On December 29, 2008, as part of ongoing efforts to lower overhead costs and reduce overall cash requirements, we committed to a plan to cease operations at our pilot manufacturing facility in Marlboro, Massachusetts. Production at the facility ceased on December 31, 2008. Future advanced manufacturing piloting activities will be performed at our Devens manufacturing facility. Almost all of the Marlboro pilot manufacturing facility employees have transferred to the Devens manufacturing facility to fill open positions associated with the second phase of Devens. As a result of the cessation of manufacturing in Marlboro, we recorded restructuring costs, principally non-cash charges, of approximately $30.4 million associated with the write-off of manufacturing and development equipment, inventory and leasehold improvements of the Marlboro pilot facility. We may also incur occupancy, location restoration and moving costs of approximately $4.0 to $5.0 million during 2009. We believe that closing the Marlboro pilot facility and better utilizing existing equipment and facilities at our research and development center and at our Devens manufacturing facility will result in lower overhead costs and reduce overall cash requirements.
At December 31, 2008, we had approximately $178 million of cash, cash equivalents and marketable securities, of which approximately $23 million was due to Sovello as their sales agent. Through mid-2009, the completion of the Devens factory, the first phase of our Midland factory and debt service interest payments will require approximately $120 million, leaving approximately $35 million available to fund our operations. Throughout the first half of 2009, we expect our working capital requirements will increase substantially as production and shipments increase from our Devens facility. Assuming we are able to execute our business plan as currently envisioned, we believe that our cash on hand combined with our expected large working capital balances will provide us with sufficient liquidity or access to liquidity to fund our operations and planned capital programs for the next 12 months. We also believe that given the current state of the worldwide economy and credit markets, it is prudent to pursue short-term financing options, including but not limited to renegotiation of existing or new working capital lines of credit, in order to provide us with the most flexible liquidity protection possible. If adequate capital does not become available when needed on acceptable terms, our ability to fund our operations, further develop and expand our manufacturing operations and distribution network, or otherwise respond to competitive pressures would be significantly limited.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of consolidated financial statements in accordance with generally accepted accounting principals requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities, if applicable. We base our estimates on historical experience and on various other assumptions that are believed 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. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Accounting for Sovello AG
On December 19, 2006, we became equal partners in Sovello with Q-Cells and REC and now share equally in its prospective net income or loss. As a result of our reduction in ownership to one-third, we are required to account for our interest in Sovello under the equity method of accounting, as opposed to consolidating the operating results of Sovello as we had in the past. Under the equity method of accounting, we report our one-third share of Sovello's net income or loss as a single line item in our statement of operations and our investment in Sovello as a single line item in our balance sheet. We began applying the equity method with respect to Sovello on December 20, 2006.
Until December 31, 2008, we marketed and sold all solar panels manufactured by Sovello under the Evergreen Solar brand, and managed customer relationships and contracts related to the sale of Sovello manufactured product. We receive selling fees from Sovello in connection with our sales of Sovello manufactured product and do not report gross revenue or cost of goods sold resulting from the sale of Sovello's solar panels. During 2007 and 2008, we received a fee of 1.7% and 1.6% of gross Sovello revenue relating to the sales and marketing of solar panels. In addition, we received royalty payments for our ongoing technology agreement with Sovello. Taken together, the sales and marketing fee and royalty payments totaled approximately 6.0% and 5.2% of gross Sovello revenue for fiscal 2007 and 2008, respectively. We also received payments from Sovello of approximately $1.9 million and $384,000 in fiscal 2007 and 2008, respectively, to reimburse us for certain research and development and other support costs we incurred that could benefit Sovello. Income statement classification of these research and development reimbursement payments depend on how we are reimbursed. The best efforts arrangement we maintain with Sovello allows for the reimbursement to offset expenses whereas a specific performance arrangement requires us to record both revenue and an offsetting cost of revenue. These reimbursements in fiscal 2008 are therefore shown as a reduction of our expenses.

Revenue Recognition and Allowance for Doubtful Accounts We recognize product revenue if there is persuasive evidence of an agreement with the customer, shipment has occurred, risk of loss has transferred to the customer, the sales price is fixed or determinable, and collectability is reasonably assured. The market for solar power products is emerging and rapidly evolving. We currently sell our solar power products primarily to distributors, system integrators and other value-added resellers within and outside of North America, who typically resell our products to end users throughout the world. For new customers requesting credit, we evaluate creditworthiness based on credit applications, feedback from provided references, and credit reports from independent agencies. For existing customers, we evaluate creditworthiness based on payment history and any known changes in their financial condition. Royalty and fee revenue are recognized at contractual rates upon shipment of product by Sovello. Product revenues represented 100%, 83% and 85% for the years ended December 31, 2006, 2007 and 2008, respectively. International product sales accounted for approximately 63%, 18% and 42% for the years ended December 31, 2006, 2007 and 2008, respectively.
We also evaluate the facts and circumstances related to each sales transaction and consider whether risk of loss has passed to the customer upon shipment. We consider whether our customer is purchasing our product for stock, and whether contractual or implied rights to return the product exist or whether our customer has an end user contractually committed. To date, we have not offered rights to return our products other than for normal warranty conditions.
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, such that their ability to make payments was impaired, additional allowances could be required. Warranty
Our current standard product warranty includes a five-year warranty period for defects in material and workmanship and a 25-year warranty period for declines in power performance. When we recognize revenue, we accrue a liability for the estimated future costs of meeting our warranty obligations. We make and revise this estimate based on the number of solar panels shipped and our historical experience with warranty claims. During 2008, we re-evaluated potential warranty exposure as a result of the substantial increase in production volumes at our Devens, Massachusetts manufacturing facility. As such, we increased our estimated future warranty costs to approximately $1.2 million as of December 31, 2008.
We engage in product quality programs and processes, including monitoring and evaluating the quality of component suppliers, in an effort to ensure the quality of our product and reduce our warranty exposure. Our warranty obligation will be affected not only by our product failure rates, but also the costs to repair or replace failed products and potential service and delivery costs incurred in correcting a product failure. If our actual product failure rates, repair or replacement costs, or service or delivery costs differ from these estimates, accrued warranty costs would be adjusted in the period that such events or costs become known.
Stock-based Compensation
We measure compensation cost arising from the grant of share-based payments to employees at fair value and recognize such cost in income over the period during which the employee is required to provide service in exchange for the award, usually the vesting period, in accordance with the provisions of Statement of Financial Accounting Standards No. 123 - (revised 2004), "Share-Based Payment"("SFAS 123R"). We selected the modified prospective method for implementing SFAS 123R and began applying the provisions to stock-based awards granted on or after January 1, 2006, plus any unvested awards granted prior to January 1, 2006. Total equity compensation expense recognized during the years ended December 31, 2006, 2007 and 2008, was approximately $5.1 million, $6.4 million and $7.2 million, respectively. Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the awards' service periods, which are the vesting periods, less estimated forfeitures. Estimated compensation for grants that were outstanding as of January 1, 2006 will be recognized over the remaining service period using the compensation cost estimated for the SFAS 123R pro forma disclosures for prior periods.
During 2007 and 2006, we granted 900,000 shares and 800,000 shares, respectively, of performance-based restricted stock, all of which immediately vest upon the achievement of specific financial performance targets prior to 2012 and 2011, respectively. Of the 1.7 million shares granted, 100,000 shares have since been cancelled due to an employee termination. We have assumed that none of these performance-based awards will vest and accordingly have not provided for compensation expense associated with the awards. We periodically evaluate the likelihood of reaching the performance

requirements and will be required to recognize compensation expense of approximately $18.2 million associated with these performance-based awards if such awards should vest.
See Note 11 of our consolidated financial statements for further information regarding our stock-based compensation assumptions and expenses. Inventory
Inventory is valued at the lower of cost or market determined on a first-in, first-out basis. Certain factors may impact the net realizable value of our inventory including, but not limited to, technological changes, market demand, changes in product mix strategy, new product introductions and significant changes to our cost structure. Estimates of reserves are made for obsolescence based on the current product mix on hand and its expected net realizable value. If actual market conditions are less favorable or other factors arise that are significantly different than those anticipated by management, additional inventory write-downs or increases in obsolescence reserves may be required. We consider lower of cost or market adjustments and inventory reserves as an adjustment to the cost basis of the underlying inventory. Accordingly, favorable changes in market conditions are not recorded to inventory in subsequent periods. In addition, we have made non-refundable prepayments under several of our multi-year polysilicon supply agreements which are presented on the balance sheet in Prepaid Cost of Inventory. These prepayments will be amortized as an additional cost of inventory as we receive and utilize the silicon. The prepayments are classified as short-term based upon the value of silicon contracted to be delivered during the next twelve months. The Company carries these prepayments on its balance sheet at cost and periodically evaluates the status of the vendor's underlying project intended to fulfill the silicon contract.
Impairment of Long-lived Assets
Our policy regarding long-lived assets is to evaluate the recoverability or usefulness of these assets when the facts and circumstances suggest that these assets may be impaired. This analysis relies on a number of factors, including changes in strategic direction, business plans, regulatory developments, economic and budget projections, technological improvements, and operating results. The test of recoverability or usefulness is a comparison of the asset value to the undiscounted cash flow of its expected cumulative net operating cash flow over the asset's remaining useful life. If such a test indicates that an impairment exists, then the asset is written down to its estimated fair value. Any write-downs would be treated as permanent reductions in the carrying amounts of the assets and an operating loss would be recognized. To date, we have had recurring operating losses and the recoverability of our long-lived assets is contingent upon executing our business plan that includes further reducing our manufacturing costs and significantly increasing sales. If we are unable to execute our business plan, we may be required to write down the value of our long-lived assets in future periods. Income Taxes
We are required to estimate our income taxes in each of the jurisdictions in which we operate as part of our consolidated financial statements. This involves estimating the actual current tax in addition to assessing temporary differences resulting from differing treatments for tax and financial accounting purposes. These differences together with net operating loss carryforwards and tax credits may be recorded as deferred tax assets or liabilities on the balance sheet. A judgment must then be made of the likelihood that any deferred tax assets will be recovered from future taxable income. To the extent that we determine that it is more likely than not that deferred tax assets will not be utilized, a valuation allowance is established. Taxable income in future periods significantly different from that projected may cause adjustments to the valuation allowance that could materially increase or decrease future income tax expense.
Results of Operations
Description of Our Revenues, Costs and Expenses Revenues. Our total revenues consist of revenues from the sale of products, royalty revenue associated with our ongoing technology agreement with Sovello, and fees from Sovello for our marketing and selling activities associated with sales of product manufactured by Sovello under the Evergreen Solar brand. Product revenues consist of revenues primarily from the sale of solar cells, panels and systems. Reported product revenues represented 100%, 83% and 85% of total revenues, in 2006, 2007 and 2008, respectively. International product sales accounted for approximately 63%, 18% and 42% of total product revenues for the years ended December 31, 2006, 2007 and 2008, respectively.

Cost of revenues. Cost of product revenues consists primarily of material expenses, salaries and related personnel costs, including stock based compensation, depreciation expense, maintenance, rent and other support expenses associated with the manufacture of our solar power products.
Research and development expenses. Research and development expenses consist primarily of salaries and related personnel costs, including stock based compensation costs, consulting expenses and prototype costs related to the design, engineering, development, testing and enhancement of our products, manufacturing equipment and manufacturing technology. We expense our research and development costs as incurred. We also may receive payments from Sovello and other third parties as reimbursement of certain research and development costs we will incur. We believe that research and development is critical to our strategic objectives of enhancing our technology, reducing manufacturing costs and meeting the changing requirements of our customers.
Selling, general and administrative expenses. Selling, general and administrative expenses consist primarily of salaries and related personnel costs, including stock based compensation costs, employee recruiting costs, accounting and legal fees, rent, insurance and other selling and administrative expenses. We expect that selling expenses will continue to increase substantially in absolute dollars as we increase our sales efforts to support our anticipated growth, hire additional sales personnel and initiate additional marketing programs.
Facility start-up. Facility startup expenses consist primarily of salaries and personnel-related costs and the cost of operating a new facility before it has been qualified for full production. It also includes all expenses related to the selection of a new site and the related legal and regulatory costs and the costs to maintain our plant expansion program, to the extent we cannot capitalize these expenditures. We expect to incur significant facility start-up expenses as we continue to plan and qualify new facilities.
Restructuring charges. Restructuring charges consist of costs associated with the closure of our Marlboro pilot manufacturing facility on December 31, 2008. The charges primarily include severance costs, and the write-off of manufacturing equipment, leasehold improvements and inventory.
Other income (expense), net. Other income (expense) consists of interest income primarily from interest earned on the holding of short-term marketable securities, bond premium amortization (or discount accretion), interest expense on outstanding debt and net foreign exchange gains and losses.
Equity income from interest in Sovello AG. As of December 20, 2006, we began accounting for our share of Sovello's results under the equity method of accounting, which requires us to record our one-third share of Sovello's net income or loss as one line item in our consolidated statement of operations. During the period from December 20, 2006 to December 31, 2006, Sovello recorded approximately $1.5 million in net income, of which we recorded approximately $495,000 in our consolidated statement of operations. For the years ended December 31, 2007 and 2008, Sovello recorded approximately $6.5 million and $26.4 million in net income, respectively, of which we recorded approximately $2.2 million and $8.4 million net of withholding taxes, respectively, in our consolidated statement of operations.
Minority interest. Through December 19, 2006, we consolidated the financial results of Sovello in our financial statements. Through December 19, 2006, Sovello incurred losses of $2.4 million, which are consolidated in our financial statements. However, $849,000 of those losses represents the portion of Sovello losses attributable to the Q-Cells and REC minority interests for the period ended December 19, 2006.
COMPARISON OF YEARS ENDED DECEMBER 31, 2008 AND 2007 Revenues. Our product revenues for the year ended December 31, 2008 were $95.2 million, an increase of 63% or $36.9 million from $58.3 million for the year-ended December 31, 2007. This increase in product revenues resulted from an increase in sales volume of 61%which was generated from our new Devens facility which began shipping product late in the third quarter. To a lesser extent, product revenues benefited from higher average selling prices of approximately 2% that primarily resulted from a geographic shift in sales to Europe. Royalty revenue and marketing and selling fees from Sovello for the year ended December 31, 2008 were $16.7 million, an increase 45% or $5.2 million from $11.5 million for the year ended December 31, 2007. The increase in royalty revenue and marketing and selling fees from Sovello was mainly due to the increased sales volume at Sovello which started production at its second facility in the second quarter of 2007.

International product revenues accounted for 42% and 18% of total product revenues for the years ended December 31, 2008 and 2007, respectively. Throughout most of 2007 orders were largely fulfilled based upon geography. More than half of the product produced at Sovello was distributed to customers in Europe and the majority of the product produced at our Marlboro facility was distributed to customers in the United States which allowed us to efficiently manage worldwide distribution of product. However, during 2008 approximately 40% of our product shipments have been to Europe in order to respond to specific customer demand. As we increase our own capacity with the completion of our Devens facility, we expect that we will continually adjust our distribution strategy as markets for solar energy rapidly develop and change.
The following table summarizes the concentration of our product revenues by geography and customer:

                                                2007      2008
                        By geography:
                        United States             82 %      58 %
                        Germany                    7 %      28 %
                        All other                 11 %      14 %

                                                 100 %     100 %


                        By customer:
                        SunPower Corporation      31 %      31 %
                        Ralos Verriebs GmbH        1 %      15 %
                        SunEdison                 14 %       2 %
                        groSolar                  12 %       4 %
                        All other                 42 %      48 %

                                                 100 %     100 %

Cost of product revenues and gross margin. Our cost of product revenues for the year ended December 31, 2008 was $93.1 million, an increase of approximately $40.2 million, or 76%, from $52.8 million for the year ended December 31, 2007. Gross margin for the year ended December 31, 2008 was 16.9% as compared to 24.4% for the year ended December 31, 2007. The decrease in gross margin primarily resulted from higher costs associated with the initial production at our new Devens facility and lower support costs allocated to research and development supporting pilot programs. These higher costs were offset by higher royalty and selling fees associated with the increase in Sovello's sales volume, higher silicon scrap sales and the increase in the volume of our product sales. These . . .