SECURED PROMISSORY NOTE

FOR VALUE RECEIVED, in cash and other consideration , Applied Solar, Inc., a Nevada corporation (“ Borrower ”), hereby promises to pay to The Quercus Trust, or its registered assigns (“ Lender ”), the sum of Six Hundred Ninety Eight Thousand ($698,000) (the “ Loan ”).

(1)            PAYMENTS OF PRINCIPAL .  On the Maturity Date, unless an Event of Default shall have sooner occurred, Borrower shall pay to Lender, in cash, all outstanding principal under this Secured Promissory Note (this “ Note ”).  The “ Maturity   Date ” shall be June 15, 2009.  Borrower may prepay all or any portion of the amounts owing under this Note at any time without fee, charge or premium.

(2)            INTEREST .  This Note shall bear interest at the rate of 10% per annum payable , in cash, on the Maturity Date.

(3)            SECURITY .  Borrower’s performance of the obligations and covenants of this Note, including but not limited to repayment, shall be secured by the lien and security interest in the Collateral, as set forth in that certain  Loan and Security Agreement between Lender and Borrower executed on even date herewith, describing all of the assets of Borrower, wherever located, subject only to existing perfected liens and encumbrances.

(4)            EVENT OF DEFAULT .

(a)            Event of Default .  Each of the following events shall constitute an “ Event of Default ” hereunder:

(i)  Borrower's failure to pay to the Lender any amount when and as due under this Note; or

(ii)  any Event of Default (as defined in the Loan and Security Agreement) under the Loan and Security Agreement including but not limited to the filing of any case or proceeding under any bankruptcy law or similar provision of state law, or any effort by Borrower to impose a lien senior to that of Lender in any Collateral held by Lender.

(b)            Acceleration .  Upon the occurrence of an Event of Default under this Note, Lender shall have, at its option, the right, without further notice or demand, which Borrower hereby expressly waives, to declare the unpaid principal and interest immediately due and payable and to exercise any other rights and remedies that Lender may have.  Lender’s failure to accelerate the payment of this Note upon the occurrence of one or more events of default shall not constitute a waiver of Lender’s right to exercise such options at any subsequent time with respect to the same or any other event of default.  Lender’s acceptance of any payment under this Note which is less than payment in full of all amounts then due and payable shall not constitute a waiver by Lender of any right to declare a default hereunder or to pursue any remedy available under this Note, at law or in equity, or under any other agreement, instrument or document entered into by and between Borrower and Lender.

(5)            LOST, STOLEN OR MUTILATED NOTE .  Upon receipt by Borrower of evidence reasonably satisfactory to Borrower of the loss, theft, destruction or mutilation of this Note, and, in the case of loss, theft or destruction, of any indemnification undertaking by the Lender to Borrower in customary form and, in the case of mutilation, upon surrender and cancellation of this Note, Borrower shall execute and deliver to the Lender a new Note representing the outstanding principal.

(6)            CUMULATIVE RIGHTS AND INJUNCTIVE RELIEF .  The remedies provided in this Note shall be cumulative and in addition to all other remedies available under this Note, or any other agreement between Lender and Borrower, at law or in equity (including a decree of specific performance and/or other injunctive relief) and nothing herein shall limit the Lender's right to pursue actual and consequential damages for any failure by Borrower to comply with the terms of this Note.  Borrower acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Lender and that the remedy at law for any such breach may be inadequate.  Borrower therefore agrees that, in the event of any such breach or threatened breach, the Lender shall be entitled, upon posting a bond and demonstrating economic loss, in addition to all other available remedies, to an injunction restraining any breach.

(7)            PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER COSTS .  If (a) this Note is placed in the hands of an attorney for collection or enforcement or is collected or enforced through any legal proceeding or the Lender otherwise takes action to collect amounts due under this Note or to enforce the provisions of this Note or (b) there occurs any bankruptcy, reorganization, receivership of Borrower or other proceedings affecting Borrower’s creditors' rights and involving a claim under this Note, then Borrower shall pay the costs incurred by the Lender for such collection, enforcement or action or in connection with such bankruptcy, reorganization, receivership or other proceeding, including, but not limited to, financial advisory fees and attorneys' fees and disbursements.

(8)            CONSTRUCTION; HEADINGS .  This Note shall be deemed to be jointly drafted by Borrower and the Lender and shall not be construed against any person as the drafter hereof.  The headings of this Note are for convenience of reference and shall not form part of, or affect the interpretation of, this Note.

(9)            FAILURE OR INDULGENCE NOT WAIVER .  No failure or delay on the part of the Lender in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege.

(10)            NOTICES; PAYMENTS .

(a)            Notices .  Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (a) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number set forth on the signature pages attached hereto prior to 5:30 p.m. (Pacific time) on a Business Day, (b) the next Business Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number set forth on the signature pages attached hereto on a day that is not a Business Day or later than 5:30 p.m. (Pacific time) on any Business Day, (c) the 2 ^nd Business Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (d) upon actual receipt by the party to whom such notice is required to be given.  The address for such notices and communications shall be as set forth below:

If to Lende