The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our results of operation and financial condition. You should read this analysis in conjunction with our audited consolidated financial statements and related footnotes. This discussion and analysis contains statements of a forward-looking nature relating to future events or our future financial performance. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements, including those set forth in this Form 10-K.

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, beginning with our sale in 1978 of the first solar photovoltaic, or PV, panels in the United States. 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 high quality customer service in the solar energy market, which leads to a significant number of word-of-mouth referrals and new customers. In addition, our majority shareholder, Gaiam, is a leader in the sustainable and renewable energy lifestyle market and has a base of over 8 million direct customers, providing us additional lead generation for potential solar energy 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 features interactive demonstrations for renewable energy and environmentally sensible technologies and is the largest facility of its kind, with more than 2 million visitors since it opened in 1996.

Mergers and Acquisitions

Marin Solar, Inc.

On November 1, 2007, we purchased 100% ownership of Marin Solar for $3.2 million in cash, plus direct acquisition costs of approximately $0.2 million. The purchase agreement provides for additional consideration contingent upon the amount of revenue generated from certain potential customers and the collection of certain rebates. As additional consideration we granted to the sellers warrants to purchase 40,000 shares of our Class A common stock at an exercise price of $3.20 per share, which vested 50% upon our initial public offering. Following such initial vesting, 2% of the warrants will vest each month thereafter. The warrants have a seven year term.

Carlson Solar

On January 1, 2008, our 88.4% owned subsidiary acquired certain of the assets of and assumed certain liabilities from Carlson Solar for $3.2 million in cash, plus direct acquisition costs of approximately $0.2 million. As part of the acquisition, as additional consideration, we granted warrants to purchase 30,000 shares of our Class A common stock at an exercise price of $3.20 per share, which vested 50% upon our initial public offering. Following such initial vesting, 2% of the warrants will vest each month thereafter. The warrants have a seven year term. The assets acquired were determined to have all inputs and processes necessary for the transferred assets to continue to conduct normal operations after acquisition; accordingly, the purchase price was treated as a business combination pursuant to SFAS No. 141, Business Combinations. On May 23, 2008, we exchanged 280,000 shares of our Class A common stock for our current Chief Financial Officer's 11.6% ownership in Real Goods Carlson Inc.

Independent Energy Systems, Inc.

On August 1, 2008, we acquired 100% ownership of IES for $3.3 million in cash and $0.3 million worth of our Class A common stock, plus direct acquisition costs of approximately $0.2 million.

Regrid Power, Inc.

On October 1, 2008, we acquired 100% ownership of Regrid Power through a merger into one of our subsidiaries, for an aggregate of $3.8 million in cash and 2,047,256 shares of our Class A common stock, plus the assumption of certain liabilities, subject to post closing adjustments, plus direct acquisition costs of approximately $0.3 million. The total share consideration could be increased, up to a maximum of 800,000 shares, based on Regrid Power's revenue and earnings performance for the 12-month period ending September 30, 2009, but in no event will total consideration paid exceed one times trailing twelve months revenues.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value 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 have identified the following to be critical accounting policies whose application have a material impact on our reported results of operations, and which involve a higher degree of complexity, as they require us to make judgments and estimates about matters that are inherently uncertain.

Revenue Recognition

Revenue consists of solar energy system installation fees and sales of renewable and sustainable energy products. We recognize revenue from fixed price contracts using either the completed or percentage-of-completion method, based on the size of the solar energy system installation. We recognize revenue from solar energy system installations of less than 110 kilowatts, or kW, when the installation is substantially complete, while we recognize revenue from solar energy system installations equal to or greater than 110 kW on a percentage-of-completion basis, measured by the percentage of contract costs incurred to date to total estimated costs for each contract. We recognize revenue from the sale of renewable and sustainable energy products when the following four basic criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the seller's price to the buyer is fixed and determinable; and (4) collectibility is reasonably assured.

Goodwill

Goodwill represents the excess of the purchase consideration over the estimated fair value of assets acquired less liabilities assumed in a business acquisition. Goodwill is no longer amortized but is reviewed for impairment annually or more frequently if impairment indicators arise. We compare the estimated fair value of a reporting unit with its carrying amount, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its estimated fair value, the goodwill impairment test is performed to measure the amount of impairment loss. Since we operate in only one business segment, we assess impairment at the enterprise level. The annual process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment at many points during the analysis. In assessing our goodwill for impairment, we use a combination of factors, including comparable company market values and multiples of revenue to the extent the information is available. If comparable market information is insufficient, we expect to supplement our assessment with other approaches, such as present value techniques, which will require us to make estimates and judgments about our future cash flows. These cash flow forecasts will be based on assumptions that are consistent with the plans and estimates we use to manage our business. Application of alternative assumptions could yield significantly different results.

Purchase Accounting

We account for the acquisition of a controlling interest in a business using the purchase method. In determining the estimated fair value of certain acquired assets and liabilities, we make assumptions based upon historical and other relevant information and, in some cases, independent expert appraisals. Assumptions may be incomplete, and unanticipated events and circumstances may occur

that could affect the validity of such assumptions, estimates, or actual results. The estimated fair value of assets and liabilities acquired in recent business combinations are preliminary as of December 31, 2008. We expect to obtain information necessary to finalize the estimated values during 2009.

Stock-Based Compensation

As of January 1, 2006, we adopted the provisions of SFAS No. 123(R), Accounting for Stock-Based Compensation ("SFAS 123(R)"), which requires companies to recognize compensation cost for stock-based awards based on the estimated fair value of the award on date of grant. We measure compensation cost at the grant date based on the estimated fair value of the award and recognize compensation cost upon the probable attainment of a specified performance condition or over a service period. We use the Black-Scholes option pricing model to estimate the fair value for purposes of accounting and disclosures under SFAS 123(R). In calculating this fair value, there are certain highly subjective assumptions that we use, as disclosed in note 6 of the notes to our consolidated financial statements, consisting of estimated market value of our stock, the expected life of the option, risk-free interest rate, dividend yield, and volatility. The use of a different estimate for any one of these components could have a material impact on the amount of calculated compensation expense. We do not recognize share-based compensation expense unless the vesting of performance condition options is probable. Prior to our initial public offering, we determined the estimated fair value of our common stock at the date of grant of stock awards based on the combination of two factors: an independent offer to purchase a portion of us in exchange for preferred stock and the value of recent acquisitions.

Income Taxes

For financial reporting purposes, income tax expense and deferred income tax balances were calculated as if we were a separate entity and had prepared our own separate tax return. We provide for income taxes pursuant to the liability method as prescribed in SFAS No. 109, Accounting for Income Taxes. The liability method requires recognition of deferred income taxes based on temporary differences between financial reporting and income tax bases of assets and liabilities, using current enacted income tax rates and regulations. These differences will result in taxable income or deductions in future years when the reported amount of the asset or liability is recovered or settled, respectively. Considerable judgment is required in determining when these events may occur and whether recovery of an asset is more likely than not.

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 certain of our deferred tax assets as of the effective date of the tax sharing agreement, May 13, 2008. As of this date, we had NOL carryforwards of approximately $6.1 million, meaning that such potential future payments to Gaiam, which would be made over a period of several years, would therefore aggregate to approximately $2.4 million. These NOL carryforwards expire beginning in 2020 if not utilized. Due to Gaiam's step acquisitions of our company, we experienced "ownership changes" as defined in Section 382 of the Internal Revenue Code. Accordingly, our use of the NOL carryforwards is limited by annual limitations described in Sections 382 and 383 of the Internal Revenue Code. However, we expect our NOL balances at December 31, 2008 to be fully recoverable.

Effective January 1, 2007, we adopted the provisions of SFAS Interpretation No. 48, Accounting of Uncertainty in Income Taxes-An Interpretation of FASB Statement No. 109 ("FIN 48"). Under FIN 48, we must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. We measure the tax benefits recognized in the consolidated financial statements from such a position based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. Interpretations of and guidance surrounding income tax law and regulations change over time and may result in changes to our subjective assumptions and judgments which can materially affect amounts recognized in our consolidated financial statements.

Results of Operations

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

Net revenue. Net revenue increased $20.3 million, or 107.3%, to $39.2 million during 2008 from $18.9 million during 2007. This increase in net revenue primarily reflects additional revenue recognized as a result of the acquisition of Marin Solar in November 2007, the acquisition of Carlson Solar in January 2008, the acquisition of IES in August 2008, and the acquisition of Regrid Power in October 2008.

Gross profit. Gross profit increased $3.9 million, or 60.8%, to $10.4 million during 2008 from $6.5 million during 2007. As a percentage of net revenue, gross profit decreased to 26.6% during 2008 from 34.3% during 2007. The decrease in gross profit percentage primarily reflects a shift in business towards solar installations and the acquisitions of Marin Solar, Carlson Solar and IES, which historically have produced lower margins.

Selling and operating expenses. Selling and operating expenses increased $6.5 million, or 109.1%, to $12.5 million during 2008 from $6.0 million during 2007. As a percentage of net revenue, selling and operating expenses increased to 31.9% during 2008 from 31.7% during 2007. The increase in selling and operating expenses resulted primarily from investments in personnel to support the revenue increases described above and the addition of costs associated with the acquisitions of Marin Solar, Carlson Solar, IES and Regrid Power.

General and administrative expenses. General and administrative expenses increased $1.2 million, or 376.6%, to $1.5 million during 2008 from $0.3 million during 2007. As a percentage of net revenue, general and administrative expenses increased to 3.9% during 2008 from 1.7% during 2007, primarily reflecting the costs associated with being a public company.

Impairment loss. Impairment loss of $27.2 million during 2008 represent a non-cash charge related to the impairment of goodwill and other intangible assets recorded as part of historical acquisitions. The impairment, resulting from the application of SFAS No. 142, Goodwill and Other Intangible Assets, was driven by the decline in the market price of our common shares and changes in the business climate for solar installations experienced in the fourth quarter.

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

Net revenue. Net revenue increased $2.1 million, or 12.6%, to $18.9 million during 2007 from $16.8 million during 2006. This increase in net revenue primarily reflects $1.3 million additional revenue recognized in the Northern California market as a result of the acquisition of Marin Solar in November 2007, with the majority of the remaining increase coming from increased penetration in existing markets.

Gross profit. Gross profit increased $0.5 million, or 9.2%, to $6.5 million during 2007 from $6.0 million during 2006. As a percentage of net revenue, gross profit decreased to 34.3% during 2007 from 35.4% during 2006. The decrease in gross profit percentage primarily reflects the acquisition of Marin Solar, which historically has produced lower margins.

Selling and operating expenses. Selling and operating expenses increased $1.0 million, or 20.7%, to $6.0 million during 2007 from $5.0 million during 2006. As a percentage of net revenue, selling and operating expenses increased to 31.7% during 2007 from 29.5% during 2006. The increase in selling and operating expenses resulted primarily from investments in personnel to support the revenue increases described above and the addition of costs associated with the acquisition of Marin Solar in November 2007.

General and administrative expenses. General and administrative expenses decreased $0.3 million, or 43.6%, to $0.3 million during 2007 from $0.6 million during 2006. As a percentage of net revenue, general and administrative expenses decreased to 1.7% during 2007 from 3.4% during 2006, reflecting the stabilization of our fixed costs.

Quarterly and Seasonal Fluctuations

The following table sets forth our unaudited quarterly results of operations during each of the quarters in 2008 and 2007. We believe this unaudited financial information includes all adjustments, consisting solely of normal recurring accruals and adjustments, necessary for a fair presentation of the results of operations for the quarters presented. This financial information should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Form 10-K. The results of operations for any quarter are not necessarily indicative of future results of operations.

(in thousands, except per share data)                   Fiscal Year 2008 Quarters Ended
                                          March 31       June 30       September 30       December 31
Net revenue                               $   6,568     $   8,841     $       10,333     $      13,479
Gross profit                                  1,837         2,638              2,806             3,161
Income (loss) before income taxes and
minority interest                              (489 )         (48 )             (363 )         (29,640 )(a)
Net income (loss)                              (306 )         (27 )             (226 )         (27,396 )
Diluted net income (loss) per share       $   (0.03 )   $    0.00     $        (0.01 )   $       (1.53 )
Weighted average shares
outstanding-diluted                          10,000        13,085             15,816            17,889

(in thousands, except per share data)                         Fiscal Year 2007 Quarters Ended
                                               March 31         June 30      September 30        December 31
Net revenue                                    $   4,364 (b)    $  4,514    $        4,279      $       5,765
Gross profit                                       1,488           1,763             1,285              1,960
Income (loss) before income taxes                     72             275              (206 )               45
Net income (loss)                                     40             151              (113 )               24
Diluted net income (loss) per share            $    0.00        $   0.02    $        (0.01 )    $        0.00
Weighted average shares outstanding-diluted       10,000          10,000            10,000             10,000

(a) During the fourth quarter of 2008, we recognized a $27.2 million charge for impaired goodwill and other intangibles. See Note 11, Asset Impairment.

(b) Revenue for this seasonally weak quarter was unusually strong as a result of the decline and change in administration of California rebates at the end of 2006 and newly available federal tax credits, prompting a higher number of installations in the first quarter of 2007.

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. With regards to our renewable and sustainable energy products sold through catalogs and the Internet, sales tend to peak during the spring and end of year holiday seasons.

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, development of renewable energy products, 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 cost of ongoing upgrades to 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 December 31, 2008, and we do not presently have any plans for future material capital expenditures. In the past 18-months, we acquired four solar energy system installation businesses. 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:



                                                      Years ended December 31,
    (in thousands)                                2008          2007          2006
    Net cash provided by (used in):
    Operating activities                        $ (10,228 )   $   1,306     $  (2,049 )
    Investing activities                           (9,652 )      (3,378 )         (42 )
    Financing activities                           31,677         2,366         2,125

    Net increase in cash and cash equivalents   $  11,797     $     294     $      34

Operating activities. Our operating activities used net cash of $10.2 million during 2008 and provided net cash of $1.3 million during 2007. Our net cash used in operating activities during 2008 was primarily attributable to a net loss, adjusted for non-cash items, of $2.7 million, cash used by increases in accounts receivable of $1.8 million, inventory of $3.7 million, other current assets of $1.1 million, and decreases in accrued liabilities of $1.5 million and deferred revenue of $2.5 million, partially offset by cash provided by

increases in accounts payable of $1.8 million and deferred costs on uncompleted contracts and advertising of $1.1 million. Approximately $8.6 million of the uses of cash are due to the consolidation of liabilities assumed in business acquisitions. Our net cash generated from operating activities during 2007 was primarily attributable to cash provided by increased accounts payable of $0.7 million and increased deferred revenue on uncompleted contracts of $0.6 million, partially offset by uses of funds resulting from increased deferred costs on uncompleted contracts of $0.5 million.

Investing activities. Our investing activities used net cash of $9.7 million and $3.4 million during 2008 and 2007, respectively. The cash used in investing activities during 2008 was used primarily to acquire Carlson Solar on January 1, 2008, Independent Energy Systems on August 1, 2008 and Regrid Power on October 1, 2008. The cash used in investing activities during 2007 was used primarily to acquire Marin Solar on November 1, 2007.

Financing activities. Our financing activities provided net cash of $31.7 million and $2.4 million during 2008 and 2007, respectively. The cash provided by financing activities during 2008 came from our initial public offering of common stock in May 2008 less loan amounts repaid to Gaiam and the settlement of the balance on a line of credit assumed in an acquisition. The cash provided by financing activities during 2007 came from Gaiam and was used to fund our daily operations and to acquire Marin Solar in November of 2007.

We believe our available cash and cash expected to be generated from operations 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.

Contractual Obligations

We have commitments under operating leases and various service agreements with Gaiam (see note 10 to our notes to consolidated financial statements), 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 our operating leases:

(in thousands) Total < 1 year 1-3 years 3-5 years > 5 yrs Operating lease obligations $ 1,196 $ 590 $ 566 $ 40 $ -

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 certain of our deferred tax assets as of the effective date of the tax sharing agreement, May 13, 2008. As of this date, we had net operating loss carryforwards, or NOLs, . . .