You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this document. This section is designed to provide information that will assist readers in understanding our condensed consolidated financial statements, changes in certain items in those statements from period to period, the primary factors that caused those changes and how certain accounting principles, policies and estimates affect the condensed consolidated financial statements.

Overview

We are a leading residential solar energy integrator. We offer turnkey services to our solar energy system customers, including design, procurement, permitting, build-out, grid connection, financing referrals and warranty and customer satisfaction activities. Our solar energy systems use high-quality solar PV modules from manufacturers such as Sharp, SunPower and Kyocera Solar. We use proven technologies and techniques to help customers achieve meaningful savings by reducing their utility costs. In addition, we help customers lower their emissions output and reliance upon fossil fuel energy sources.

We have 30 years of experience in residential solar energy and believe we have installed more residential solar energy systems in the United States than any other company, including more than 2,600 residential and small commercial solar energy systems. In addition, we have sold a variety of solar products to more than 30,000 customers since our founding.

Our focused customer acquisition approach and our efficiency in converting leads into customers enable us to have what we believe are low customer acquisition costs. We believe that our Real Goods brand has a national reputation for the highest quality customer service in the solar energy market, which leads to a significant number of word-of-mouth referrals and new customers. We also generate leads by selling solar and other renewable energy and sustainable living products and resources through our nationally distributed catalog and website, including books and DVDs on renewable energy and sustainable living, products for solar and other water heating, green building products and systems, air purification products, water conservation and purification products, and other solar and sustainable living related products. Our Solar Living Center in Hopland, California features interactive demonstrations for renewable energy and environmentally sensible technologies and is the largest facility of its kind, with approximately 2 million visitors since it opened in 1996.

Results of Operations

The following table sets forth certain financial data as a percentage of revenue
for the periods indicated:



                                                       Three Months Ended        Six Months Ended
                                                            June 30,                 June 30,
                                                      2008           2007        2008         2007
Net revenue                                            100.0 %        100.0 %     100.0 %     100.0 %
Cost of goods sold                                      70.2 %         60.9 %      71.0 %      63.4 %

Gross profit                                            29.8 %         39.1 %      29.0 %      36.6 %


Expenses:
Selling and operating                                   27.8 %         31.8 %      29.3 %      31.1 %
General and administrative                               3.5 %          1.2 %       3.8 %       1.6 %

Total expenses                                          31.3 %         33.0 %      33.1 %      32.7 %


Income (loss) from operations                           (1.5 )%         6.1 %      (4.1 )%      3.9 %

Interest income                                          1.0 %           -  %       0.6 %        -  %
Income tax expense (benefit)                            (0.2 )%         2.7 %      (1.4 )%      1.8 %
Minority interest in net (income) loss of
consolidated subsidiaries, net of tax                     -  %           -  %        -  %        -  %

Net income (loss)                                       (0.3 )%         3.4 %      (2.1 )%      2.1 %

Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007

Net revenue. Net revenue increased $4.3 million, or 95.9%, to $8.8 million during the second quarter of 2008 from $4.5 million during the second quarter of 2007. This increase in net revenue is primarily the result of our acquisitions of Marin Solar in the fourth quarter of 2007 and Carlson Solar in the first quarter of 2008, as well as internal growth.

Gross profit. Gross profit increased $0.9 million, or 49.6%, to $2.6 million during the second quarter of 2008 from $1.8 million during the second quarter of 2007. As a percentage of net revenue, gross profit decreased to 29.8% during the second quarter of 2008 from 39.1% during the second quarter of 2007. The decrease in gross profit percentage partially reflects the acquisition of Marin Solar, which had larger average installation sizes that traditionally produce lower gross profit margins.

Selling and operating expenses. Selling and operating expenses increased $1.0 million, or 71.4%, to $2.5 million during the second quarter of 2008 from $1.4 million during the second quarter of 2007. As a percentage of net revenue, selling and operating expenses decreased to 27.8% during the second quarter of 2008 from 31.8% during the second quarter of 2007. The increase in selling and operating expenses resulted primarily from the addition of costs associated with the acquisitions of Marin Solar and Carlson Solar. The 400 basis point decrease in percentage of revenue was primarily the result of leveraging our expenses off a larger revenue base.

General and administrative expenses. General and administrative expenses increased $258,000 to $0.3 million during the second quarter of 2008 from $53,000 during the second quarter of 2007. As of percentage of net revenue, general and administrative expenses increased to 3.5% during the second quarter of 2008 from 1.2% during the second quarter of 2007, reflecting an increase in our infrastructure to support our recent acquisitions, public company costs, and costs related to our growth strategy.

Interest income. Interest income was $0.1 million for the second quarter of 2008 reflecting the investment of funds generated by our initial public offering.

Net income (loss). As a result of the above factors, net income decreased $0.2 million to a net loss of $27,000 during the second quarter of 2008 from net income of $0.2 million during the second quarter of 2007. Net income per share decreased $0.02 per share to $0.00 per share during the second quarter of 2008 from net income of $0.02 per share during the second quarter of 2007.

Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007

Net revenue. Net revenue increased $6.5 million, or 73.6%, to $15.4 million during the first half of 2008 from $8.9 million during the first half of 2007. This increase in net revenue is primarily the result of our acquisitions of Marin Solar in the fourth quarter of 2007 and Carlson Solar in the first quarter of 2008, as well as internal growth.

Gross profit. Gross profit increased $1.2 million, or 37.7%, to $4.5 million during the first half of 2008 from $3.3 million during the first half of 2007. As a percentage of net revenue, gross profit decreased to 29.0% during the first half of 2008 from 36.6% during the first half of 2007. The decrease in gross profit percentage partially reflects the acquisition of Marin Solar, which had larger average installation sizes that traditionally produce lower gross profit margins.

Selling and operating expenses. Selling and operating expenses increased $1.8 million, or 63.4%, to $4.5 million during the first half of 2008 from $2.8 million during the first half of 2007. As a percentage of net revenue, selling and operating expenses decreased to 29.3% during the first half of 2008 from 31.1% during the first half of 2007. The increase in selling and operating expenses resulted primarily from the addition of costs associated with the acquisitions of Marin Solar and Carlson Solar. The percentage of revenue decrease was primarily the result of leveraging our expenses off a larger revenue base.

General and administrative expenses. General and administrative expenses increased $0.4 million to $0.6 million during the first half of 2008 from $0.1 million during the first half of 2007. As of percentage of net revenue, general and administrative expenses increased to 3.8% during the first half of 2008 from 1.6% during the first half of 2007, reflecting an increase in our infrastructure to support our recent acquisitions, public company costs, and costs related to our growth strategy.

Interest income. Interest income was $0.1 million for the second quarter of 2008 reflecting the investment of funds generated by our initial public offering.

Net income (loss). As a result of the above factors, net income decreased $0.5 million to a net loss of $0.3 million during the first half of 2008 from net income of $0.2 million during the first half of 2007. Net income per share decreased $0.05 to a net loss of $0.03 per share during the first half of 2008 from net income of $0.02 per share during the first half of 2007.

Seasonality

Our quarterly net revenue and operating results for solar energy system installations are difficult to predict and have in the past and may in the future fluctuate from quarter to quarter as a result of changes in state, federal, or private utility company subsidies, as well as weather and other factors. We have historically experienced seasonality in our solar installation business, with the first quarter representing our slowest installation quarter of the year. Additionally, the fourth quarter is often impacted by unfavorable weather in certain geographic regions. Much of the seasonality in the business in previous quarters has been offset by changes in government activities as well as strong organic growth.

Liquidity and Capital Resources

Our capital needs arise from working capital required to fund our purchases of solar PV modules and inverters, capital related to acquisitions of new businesses, replacements, expansions and improvements to our infrastructure, and future growth. These capital requirements depend on numerous factors, including business acquisitions, the ability to attract new solar energy system installation customers, market acceptance of our product offerings, the level of expenditures for sales and marketing, the level of investment in support systems and facilities and other factors. The timing and amount of these capital requirements are variable and cannot accurately be predicted. We did not have any material commitments for capital expenditures as of June 30, 2008, and we do not presently have any plans for future material capital expenditures. We plan to continue to pursue business acquisition and other opportunities to expand our sales territories, technologies and products, and increase our sales and marketing programs as needed.

Cash Flows

The following table summarizes our primary sources (uses) of cash during the
periods presented:



                                                        Six Months Ended
                                                            June 30,
          (in thousands)                                 2008         2007
          Net cash provided by (used in):
          Operating activities                        $   (2,796 )   $  845
          Investing activities                            (2,988 )       (7 )
          Financing activities                            30,871       (769 )

          Net increase in cash and cash equivalents   $   25,087     $   69

Operating activities. Our operating activities used net cash of $2.8 million during the first half of 2008 and provided net cash of $0.8 million during the first half of 2007. Our net cash used in operating activities during the first half of 2008 was primarily attributable to decreased accounts payable, deferred revenue, and other accrued liabilities of $1.7 million, a significant portion of which represented the settlement, in the normal course of business, of liabilities assumed as part of the Marin Solar and Carlson Solar acquisitions, increased accounts receivable and other current assets of $1.5 million, and our net loss of $0.3 million, partially offset by noncash adjustments to the net loss of $0.3 million and decreased inventory and deferred costs of $0.3 million. Our net cash provided by operating activities during the first half of 2007 primarily resulted from decreased accounts receivable of $0.5 million, decreased inventory and deferred costs of $0.4 million, and net income and noncash adjustments to net income of $0.2 million each, partially offset by decreased accounts payable, accrued liabilities, and deferred revenue of $0.4 million.

Investing activities. Our investing activities used net cash of $2.9 million and $7,000 during the first half of 2008 and 2007, respectively. The cash used in investing activities during the first half of 2008 was used primarily to acquire Carlson Solar on January 1, 2008 for a net $2.9 million.

Financing activities. Our financing activities provided net cash of $30.9 million during the first half of 2008 and used net cash of $0.8 million during the first half of 2007. The financing net cash provided during the first half of 2008 primarily reflects net proceeds from our IPO of $48.2 million, partially offset by cash used to repay borrowings from Gaiam of $17.3 million that were used to acquire businesses and fund our daily operations.

We believe our available cash, cash expected to be generated from operations, and cash generated by the sale of Class A common stock should be sufficient to fund our business for the foreseeable future. However, our projected cash needs may change as a result of possible acquisitions, unforeseen operational difficulties, or other factors.

In the normal course of our business, we investigate, evaluate and discuss acquisition, joint venture, minority investment, strategic relationship and other business combination opportunities in the solar energy markets. For any future investment, acquisition, or joint venture opportunities, we may consider using then-available liquidity, issuing equity securities, or incurring additional indebtedness.

Off-Balance Sheet Arrangements

We do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as special purpose entities or variable interest entities, which have been established for the purpose of facilitating off-balance sheet arrangements or other limited purposes.

Contractual Obligations

We have commitments under operating leases and various service agreements with Gaiam, but do not have any outstanding commitments under long-term debt obligations or purchase obligations. The following table shows our commitments to make future payments under operating leases:

(in thousands) Total < 1 year 1-3 years 3-5 years > 5 yrs Operating lease obligations $ 369 $ 198 $ 171 $ 0 $ 0

After May 13, 2008, the date we ceased to be a member of Gaiam's consolidated group for federal income tax purposes and to the extent we become entitled to utilize loss carryforwards from our separate tax returns, we will distribute to Gaiam the tax effect (estimated to be 34% for federal income tax purposes) of the amount of such tax loss carryforwards so utilized. Accordingly, we recognized a valuation allowance against all of our tax loss carryforwards as of the effective date of the tax sharing agreement. As of May 13, 2008, such potential future payments to Gaiam, which would be made over a period of many years, aggregated to approximately $2.3 million.

Risk Factors

We wish to caution you that there are risks and uncertainties that could cause our actual results to be materially different from those indicated by forward looking statements that we make from time to time in filings with the Securities and Exchange Commission, news releases, reports, proxy statements, registration statements and other written communications as well as oral forward looking statements made from time to time by our representatives. These risks and uncertainties include, but are not limited to, those risks listed in our Registration Statement on Form S-1 (Registration No. 333-149092) which was declared effective May 7, 2008. Additional risks and uncertainties that we currently deem immaterial may also impair our business operations, and historical results are not necessarily an indication of the future results. Except for the historical information contained herein, the matters discussed in this analysis are forward-looking statements that involve risk and uncertainties, including, but not limited to, general economic and business conditions, competition, pricing, brand reputation, consumer trends, and other factors which are often beyond our control. We do not undertake any obligation to update forward-looking statements except as required by law.