LOAN AND SECURITY AGREEMENT

LOAN AND SECURITY AGREEMENT

THIS LOAN AND SECURITY AGREEMENT (this “Agreement” ) dated as of May 18, 2009 (the “ Effective Date ”), entered into by and among Applied Solar, Inc., a Nevada corporation (“ Borrower ”), and The Quercus Trust ( “Lender” ), sets forth the agreement pursuant to which Borrower is borrowing funds from Lender, pledging its interest in, and granting a security interest and general Lien (as defined in Section 14.2 below) in and upon, the Collateral (as defined in Section 14.2 below) as security for satisfaction of any and all obligations of Borrower arising out of or related to that certain Secured Promissory Note made by Borrower in favor of Lender and dated as of the date hereof or arising out of or related to this Agreement  or any of the Loan Documents (the “ Obligations ”).

WHEREAS, Lender is the holder of a Series B Convertible Note payable by Borrower in the principal amount of $20,000,000 (the “ Series B Convertible Note ”), and

WHEREAS, Borrower seeks to borrow additional funds from Lender on a short term basis to be used as set forth in Section 1.1 below, and

WHEREAS, Borrower requires immediate funds to continue its operations and intends, within thirty (30) days from the date hereof, to file for protection under Chapter 11 of the U.S. Bankruptcy Code,

WHEREAS, Lender is willing to lend to Borrower $698,000 subject to the terms and conditions herein upon execution of this Agreement and a Secured Promissory Note, a copy of which is attached hereto as Exhibit “A” and made a part hereof (the “ Note ”),

WHEREAS, as consideration to induce the Lender to loan funds pursuant to this Agreement, Borrower executes this Agreement in favor of the Lender.

NOW THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good, valuable, and binding consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows:

1.       Loan . Subject to the terms and conditions of this Agreement and the Note (collectively, and together with any and all financing statements and any other agreements or instruments executed by Borrower at Lender’s request the “ Loan Documents ”), and subject to there being no Event of Default (as defined herein) under any of the Loan Documents, (or event which would, with the giving of notice or the passage of time, mature into an Event of Default), Lender agrees to lend to Borrower an amount not to exceed the principal sum of Six Hundred Ninety Eight Thousand  ($698,000) on the terms set forth in the Note and in this Agreement (the “ Loan ”).

1.1       Purpose and Use of Borrowing .  The proceeds from the Loan shall be used solely as follows:

(a)   $297,558.18 shall be paid to Suntech America, Inc.; and

Any amounts loaned hereunder shall be conclusively presumed to have been made to or for the benefit of Borrower when Lender believes in good faith that such requests and directions have been made by an authorized person.

2.       Grant of Liens .  As security for the due and punctual payment and performance in full of all obligations under this Agreement or the Note (whether at the stated maturity, by acceleration, or otherwise), Borrower hereby pledges, and grants to the Lender a continuing security interest in and a general Lien (as hereinafter defined) upon the Collateral and all additions, accessions, replacements, proceeds and  any permitted substitutions thereto, whether heretofore, now or hereafter received by or delivered or transferred to the Lender hereunder, and all proceeds of the foregoing.  To the extent that any provision set forth herein or in any Loan Document is in conflict with or would result in a breach of or default under that certain Loan and Security Agreement dated as of April 30, 2008, as amended, or the Secured Promissory Note dated of even date therewith (including all documents and instruments executed in connection therewith, and amendments thereto, the “ April 2008 Loan Documents ”), Lender hereby waives any such conflict, breach or default.

3.       Continuing Security Interest .

3.1      This Agreement creates an assignment, pledge, charge, continuing security interest in, and general Lien upon, the Collateral and shall (a) remain in full force and effect until all Obligations under the Note have been indefeasibly paid in full, (b) be binding upon Borrower and its successors, transferees, and assigns, and (c) inure, together with the rights and remedies of Lender hereunder, to the benefit of the Lender and its successors, transferees, and assigns.

3.2      Upon the indefeasible satisfaction in full of all Obligations due under the Loan Documents, the pledge, Lien, and security interest granted hereunder shall terminate and, all rights to the Collateral shall revert to Borrower.  Upon such termination, the Lender will execute and deliver to Borrower such documents as Borrower shall reasonably request to evidence such termination and the Lender shall deliver and transfer such Collateral to Borrower.

4.       Delivery and Perfection; Further Action .  Borrower hereby irrevocably authorizes Lender to file one or more financing or continuation statements, and amendments thereto, relating to all or any part of the Collateral, and agrees itself to take all such other actions and to execute for its account and as an agent of Borrower and deliver and file or cause to be filed such other instruments, agreements or documents, as Lender may reasonably require in order to establish and maintain a perfected, valid, and continuing first priority security interest and Lien in the Collateral in accordance with this Agreement and the UCC and other applicable law including, without limitation, any intellectual property including trademarks and patents.

5.       Proceeds of Sale .  Nothing contained in this Agreement shall limit or restrict in any way Lender’s right to receive Proceeds (as defined in Section 14.2 below) of the Collateral in any form in accordance with the provisions of this Agreement.

6.       Representations and Warranties .  To induce Lender to enter into the Loan Documents and to agree to make the Loan described herein, Borrower represents and warrants, and seek to have Lender rely on the statements as set forth herein, that as of the date hereof (except as otherwise described or set forth in any of the Borrower’s filings with the Securities and Exchange Commission pursuant to the Exchange Act of 1934, as amended)(the “ SEC Filings ”):

6.1       Power and Authority .  Borrower and the person or persons executing this Agreement on behalf of Borrower and each of them has the power to take all actions contemplated hereby.  The Loan Documents when executed and delivered by Borrower will constitute the legal, valid and binding obligation of Borrower, and will be upon execution, be enforceable against Borrower in accordance with their respective terms.

6.2       No Violation .  The execution, delivery or performance of the obligations by Borrower and compliance by Borrower with the terms and provisions hereof and thereof, (a) do not contravene any provision of any law, statute, rule or regulation or any order, writ, injunction or decree of any court or governmental instrumentality applicable to Borrower,  (b) do not conflict with or result in any breach of any of the terms, covenants, conditions or provisions of, or constitute a default under, or result in the creation or imposition of (or the obligation to create or impose) any Lien (other than as contemplated by the Loan Documents) upon any of the property or assets of Borrower pursuant to the terms of any material indenture, mortgage, deed of trust, credit agreement, loan agreement or other agreement, contract or instrument to which Borrower is a party or by which Borrower or any of its properties or assets are bound or to which any Borrower may be subject and (c) do no violate any provision of Borrower’s organizational documents or other agreements or understandings, including but not limited to, the provisions of the Borrower’s articles of incorporation, by-laws, or any amendments thereto.

6.3       Governmental Approvals .  Except for (1) any filings with the Secretary of State or county clerk’s office or office of any Agency or Department of the Federal Government  in connection with the security interests covering any of the Collateral, and (2) any state or federal securities filings required by this transaction,  no order, consent, approval, license, authorization or validation of, or filing, recording or registration with, or exemption by, or other act by (except as have been obtained or made), any governmental or public body or authority, or any subdivision thereof, is required to authorize, or is required in connection with, (a) the execution, delivery and performance by Borrower of the Loan Documents or (b) the legality, validity, binding effect or enforceability against Borrower of the Loan Documents.

6.4       Tax Returns and Payments .  Borrower has filed all tax returns required to be filed by it and has paid all income and franchise taxes payable by it which have become due pursuant to such tax returns and all other taxes and assessments payable by it which have become due, other than those not yet delinquent and except for those contested in good faith and by appropriate proceedings.  The amounts shown on those tax returns fairly present the tax position of the Borrower does not expect any material adjustments or any amounts shown on such tax returns.  Borrower has paid, or has provided adequate reserves for the payment of, all foreign, federal and state income and franchise taxes, all employer and employee withholding taxes and all appropriate withholding required under state or federal law, applicable for all prior fiscal years and for the current fiscal year to the date hereof.  As of the date hereof, no tax lien has been filed, and, to the knowledge of Borrower, no claim is being asserted, with respect to any tax, fee or other charge.

6.5       Compliance with Laws, etc.   Borrower is in compliance with all applicable statutes, laws, regulations and orders of, and all applicable restrictions imposed by, all governmental bodies, domestic or foreign, in respect of the conduct of its business and the ownership of its properties, except such noncompliance as would not, in the aggregate, reasonably be expected to have a material adverse effect on the condition (financial or otherwise), prospects, assets or properties of Borrower.

6.6       Name; Location of Offices and Records .  Borrower has never conducted business under any names other than Applied Solar, Inc., Open Energy Corporation, Barnabus Enterprises Ltd and Barnabus Energy, Inc.  The chief executive offices and the chief place of business for Borrower and the office where Borrower keeps its books and records, are located at the addresses set forth in Section   14.3 hereof.

6.7       Borrower’s Organization .  Borrower is a corporation duly formed under the laws of the State of Nevada.

6.8       Subsidiaries .  Borrower has no Subsidiary and does not own any shares of capital stock or other securities of or equity interest in any other Person, other than Solar Communities I, LLC, and the other Subsidiaries described in the SEC Filings.

6.9       Collateral .  Borrower is and will be the sole legal and beneficial owners of all of the Collateral now owned or hereafter acquired free and clear of any Lien, security interest, assignment, option, or other charge or encumbrance, other than the Lien or security interest created by this Agreement in favor of Lender, any Permitted Liens and any Liens already held by Secured Party.

6.10     Borrower’s Authorization .  The Loan Documents have been duly and validly authorized by Borrower and executed and delivered by Borrower.

6.11     Indebtedness .  All financial statements of the Borrower and all related financial data set forth in the Borrower’s Quarterly Report on Form 10-Q for the quarterly period ended February 28, 2009 (the “ Form 10-Q ”)were true and correct in all material respects as of their respective dates and for the periods covered, and no material adverse change has occurred in the financial condition presented therein since the respective dates thereof.  Since the date of the latest balance sheet set forth in the Form 10-Q, the Borrower has incurred no indebtedness other than in the ordinary course of business.

7.       Covenants .  In consideration of the Loan described herein, Borrower covenants and agrees that, from the date of this Agreement until the indebtedness represented by the Note and all other amounts owed under the Loan Documents are paid in full in cash, Borrower shall comply with the following provisions:

7.1       No Disposition .  Borrower will not sell, assign, transfer, exchange, or otherwise dispose of, or grant any option with respect to, any of the Collateral, nor will it create, incur, or permit to exist any Lien on or with respect to any of the Collateral, any interest therein, or any Proceeds thereof, other than in the ordinary course of business or any Permitted Lien.    Borrower covenants and agrees that it  will take all action necessary to remove any claims to, interest in, or Lien upon the Collateral and the security interest granted hereby, and shall defend the right, title and interest of Lender in and to the Collateral against claims and demands of all persons and entities at any time claiming the same or any interest therein.

7.2       Use of Proceeds .  All proceeds of the Loan will be used by Borrower exclusively as provided in Section 1.1 .

7.3       Bankruptcy Filing .  Borrower shall, within thirty (30) days of the Effective Date, file for protection pursuant to Title 11 of the U.S. Bankruptcy Code.

7.4       Taxes, Assessments and Liabilities .  Borrower shall pay all taxes, assessments, and other liabilities when due, except for those which are contested in good faith.

7.6       Further Assurances .  Borrower shall provide Lender with such additional information or documentation as Lender may reasonably request from time to time.

7.7       Records and Information .  Borrower agrees to keep records concerning the Collateral.  Borrower agrees to promptly furnish to the Lender such information concerning Borrower, the Collateral, and any Account Debtor as the Lender may reasonably request

7.8       Incurrence of Indebtedness .  Borrower shall not, incur or guarantee or assume any indebtedness, other than the indebtedness evidenced by the Note and Permitted Indebtedness without the prior written consent of the Lender.

7.9       Restricted Payments .  Borrower shall not directly or indirectly, redeem, defease, repurchase, repay or make any payments in respect of, by the payment of cash or cash equivalents (in whole or in part, whether by way of open market purchases, tender offers, private transactions or otherwise), all or any portion of any Permitted Indebtedness, whether by way of payment in respect of principal of (or premium, if any) or interest on such indebtedness, if at the time such payment is due or is otherwise made or after giving effect to such payment, an event constituting, or that with the passage of time and without being cured would constitute, an Event of Default has occurred and is continuing.