufacturing our solar cells, our sales could decrease and our relationships with our customers and our reputation may be harmed.
 
The manufacture of solar cells is a highly complex process. Minor deviations in the manufacturing process can cause substantial decreases in yield and in some cases, cause production to be suspended or yield no output. We have from time to time experienced lower than anticipated manufacturing yields. This often occurs during the production of new products or the installation and start-up of new process technologies or equipment. As we expand our manufacturing capacity and bring additional lines or facilities into production, we may experience lower yields initially as is typical with any new equipment or process. We also expect to experience lower yields as we continue the initial migration of our manufacturing processes to thinner wafers. If we do not achieve planned yields, our product costs could increase, and product availability would decrease resulting in lower revenues than expected.
 
Additionally, products as complex as ours may contain undetected errors or defects, especially when first introduced. For example, our solar cells and solar panels may contain defects that are not detected until after they are shipped or are installed because we cannot test for all possible scenarios. These defects could cause us to incur significant re-engineering costs, divert the attention of our engineering personnel from product development efforts and significantly affect our customer relations and business reputation. If we deliver solar cells or solar panels with errors or defects, including cells or panels of third-party manufacturers, or if there is a perception that such solar cells or solar panels contain errors or defects, our credibility and the market acceptance and sales of our products could be harmed.

We obtain capital equipment used in our manufacturing process from sole suppliers and if this equipment is damaged or otherwise unavailable, our ability to deliver products on time will suffer, which in turn could result in order cancellations and loss of revenue.
 
Some of the capital equipment used in the manufacture of our solar power products and in our wafer-slicing operations have been developed and made specifically for us, is not readily available from multiple vendors and would be difficult to repair or replace if it were to become damaged or stop working. If any of these suppliers were to experience financial difficulties or go out of business, or if there were any damage to or a breakdown of our manufacturing or wafer-slicing equipment at a time when we are manufacturing commercial quantities of our products, our business would suffer. In addition, a supplier’s failure to supply this equipment in a timely manner, with adequate quality and on terms acceptable to us, could delay our capacity expansion of our manufacturing facility and otherwise disrupt our production schedule or increase our costs of production.

 
We depend on a third-party subcontractor in China to assemble a significant portion of our solar cells into solar panels and any failure to obtain sufficient assembly and test capacity could significantly delay our ability to ship our solar panels and damage our customer relationships.
 
Historically, we have relied on Jiawei SolarChina Co., Ltd., a third-party subcontractor in China, to assemble a significant portion of our solar cells into solar panels and perform panel testing and to manage packaging, warehousing and shipping of our solar panels. We do not have a long-term agreement with Jiawei and we typically obtain its services based on short-term purchase orders that are generally aligned with timing specified by our customers’ purchase orders and our sales forecasts. As a result of outsourcing a significant portion of this final step in our production, we face several significant risks, including limited control over assembly and testing capacity, delivery schedules, quality assurance, manufacturing yields and production costs. If the operations of Jiawei were disrupted or its financial stability impaired, or if it were unable or unwilling to devote capacity to our solar panels in a timely manner, our business would suffer as we may be unable to produce finished solar panels on a timely basis. We also risk customer delays resulting from an inability to move module production to an alternate provider, and it may not be possible to obtain sufficient capacity or comparable production costs at another facility in a timely manner. In addition, migrating our design methodology to a new third-party subcontractor or to a captive panel assembly facility could involve increased costs, resources and development time, and utilizing additional third-party subcontractors could expose us to further risk of losing control over our intellectual property and the quality of our solar panels. Further, we supply inventory to Jiawei and bear the risk of loss, theft or damage to our inventory while it is held in its facilities. Any reduction in the supply of solar panels could impair our revenue by significantly delaying our ability to ship products and potentially damage our relationships with new and existing customers.

We established a captive solar panel assembly facility, and, if this panel manufacturing facility is unable to produce high quality solar panels at commercially reasonable costs, our revenue growth and gross margin could be adversely affected.
 
We currently run seven solar panel assembly lines in the Philippines. This factory commenced commercial production during the fourth quarter of 2006. Much of the manufacturing equipment and technology in this factory is new and ramping to achieve their full rated capacity. In the event that this factory is unable to ramp production with commercially reasonable yields and competitive production costs, our anticipated revenue growth and gross margin will be adversely affected.

Our Systems Segment acts as the general contractor for our customers in connection with the installations of our solar power systems and is subject to risks associated with construction, cost overruns, delays and other contingencies tied to performance bonds and letters of credit, which could have a material adverse effect on our business and results of operations.
 
Our Systems Segment acts as the general contractor for our customers in connection with the installation of our solar power systems. All essential costs are estimated at the time of entering into the sales contract for a particular project, and these are reflected in the overall price that we charge our customers for the project. These cost estimates are preliminary and may or may not be covered by contracts between us or the other project developers, subcontractors, suppliers and other parties to the project. In addition, we require qualified, licensed subcontractors to install most of our systems. Shortages of such skilled labor could significantly delay a project or otherwise increase our costs. Should miscalculations in planning a project or defective or late execution occur, we may not achieve our expected margins or cover our costs. Also, some systems customers require performance bonds issued by a bonding agency or letters of credit issued by financial institutions. Due to the general performance risk inherent in construction activities, it has become increasingly difficult recently to secure suitable bonding agencies willing to provide performance bonding, and obtaining letters of credit requires adequate collateral because we have not obtained a credit rating. In the event we are unable to obtain bonding or sufficient letters of credit, we will be unable to bid on, or enter into, sales contracts requiring such bonding.
 
In addition, some of our larger systems customers require that we pay substantial liquidated damages for each day or other period its solar installation is not completed beyond an agreed target date, up to and including the return of the entire project sale price. This is particularly true in Europe, where long-term, fixed feed-in tariffs available to investors are typically set during a prescribed period of project completion, but the fixed amount declines over time for projects completed in subsequent periods. We face material financial penalties in the event we fail to meet the completion deadlines, including but not limited a full refund of the contract price paid by the customers. In certain cases we do not control all of the events which could give rise to these penalties, such as reliance on the local utility to timely complete electrical substation construction.

Furthermore, investors often require that the solar power system generate specified levels of electricity in order to maintain their investment returns, allocating substantial risk and financial penalties to us if those levels are not achieved, up to and including the return of the entire project sale price. Also, our customers often require protections in the form of conditional payments, payment retentions or holdbacks, and similar arrangements that condition its future payments on performance. Delays in solar panel or other supply shipments, other construction delays, unexpected performance problems in electricity generation or other events could cause us to fail to meet these performance criteria, resulting in unanticipated and severe revenue and earnings losses and financial penalties. Construction delays are often caused by inclement weather, failure to timely receive necessary approvals and permits, or delays in obtaining necessary solar panels, inverters or other materials. Additionally, we sometimes purchase land in connection with project development and assume the risk of project completion. All such risks could have a material adverse effect on our business and results of operations.

 
We may be unable to achieve our goal of reducing the cost of installed solar systems by 50 percent by 2012, which may negatively impact our ability to sell our products in a competitive environment, resulting in lower revenues, gross margins and earnings.
 
To reduce the cost of installed solar systems by 50 percent by 2012, as compared against the cost in 2006, we will have to achieve cost savings across the entire value chain from designing to manufacturing to distributing to selling and ultimately to installing solar systems. We have identified specific areas of potential savings and are pursuing targeted goals. However, such cost savings are dependent upon decreasing silicon prices and lowering manufacturing costs. In addition, we continue to explore cost effective methods of installing solar systems. If we are unsuccessful in our efforts to reduce the cost of installed solar systems by 50 percent by 2012, our revenues, gross margins and earnings may be negatively impacted in the competitive environment. Such risks would be exacerbated if governmental and fiscal incentives are reduced, or if these lower prices have been assumed in connection with our sales commitments and we are then unable to realize the expected reduction in cost of revenues, or if an increase in the global supply of solar cells and solar panels causes substantial downward pressure on prices of our products.

Acquisitions of other companies or investments in joint ventures with other companies could materially and adversely affect our financial condition and results of operations, and dilute our stockholders’ equity.
 
To increase our business and maintain our competitive position, we may acquire other companies or engage in joint ventures in the future. Acquisitions and joint ventures involve a number of risks that could harm our business and result in the acquired business or joint venture not performing as expected, including:
 
 
insufficient experience with technologies and markets in which the acquired business is involved, which may be necessary to successfully operate and integrate the business;
 
 
problems integrating the acquired operations, personnel, technologies or products with the existing business and products;
 
 
diversion of management time and attention from the core business to the acquired business or joint venture;
 
 
potential failure to retain key technical, management, sales and other personnel of the acquired business or joint venture;
 
 
difficulties in retaining relationships with suppliers and customers of the acquired business, particularly where such customers or suppliers compete with us;

 
reliance upon joint ventures which we do not control;

 
subsequent impairment of the acquired assets, including intangible assets; and
 
 
assumption of liabilities including, but not limited to, lawsuits, tax examinations, warranty issues, etc.
 
Additionally, we may decide that it is in our best interests to enter into acquisitions or joint ventures that are dilutive to earnings per share or that negatively impact margins as a whole. Acquisitions or joint ventures could also require investment of significant financial resources and require us to obtain additional equity financing, which may dilute our stockholders’ equity, or require us to incur additional indebtedness. Further, following the spin-off of our shares by Cypress on September 29, 2008, our ability to issue equity, including to acquire companies or assets, is subject to limits as described in “Our agreements with Cypress require us to indemnify Cypress for certain tax liabilities. These indemnification obligations and related contractual restrictions may limit our ability to obtain additional financing, participate in future acquisitions or pursue other business initiatives.” To the extent these limits prevent us from pursuing acquisitions or investments that we would otherwise pursue, our growth and strategy could be impaired.
 
To the extent that we invest in upstream suppliers or downstream channel capabilities, we may experience competition or channel conflict with certain of our existing and potential suppliers and customers. Specifically, existing and potential suppliers and customers may perceive that we are competing directly with them by virtue of such investments and may decide to reduce or eliminate their supply volume to us or order volume from us. In particular, any supply reductions from our polysilicon, ingot or wafer suppliers could materially reduce manufacturing volume.
 
Our agreements with Cypress require us to indemnify Cypress for certain tax liabilities. These indemnification obligations and related contractual restrictions may limit our ability to obtain additional financing, participate in future acquisitions or pursue other business initiatives.
 
We have entered into a tax sharing agreement with Cypress, under which we and Cypress agree to indemnify one another for certain taxes and similar obligations that the other party could incur under certain circumstances. In general, we will be responsible for taxes relating to our business. As of September 29, 2008, Cypress distributed the shares of SunPower to its shareholders, so we are no longer eligible to file any state combined returns. To the extent that we become entitled to certain tax benefits on our separate
 
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tax returns existing as of such date, we will distribute the amount of such benefits to Cypress. We will distribute these amounts to Cypress in cash or in our shares, at Cypress’s option. As of December 28, 2008, potential future payments to Cypress, which would be made over a period of several years, aggregate approximately $18.7 million. The majority of the deductions giving rise to these potential tax benefit payments were created by employee stock transactions. Because there is uncertainty as to our ability to use these deductions, the portion created by employee stock transactions are not reflected on our Consolidated Balance Sheets. If these deductions were reflected on the Consolidated Balance Sheets, they could be accounted for as an increase to deferred tax assets and stockholders’ equity.

Cypress has obtained a ruling from the Internal Revenue Service, or IRS, that the distribution by Cypress of our class B common stock to Cypress stockholders qualified as a tax-free distribution under Section 355 of the Internal Revenue Code, or Code. Despite that ruling, the distribution may nonetheless be taxable to Cypress if 50% or more of our voting power or economic value is acquired as part of a plan or series of related transactions that includes the distribution of our stock. The tax sharing agreement requires us to indemnify Cypress for any liability incurred as a result of issuances or dispositions of our stock after the distribution, other than liability attributable solely to certain dispositions of our stock by Cypress, that cause Cypress’s distribution of our stock to be taxable to Cypress. Under current law, for up to two years after the distribution (or possibly longer if we are acting pursuant to a preexisting plan), our obligation to indemnify Cypress will be triggered if we issue stock or otherwise participate in one or more financing or acquisition transactions in which 50% or more of our voting power or economic value is acquired as part of a plan or series of related transactions that includes the distribution.

In connection with Cypress’ spin-off of its shares of our class B common stock, on August 12, 2008, we and Cypress entered into an Amendment No. 1 to the Tax Sharing Agreement, or the Amended Tax Sharing Agreement, to address certain transactions that may affect the tax treatment of the spin-off and certain other matters.

Under the Amended Tax Sharing Agreement, we are required to provide notice to Cypress of certain transactions that could give rise to our indemnification obligation described above. Such transactions include a conversion of any or all of our class B common stock to class A common stock or any similar recapitalization transaction or series of related transactions (a “Recapitalization”). We are not required to indemnify Cypress for any taxes which would result solely from (A) issuances and dispositions of our stock prior to the spin-off and (B) any acquisition of our stock by Cypress after the spin-off.

Under the Amended Tax Sharing Agreement, we also agreed that, for a period of 25 months following the spin-off, we will not (i) effect a Recapitalization or (ii) enter into or facilitate any other transaction resulting in an acquisition of our stock without first obtaining the written consent of Cypress; if such transaction (either alone or when taken together with one or more other transactions entered into or facilitated by us consummated after August 4, 2008 and during the 25-month period following the spin-off) would involve the acquisition of more than 25% of our outstanding shares of common stock. However, we need not obtain Cypress’s consent for (A) certain qualifying acquisitions of our stock issued in connection with the performance of services, (B) any acquisition of our stock for which we furnish to Cypress prior to such acquisition an opinion of counsel and supporting documentation, in form and substance reasonably satisfactory to Cypress (a “Tax Opinion”), that such acquisition will qualify for certain “safe harbors” specified in Treasury Regulations or (C) the adoption by us of a standard stockholder rights plan. We further agreed that we will not (i) effect a Recapitalization during the 36 month period following the spin-off without first obtaining a Tax Opinion to the effect that such Recapitalization (either alone or when taken together with any other transaction or transactions) will not cause the spin-off to become taxable, or (ii) seek any private ruling, including any supplemental private ruling, from the IRS with regard to the spin-off, or any transaction having any bearing on the tax treatment of the spin-off, without the prior written consent of Cypress.

Our ability to use our equity to obtain additional financing or to engage in acquisition transactions for a period of time after the tax-free distribution of our shares by Cypress will be restricted if we can only sell or issue a limited amount of our stock before triggering our obligation to indemnify Cypress for taxes relating to the distribution of our stock. Cypress made a complete distribution of its shares of our class B common stock on September 29, 2008 when our total outstanding capital stock was 85.8 million shares. Thus, in order to avoid causing an indemnification obligation to Cypress, we could not, for up two years (or possibly longer) after the date of the distribution, issue 85.8 million or more shares of our class A common stock or participate in one or more transactions (excluding the distribution itself) in which 42 million or more shares of our then-existing class A common stock were acquired, if any such transaction(s) are in connection with a plan or series of related transactions that includes the distribution. If we were to participate in such a transaction, and thereby triggered tax to Cypress on the distribution, then assuming that Cypress distributed 42 million shares, Cypress’s top marginal income tax rate was 40% for federal and state income tax purposes, the fair market value of our class B common stock was $35.00 per share, and Cypress’s tax basis in such stock was $5.00 per share on the date of the distribution, our liability under our indemnification obligation to Cypress would be approximately $504.0 million.

 
Our headquarters and manufacturing facilities, as well as the facilities of certain of our key subcontractors, are located in regions that are subject to earthquakes and other natural disasters.
 
Our headquarters and research and development operations are located in California, our manufacturing facilities are located in the Philippines, and the facilities of our subcontractor for assembly and test of solar panels are located in China. Since we do not have redundant facilities, any significant earthquake, tsunami or other natural disaster in these countries could materially disrupt our production capabilities and could result in our experiencing a significant delay in delivery, or substantial shortage, of our solar cells.

We could unexpectedly be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws.

The U.S. Foreign Corrupt Practices Act, or FCPA, and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. Our policies mandate compliance with these anti-bribery laws. We operate in many parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. We train our key staff concerning FCPA issues, and we also inform many of our partners, subcontractors, agents and others who work for us or on our behalf that they must comply with FCPA requirements. There can be no assurance that our internal controls and procedures will always protect us from the reckless or criminal acts committed by our employees, subcontractors or agents. If we are found to be liable for FCPA violations (either due to our own acts or our inadvertence, or due to the acts or inadvertence of others), we could suffer from criminal or civil penalties or other sanctions which could have a material adverse effect on our business.

Compliance with environmental regulations can be expensive, and noncompliance with these regulations may result in adverse publicity and potentially significant monetary damages and fines.
 
We are required to comply with all foreign, U.S. federal, state and local laws and regulations regarding pollution control and protection of the environment. In addition, under some statutes and regulations, a government agency, or other parties, may seek recovery and response costs from operators of property where releases of hazardous substances have occurred or are ongoing, even if the operator was not responsible for such release or otherwise at fault. We use, generate and discharge toxic, volatile and otherwise hazardous chemicals and wastes in our research and development and manufacturing activities. Any failure by us to control the use of, or to restrict adequately the discharge of, hazardous substances could subject us to potentially significant monetary damages and fines or suspensions in our business operations. In addition, if more stringent laws and regulations are adopted in the future, the costs of compliance with these new laws and regulations could be substantial. To date such laws and regulations have not had a significant impact on our operations, and we believe that we have all necessary permits to conduct their respective operations as they are presently conducted. If we fail to comply with present or future environmental laws and regulations, however, we may be required to pay substantial fines, suspend production or cease operations.

Our success depends on the continuing contributions of our key personnel.
 
We rely heavily on the services of our key executive officers and the loss of services of any principal member of our management team could adversely impact our operations. In addition, we anticipate that we will need to hire a significant number of highly skilled technical, manufacturing, sales, marketing, administrative and accounting personnel. The competition for qualified personnel is intense in our industry. We may not be successful in attracting and retaining sufficient numbers of qualified personnel to support our anticipated growth. However, we cannot guarantee that any employee will remain employed with us for any definite period of time since all of our employees, including our key executive officers, serve at-will and may terminate their employment at any time for any reason.

Risks Related to Our Intellectual Property
 
Loss of government programs that partially fund our research and development programs would increase our research and development expenses.
 
We selectively pursue contract research, product development and market development programs funded by various agencies of the federal and state governments to complement and enhance our own resources. Funding from government grants is generally recorded as an offset to our research and development expense. These government agencies may not continue their commitment to programs relevant to our development projects. Moreover, we may not be able to compete successfully to obtain funding through these or other programs, and generally government agencies may unilaterally terminate or modify such agreements. A reduction or discontinuance of these programs, or of our participation in these programs, would increase our research and development expenses, which could materially and adversely affect our results of operations and could impair our ability to develop competitive solar power products and services.

 
Our reliance on government programs to partially fund our research and development programs could impair our ability to commercialize our solar power products and services.

Government funding of some of our research and development efforts imposes certain restrictions on our ability to commercialize results and may grant commercialization rights to the government. In some funding awards, the government is entitled to intellectual property rights arising from the related research. Such rights could include a nonexclusive, nontransferable, irrevocable, paid-up license to practice or have practiced each subject invention developed under an award throughout the world by or on behalf of the government, or the right to require us to grant a license to the developed technology or products to a third-party or, if we refuse, the government may grant the license itself, if the government determines that action is necessary because we fail to achieve practical application of the technology, or because action is necessary to alleviate health or safety needs, to meet requirements of federal regulations, or to give the United States industry preference. Accepting government funding can also require that manufacturing of products developed with federal funding be conducted in the United States.

We are dependent on our intellectual property, and we may face intellectual property infringement claims that could be time-consuming and costly to defend and could result in the loss of significant rights.
 
From time to time, we, our respective customers or third-parties with whom we work may receive letters, including letters from various industry participants, alleging infringement of their patents. Although we are not currently aware of any parties pursuing or intending to pursue infringement claims against us, we cannot assure investors that we will not be subject to such claims in the future. Additionally, we are required by contract to indemnify some of our customers and our third-party intellectual property providers for certain costs and damages of patent infringement in circumstances where our products are a factor creating the customer’s or these third-party providers’ infringement liability. This practice may subject us to significant indemnification claims by our customers and our third-party providers. We cannot assure investors that indemnification claims will not be made or that these claims will not harm our business, operating results or financial condition. Intellectual property litigation is very expensive and time-consuming and could divert management’s attention from our business and could have a material adverse effect on our business, operating results or financial condition. If there is a successful claim of infringement against us, our customers or our third-party intellectual property providers, we may be required to pay substantial damages to the party claiming infringement, stop selling products or using technology that contains the allegedly infringing intellectual property, or enter into royalty or license agreements that may not be available on acceptable terms, if at all. Parties making infringement claims may also be able to bring an action before the International Trade Commission that could result in an order stopping the importation into the United States of our solar cells. Any of these judgments could materially damage our business. We may have to develop non-infringing technology, and our failure in doing so or in obtaining licenses to the proprietary rights on a timely basis could have a material adverse effect on our business.
 
We have filed, and, may continue to file claims against other parties for infringing our intellectual property that may be very costly and may not be resolved in our favor.
 
To protect our intellectual property rights and to maintain our competitive advantage, we have, and may continue to, file suits against parties who we believe infringe our intellectual property. Intellectual property litigation is expensive and time consuming and could divert management’s attention from our business and could have a material adverse effect on our business, operating results or financial condition, and our enforcement efforts may not be successful. In addition, the validity of our patents may be challenged in such litigation. Our participation in intellectual property enforcement actions may negatively impact our financial results.
 
We may not be able to prevent others from using the term SunPower or similar terms in connection with their solar power products which could adversely affect the market recognition of our name and our revenue.
 
“SunPower” is our registered trademark in certain countries, including the U.S., for use with solar cells and solar panels. We are seeking similar registration of the “SunPower” trademark in other countries but we may not be successful in some of these jurisdictions. We hold registered trademarks for SunPower®, PowerLight®, PowerGuard®, PowerTracker® and SunTile®, in certain countries, including the U.S. We have not registered, and may not be able to register, these trademarks in other key countries. In the foreign jurisdictions where we are unable to obtain or have not tried to obtain registrations, others may be able to sell their products using trademarks compromising or incorporating “SunPower,” or our other chosen brands, which could lead to customer confusion. In addition, if there are jurisdictions where another proprietor has already established trademark rights in marks containing “SunPower,” or our other chosen brands, we may face trademark disputes and may have to market our products with other trademarks, which may undermine our marketing efforts. We may encounter trademark disputes with companies using marks which are confusingly similar to the SunPower mark, or our other marks, which if not resolved favorably could cause our branding efforts to suffer. In addition, we may have difficulty in establishing strong brand recognition with consumers if others use similar marks for similar products.
 
 
We rely substantially upon trade secret laws and contractual restrictions to protect our proprietary rights, and, if these rights are not sufficiently protected, our ability to compete and generate revenue could suffer.
 
We seek to protect our proprietary manufacturing processes, documentation and other written materials primarily under trade secret and copyright laws. We also typically require employees and consultants with access to our proprietary information to execute confidentiality agreements. The steps taken by us to protect our proprietary information may not be adequate to prevent misappropriation of our technology. In addition, our proprietary rights may not be adequately protected because:
 
 
people may not be deterred from misappropriating our technologies despite the existence of laws or contracts prohibiting it;
 
 
policing unauthorized use of our intellectual property may be difficult, expensive and time-consuming, and we may be unable to determine the extent of any unauthorized use;

 
the laws of other countries in which we market our solar cells, such as some countries in the Asia/Pacific region, may offer little or no protection for our proprietary technologies; and

 
reports we file in connection with government-sponsored research contracts are generally available to the public and third-parties may obtain some aspects of our sensitive confidential information.
 
Reverse engineering, unauthorized copying or other misappropriation of our proprietary technologies could enable third-parties to benefit from our technologies without compensating us for doing so. Any inability to adequately protect our proprietary rights could harm our ability to compete, to generate revenue and to grow our business.

We may not obtain sufficient patent protection on the technology embodied in the solar cells or solar system components we currently manufacture and market, which could harm our competitive position and increase our expenses.
 
Although we substantially rely on trade secret laws and contractual restrictions to protect the technology in the solar cells and solar system components we currently manufacture and market, our success and ability to compete in the future may also depend to a significant degree upon obtaining patent protection for our proprietary technology. We currently own multiple patents and patent applications which cover aspects of the technology in the solar cells and mounting systems that we currently manufacture and market. Material patents that relate to our systems products and services primarily relate to our rooftop mounting products and ground-mounted tracking products. We intend to continue to seek patent protection for those aspects of our technology, designs, and methodologies and processes that we believe provide significant competitive advantages.
 
Our patent applications may not result in issued patents, and even if they result in issued patents, the patents may not have claims of the scope we seek or we may have to refile patent applications due to newly discovered prior art. In addition, any issued patents may be challenged, invalidated or declared unenforceable, or even if we obtain an award of damages for infringement by a third-party, such award could prove insufficient to compensate for all damages incurred as a result of such infringement. The term of any issued patents would be 20 years from their filing date and if our applications are pending for a long time period, we may have a correspondingly shorter term for any patent that may issue. Our present and future patents may provide only limited protection for our technology and may not be sufficient to provide competitive advantages to us. For example, competitors could develop similar or more advantageous technologies on their own or design around our patents. Also, patent protection in certain foreign countries may not be available or may be limited in scope and any patents obtained may not be as readily enforceable as in the United States, making it difficult for us to effectively protect our intellectual property from misuse or infringement by other companies in these countries. Our inability to obtain and enforce our intellectual property rights in some countries may harm our business. In addition, given the costs of obtaining patent protection, we may choose not to protect certain innovations that later turn out to be important.
 
Risks Related to Our Debt and Equity Securities
 
Conversion of our outstanding debentures, future substantial issuances or dispositions of our class A or class B common stock or other securities, could dilute ownership and earnings per share or cause the market price of our stock to decrease.
 
To the extent we issue class A common stock upon conversion of debentures, the conversion of some or all of such debentures will dilute the ownership interests of existing stockholders, including holders who had previously converted their debentures. Any sales in the public market of the class A and class B common stock issuable upon such conversion could adversely affect prevailing market prices of our class A and class B common stock. Sales of our class A or class B common stock in the public market or sales of any of our other securities could dilute ownership and earnings per share, and even the perception that such sales could occur and could cause the market prices of our class A and class B common stock to decline. In addition, the existence of our outstanding debentures may encourage short selling of our common stock by market participants who expect that the conversion of the debentures could depress the prices of our class A and class B common stock.
 
 
Approximately 4.7 million shares of class A common stock were lent to underwriters of our debenture offerings, including approximately 2.9 million shares lent to Lehman Brothers International (Europe) Limited, or LBIE, and approximately 1.8 million shares lent to Credit Suisse International, or CSI. Such shares were lent to facilitate later hedging arrangements of future purchases for debentures in the after-market. Shares still held by CSI may be freely sold into the market at any time, and such sales could depress our stock price. In addition, any hedging activity facilitated by our debenture underwriters would involve short sales or privately negotiated derivatives transactions. Due to the September 15, 2008 bankruptcy filing of Lehman and commencement of administrative proceedings for LBIE in the U.K., we recorded the shares lent to LBIE as issued and outstanding as of September 15, 2008, for the purpose of computing and reporting basic and diluted earnings per share. If Credit Suisse Securities (USA) LLC or its affiliates, including CSI, were to file bankruptcy or commence similar administrative, liquidating, restructuring or other proceedings, we may have to consider approximately 1.8 million shares lent to CSI as issued and outstanding for purposes of calculating earnings per share which would further dilute our earnings per share. These or other similar transactions could further negatively affect our stock price.
 
The price of our class A common stock, and therefore of our outstanding debentures, as well as our class B common stock may fluctuate significantly, and a liquid trading market for our class A and class B common stock may not be sustained.
 
Our class A and class B common stock has a limited trading history in the public markets, and during that period has experienced extreme price and volume fluctuations. The trading price of our class A and class B common stock could be subject to wide fluctuations due to the factors discussed in this risk factors section. In addition, the stock market in general, and The Nasdaq Global Select Market and the securities of technology companies and solar companies in particular, have experienced severe price and volume fluctuations. These trading prices and valuations, including our own market valuation and those of companies in our industry generally, may not be sustainable. These broad market and industry factors may decrease the market price of our class A and class B common stock, regardless of our actual operating performance. Because the debentures are convertible into our class A common stock, volatility or depressed prices of our class A common stock could have a similar effect on the trading price of these debentures.
 
The difference in the voting rights and liquidity could result in different market values for shares of our class A and our class B common stock.
 
The rights of class A and class B common stock are substantially similar, except with respect to voting. The class B common stock is entitled to eight votes per share and the class A common stock is entitled to one vote per share. Additionally, our restated certificate of incorporation imposed certain limitations on the rights of holders of class B common stock to vote the full number of their shares. The difference in the voting rights of our class A and class B common stock could reduce the value of our class A common stock to the extent that any investor or potential future purchaser of our common stock ascribes value to the right of our class B common stock to eight votes per share. In addition, the lack of a long trading history and lower trading volume of the class B common stock, compared to the class A common stock, could result in lower trading prices for the class B common stock.
 
Delaware law and our certificate of incorporation and bylaws contain anti-takeover provisions, our outstanding debentures provide for a right to convert upon certain events, and our board of directors entered into a rights agreement and declared a rights dividend, any of which could delay or discourage takeover attempts that stockholders may consider favorable.
 
Provisions in our restated certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:
 
•  the right of the board of directors to elect a director to fill a vacancy created by the expansion of the board of directors;
 
•  the prohibition of cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates;
 
•  the requirement for advance notice for nominations for election to the board of directors or for proposing matters that can be acted upon at a stockholders’ meeting;
 
•  the ability of the board of directors to issue, without stockholder approval, up to approximately 10.0 million shares of preferred stock with terms set by the board of directors, which rights could be senior to those of common stock; and

•  our board of directors is divided into three classes of directors, with the classes to be as nearly equal in number as possible;
 
•  no action can be taken by stockholders except at an annual or special meeting of the stockholders called in accordance with our bylaws, and stockholders may not act by written consent;
 
•  stockholders may not call special meetings of the stockholders;
 
•  limitations on the voting rights of our stockholders with more than 15% of our class B common stock subject to receipt by Cypress of a supplemental ruling from the IRS that the effectiveness of the restriction will not prevent the favorable rulings received by Cypress with respect to certain tax issues arising under Section 355 of the Code in connection with the spin-off from having full force and effect; and
 
 
•  our board of directors is able to alter our bylaws without obtaining stockholder approval.

Certain provisions of our outstanding debentures could make it more difficult or more expensive for a third-party to acquire us. Upon the occurrence of certain transactions constituting a fundamental change, holders of our outstanding debentures will have the right, at their option, to require us to repurchase, at a cash repurchase price equal to 100% of the principal amount plus accrued and unpaid interest on the debentures, all of their debentures or any portion of the principal amount of such debentures in integral multiples of $1,000. We may also be required to issue additional shares of our class A common stock upon conversion of such debentures in the event of certain fundamental changes. In addition, on August 12, 2008, we entered into a Rights Agreement with Computershare Trust Company, N.A. and our board of directors declared an accompanying rights dividend. The Rights Agreement became effective upon completion of Cypress’ spin-off of our shares of class B common stock to the holders of Cypress common stock. The Rights Agreement contains specific features designed to address the potential for an acquirer or significant investor to take advantage of our capital structure and unfairly discriminate between classes of our common stock. Specifically, the Rights Agreement is designed to address the inequities that could result if an investor, by acquiring 20% or more of the outstanding shares of class B common stock, were able to gain significant voting influence over our company without making a correspondingly significant economic investment. Our board of directors determined that the rights dividend became payable to the holders of record of our common stock as of the close of business on September 29, 2008. The rights dividend and Rights Agreement, commonly referred to as a “poison pill,” could delay or discourage takeover attempts that stockholders may consider favorable.
 
 
None.
 
ITEM 2: PROPERTIES
 
Our corporate headquarters is located in San Jose, California, where we occupy approximately 60,000 square feet under a lease from Cypress that expires in April 2011. In Richmond, California, we occupy approximately 207,000 square feet for office, light industrial and research and development use under a lease from an unaffiliated third-party that expires in December 2018. In addition to these facilities, we also have our European headquarters located in Geneva, Switzerland where we occupy approximately 4,000 square feet under a lease that expires in September 2012 as well as sales and support offices in Southern California, New Jersey, Australia, Canada, Germany, Italy, Spain, and South Korea, all of which are leased from unaffiliated third-parties.
 
We leased from Cypress an approximately 215,000 square foot building in the Philippines from fiscal 2003 through April 2008, which serves as FAB1 with four solar cell manufacturing lines in operation. In May 2008, we purchased FAB1 from Cypress and assumed the lease for the land from an unaffiliated third-party for a total purchase price of $9.5 million. The lease for the land expires in May 2048 and is renewable for an additional 25 years. In August 2006, we purchased a 344,000 square foot building (FAB2) in the Philippines. FAB2 is approximately 20 miles from FAB1 and is being developed to house up to twelve solar cell manufacturing lines. We currently operate twelve solar cell manufacturing lines in our two solar cell manufacturing facilities, with a total rated manufacturing capacity of 414 megawatts per year. By the end of 2009, we plan to operate 16 solar cell manufacturing lines with an aggregate manufacturing capacity of 574 megawatts per year. We plan to begin production in 2010 on the first line of FAB3 which will be constructed in Malaysia. FAB3 will be constructed in two phases, with an aggregate manufacturing capacity of more than 500 megawatts per year after the completion of the first phase, and an expected aggregate manufacturing capacity of more than 1 gigawatt per year when the second phase is completed. In January 2008, we completed the construction of an approximately 175,000 square foot building in the Philippines. This facility serves as our solar panel assembly facility that currently operates seven solar panel manufacturing lines with a rated manufacturing capacity of 210 megawatts of solar panels per year. We may require additional space in the future, which may not be available on commercially reasonable terms or in the location we desire.
 
Because of the interrelation of our business segments, both the Components Segment and Systems Segment use substantially all of the properties at least in part, and we retain the flexibility to use each of the properties in whole or in part for each of the segments. Therefore, we do not identify or allocate assets by business segment. For more information on property, plant and equipment by country, see Note 17 of Notes to our Consolidated Financial Statements in "Item 8: Financial Statements and Supplemental Data."
 
 
From time to time we are a party to litigation matters and claims that are normal in the course of our operations. While we believe that the ultimate outcome of these matters will not have a material adverse effect on us, the outcome of these matters is not determinable and negative outcomes may adversely affect our financial position, liquidity or results of operations.
 
 
No matters were submitted to a vote of our stockholders during the fourth quarter of fiscal 2008.
 
 
 
 
Our class A and class B common stock is listed on the Nasdaq Global Select Market under the trading symbol “SPWRA” and “SPWRB,” respectively. The high and low trading prices of our class A and class B common stock during fiscal 2008 and 2007 are as follows:

 
SPWRA
 
SPWRB*
 
For the year ended December 28, 2008
High
 
Low
 
High
 
Low
 
  Fourth quarter
 
$
77.25
   
$
19.00
   
$
71.47
   
$
11.94
 
  Third quarter
   
97.55
     
61.23
     
     
 
  Second quarter
   
99.58
     
72.71
     
     
 
  First quarter
   
131.29
     
54.95
     
     
 
For the year ended December 30, 2007
High
 
Low
 
High
 
Low
 
  Fourth quarter
 
$
164.49
   
$
81.50
   
$
   
$
 
  Third quarter
   
86.93
     
59.64
     
     
 
  Second quarter
   
65.55
     
45.84
     
     
 
  First quarter
   
48.11
     
35.40
     
     
 
 
*
Our class B common stock started trading publicly on September 30, 2008.

As of February 13, 2009, there were approximately 608 and 1,054 record holders of our class A and class B common stock, respectively. A substantially greater number of holders of our class A and class B common stock are in “street name” or beneficial holders, whose shares are held of record by banks, brokers and other financial institutions.
 
Dividends
 
We have never declared or paid any cash dividend on our common stock, and we do not currently intend to pay any cash dividend on our common stock in the foreseeable future. We intend to retain future earnings, if any, to finance the operation and expansion of our business.
 
Our credit facilities place restrictions on us and our subsidiaries’ ability to pay cash dividends. Additionally, our debentures issued in February 2007 and July 2007 allow the holders to convert their bonds into our class A common stock if we declare a dividend that on a per share basis exceeds 10% of our class A common stock’s market price.
 
Recent Sales of Unregistered Securities

We conducted no unregistered sales of equity securities during the fourth quarter of fiscal 2008. 

 
Issuer Purchases of Equity Securities
 
Period
Total Number of
Shares Purchased(1)
(in thousands)
Average Price
Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares That May Yet Be Purchased Under the Publicly Announced Plans or Programs
October 27, 2008 through November 23, 2008
15 
$34.95
   
 
November 24, 2008 through December 28, 2008
$32.82
   
 
  Total
24 
$34.16
   
 
 
 (1) 
The total number of shares purchased includes shares surrendered to satisfy tax withholding obligations in connection with the vesting of restricted stock issued to employees.
 
Equity Compensation Plan Information
 
The following table provides certain information as of December 28, 2008 with respect to our equity compensation plans under which shares of class A common stock are authorized for issuance (in thousands, except dollar figures):
 
Plan Category
 
 
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
 
Weighted average
exercise price of
outstanding
options, warrants
and rights
 
Number of securities remaining
available for future issuance
under equity compensation
plans (excluding securities
reflected in the first column)
 
Equity compensation plans approved by security holders
2,008 
 
$8.99
   
1,268 
 
Equity compensation shares not approved by security holders
17 
(1)
$2.00
   
 
  Total
2,025 
(2)
$8.93
   
1,268 
 
 
(1) 
Represents one option to purchase shares of class A common stock issued to one SunPower employee on June 17, 2004 with an exercise price of $2.00, vesting over five years.
(2)
This table excludes options to purchase an aggregate of approximately 520,000 shares of class A common stock, at a weighted average exercise price of $9.03 per share, that we assumed in connection with the acquisition of PowerLight (now known as SP Systems) in January 2007.
 
 
Company Stock Price Performance
 
The following graph compares the performance of an investment in our class A common stock from the pricing of our IPO on November 17, 2005 through December 28, 2008, with the NASDAQ Market Index and with four comparable issuers: Evergreen Solar, Inc., Energy Conversion Devices, Inc., Suntech Power Holdings Co., Ltd. and First Solar, Inc. The graph assumes $100 was invested on November 17, 2005 in our class A common stock at the closing price of $25.45 per share and at the closing prices for the NASDAQ Market Index, Evergreen Solar, Inc. and Energy Conversion Devices, Inc. The graph also assumes $100 was invested at the closing prices of the common stock for Suntech Power Holdings Co., Ltd. on December 14, 2005 and First Solar, Inc. on November 17, 2006. In addition, the graph also assumes that any dividends were reinvested on the date of payment without payment of any commissions. The performance shown in the graph represents past performance and should not be considered an indication of future performance.
 
Company Stock Price Performance Graph
 
ASSUMES $100 INVESTED ON NOVEMBER 17, 2005
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDED DECEMBER 28, 2008

   
11/17/05
   
12/30/05
   
12/31/06
   
12/30/07
   
12/28/08
 
SunPower Corporation
 
$
100.00
   
$
133.56
   
$
146.05
   
$
514.93
   
$
139.02 
 
NASDAQ Market Index
   
100.00
     
99.32
     
108.77
     
120.45
     
68.92 
 
Evergreen Solar, Inc.
   
100.00
     
89.27
     
63.45
     
144.34
     
23.55 
 
Energy Conversion Devices, Inc.
   
100.00
     
130.15
     
108.53
     
105.78
     
74.77 
 
Suntech Power Holdings Co., Ltd.(1)
           
181.67
     
226.73
     
545.27
     
68.60 
 
First Solar, Inc.(2)
                   
149.20
     
1,330.20
     
675.05 
 
 
(1) 
The common stock of Suntech Power Holdings Co., Ltd. started trading publicly on December 14, 2005.
(2)
The common stock of First Solar, Inc. started trading publicly on November 17, 2006.
 
 
 
The following selected consolidated financial data should be read together with “Item 7:  Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8: Financial Statements and Supplementary Data” included elsewhere in this Annual Report on Form 10-K.
 
On November 9, 2004, Cypress acquired 100% ownership of all outstanding shares of our capital stock, excluding unexercised warrants and options. This transaction resulted in the “push down” of the effect of the acquisition of SunPower by Cypress and created a new basis of accounting. The Consolidated Balance Sheets and Statements of Operations data in this Annual Report on Form 10-K prior and up to November 8, 2004 refer to the Predecessor Company and this period is referred to as the pre-merger period, while the Consolidated Balance Sheets and Statements of Operations data subsequent to November 8, 2004 refer to the Successor Company and this period is referred to as the post-merger period. A black line has been drawn between the accompanying financial statements to distinguish between the pre-merger and post-merger periods. After the close of trading on September 29, 2008, Cypress completed a spin-off of all of its shares of our class B common stock, in the form of a pro rata dividend to the holders of record as of September 17, 2008 of Cypress common stock.
 
On January 10, 2007, we completed the acquisition of PowerLight Corporation, a leading global provider of large-scale solar power systems, which we renamed SunPower Corporation, Systems (SP Systems) in June 2007. SP Systems designs, manufactures, markets and sells solar electric power system technology that integrates solar cells and solar panels manufactured by us and other suppliers to convert sunlight to electricity compatible with the utility network. The results of SP Systems have been included in the following selected consolidated financial information from January 10, 2007. See Note 3 of Notes to our Consolidated Financial Statements.
 
We report our results of operations on the basis of 52- or 53-week periods, ending on the Sunday closest to December 31. The combined periods of fiscal 2004 ended on January 2, 2005 and included 53 weeks. Fiscal 2005 ended on January 1, 2006, fiscal 2006 ended on December 31, 2006, fiscal 2007 ended on December 30, 2007, fiscal 2008 ended on December 28, 2008 and each fiscal year included 52 weeks. Our fiscal quarters end on the Sunday closest to the end of the applicable calendar quarter, except in a 53-week fiscal year in which the additional week falls into the fourth quarter of that fiscal year.
 
 
   
Successor Company
   
Predecessor
Company
 
   
Year Ended
 
Nov. 9, 2004
Through
Jan. 2, 2005
   
Dec. 29, 2003
Through
Nov. 8, 2004
 
(In thousands, except per share data)
 
December 28,
2008
   
December 30,
2007
   
December 31,
2006
   
January 1,
2006
Consolidated Statements of Operations Data
                                 
Revenue:
                                 
  Systems
 
$
  820,632
   
$
464,178
   
$
   
$
 
$
   
$
 
  Components
   
  614,287
     
310,612
     
236,510
     
78,736
   
4,055
     
6,830
 
    Total revenue
   
  1,434,919
     
774,790
     
236,510
     
78,736
   
4,055
     
6,830
 
Cost of revenue:
                                             
  Cost of systems revenue
   
  653,569
     
386,511
     
     
   
     
 
  Cost of components revenue
   
  417,669
     
240,475
     
186,042
     
74,353
   
6,079
     
9,498
 
    Total cost of revenue
   
  1,071,238
     
626,986
     
186,042
     
74,353
   
6,079
     
9,498
 
       Gross margin
   
  363,681
     
147,804
     
50,468
     
4,383
   
(2,024
)
   
(2,668
)
Operating income (loss)
   
  168,467
     
2,342
     
19,107
     
(12,985
)
 
(4,552
)
   
(19,499
)
Income (loss) before income taxes and equity in earnings of unconsolidated investees
   
  147,584
     
3,560
     
28,461
     
(15,793
)
 
(5,609
)
   
(23,302
)
Income (loss) before equity in earnings of unconsolidated investees
   
  78,216
     
9,480
     
26,516
     
(15,843
)
 
(5,609
)
   
(23,302
)
Net income (loss)
 
$
  92,293
   
$
9,202
   
$
26,516
   
$
(15,843
)
$
(5,609
)
 
$
(23,302
)
                                               
Net income (loss) per share of class A and class B common stock:
                                             
  Basic(1)
 
$
  1.15
   
$
0.12
   
$
0.40
   
$
(0.68
)
$
(2,804.50
)
 
$
(5.51
)
  Diluted(1)
 
$
  1.09
   
$
0.11
   
$
0.37
   
$
(0.68
)
$
(2,804.50
)
 
$
(5.51
)
                                               
Weighted-average shares:
                                             
  Basic (1)
   
  80,522
     
75,413
     
65,864
     
23,306
   
2
     
4,230
 
  Diluted(1)
   
  84,446
     
81,227
     
71,087
     
23,306
   
2
     
4,230
 
 
(1) 
As of September 15, 2008, the date on which Lehman filed a petition for protection under Chapter 11 of the U.S. bankruptcy code and LBIE commenced administrative proceedings (analogous to bankruptcy) in the United Kingdom, approximately 2.9 million shares of class A common stock lent to LBIE in connection with the 1.25% debentures are included in basic weighted-average common shares. Basic weighted-average common shares exclude approximately 1.8 million shares of class A common stock lent to CSI in connection with the 0.75% debentures. See Note 15 of Notes to our Consolidated Financial Statements for a detailed explanation of the determination of the shares used in computing basic and diluted net income (loss) per share.

(In thousands)
 
December 28,
2008
   
December 30,
2007
   
December 31,
2006
   
January 1,
2006
   
January 2,
2005
 
Consolidated Balance Sheets Data
                             
Cash, cash equivalents and short-term investments (excluding restricted cash)
 
$
219,510 
   
$
390,667
   
$
182,092
   
$
143,592
   
$
3,776
 
Working capital (deficiency)
   
396,849 
     
93,953
     
228,269
     
155,243
     
(54,314
)
Total assets
   
  2,076,135
     
1,653,738
     
576,836
     
317,654
     
89,646
 
Long-term debt
   
  54,598
     
     
     
     
 
Convertible debt
   
  423,608
     
425,000
     
     
     
 
Deferred tax liability
   
8,115 
     
6,213
     
46
     
336
     
 
Customer advances, net of current portion
   
91,359 
     
60,153
     
27,687
     
28,438
     
 
Other long-term liabilities
   
25,950 
     
14,975
     
     
     
 
Notes payable to Cypress, net of current portion
   
 —
     
     
     
     
21,673
 
Convertible preferred stock
   
 —
     
     
     
     
8,552
 
Total stockholders’ equity (deficit)
   
  1,021,374
     
864,090
     
488,771
     
258,650
     
(10,664
)

 
 
- 32 -

 
 
General
 
We are a vertically integrated solar products and services company that designs, manufactures and markets high-performance solar electric power technologies. Our solar cells and solar panels are manufactured using proprietary processes, and our technologies are based on more than 15 years of research and development. Of all the solar cells available for the mass market, we believe our solar cells have the highest conversion efficiency, a measurement of the amount of sunlight converted by the solar cell into electricity. Our solar power products are sold through our components business segment, or Components Segment. In January 2007, we acquired PowerLight Corporation, or PowerLight, now known as SunPower Corporation, Systems, or SP Systems, which developed, engineered, manufactured and delivered large-scale solar power systems. These activities are now performed by our systems business segment, or our Systems Segment. Our solar power systems, which generate electricity, integrate solar cells and panels manufactured by us as well as other suppliers.
 
In November 2005, we raised net proceeds of $145.6 million in an initial public offering, or IPO, of 8.8 million shares of class A common stock at a price of $18.00 per share. In June 2006, we completed a follow-on public offering of 7.0 million shares of our class A common stock, at a per share price of $29.50, and received net proceeds of $197.4 million. In July 2007, we completed a follow-on public offering of 2.7 million shares of our class A common stock, at a discounted per share price of $64.50, and received net proceeds of $167.4 million.
 
    In February 2007, we issued $200.0 million in principal amount of our 1.25% senior convertible debentures to Lehman Brothers Inc., or Lehman Brothers, and lent approximately 2.9 million shares of our class A common stock to Lehman Brothers International (Europe) Limited, or LBIE. Net proceeds from the issuance of our 1.25% senior convertible debentures in February 2007 were $194.0 million. We did not receive any proceeds from the approximate 2.9 million loaned shares of our class A common stock, but received a nominal lending fee. In July 2007, we issued $225.0 million in principal amount of our 0.75% senior convertible debentures to Credit Suisse Securities (USA) LLC, or Credit Suisse, and lent approximately 1.8 million shares of our class A common stock to Credit Suisse International, or CSI. Net proceeds from the issuance of our 0.75% senior convertible debentures in July 2007 were $220.1 million. We did not receive any proceeds from the approximate 1.8 million loaned shares of class A common stock, but received a nominal lending fee. See Note 11 of Notes to our Consolidated Financial Statements.
 
In January 2007, we completed the acquisition of PowerLight, a privately-held company which developed, engineered, manufactured and delivered large-scale solar power systems for residential, commercial, government and utility customers worldwide. These activities are now performed by our Systems Segment. As a result of the acquisition, PowerLight became our wholly-owned subsidiary. In June 2007, we changed PowerLight’s name to SunPower Corporation, Systems (SP Systems) to capitalize on SunPower’s name recognition. We believe the acquisition will enable us to develop the next generation of solar products and solutions that will accelerate reduction in solar system cost to compete with retail electric rates without incentives and simplify and improve customer experience. The total purchase consideration and future stock compensation for the transaction was $334.4 million, consisting of $120.7 million in cash and $213.7 million in common stock, restricted stock, stock options and related acquisition costs. See Note 3 of Notes to our Consolidated Financial Statements.
 
After completion of our IPO in November 2005, Cypress Semiconductor Corporation, or Cypress, held, in the aggregate, approximately 52.0 million shares of our class B common stock, representing all of our then-outstanding class B common stock. On May 4, 2007 and August 18, 2008, Cypress completed the sale of 7.5 million shares and 2.5 million shares, respectively, of our class B common stock in offerings pursuant to Rule 144 of the Securities Act. Such shares converted to 10.0 million shares of class A common stock upon the sale. We were a majority-owned subsidiary of Cypress through September 29, 2008. After the close of trading on September 29, 2008, Cypress completed a spin-off of all of its shares of our class B common stock, in the form of a pro rata dividend to the holders of record as of September 17, 2008 of Cypress common stock. As a result, our class B common stock now trades publicly and is listed on the Nasdaq Global Select Market, along with our class A common stock.
 
Financial Operations Overview
 
The following describes certain line items in our Consolidated Statements of Operations:
 
Total Revenue
 
Systems Segment Revenue:  Our systems revenue represents sales of engineering, procurement and construction, or EPC, projects and other services relating to solar electric power systems that integrate our solar panels and balance of systems components, as well as materials sourced from other manufacturers. In the United States, where customers often utilize rebate and tax credit programs in connection with projects rated one megawatt or less of capacity, we typically sell solar systems rated up to one megawatt of capacity to provide a supplemental, distributed source of electricity for a customer’s facility. In Europe and South Korea, our systems are often purchased by third-party investors as central-station solar power plants, typically rated from one to twenty megawatts, which generate electricity for sale under tariff to regional and public utilities. We also sell our solar systems under materials-only sales contracts in the United States, Europe and Asia. The balance of our systems revenue are generally derived from sales to new home builders for residential applications and maintenance revenue from servicing installed solar systems. We expect the current credit market conditions to continue through at least the first half of fiscal 2009, negatively affecting our ability to finance systems projects. The U.S. utility and power plant market demand for renewable energy is expected to grow over 50% annually over the next five years.
 
 
Components Segment Revenue:  Our components revenue represents sales of our solar cells, solar panels and inverters to solar systems installers and other resellers. Factors affecting our components revenue include unit volumes of solar cells and solar panels produced and shipped, average selling prices, product mix, product demand and the percentage of our construction projects sourced with SunPower solar panels sold through the Systems Segment which reduces the inventory available to sell through our Components Segment. We have experienced quarter-over-quarter unit volume increases in shipments of our solar power products since we began commercial production in the fourth quarter of 2004. From fiscal 2005 through 2008, we have experienced increases in average selling prices for our solar power products primarily due to the strength of end-market demand and favorable currency exchange rates. Accordingly, our Components Segment's average selling prices were slightly higher during fiscal 2008 compared to the same period in fiscal 2007 and 2006. Over the next several years, we expect average selling prices for our solar power products to decline as the market becomes more competitive, as certain products mature and as manufacturers are able to lower their manufacturing costs and pass on some of the savings to their customers.

Cost of Revenue
 
Systems Segment Cost of Revenue:  Our cost of systems revenue consists primarily of solar panels, mounting systems, inverters and subcontractor costs. The cost of solar panels is the single largest cost element in our cost of systems revenue. Our Systems Segment sourced approximately 60% of its solar panel installations with SunPower solar panels in fiscal 2008 compared to 27% in fiscal 2007. Over time, we expect that our Systems Segment will increase the percentage of its construction projects sourced with SunPower solar panels to as much as 80% in fiscal 2009. Our Systems Segment generally experiences higher gross margin on construction projects that utilize SunPower solar panels compared to construction projects that utilize solar panels purchased from third-parties.
 
In connection with the acquisition of PowerLight (now known as SP Systems) in January 2007, there were $79.5 million of identifiable purchased intangible assets, of which $56.8 million was being amortized to cost of systems revenue on a straight-line basis over periods ranging from one to five years. As a result of our new branding strategy, during the quarter ended July 1, 2007, the PowerLight tradename asset with a net book value of $14.1 million was written off as an impairment of acquisition-related intangible assets. As such, the remaining balance of $41.2 million of intangible assets, which are related to purchased patents, technology and backlog are being amortized to cost of systems revenue on a straight-line basis over periods ranging from one to four years.
 
Our cost of systems revenue will also fluctuate from period to period due to the mix of projects completed and recognized as revenue, in particular between large projects and large commercial installation projects. Our gross profit each quarter is affected by a number of factors, including the types of projects in process and their various stages of completion, the gross margins estimated for those projects in progress and the actual system group department overhead costs. Historically, revenue from materials-only sales contracts generate a higher gross margin percentage for our Systems Segment than revenue generated from turnkey contracts which generate higher revenue per watt from providing both materials as well as EPC management services.

Almost all of our Systems Segment construction contracts are fixed price contracts. However, we have in several instances obtained change orders that reimburse us for additional unexpected costs due to various reasons. The Systems Segment also has long-term agreements for solar cell and solar panel purchases with several major solar panel manufacturers, some with liquidated damages and/or take-or-pay arrangements. An increase in project costs, including solar panel, inverter and subcontractor costs, over the term of a construction contract could have a negative impact on our Systems Segment’s overall gross profit. Our Systems Segment gross profit may also be impacted by certain adjustments for inventory reserves. We are seeking to improve gross profit over time as we implement cost reduction efforts, improve manufacturing processes, and seek better and less expensive materials globally, as we grow the business to attain economies of scale on fixed costs. Any increase in gross profit based on these items, however, could be partially or completely offset by increased raw material costs or our inability to increase revenue in line with expectations, and other competitive pressures on gross margin.
 
Components Segment Cost of Revenue:  Our cost of components revenue consists primarily of silicon ingots and wafers used in the production of solar cells, along with other materials such as chemicals and gases that are needed to transform silicon wafers into solar cells. For our solar panels, our cost of revenue includes the cost of solar cells and raw materials such as glass, frame, backing and other materials, as well as the assembly costs we pay to our third-party subcontractor in China. Our Components Segment gross profit each quarter is affected by a number of factors, including average selling prices for our products, our product mix, our actual manufacturing costs, the utilization rate of our solar cell manufacturing facilities and changes in amortization of intangible assets.
 
From time to time, we enter into agreements whereby the selling price for certain of our solar power products is fixed over a defined period. An increase in our manufacturing costs over such a defined period could have a negative impact on our overall gross profit. Our gross profit may also be impacted by fluctuations in manufacturing yield rates and certain adjustments for inventory reserves. We expect our gross profit to increase over time as we improve our manufacturing processes and as we grow our business and leverage certain of our fixed costs. An expected increase in gross profit based on manufacturing efficiencies, however, could be partially or completely offset by increased raw material costs or decreased revenue. Our inventory policy is described in more detail under “Critical Accounting Policies and Estimates.”
 
 
Other Cost of Revenue Factors:  Other factors contributing to cost of revenue include depreciation, provisions for estimated warranty, salaries, personnel-related costs, freight, royalties, facilities expenses and manufacturing supplies associated with contracting revenue and solar cell fabrication as well as factory pre-operating costs associated with our second solar cell manufacturing facility, or FAB2, and our solar panel assembly facility. Such pre-operating costs included compensation and training costs for factory workers as well as utilities and consumable materials associated with preproduction activities. Additionally, within our own solar panel assembly facility in the Philippines we incur personnel-related costs, depreciation, utilities and other occupancy costs. To date, demand for our solar power products has been robust and our production output has increased allowing us to spread a significant amount of our fixed costs over relatively high production volume, thereby reducing our per unit fixed cost. We currently operate twelve solar cell manufacturing lines in our two solar cell manufacturing facilities, with a total rated manufacturing capacity of 414 megawatts per year. In addition, we currently operate seven solar panel manufacturing lines in our solar panel assembly facility, with a total rated manufacturing capacity of 210 megawatts per year. By the end of 2009, we plan to operate 16 solar cell manufacturing lines with an aggregate manufacturing capacity of 574 megawatts per year. We plan to begin production in 2010 on the first line of our planned third solar cell manufacturing facility, or FAB3, which will be constructed in Malaysia. FAB3 will be constructed in two phases, with an aggregate manufacturing capacity of more than 500 megawatts per year after the completion of the first phase, and an expected aggregate manufacturing capacity of more than 1 gigawatt per year when the second phase is completed. As we build additional manufacturing lines or facilities, our fixed costs will increase, and the overall utilization rate of our solar cell manufacturing and solar panel assembly facilities could decline, which could negatively impact our gross margin. This decline may continue until a line’s manufacturing output reaches its rated practical capacity.
 
Operating Expenses
 
Our operating expenses include research and development expense, sales, general and administrative expense, purchased in-process research and development expense and impairment of acquisition-related intangible assets. Research and development expense consists primarily of salaries and related personnel costs, depreciation and the cost of solar cell and solar panel materials and services used for the development of products, including experiment and testing. We expect our research and development expense to continually increase in absolute dollars as we continue to develop new processes to further improve the conversion efficiency of our solar cells and reduce their manufacturing cost, and as we develop new products to diversify our product offerings.
 
Research and development expense is reported net of any funding received under contracts with governmental agencies because such contracts are considered collaborative arrangements. These awards are typically structured such that only direct costs, research and development overhead, procurement overhead and general and administrative expenses that satisfy government accounting regulations are reimbursed. In addition, our government awards from state agencies will usually require us to pay to the granting governmental agency certain royalties based on sales of products developed with grant funding or economic benefit derived from incremental improvements funded. Royalties paid to governmental agencies will be charged to the cost of goods sold. Our funding from government contracts offset our research and development expense by approximately 25%, 21% and 8% in fiscal 2008, 2007 and 2006, respectively.
 
Sales, general and administrative expense for our business consists primarily of salaries and related personnel costs, professional fees, insurance and other selling and marketing expenses. We expect our sales, general and administrative expense to increase in absolute dollars as we expand our sales and marketing efforts, hire additional personnel and improve our information technology infrastructure to support our growth. However, assuming our revenue increases as we expect, over time we anticipate that our sales, general and administrative expense will continue to decrease as a percentage of revenue.
 
Purchased in-process research and development expense for fiscal 2007 of $9.6 million resulted from the acquisition of PowerLight (now known as SP Systems), as technological feasibility associated with the in-process research and development projects had not been established and no alternative future use existed. In addition, as a result of the change in our branding strategy during the quarter ended July 1, 2007, the net book value of the PowerLight tradename of $14.1 million was written off as an impairment of acquisition-related intangible assets.
 
Other Income (Expense), Net
 
 Interest income consists of interest earned on cash, cash equivalents, restricted cash and investments. Interest expense primarily relates to interest due on convertible debt and outstanding customer advance payments (see Note 8 of Notes to our Consolidated Financial Statements). In February 2007, we issued $200.0 million in principal amount of our 1.25% senior convertible debentures and in July 2007, we issued $225.0 million in principal amount of our 0.75% senior convertible debentures (see Note 11 of Notes to our Consolidated Financial Statements). Other, net consists primarily of the write-off of unamortized debt issuance costs as a result of the market price conversion trigger on our senior convertible debentures being met in December 2007, amortization of debt issuance costs, impairment of investments, gains or losses from derivatives and foreign exchange.
 
 
Income Taxes
 
For financial reporting purposes, during periods when we were a subsidiary of Cypress, income tax expense and deferred income tax balances has historically been calculated as if we were a separate entity and had prepared our own separate tax return. Effective with the closing of our follow-on public offering of common stock in June 2006, we are no longer eligible to file federal and most state consolidated tax returns with Cypress. As of September 29, 2008, Cypress completed a spin-off of all of its shares of our class B common stock to its shareholders, so we are no longer eligible to file any state combined tax returns with Cypress. Accordingly, we have agreed to pay Cypress for any federal income tax credit or net operating loss carryforwards utilized in our federal tax returns in subsequent periods that originated while our results were included in Cypress’s federal tax returns. Deferred tax assets and liabilities are recognized for temporary differences between financial statement and income tax bases of assets and liabilities. Valuation allowances are provided against deferred tax assets when management cannot conclude that it is more likely than not that some portion or all deferred tax assets will be realized. See Notes 1, 2 and 13 of Notes to our Consolidated Financial Statements.
  
We currently benefit from income tax holiday incentives in the Philippines in accordance with our subsidiary’s registration with the Philippine Economic Zone Authority, which provide that we pay no income tax in the Philippines. Our current income tax holidays expire within the next several years beginning in 2010, and we intend to apply for extensions and renewals upon expiration. However, these tax holidays may or may not be extended. We believe that as our Philippine tax holidays expire, (a) gross income attributable to activities covered by our Philippine Economic Zone Authority registrations will be taxed at a 5% preferential rate, and (b) our Philippine net income attributable to all other activities will be taxed at the statutory Philippine corporate income tax rate, currently 32%. Fiscal 2007 was the first year for which profitable operations benefitted from the Philippine tax ruling.

Equity in Earnings of Unconsolidated Investees

In the third quarter of fiscal 2006, we entered into an agreement to form Woongjin Energy Co., Ltd, or Woongjin Energy, a joint venture to manufacture monocrystalline silicon ingots. This joint venture is located in South Korea and began manufacturing in the third quarter of fiscal 2007. In October 2007, we entered into an agreement to form First Philec Solar Corporation, or First Philec Solar, a joint venture to provide wafer slicing services of silicon ingots. This joint venture is located in the Philippines and became operational in the second quarter of fiscal 2008. We account for these investments using the equity method, in which the equity investments are classified as “Other long-term assets” in the Consolidated Balance Sheets and our share of the investees’ earnings is included in “Equity in earnings of unconsolidated investees” in the Consolidated Statements of Operations. See Note 10 of Notes to our Consolidated Financial Statements.
 
Critical Accounting Policies and Estimates
 
Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our most critical policies include: (a) revenue recognition, which impacts the recording of revenue; (b) allowance for doubtful accounts and sales returns, which impacts sales, general and administrative expense; (c) warranty reserves, which impact cost of revenue and gross margin; (d) valuation of inventories, which impacts cost of revenue and gross margin; (e) accounting for equity in earnings of joint ventures, which impacts net income; (f) valuation of long-lived assets, which impacts write-offs of goodwill and other intangible assets; (g) valuation of goodwill impairment, which impacts operating expense; (h) purchase accounting, which impacts fair value of goodwill, other intangible assets and in-process research and development expense; (i) fair value of financial instruments; and (j) accounting for income taxes which impacts our tax provision (benefit). We also have other key accounting policies that are less subjective and, therefore, judgments in their application would not have a material impact on our reported results of operations. The following is a discussion of our most critical policies as of and for the year ended December 28, 2008, as well as the estimates and judgments involved.
 
Revenue Recognition
 
Our systems revenue is primarily comprised of EPC projects which are governed by customer contracts that require us to deliver functioning solar power systems and are generally completed within three to nine months from commencement of construction. In addition, our Systems Segment also derives revenue from sales of certain solar power products and services that are smaller in scope than an EPC contract. We recognize revenue from fixed price construction contracts under American Institute of Certified Public Accountants, or AICPA, Statement of Position, or SOP, 81-1 “Accounting for Performance of Construction-Type and Certain Production-Type Contracts,” or SOP 81-1, using the percentage-of-completion method of accounting. Under this method, systems revenue arising from fixed price construction contracts is recognized as work is performed based on the percentage of incurred costs to estimated total forecasted costs utilizing the most recent estimates of forecasted costs.
 
 
In addition to the EPC deliverable, a limited number of arrangements also include multiple deliverables such as post-installation systems monitoring and maintenance and system output performance guarantees. For contracts with separately priced performance guarantees or maintenance, we recognize revenue related to such separately priced elements on a straight-line basis over the contract period in accordance with Financial Accounting Standards Board, or FASB, Technical Bulletin, or FTB, 90-1, “Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts,” or FTB 90-1. For contracts including performance guarantees or maintenance contracts not separately priced, we follow the guidance in Emerging Issues Task Force Issue, or EITF, No. 00-21, “Revenue Arrangements with Multiple Deliverables,” or EITF 00-21, to determine whether the entire contract  has more than one unit of accounting.

We have determined that post-installation systems monitoring and maintenance, and system output performance guarantees qualify as separate units of accounting under EITF 00-21. Such post-installation elements are deferred at the time the contract is executed and are recognized to income over the contractual term under Staff Accounting Bulletin, or SAB, No. 104. The remaining EPC is recognized to income on a percentage-of-completion basis under SOP 81-1.

In addition, when arrangements include contingent revenue clauses such as liquidated damages or customer termination or put rights for non-performance, we defer the contingent revenue until such time as the contingencies expire.

Incurred costs include all direct material, labor, subcontract costs and those indirect costs related to contract performance, such as indirect labor, supplies and tools. Job material costs are included in incurred costs when the job materials have been installed. Revenue is deferred and recognized upon installation, in accordance with the percentage-of-completion method of accounting. Job materials are considered installed materials when they are permanently attached or fitted to the solar power system as required by the job’s engineering design.
 
Due to inherent uncertainties in estimating cost, job costs estimates are reviewed and/or updated by management working within the Systems Segment. The Systems Segment determines the completed percentage of installed job materials at the end of each month; generally this information is also reviewed with the customer’s on-site representative. The completed percentage of installed job materials is then used for each job to calculate the month-end job material costs incurred. Direct labor, subcontractor and other costs are charged to contract costs as incurred. Provisions for estimated losses on uncompleted contracts, if any, are recognized in the period in which the loss first becomes probable and reasonably estimable. Contracts may include profit incentives such as milestone bonuses. These profit incentives are included in the contract value when their realization is reasonably assured.
 
We sell our components products, as well as our balance of systems products from the Systems Segment, to system integrators and original equipment manufacturers, or OEMs, and recognize revenue, net of accruals for estimated sales returns, when persuasive evidence of an arrangement exists, the product has shipped, title and risk of loss has passed to the customer, the sales price is fixed and determinable, collectability of the resulting receivable is reasonably assured and the rights and risks of ownership have passed to the customer. We do not currently have any significant post-shipment obligations, including installation, training or customer acceptance clauses with any of our customers, which could have an impact on revenue recognition. As such, we record revenue and trade receivables for the selling price when the above conditions are met. Our revenue recognition is consistent across product lines and sales practices are consistent across all geographic locations.
 
Allowance for Doubtful Accounts and Sales Returns
 
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. A considerable amount of judgment is required to assess the likelihood of the ultimate realization of accounts receivables. We make our estimates of the collectability of our accounts receivable by analyzing historical bad debts, specific customer creditworthiness and current economic trends. The allowance for doubtful accounts was $1.9 million and $1.4 million as of December 28, 2008 and December 30, 2007, respectively.

In addition, at the time revenue is recognized, we simultaneously record estimates for sales returns which reduces revenue. These estimates are based on historical sales returns, analysis of credit memo data and other known factors. Actual returns could differ from these estimates. The allowance for sales returns was $0.2 million and $0.4 million as of December 28, 2008 and December 30, 2007, respectively.
 
Warranty Reserves
 
It is customary in our business and industry to warrant or guarantee the performance of our solar panels at certain levels of conversion efficiency for extended periods, often as long as 20 years. It is also customary to warrant or guarantee the functionality of our solar cells for at least 10 years. In addition, we generally provide a warranty on our systems for a period of 5 to 10 years. We also pass through to customers long-term warranties from the OEMs of certain system components. Warranties of 20 years from solar panels suppliers are standard, while inverters typically carry a 2-, 5- or 10-year warranty. We therefore maintain warranty reserves to cover potential liability that could arise from these guarantees. Our potential liability is generally in the form of product replacement or repair. Our warranty reserves reflect our best estimate of such liabilities and are based on our
 
- 37 -

 
analysis of product returns, results of industry-standard accelerated testing, unique facts and circumstances involved in each particular construction contract and various other assumptions that we believe to be reasonable under the circumstances. We recognize our warranty reserve as a component of cost of revenue. Our warranty reserve includes specific accruals for known product and system issues and an accrual for an estimate of incurred but not reported product and system issues based on historical activity. Due to effective product testing and the short turnaround time between product shipment and the detection and correction of product failures, accruals for warranties issued were $14.2 million, $10.8 million and $3.2 million during fiscal 2008, 2007 and 2006, respectively, and the year-over-year increase is primarily attributable to increased sales of our products. See Note 9 of Notes to our Consolidated Financial Statements.
 
Valuation of Inventory
 
Inventory is valued at the lower of cost or market. Certain factors could impact the realizable value of our inventory, so we continually evaluate the recoverability based on assumptions about customer demand and market conditions. The evaluation may take into consideration historic usage, expected demand, anticipated sales price, new product development schedules, the effect new products might have on the sale of existing products, product obsolescence, customer concentrations, product merchantability and other factors. The reserve or write-down is equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory reserves or write-downs may be required that could negatively impact our gross margin and operating results. If actual market conditions are more favorable, we may have higher gross margin when products that have been previously reserved or written down are eventually sold.

Equity in Earnings of Unconsolidated Investees

We account for our investment in Woongjin Energy located in South Korea and First Philec Solar located in the Philippines under APB Opinion No. 18 “The Equity Method of Accounting for Investments in Common Stock,” or the equity method, in which the equity investments are classified as “Other long-term assets” in the Consolidated Balance Sheets and our share of the investees’ earnings is included in “Equity in earnings of unconsolidated investees” in the Consolidated Statements of Operations. As of December 28, 2008 and December 30, 2007, we had a 40.0% and 19.9% equity investment, respectively, in Woongjin Energy. As of December 28, 2008 and December 30, 2007, we had a 19.0% and 16.9% equity investment, respectively, in First Philec Solar. To calculate our share of the investees’ earnings, we adjust the net income (loss) of each joint venture to conform to U.S. GAAP and multiply that by our equity investment.

We periodically evaluate the qualitative and quantitative attributes of our relationship with Woongjin Energy and First Philec Solar to determine whether we are the primary beneficiary of the joint ventures and need to consolidate their financial results into our financial statements in accordance with FASB Staff Position, or FSP, Interpretation No. 46 “Consolidation of Variable Interest Entities,” or FSP FIN 46(R). We do not consolidate the financial results of Woongjin Energy and First Philec Solar as we have concluded that we are not the primary beneficiary of any of the above joint ventures and we do not absorb a majority of the joint ventures’ income (loss) or receive a majority of the expected residual returns. See Note 10 of the Notes to our Consolidated Financial Statements for discussions of our joint ventures.
 
Valuation of Long-Lived Assets
 
Our long-lived assets include manufacturing equipment and facilities as well as certain intangible assets. Our business requires heavy investment in manufacturing facilities that are technologically advanced but can quickly become significantly under-utilized or rendered obsolete by rapid changes in demand for solar power products produced in those facilities. In November 2004, Cypress acquired 100% ownership of all outstanding shares of our capital stock, and as a result of that transaction, we were required to record Cypress’s cost of acquiring us in our financial statement by recording intangible assets including purchased technology, patents, trademarks, distribution agreement and goodwill. In January 2007, we acquired PowerLight, and in January 2008 and July 2008, we acquired Solar Solutions (subsequently renamed SunPower Italia S.r.l., or SunPower Italia) and Solar Sales Pty. Ltd. (subsequently renamed SunPower Corporation Australia Pty. Ltd., or SunPower Australia), respectively. In connection with the transactions, we recorded all the acquired assets and liabilities at their fair values on the date of the acquisition, including goodwill and identified intangible assets.
 
We evaluate our long-lived assets, including property, plant and equipment and purchased intangible assets with finite lives, for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Prior to fiscal 2007, we operated in one business segment and therefore impairment of long-lived assets was assessed at the enterprise level. As a result of the acquisition of PowerLight, we began operating in two business segments, the Systems Segment and Components Segment, and impairment of long-lived assets is assessed at the business segment level. Factors considered important that could result in an impairment review include significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of use of acquired assets or the strategy for our business and significant negative industry or economic trends. Impairments are recognized based on the difference between the fair value of the asset and its carrying value, and fair value is generally measured based on discounted cash flow analyses.
 
 
In fiscal 2008, we recorded a $2.2 million impairment charge to cost of components revenue for manufacturing equipment located in a Texas wafer fabrication facility. As a result of Cypress’s announcement to close its Texas wafer fabrication facility that manufactured our imaging and infrared detector products, we evaluated our alternatives relating to the future plans for this business and decided to wind-down our activities related to the imaging detector product line in the first quarter of fiscal 2008. In fiscal 2007, we recorded $14.4 million of impairment charges relating to long-lived assets, primarily related to a $14.1 million write-off of the carrying value of the PowerLight tradename resulting from a change in our branding strategy.  
 
Goodwill Impairment Testing
 
On November 9, 2004, Cypress acquired 100% ownership of all outstanding shares of our capital stock, excluding unexercised warrants and options. As a result of that transaction, we were required to record Cypress’ cost of acquiring us, including its equity investment and pro rata share of our losses in our financial statements by recording intangible assets including purchased technology, patents, trademarks, distribution agreement and goodwill. In January 2007, we acquired PowerLight, and in January 2008 and July 2008, we acquired SunPower Italia and SunPower Australia, respectively, and as a result of the transactions, we were required to record all assets and liabilities acquired under the purchase acquisition, including goodwill and identified intangible assets, at fair value in our financial statements. We perform a goodwill impairment test on an annual basis and will perform an assessment between annual tests in certain circumstances. The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment at many points during the analysis. In estimating the fair value of our business, we make estimates and judgments about our future cash flows. Our cash flow forecasts are based on assumptions that are consistent with the plans and estimates we use to manage our business. See Note 4 of Notes to our Consolidated Financial Statements.
 
Purchase Accounting
 
We record all assets and liabilities acquired in purchase acquisitions, including goodwill, identified intangible assets and in-process research and development, at fair value as required by SFAS No. 141 “Business Combinations.” The initial recording of goodwill, identified intangible assets and in-process research and development requires certain estimates and assumptions especially concerning the determination of the fair values and useful lives of the acquired intangible assets. The judgments made in the context of the purchase price allocation can materially impact our future results of operations. Accordingly, for significant acquisitions, we obtain assistance from third-party valuation specialists. The valuations are based on information available at the acquisition date. Goodwill is not amortized but is subject to annual tests for impairment or more often if events or circumstances indicate they may be impaired. Other identified intangible assets are amortized over their estimated useful lives and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount. See Note 3 and 4 of Notes to our Consolidated Financial Statements.
 
Fair Value of Financial Instruments
 
Effective December 31, 2007, we adopted the provisions of SFAS No. 157 “Fair Value Measurements,” or SFAS No. 157, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Our financial assets and financial liabilities that require recognition under SFAS No. 157 include available-for-sale securities under SFAS No. 115 “Accounting for Investment in Certain Debt and Equity Securities,” or SFAS No. 115, and foreign currency derivatives. We enter into over-the-counter, or OTC, foreign currency derivatives and use a valuation model to derive the value of option and forward contracts. In determining fair value, we use various valuation techniques, including market and income approaches to value available-for-sale securities and foreign currency derivatives. SFAS No. 157 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. As such, fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. The hierarchy is broken down into three levels based on the reliability of inputs as follows:

Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment. Financial assets utilizing Level 1 inputs include most money market funds and bank notes.

Level 2—Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, directly or indirectly. Financial assets utilizing Level 2 inputs include foreign currency option contracts and forward exchange contracts and some corporate securities. The selection of a particular model to value an OTC foreign currency derivative depends upon the contractual term of, and specific risks inherent with, the instrument as well as the availability of pricing information in the market. We generally use similar models to value similar instruments. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit curves and measures of volatility. For OTC foreign currency derivatives that trade in liquid markets, such as generic forward, option and swap contracts, model inputs can generally be verified and model selections do not involve significant management judgment.
 
 
Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement. Financial assets utilizing Level 3 inputs include money market funds comprised of the Reserve Primary Fund and the Reserve International Liquidity Fund, collectively referred to as the Reserve Funds, and corporate securities comprised of auction rate securities. We use the market approach to estimate the price that would be received to sell our Reserve Funds in an orderly transaction between market participants ("exit price"). We reviewed the underlying holdings and estimated the price of underlying fund holdings to estimate the fair value of these funds. We use an income approach valuation model to estimate the exit price of the auction rate securities, which is derived as the weighted average present value of expected cash flows over various periods of illiquidity, using a risk adjusted discount rate that is based on the credit risk and liquidity risk of the securities.

    Availability of observable inputs can vary from instrument to instrument and to the extent that valuation is based on inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by our management in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. In regards to our Reserve Funds, the market approach was based on both Level 2 (term, maturity dates, rates and credit risk) and Level 3 inputs. We determined that the Level 3 inputs, particularly the liquidity premium, were the most significant to the overall fair value measurement. In regards to our auction rate securities, the income approach valuation model was based on both Level 2 (credit quality and interest rates) and Level 3 inputs. We determined that the Level 3 inputs were the most significant to the overall fair value measurement, particularly the estimates of risk adjusted discount rates and ranges of expected periods of illiquidity.

Unrealized gains and losses of our available-for-sale securities and foreign currency derivatives are excluded from earnings and reported as a component of other comprehensive income (loss) on the Consolidated Balance Sheets. Additionally, we assess whether an other-than-temporary impairment loss on our available-for-sale securities has occurred due to declines in fair value or other market conditions. Declines in fair value that are considered other-than-temporary are recorded in other, net in the Consolidated Statements of Operations.
 
In general, investments with original maturities of greater than ninety days and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year may also be classified as short-term based on their highly liquid nature and because such investments represent the investment of cash that is available for current operations.
 
We also invest in auction rate securities that are typically over-collateralized and secured by pools of student loans originated under the Federal Family Education Loan Program, or FFELP, that are guaranteed and insured by the U.S. Department of Education. In addition, all auction rate securities held are rated by one or more of the Nationally Recognized Statistical Rating Organizations, or NRSRO, as triple-A. Historically, these securities have provided liquidity through a Dutch auction at pre-determined intervals every seven to 49 days. When auction rate securities fail to clear at auction and we are unable to estimate when the impacted auction rate securities will clear at the next auction, we classify these as long-term, consistent with the stated contractual maturities of the securities. The “stated” or “contractual” maturities for these securities generally are between 20 to 30 years. A failed auction results in a lack of liquidity, which occurs when sell orders exceed buy orders, and does not necessarily signify a default by the issuer. Beginning in February 2008, the auction rate securities market experienced a significant increase in the number of failed auctions. See “Item 1A Risk Factors If the recent credit market conditions continue or worsen, they could have a material adverse impact on our investment portfolio.” See also Note 6 of Notes to our Consolidated Financial Statements.
 
Accounting for Income Taxes
 
Our global operations involve manufacturing, research and development and selling activities. Profit from non-U.S. activities is subject to local country taxes but not subject to United States tax until repatriated to the United States. It is our intention to indefinitely reinvest these earnings outside the United States. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. In assessing the need for a valuation allowance, we consider historical levels of income, expectations and risks associated with the estimates of future taxable income and ongoing prudent and feasible tax planning strategies. In the event we determine that we would be able to realize additional deferred tax assets in the future in excess of the net recorded amount, or if we subsequently determine that realization of an amount previously recorded is unlikely, we would record an adjustment to the deferred tax asset valuation allowance, which would change income in the period of adjustment.

On January 1, 2007, we adopted the provisions for FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes, and Related Implementation Issues,” or FIN 48, which is an interpretation of SFAS No. 109. FIN 48 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.

 
The calculation of tax liabilities involves dealing with uncertainties in the application of complex global tax regulations. We recognize potential liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If the estimate of tax liabilities proves to be less than the ultimate tax assessment, a further charge to expense would result. We accrue interest and penalties on tax contingencies as required by FIN 48 and SFAS No. 109. This interest and penalty accrual is classified as income tax provision (benefit) in the Consolidated Statements of Operations and is not considered material. See Note 13 of Notes to our Consolidated Financial Statements.

In addition, foreign exchange gains (losses) may result from estimated tax liabilities, which are expected to be realized in currencies other than the U.S. dollar.
 
Results of Operations
 
Revenue
 
   
Year Ended
 
(Dollars in thousands)
 
December 28,
2008
   
December 30,
2007
   
December 31,
2006
 
Systems revenue
 
$
820,632 
   
$
464,178
   
$
 
Components revenue
   
614,287 
     
310,612
     
236,510
 
Total revenue
 
$
1,434,919 
   
$
774,790
   
$
236,510
 
 
Total Revenue:  During fiscal 2008 and 2007, our total revenue was $1,434.9 million and $774.8 million, respectively, an increase of 85%. Our fiscal 2007 revenue increased 228% compared to our total revenue in 2006 of $236.5 million. The significant increase in our total revenue from fiscal 2007 to 2008 is attributable in part to the Systems Segment’s installation of more than 40 megawatts of production for several large-scale solar power plants in Spain, the Components Segment’s continued increase in the demand for our solar cells and solar panels and the continued increases in unit production and unit shipments of both solar cells and solar panels as we have expanded our manufacturing capacity. The significant increase in our total revenue from fiscal 2006 to 2007 resulted from the combination of an increase in components revenue of approximately $74.1 million during fiscal 2007, and the addition of $464.2 million in systems revenue for fiscal 2007, as a result of the acquisition of PowerLight (now known as SP Systems). We had twelve, seven and four solar cell manufacturing lines in our two solar cell manufacturing facilities as of December 28, 2008, December 30, 2007 and December 31, 2006, respectively, with a total rated manufacturing capacity of 414 megawatts, 214 megawatts and 108 megawatts, respectively, per year. During fiscal 2008, 2007 and 2006, our two solar cell manufacturing facilities produced 236.9 megawatts, 100.1 megatwatts and 66.7 megawatts, respectively.
  
Sales outside the United States represented approximately 64%, 55% and 68% of our total revenue for fiscal 2008, 2007 and 2006, respectively, and we expect international sales to remain a significant portion of overall sales for the foreseeable future. International sales as a percentage of our total revenue increased approximately 9% from fiscal 2007 to 2008 as our Systems Segment installed more than 40 megawatts of production for several large-scale solar power plants in Spain in fiscal 2008, and our Components Segment continues to expand our global dealer network, with an emphasis on European expansion. International sales as a percentage of our total revenue decreased approximately 13% from fiscal 2006 to 2007 primarily due to the completion of an approximately 14 megawatt solar power plant at Nellis Air Force Base in Nevada that currently represents our largest installed solar power project in North America.

Concentrations:  We have eight customers that each accounted for more than 10 percent of our total revenue in one or more of fiscal 2008, 2007 and 2006 as follows:
 
   
Year Ended
   
December 28,
2008
 
December 30,
2007
 
December 31,
 2006
Significant customers:
Business Segment
         
Naturener Group
Systems
18% 
   
*
 
—%
Sedwick Corporate, S.L.
Systems
11% 
   
*
 
—%
SolarPack
Systems
*
   
18%
 
—%
MMA Renewable Ventures
Systems
*
   
16%
 
—%
Conergy AG
Components
*
   
*
 
25%
Solon AG
Components
*
   
*
 
24%
PowerLight**
Components
n.a.
   
n.a.
 
16%
General Electric Company***
Components
*
   
*
 
10%
 
denotes less than 10% during the period
** 
acquired by us on January 10, 2007
*** 
includes its subcontracting partner, Plexus Corporation
 
 
We generate revenue from two business segments, as follows:
 
Systems Segment Revenue:  Our systems revenue for fiscal 2008 and 2007 was $820.6 million and $464.2 million, respectively, which accounted for 57% and 60%, respectively, of our total revenue. We had no systems revenue in fiscal 2006. For fiscal 2008 and 2007, 92% and 84%, respectively, of systems revenue was from EPC construction contracts and the remaining 8% and 16%, respectively, was from materials-only sales contracts. Our systems revenue is largely dependent on the timing of revenue recognition on large construction projects and, accordingly, will fluctuate from period to period. For fiscal 2008, our Systems Segment benefited from strong power plant scale demand in Europe, primarily in Spain, and reflected the completion of Spain based projects before the expiration of the pre-existing feed-in tariff in September 2008. For fiscal 2007, our Systems Segment benefited from strong demand for our solar power systems in a rapidly growing solar business environment, particularly with respect to the ongoing evolution of country-specific customer incentive programs.

Naturener Group, Sedwick Corporate, S.L., SolarPack and MMA Renewable Ventures purchased systems from us as central-station power plants which generate electricity for sale to commercial customers and under tariff to regional and public utilities customers. In fiscal 2008 and 2007, approximately 37% and 32%, respectively, of our total revenue was derived from such sales of systems to financing companies that engage in power purchase agreements with end-users of electricity.
 
Components Segment Revenue:  Components revenue for fiscal 2008, 2007 and 2006 was $614.3 million, $310.6 million and $236.5 million, respectively, or 43%, 40% and 100%, respectively, of our total revenue. During fiscal 2008, our Components Segment benefited from strong demand in the residential and small commercial roof-top markets through our dealer network in both Europe and the United States. During fiscal 2008, we tripled the size of our dealer network by adding more than 350 dealers worldwide. During fiscal 2007 and 2006, our Components Segment benefited from continued strong world-wide demand for our solar power products, increasing sequential quarterly average selling prices and production volume output.

Cost of Revenue
 
   
Year Ended
 
(Dollars in thousands)
 
December 28,
2008
   
December 30,
2007
   
December 31,
2006
 
Cost of systems revenue
 
$
653,569 
   
$
386,511
   
$
 
Cost of components revenue
   
417,669 
     
240,475
     
186,042
 
Total cost of revenue
 
$
1,071,238 
   
$
626,986
   
$
186,042
 
Total cost of revenue as a percentage of revenue
   
75 
%
   
81
%
   
79
%
Total gross margin percentage
   
25 
%
   
19
%
   
21
%
 
Details to cost of systems revenue is as follows:

   
Year Ended
 
(Dollars in thousands)
 
December 28,
2008
   
December 30,
2007
 
Amortization of purchased intangible assets
 
$
7,691 
   
$
20,085
 
Stock-based compensation
   
10,745 
     
8,187
 
Factory pre-operating costs
   
1,069 
     
939
 
All other cost of revenue
   
634,064 
     
357,300
 
Total cost of revenue
 
$
653,569 
   
$
386,511
 
Cost of systems revenue as a percentage of revenue
   
80 
%
   
83
%
Total gross margin percentage
   
20 
%
   
17
%

Details to cost of components revenue is as follows:
 
     
   
Year Ended
 
(Dollars in thousands)
 
December 28,
2008
   
December 30,
2007
   
December 31,
2006
 
Amortization of purchased intangible assets
 
$
4,305 
   
$
4,767
   
$
4,690
 
Stock-based compensation
   
8,144 
     
4,213
     
846
 
Impairment of long-lived assets
   
2,203 
     
     
 
Factory pre-operating costs
   
1,870 
     
3,964
     
383
 
All other cost of revenue
   
401,147 
     
227,531
     
180,123
 
Total cost of revenue
 
$
 417,669 
   
$
240,475
   
$
186,042
 
Cost of components revenue as a percentage of revenue
   
68 
%
   
77
%
   
79
%
Total gross margin percentage
   
32 
%
   
23
%
   
21
%
 
 
Total Cost of Revenue:  During fiscal 2008 and 2007, our total cost of revenue was $1,071.2 million and $627.0 million, respectively, which represents an increase of 71%. Our fiscal 2007 cost of revenue increased 237% compared to our total cost of revenue in 2006 of $186.0 million. The increase in total cost of revenue resulted from increased volume in all cost of revenue spending categories and corresponds with an increase of 85% in total revenue from fiscal 2007 to 2008 and 228% from fiscal 2006 to 2007. As a percentage of total revenue, our total cost of revenue decreased from 81% in fiscal 2007 to 75% in fiscal 2008. This decrease in total cost of revenue as a percentage of total revenue is reflective of decreased costs of polysilicon beginning in the second quarter of fiscal 2008 and improved manufacturing economies of scale associated with markedly higher production volume, partially offset by (i) a one-time asset impairment charge of $2.2 million in fiscal 2008 relating to the wind-down of our imaging detector product line; (ii) a more favorable mix of business in our Systems Segment that benefited gross margin by approximately five percentage points during fiscal 2007; and (iii) the $2.7 million settlement received from one of our suppliers in the Components Segment during fiscal 2007 in connection with defective materials sold to us during 2006 that was reflected as a reduction to total cost of revenue.

As a percentage of total revenue, our total cost of revenue increased from 79% in fiscal 2006 to 81% in fiscal 2007 primarily due to a $20.1 million increase in amortization of intangible assets charged to cost of systems revenue for fiscal 2007 and an additional $8.2 million in stock-based compensation expense charged to cost of systems revenue incurred in fiscal 2007, both associated with our acquisition of PowerLight (now known as SP Systems). Additionally, costs of raw materials such as polysilicon continued to increase from fiscal 2006 to 2007 and we began incurring pre-operating costs associated with FAB2 and solar panel assembly facility starting in the fourth quarter of 2006. The additional cost of revenue in fiscal 2007 was only partially offset by improved manufacturing economies of scale associated with markedly higher production volume and improved yields.
 
Since the second half of 2006, we have increased our estimated warranty reserve provision rates based on results of our recent testing that simulates adverse environmental conditions and potential failure rates our solar panels could experience during their 20-year warranty period. Provisions for warranty reserves charged to cost of revenue were $14.2 million, $10.8 million, and $3.2 million during fiscal 2008, 2007 and 2006, respectively. As a result of the acquisitions of SunPower Italia and SunPower Australia in fiscal 2008 and PowerLight (now known as SP Systems) in fiscal 2007, amortization of intangible assets charged to cost of revenue totaled $12.0 million in fiscal 2008, as compared to $24.9 million in fiscal 2007 and $4.7 million in fiscal 2006. Amortization of intangible assets charges represent amortization of purchased technology, patents, trademarks and other intangible assets. Stock-based compensation charges to cost of revenue were $18.9 million, $12.4 million, and $0.8 million during fiscal 2008, 2007 and 2006, respectively. The substantial increase in stock-based compensation expense in fiscal 2008 and 2007 as compared to fiscal 2006 primarily relates to the acquisition of PowerLight (now known as SP Systems).

Systems Segment Gross Margin:  Gross margin was $167.1 million and $77.7 million for fiscal 2008 and 2007, respectively, or 20% and 17% of systems revenue, respectively. Gross margin increased due to a higher percentage of SunPower solar panels used in its projects as well as cost savings we realized from more efficient field implementation of our systems trackers.

Components Segment Gross Margin:  Gross margin was $196.6 million, $70.1 million and $50.5 million for fiscal 2008, 2007 and 2006, respectively, or 32%, 23% and 21%, respectively, of components revenue. Gross margin increased due to higher average solar cell conversion efficiency and better silicon utilization, continued reduction in silicon costs, higher volume, and slightly higher average selling prices.

Research and Development
 
   
Year Ended
 
(Dollars in thousands)
 
December 28,
2008
   
December 30,
2007
   
December 31,
2006
 
Research & development
 
$
21,474 
   
$
13,563
   
$
9,684
 
As a percentage of revenue
   
%
   
2
%
   
4
%
 
During fiscal 2008 and 2007, our research and development expense was $21.5 million and $13.6 million, respectively, which represents an increase of 58%. Our fiscal 2007 research and development expense increased 40% compared to $9.7 million in fiscal 2006. The increase in spending year-over-year resulted primarily from: (i) increases in salaries, benefits and stock-based compensation costs as a result of increased headcount from approximately 40 on December 31, 2006 to 70 on December 30, 2007 to 150 on December 28, 2008; and (ii) costs related to the development of our second generation of more efficient solar cells and thinner polysilicon wafers for solar cell manufacturing, as well as development of new processes to automate solar panel assembly operations. These increases were partially offset by grants and cost reimbursements received from various government entities in the United States. 

 
Sales, General and Administrative
 
   
Year Ended
 
(Dollars in thousands)
 
December 28,
2008
   
December 30,
2007
   
December 31,
2006
 
Sales, general & administrative
 
$
173,740 
   
$
108,256
   
$
21,677
 
As a percentage of revenue
   
12 
%
   
14
%
   
9
%
 
During fiscal 2008 and 2007, our sales, general and administrative expense, or SG&A expense, was $173.7 million and $108.3 million, respectively, which represents an increase of 60%. Our fiscal 2007 SG&A expense increased 399% compared to $21.7 million in fiscal 2006. The increase in costs year-over-year resulted primarily from higher spending in all of the functional areas to support the growth of our business. Headcount related to SG&A expense increased from approximately 90 on December 31, 2006 to 230 on December 30, 2007 to 640 on December 28, 2008. Additional costs increases were related to sales and marketing spending to expand our global dealer network primarily in Europe and global branding initiatives, as well as increased expenses associated with deployment of a new enterprise resource planning system, legal and accounting services. During fiscal 2008, 2007 and 2006, stock-based compensation included in our SG&A expense was approximately $47.3 million, $37.0 million and $2.8 million, respectively. As a percentage of revenue, SG&A expense decreased to 12% in fiscal 2008 from 14% in fiscal 2007, because these expenses increased at a lower rate than the rate of growth of our revenue. SG&A expense increased from 9% in fiscal 2006 to 14% in fiscal 2007 largely due to the acquisition and integration of PowerLight (now known as SP Systems).
 
Purchased In-Process Research and Development, or IPR&D
 
   
Year Ended
 
(Dollars in thousands)
 
December 28,
2008
   
December 30,
2007
   
December 31,
2006
 
Purchased in-process research and development
  $
    $
9,575
    $
 
As a percentage of revenue
   
n.a.
   
1
%  
n.a.
 
 
For fiscal 2007, we recorded an IPR&D charge of $9.6 million in connection with the acquisition of PowerLight (now known as SP Systems) in January 2007, as technological feasibility associated with the IPR&D projects had not been established and no alternative future use existed. No in-process research and development expense was recorded for fiscal 2008 and 2006. See Note 3 of Notes to our Consolidated Financial Statements.

Impairment of Acquisition-Related Intangible Assets
 
   
Year Ended
 
(Dollars in thousands)
 
December 28,
2008
   
December 30,
2007
   
December 31,
2006
 
Impairment of acquisition-related intangible assets
 
$
   
$
14,068
   
$
 
As a percentage of revenue
   
n.a.
     
2
%
   
n.a.
 
 
For fiscal 2007, we recognized a charge for the impairment of acquisition-related intangible assets of $14.1 million. In June 2007, we changed our branding strategy and consolidated all of our product and service offerings under the SunPower tradename.  As a result of the change in our branding strategy, during the quarter ended July 1, 2007, the net book value of the PowerLight tradename of $14.1 million was written off as an impairment of acquisition-related intangible assets. See Note 3 and 4 of Notes to our Consolidated Financial Statements.
 
Other Income (Expense), Net

   
Year Ended
 
(Dollars in thousands)
 
December 28,
2008
   
December 30,
2007
   
December 31,
2006
 
Interest income
 
$
10,789 
   
$
13,882
   
$
10,086
 
As a percentage of revenue
   
1
%
   
2
%
   
4
%
Interest expense
 
$
(4,387)
   
$
(5,071)
   
$
(1,809)
 
As a percentage of revenue
   
(0)
%
   
(1)
%
   
(1)
%
Other, net
 
$
(27,285)
   
$
(7,593)
   
$
1,077
 
As a percentage of revenue
   
(2)
%
   
(1)
%
   
0
%
 
 
Interest income during fiscal 2008, 2007 and 2006 primarily represents interest income earned on our cash, cash equivalents, restricted cash and investments during these periods. The decrease in interest income of 22% from fiscal 2007 to 2008 resulted from lower cash holdings related to capital expenditures for our manufacturing capacity expansion. The increase in interest income of 38% from fiscal 2006 to 2007 is primarily the effect of interest earned on $581.5 million in net proceeds from our class A common stock and convertible debenture offerings in February and July 2007, partially offset by the use of cash for capital expenditures for our manufacturing capacity expansion.
 
Interest expense during fiscal 2008 and 2007 relates to interest due on convertible debt and customer advance payments. Interest expense during fiscal 2006 primarily relates to customer advance payments. The decrease in interest expense of 13% from fiscal 2007 to 2008 resulted from capitalized interest of $1.4 million in fiscal 2008. The increase in interest expense of 180% from fiscal 2006 to 2007 is primarily due to interest related to the aggregate of $425.0 million in convertible debentures issued in February and July 2007. Our convertible debt was used in part to fund our capital expenditures for our manufacturing capacity expansion.
 
In May 2008, the FASB issued FSP APB 14-1 “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement),” or FSP APB 14-1, which clarifies the accounting for convertible debt instruments that may be settled in cash upon conversion. FSP APB 14-1 significantly impacts the accounting for our convertible debt by requiring us to separately account for the liability and equity components of the convertible debt in a manner that reflects interest expense equal to our non-convertible debt borrowing rate. FSP APB 14-1 may result in significantly higher non-cash interest expense on our convertible debt. FSP APB 14-1 is effective for fiscal years and interim periods beginning after December 15, 2008, and retrospective application will be required for all periods presented.
 
The following table summarizes the components of other, net:
 
   
Year Ended
 
(In thousands)
 
December 28,
2008
   
December 30,
2007
   
December 31,
2006
 
Write-off of unamortized debt issuance costs
 
$
(972
)
 
$
(8,260
)
 
$
 
Amortization of debt issuance costs
   
— 
     
(1,710
)
   
 
Impairment of investments
   
(5,408
)
   
     
 
Gain (loss) on derivatives and foreign exchange, net of tax
   
(20,602
)
   
2,086
     
863
 
Other income (expense), net