All references to the "Company," "we," "our," and "us" refer to Akeena Solar, Inc. and its subsidiaries ("Akeena Solar").

The following discussion highlights what we believe are the principal factors that have affected our financial condition and results of operations as well as our liquidity and capital resources for the periods described. This discussion should be read in conjunction with our financial statements and related notes appearing elsewhere in this Quarterly Report. This discussion contains "forward-looking statements," including but not limited to expectations regarding revenue growth, net sales, gross profit, operating expenses and performance objectives, and statements using the terms "believes," "expects," "will," "could," "plans," "anticipates," "estimates," "predicts," "intends," "potential," "continue," "should," "may," or the negative of these terms or similar expressions. These forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from those expressed or implied by these forward-looking statements. Such risks and uncertainties include, without limitation, the risks described below in Item 1A. of Part II of this Quarterly Report. Further information on potential risk factors that could affect our future business and financial results can be found in our periodic filings with the Securities and Exchange Commission (the "SEC"). We undertake no obligation to update any of these forward-looking statements.

Company Overview

We are a designer, integrator and installer of solar power systems. We market, sell, design and install systems for residential and commercial customers, sourcing components (such as solar panels and inverters) from manufacturers such as Fronius, Kyocera, SMA and Suntech. We currently serve customers in California, New York, New Jersey, Pennsylvania, Connecticut and Colorado. According to data compiled by the California Energy Commission, the Solar Electric Power Association and the New Jersey Clean Energy Program, over the past four years we have been one of the largest national installers of residential and commercial solar electric power systems in the United States. We are a member of the Solar Energy Industry Association, the California Solar Energy Industries Association, the Northern California Solar Energy Association, the Independent Power Providers, the Solar Energy Business Association of New England, and the New York Solar Energy Industries Association.

Akeena Solar was formed in February 2001 as a California corporation under the name "Akeena, Inc." and reincorporated as a Delaware corporation in June 2006, at which time its name was changed to "Akeena Solar, Inc." As of August 7, 2008, we had twelve offices. Our offices are located in Los Gatos, Fresno (Clovis), Lake Forest, Bakersfield, Manteca , Santa Rosa, Palm Springs, San Diego and Thousand Oaks (Westlake Village), California, as well as Fairfield, New Jersey, Milford, Connecticut and Littleton, Colorado. Our Corporate headquarters are located at 16005 Los Gatos Boulevard, Los Gatos, California 95032. Our telephone number is (408) 402-9400. Additional information about Akeena Solar is available on our website at http://www.akeena.com. The information on our web site is not incorporated herein by reference.

On August 11, 2006, we entered into a reverse merger transaction (the "Merger") with Fairview Energy Corporation, Inc. ("Fairview"). Since the stockholders of Akeena Solar owned a majority of the outstanding shares of Fairview common stock immediately following the Merger, and the management and board of Akeena Solar became the management and board of Fairview immediately following the Merger, the Merger was accounted for as a reverse merger transaction and Akeena Solar was deemed to be the acquirer.

During September 2007, we introduced our new solar panel technology ("Andalay"), which we believe will significantly reduce the installation time and costs, as well as provide superior reliability and aesthetics, when compared to other solar panel mounting products and technology. Andalay offers the following features: (i) mounts closer to the roof with less space in between panels; (ii) all black appearance with no unsightly racks underneath or beside panels; (iii) built-in wiring connections; (iv) approximately 70% fewer roof-assembled parts and approximately 50% less roof-top labor required; (v) approximately 25% fewer roof attachment points; (vi) complete compliance with the National Electric Code and UL wiring and grounding requirements. Pursuant to an agreement, Suntech Power Holdings Co. Ltd. ("Suntech") will provide us with volume manufacturing and delivery of our Andalay product used in our solar system installations. During January 2008, we also entered into a Licensing Agreement with Suntech. The terms of the Licensing Agreement authorize Suntech to distribute our Andalay product in Europe, Japan, and Australia commencing in January 2008. On August 5, 2008, we received U.S. Patent #7,406,800 from the United States Patent and Trademark Office which covers key claims of our Andalay solar panel technology, as well as U.S. Trademark #3481373 for registration of the mark "Andalay".

Results of Operations
   The following table sets forth, for the periods indicated, certain
information related to our operations, expressed in dollars and as a percentage
of net sales:

                                      Three Months Ended June 30,                          Six Months Ended June 30,
                                     2008                      2007                      2008                      2007
Net sales                   $  7,061,699     100.0 %  $  7,510,861     100.0 %  $ 19,310,071     100.0 %  $ 13,803,291     100.0 %
Cost of sales                  6,019,310      85.2 %     5,741,097      76.4 %    15,852,127      82.1 %    10,533,961      76.3 %
Gross profit                   1,042,389      14.8 %     1,769,764      23.6 %     3,457,944      17.9 %     3,269,330      23.7 %
Operating expenses:
Sales and marketing            2,128,929      30.2 %     1,314,285      17.5 %     4,245,223      22.0 %     2,082,416      15.0 %
General and
administrative                 4,039,943      57.2 %     2,358,374      31.4 %     9,052,300      46.9 %     3,996,235      29.0 %
Total operating expenses       6,168,872      87.4 %     3,672,659      48.9 %    13,297,523      68.9 %     6,078,651      44.0 %
Loss from operations          (5,126,483 )   (72.6 )%   (1,902,895 )   (25.3 )%   (9,839,579 )   (51.0 )%   (2,809,321 )   (20.3 )%
Other income (expense):
Interest income
(expense), net                    27,000       0.4 %       (21,417 )    (0.3 )%      161,939       0.8 %       (48,395 )    (0.4 )%
Total other income
(expense)                         27,000       0.4 %       (21,417 )    (0.3 )%      161,939       0.8 %       (48,395 )    (0.4 )%
Loss before provision for
income taxes                  (5,099,483 )   (72.2 )%   (1,924,312 )   (25.6 )%   (9,677,640 )   (50.2 )%   (2,857,716 )   (20.7 )%
Provision for income
taxes                                  -       0.0 %             -       0.0 %             -       0.0 %             -       0.0 %
Net loss                    $ (5,099,483 )   (72.2 )% $ (1,924,312 )   (25.6 )% $ (9,677,640 )   (50.2 )% $ (2,857,716 )   (20.7 )%

Three Months Ended June 30, 2008 as compared to Three Months Ended June 30, 2007

Net sales

Net sales totaled $7.1 million for the three months ended June 30, 2008 as compared to $7.5 million for the same period in 2007, or a decrease of 6.0% from 2007. During the three months ended June 30, 2008, our kilowatts installed was down slightly from the same period of 2007 primarily as a result of the unfavorable economic conditions surrounding tightening consumer credit and the uncertainty regarding the solar investment tax credit (ITC) extension.

Cost of sales

Cost of sales, including all installation expenses, during the three months ended June 30, 2008 was 85.2% of net sales as compared to 76.4% in 2007. This is primarily the result of higher than anticipated costs on commercial projects that were completed during the three months ended June 30, 2008 as compared to the same period of the prior year. Additionally, we had a favorable warranty adjustment during the three months ended June 30, 2007 which resulted in a 2.7% improvement of the prior year gross profit margin. Gross profit margin for the three months ended June 30, 2008 was 14.8% of net sales compared to 23.6% in 2007.

Sales and marketing expenses

Sales and marketing expenses for the three months ended June 30, 2008 were 30.2% of net sales as compared to 17.5% of net sales during the same period of the prior year. Sales and marketing expenses were approximately $2.1million for the three months ended June 30, 2008 as compared to approximately $1.3 million for the same period in 2007. This increase is mainly due to higher sales and marketing payroll and sales commissions related to 35 additional sales and marketing employees as of June 30, 2008 compared to June 30, 2007. Advertising, public relations, trade shows, conferences and sales and marketing stock-based compensation also increased over the same period of 2007.

General and administrative expenses

General and administrative expenses for the quarter ended June 30, 2008 were 57.2% of net sales as compared to 31.4% of net sales during the same period of the prior year. General and administrative expenses increased to approximately $4.0 million for the three months ended June 30, 2008 compared to approximately $2.4 million for the three months ended June 30, 2007. We increased our overall general and administrative headcount by two positions as of June 30, 2008 compared to June 30, 2007. General and administrative stock-based compensation increased compared to the prior year. Additionally, we were operating 12 offices as of June 30, 2008 compared to 7 offices as of June 30, 2007.

Interest expense

A credit line of $25.0 million is available to us under our credit facility (the "2007 Credit Facility"), as evidenced by a loan and security agreement with Comerica Bank, entered into on January 29, 2007 and subsequently amended. Approximately $20.5 million in additional borrowing capacity was available at June 30, 2008. Interest expense was approximately $84,000 for the three months ended June 30, 2008 as compared to interest expense of approximately $21,000 during the same period of 2007. Interest expense for the three months ended June 30, 2008 was offset by interest income of approximately $111,000.

Income taxes

During the three months ended June 30, 2008 and June 30, 2007, there was no income tax expense or benefit for federal and state income taxes reflected in the Company's condensed consolidated statements of operations due to the Company's net loss and a valuation allowance on the resulting deferred tax asset.

Six Months Ended June 30, 2008 as compared to Six Months Ended June 30, 2007

Net sales

Net sales totaled $19.3 million for the six months ended June 30, 2008 as compared to $13.8 million for the same period in 2007. The increase over the same period of the prior year is due to a higher volume of both residential and commercial installations for the six months ended June 30, 2008 as compared to 2007. The increased volume reflects a widening acceptance of photovoltaic technology on the consumer level. We were operating 12 offices as of June 30, 2008 compared to 7 offices as of June 30, 2007.

Cost of sales

Cost of sales, including all installation expenses, during the six months ended June 30, 2008 was 82.1% of net sales as compared to 76.3% in 2007. This is the result of higher equipment costs and higher than anticipated costs on commercial projects that were completed during the six months ended June 30, 2008 as compared to the same period of the prior year. Gross profit margin for the six months ended June 30, 2008 was 17.9% of net sales, as compared to 23.7% in 2007. Additionally, we had a favorable warranty adjustment during the three months ended June 30, 2007 which resulted in an improved gross profit margin for the prior year.

Sales and marketing expenses

Sales and marketing expenses for the six months ended June 30, 2008 were 22.0% of net sales as compared to 15.0% of net sales during the same period of the prior year. Sales and marketing expenses were approximately $4.2 million for the six months ended June 30, 2008 as compared to approximately $2.1 million for the same period in 2007. This increase is mainly due to higher sales and marketing payroll and sales commissions related to 35 additional sales and marketing employees as of June 30, 2008 compared to June 30, 2007. Advertising, public relations, trade shows, conferences and sales and marketing stock-based compensation also increased over the same period of 2007.

General and administrative expenses

General and administrative expenses for the six months ended June 30, 2008 were 46.9% of net sales as compared to 29.0% of net sales during the same period of the prior year. General and administrative expenses increased to approximately $9.1 million for the six months ended June 30, 2008 compared to approximately $4.0 million for the six months ended June 30, 2007. We increased our overall general and administrative headcount by two positions as of June 30, 2008 compared to June 30, 2007. General and administrative stock-based compensation increased compared to the prior year. Additionally, we were operating 12 offices as of June 30, 2008 compared to 7 offices as of June 30, 2007.

Interest expense

Interest expense was approximately $98,000 for the six months ended June 30, 2008 as compared to interest expense of approximately $48,000 during the same period of 2007. Interest expense for the six months ended June 30, 2008 was offset by interest income of approximately $260,000.

Income taxes

During the six months ended June 30, 2008 and June 30, 2007, there was no income tax expense or benefit for federal and state income taxes reflected in the Company's condensed consolidated statements of operations due to the Company's net loss and a valuation allowance on the resulting deferred tax asset.

Liquidity and capital resources

Our 2007 Credit Facility is evidenced by a loan and security agreement with Comerica Bank, entered into on January 29, 2007 and subsequently amended (the "Security Agreement"). Borrowings under the 2007 Credit Facility bear interest at prime minus 0.5%, payable on the first of each month. Pursuant to a modification in August 2008, the 2007 Credit Facility matures on October 1, 2009, at which time all outstanding amounts will become due and payable. Interest was calculated based on Prime minus 0.5% (4.50%) at June 30, 2008. We are required to maintain or achieve certain financial ratios and covenants under the 2007 Credit Facility. While management believes our forecasted objectives are reasonable, actual results may differ materially from those projected, which may adversely affect the Company's ability to meet one or more of the financial ratios and covenants. The Company was in compliance with these financial ratios and covenants at June 30, 2008.

Our primary capital requirement is to fund purchases of solar panels and inverters. Significant sources of liquidity are cash on hand, cash flows from operating activities, working capital, borrowings from our revolving line of credit and proceeds from equity financings. As of June 30, 2008, we had approximately $13.0 million in cash on hand, excluding $4.5 million of restricted cash, and approximately $20.5 million in additional borrowing capacity was available under our 2007 Credit Facility at June 30, 2008.

Cash flows used in operating activities were approximately $11.0 million and approximately $5.3 million for the six months ended June 30, 2008 and 2007, respectively. Accounts payable decreased by approximately $5.3 million, while our overall state rebates receivable balances and trade receivable balances decreased by approximately $848,000.

Cash flows used in investing activities were approximately $454,000 and approximately $899,000, respectively, for the six months ended June 30, 2008 and 2007. During 2008, we acquired computer equipment, office equipment, office furniture and other fixed assets primarily for our corporate office location.

Cash flows provided by financing activities were approximately $2.2 million and approximately $19.3 million, respectively, for the six months ended June 30, 2008 and 2007. During the first half of 2008, we borrowed approximately $4.5 million and we received proceeds of approximately $2.3 million from the exercise of warrants for shares of our common stock. During the first half of 2007, we raised proceeds of approximately $16.6 million, before cash paid for placement agent fees and registration fees of approximately $1.0 million, from the issuance of our common stock under private placements. In addition, approximately $3.0 million was borrowed during the six months ended June 30, 2007 under our 2007 Credit Facility.

Contractual obligations

                                              Payments Due
                                 Less than                                 More than
Obligation            Total        1 year       1-3 years     4-5 years      5 years
Operating leases   $ 1,597,622   $   785,254   $   783,106   $    29,262   $         -
Vehicle loans          863,580       219,357       591,411        52,812             -
Capital leases          59,894        17,991        41,903             -             -
                   $ 2,521,096   $ 1,022,602   $ 1,416,420   $    82,074   $         -

Application of critical accounting policies and estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires estimates and assumptions that affect the reporting of assets, liabilities, sales and expenses, and the disclosure of contingent assets and liabilities. Note 2 to our consolidated financial statements for the years ended December 31, 2007 and 2006 as filed in our Annual Report on Form 10-KSB provides a summary of our significant accounting policies, which are all in accordance with generally accepted accounting policies in the United States. Certain of our accounting policies are critical to understanding our consolidated financial statements, and it should be noted that their application requires management to make assumptions about future results and depends to a large extent on management's judgment, because past results have fluctuated and are expected to continue to do so in the future.

We believe that the application of the accounting policies described in the following paragraphs is highly dependent on critical estimates and assumptions that are inherently uncertain and highly susceptible to change. For all these policies, we caution that future events rarely develop exactly as estimated, and the best estimates routinely require adjustment. On an ongoing basis, we evaluate our estimates and assumptions, including those discussed below.

Revenue recognition. Revenue from sales of products is recognized when:
(1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the sale price is fixed or determinable, and
(4) collection of the related receivable is reasonably assured. In general, we recognize revenue upon completion of a system installation for residential installations and we recognize revenue under the percentage-of-completion method for commercial installations. Revenue recognition methods for revenue streams that fall under other categories are determined based on facts and circumstances.

Long-lived assets. We periodically review our property and equipment and identifiable intangible assets for possible impairment whenever facts and circumstances indicate that the carrying amount may not be fully recoverable. Assumptions and estimates used in the evaluation of impairment may affect the carrying value of long-lived assets, which could result in impairment charges in future periods. Significant assumptions and estimates include the projected cash flows based upon estimated revenue and expense growth rates and the discount rate applied to expected cash flows. In addition, our depreciation and amortization policies reflect judgments on the estimated useful lives of assets.

Goodwill and other intangible assets. We do not amortize goodwill, but rather test goodwill for impairment at least annually. A customer list was amortized over the estimated useful life of the list, which was determined to be eighteen months.

Stock-based compensation. We measure the cost of services received in exchange for equity-based awards based on the grant date fair value. Pre-vesting forfeitures are estimated at the time of grant and we periodically revise those estimates in subsequent periods if actual forfeitures differ from those estimates. Equity-based compensation is recognized for equity-based awards expected to vest.

Warranty Provision. We warrant our products for various periods against defects in material or installation workmanship. We provide for a 5-year warranty or a 10-year warranty on the installation of a system and all equipment and incidental supplies other than solar panels and inverters that are covered under the manufacturer warranty. The manufacturer warranty on the solar panels and the inverters range from 5 to 25 years. We assist the customer in the event that the manufacturer warranty needs to be used to replace a defective panel or inverter. We record a provision for our installation warranty, within cost of sales, based on historical experience and future expectations of the probable cost to be incurred in honoring its warranty commitment.

Seasonality

Our quarterly installation and operating results may vary significantly from quarter to quarter as a result of seasonal changes in weather as well as changes in state or Federal subsidies. Historically, our sales are highest during the third and fourth quarters as a result of good weather and robust bookings in the second quarter.