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 and in our Annual Report on Form 10-K. 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 November 12, 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. Our Andalay panel technology 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. Suntech Power Holdings Co. Ltd. ("Suntech") and Kyocera Solar, Inc. ("Kyocera") have agreements with us to provide 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 from the United States Patent and Trademark Office U.S. Patent #7,406,800 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 March 31, 2009
                                                   2009                       2008
Net sales                                 $  7,594,590     100.0 %   $ 12,248,372     100.0 %
Cost of sales                                5,339,982      70.3 %      9,832,817      80.3 %
Gross profit                                 2,254,608      29.7 %      2,415,555      19.7 %
Operating expenses:
Sales and marketing                          1,654,121      21.8 %      2,116,294      17.3 %
General and administrative                   4,061,406      53.5 %      5,012,357      40.9 %
Total operating expenses                     5,715,527      75.3 %      7,128,651      58.2 %
Loss from operations                        (3,460,919 )   (45.6 )%    (4,713,096 )   (38.5 )%
Other income (expense):
Interest income (expense), net                 (76,541 )    (1.0 )%       134,939       1.1 %
Adjustment to the fair value of common
stock warrants                              (1,541,764 )   (20.3 )%             -       0.0 %
Total other income (expense)                (1,618,305 )   (21.3 )%       134,939       1.1 %
Loss before provision for income taxes      (5,079,224 )   (66.9 )%    (4,578,157 )   (37.4 )%
Provision for income taxes                           -       0.0 %              -       0.0 %
Net loss                                  $ (5,079,224 )   (66.9 )%  $ (4,578,157 )   (37.4 )%

Three Months Ended March 31, 2009 as compared to Three Months Ended March 31, 2008

Net sales

Net sales totaled $7.6 million for the three months ended March 31, 2009 as compared to $12.2 million for the same period in 2008, or a decrease of 38.0% from 2008. During the three months ended March 31, 2009, our kilowatts installed decreased from the same period of 2008 as a result of a decrease in commercial installations. During the three months ended March 31, 2009, we were operating seven offices in California and one office each in Colorado and Connecticut, as compared to eight offices in California and one office in New Jersey for the three months ended March 31, 2008. During March 2009, the offices in Colorado and Connecticut were closed due to a change in strategy from installation to distribution for those markets and as part of our cost reduction initiatives.

Cost of sales

Cost of sales as a percent of sales, including all installation expenses, during the three months ended March 31, 2009 was 70.3% of net sales as compared to 80.3% during the three months ended March 31, 2008. The decrease in cost of sales as a percent of sales was primarily due to lower panel costs and a decrease in installation labor due to efficiencies gained with of our Andalay panels. Gross profit margin for the three months ended March 31, 2009 was 29.7% of net sales compared to 19.7% for the three months ended March 31, 2008.

Sales and marketing expenses

Sales and marketing expenses for the three months ended March 31, 2009 were $1.7 million, or 21.8% of net sales as compared to $2.1 million, or 17.3% of net sales during the same period of the prior year. The decrease in sales and marketing expenses for the three months ended March 31, 2009 was primarily due to lower sales and marketing payroll and sales commissions related to a decrease by thirty-six in sales and marketing employees as of March 31, 2009 compared to March 31, 2008 and due to a decrease in stock-based compensation expense. Expenditures for advertising, public relations, trade shows and conferences were relatively consistent with the same period of 2008.

General and administrative expenses

General and administrative expenses for the three months ended March 31, 2009 were $4.1 million, or 53.5% of net sales as compared to $5.0 million, or 40.9% of net sales during the same period of the prior year. Items included in the three months ended March 31, 2009 included a non-cash charge of approximately $76,000 for future lease payments for office space in Connecticut and Colorado that we no longer occupy; and severance expense of approximately $72,000 related to a reduction in force in February 2009. Offsetting these expense increases were lower general and administrative payroll expenses of $465,000 as compared to the prior year due to a decrease in headcount. General and administrative stock-based compensation decreased approximately $448,000 as compared to the prior year.

Interest, net

Interest expense was approximately $113,000 for the three months ended March 31, 2009, related to our 2007 Credit Facility with Comerica Bank. During the first three months of March 31, 2009, interest expense was offset by interest income of approximately $36,000. Interest expense was approximately $14,000 during the same period in 2008, which was more than offset by interest income of $149,000.

Adjustment to the fair value of common stock warrants

During the three months ended March 31, 2009, a $1.5 million non-cash charge was incurred to adjust the fair value of common stock warrants as required by a new accounting rule. The new rule is EITF 07-05, "Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity's Own Stock." In accordance with the new rule, stock warrants that were previously accounted for as equity must now be accounted for as a liability with adjustments of fair value recorded on the income statement.

Income taxes

During the three months ended March 31, 2009 and March 31, 2008, 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

The current economic downturn presents us with challenges in meeting the working capital needs of our business. In recent years, we have incurred losses from operations and have undertaken several equity financing transactions to provide us with capital as we worked to grow our business. While our revenue has grown significantly over the last three years, our operating expenses and our need for working capital to support that growth has grown faster and occurred sooner than the resulting revenue growth. We have plans to reach breakeven cash flow from operations in the second half of 2009, but we have not reached that goal yet. We intend to address our working capital needs through a combination of expense reductions and careful management of our operations, along with ongoing efforts to raise additional equity and to obtain a replacement asset-backed credit facility.

We have taken recent cost reduction measures, including reductions in force and the announced closure of our Connecticut and Colorado offices. In February 2009, we eliminated approximately 45 positions, or approximately 25% of our workforce, and reduced the regular hours and salaries of our remaining workforce by 10%. We believe these measures will adjust our capacity to a level that reflects our current customer demand and our improved efficiency in sales, design and installation. We expect these changes to result in a significant reduction in our monthly operating expenses, as well as a corresponding reduction in the level of revenue we need to become break-even on the basis of our continuing operations. However even after these changes, we anticipate that we will continue to sustain losses in the near term, and we cannot assure investors that we will be successful in reaching break-even.

We recently completed a stock and warrant offering in March 2009 (described below). In addition to the proceeds from that offering, we are currently benefiting from a lower cost structure as a result our November 2008 reduction in force, our February 2009 cost reduction actions, and the utilization of our panel inventory on hand. We believe we can generate positive cash flow during 2009 due to the continued utilization of our panel inventory, the collection of receivables and our February 2009 cost reduction actions. We believe the combination of our improved gross margins (as a result of lower world-wide panel prices and our related fourth quarter 2008 inventory write-down to the lower of cost or market), a more streamlined cost structure, and tight expense control will allow us to achieve cash flow breakeven in the second half of 2009. In the event that our revenue is lower than anticipated, further staffing reductions and expense cuts could occur.

As an additional potential source of capital, the terms of our March 2009 equity offering provide the possibility for us to receive additional proceeds over the next several months upon the exercise of warrants, depending on market conditions. We have an effective shelf registration statement, permitting us to raise funds in the public markets from time to time. We are also pursuing discussions with banks for an asset-backed credit line. We believe funds generated by our operations and the amounts that should be available to us through debt and equity financing are adequate to fund our anticipated cash needs, at least through the next twelve months. The current economic downturn adds uncertainty to our anticipated revenue levels and to the timing of cash receipts, which are needed to support our operations. It also worsens the market conditions for seeking equity and debt financing. We currently anticipate that we will retain all of our earnings, if any, for development of our business and do not anticipate paying any cash dividends in the foreseeable future.

Our Line of Credit

On March 3, 2009, we entered into a Loan and Security Agreement (Cash Collateral Account) with Comerica Bank, dated as of February 10, 2009 (the "2009 Bank Facility"), which replaced and amended our 2007 Credit Facility with Comerica Bank. The 2009 Bank Facility has a termination date of January 1, 2011. We fully repaid the $17.2 million outstanding principal balance as of March 3, 2009 on the 2007 Credit Facility by using our restricted cash balance that was on deposit with Comerica. Under the 2009 Bank Facility, our credit facility with Comerica has a limit of $1.0 million, subject to our obligation to maintain cash as collateral for any borrowings incurred or any letters of credit issued on our behalf. The 2009 Bank Facility no longer includes an asset-based line of credit, and Comerica Bank has released its security interest in our inventory, accounts receivable, and other assets (other than the cash collateral account as provided in the 2009 Bank Facility). The 2009 Bank Facility does not include any ongoing minimum net worth or other financial covenants, and we are in compliance with the terms of the 2009 Bank Facility as of March 12, 2009.

Equity Financing Activity

On March 3, 2009, we closed a registered offering of securities pursuant to a securities purchase agreement with certain investors, dated February 26, 2009 (the "March 2009 Offering"). Net proceeds to us from the offering are estimated to be $1.557 million, after deducting the placement agents' fees and estimated expenses. In the March 2009 Offering, we sold units consisting of an aggregate of (i) 1,785,714 shares of Common Stock at a price of $1.12 per share; (ii) 2,000 shares of Series A Preferred Stock which are convertible into a maximum aggregate of 539,867 shares of Common Stock; (iii) Series E Warrants to purchase up to 1,339,286 shares of Common Stock at a strike price of $1.34 per share, which warrants are not exercisable until six months after the closing and have a term of seven years from the date of first exercisability; (iv) Series F Warrants to purchase up to an aggregate of 540,000 shares of Common Stock (subject to reduction share for share to the extent shares of Common Stock are issued upon conversion of the Series A Preferred Stock) at a strike price of $1.12 per share, which warrants are immediately exercisable and have a term of 150 trading days from the Closing; and (v) Series G Warrants to purchase up to an aggregate of 2,196,400 shares of Common Stock at a strike price of $1.12 per share, which warrants are immediately exercisable and have a term of 67 trading days from the Closing. During March, the 2,000 shares of Series A Preferred Stock issued in the financing subsequently converted into 539,867 shares of Common Stock. As a result of issuance of the conversion shares, the shares of Common Stock subject to purchase under the Series F Warrants were reduced by 539,867 shares.

On April 20, 2009, we entered into an amendment agreement (the "Amendment Agreement") with investors who had previously acquired Series G Warrants to purchase up to an aggregate of 2,196,400 shares of Common in the March 2009 Offering(the "Original Series G Warrants"). The Original Series G Warrants were immediately exercisable and had a term of 67 trading days from the date of original issuance. In the Amendment Agreement, the investors agreed to exercise 425,000 of their Original Series G Warrants, with gross proceeds to us of $476,000. In conjunction with that exercise, we agreed to amend the terms of the remaining Original Series G Warrants, such that the unexercised balance of the Original Series G Warrants have a term that is extended until August 10, 2009 (the "Extended Term"), and to issue to the investors additional, newly issued Series G Warrants on the same terms as the amended Original Series G Warrants (with the Extended Term) to purchase up to an aggregate of 1,275,000 shares of Common Stock at a strike price of $1.12 per share (the "New Series G Warrants"). The closing of the transactions contemplated by the Amendment Agreement and the issuance of the New Series G Warrants took place on April 20, 2009. The Series G Warrants include a "put" feature which allows us to require the holder to exercise those warrants atour election, commencing 31 days from the date of issuance, provided that specified trading price and volume conditions are satisfied (including that (i) the volume weighted average price of our stock has been not less than $1.30 per share and (ii) the daily trading volume more than $175,000 for at least four out of five consecutive trading days prior to each exercise of a put right during the term of such warrants).

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 March 31, 2009, we had approximately $2.9 million in cash and cash equivalents. As of March 31, 2009, we had approximately $1.0 million in additional borrowing capacity available under our 2009 Bank Facility.

Cash flows from operating activities were approximately $2.6 million for the three months ended March 31, 2009, compared with cash used in operating activities of approximately $7.2 million for the three months ended March 31, 2008. A $3.4 million decrease in inventory, a $2.2 million decrease in accounts receivable and a $1.5 million decrease in prepaid expenses and other current assets were partially offset by a $918,000 decrease in accounts payable and a $608,000 decrease in accrued liabilities and accrued warranty. During the quarter ended March 31, 2009, we used existing solar panel inventory and did not purchase any solar panels. Accounts receivable decreased as a result of lower revenue while the decrease in prepaid expenses and other current assets and the decrease in accounts payable and accrued liabilities and accrued warranty were primarily due to the timing of payments. During the quarter ended March 31, 2008, our overall state rebates receivable balances and trade receivable balances increased by approximately $2.4 million while accounts payable decreased by approximately $3.2 million.

During the quarter ended March 31, 2009, no cash was used for investing activities. Cash flows used in investing activities for the quarter ended March 31, 2008 were approximately $219,000, primarily for the purchase of property and equipment.

Cash flows provided by financing activities were approximately $76,000 for the three months ended March 31, 2009 compared with approximately $1.2 million for the three months ended March 31, 2008. During the first three months of 2009, we repaid the outstanding balance on our 2007 Credit Facility of $18.7 million utilizing $17.5 million of restricted cash and we received proceeds for the issuance of common shares pursuant to our stock offering of $1.4 million, net of fees. For the first three months of 2008, we borrowed approximately $1.5 million and we received proceeds of approximately $1.2 million from the exercise of warrants of our common stock.

Contractual Obligations

                                                  Payments Due
                                    Less than                                      More than
Obligation            Total           1 year        1-3 years       4-5 years        5 years
Operating leases   $ 1,100,245     $    653,484     $  446,761     $         -     $         -
Vehicle loans          755,178          653,484        523,009          12,293               -
Capital leases          38,541           22,887         15,655               -               -
                   $ 1,893,965     $    896,247     $  985,425     $    12,293     $         -

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 ending December 31, 2008 and 2007 as filed in this Annual Report on Form 10-K 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, because 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. 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.

Inventory. Inventory is stated at the lower of cost (on an average basis) or market value. We determine cost based on our weighted-average purchase price and include both the costs of acquisition and the shipping costs in our inventory. We regularly review the cost of inventory against its estimated market value and record a lower of cost or market write-down to cost of goods sold, if any inventory has a cost in excess of estimated market value. Our inventory generally has a long life cycle and obsolescence has not historically been a significant factor in its valuation.

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 is being 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 period 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. The manufacturer warranty on solar panels and the inverters have a warranty period range of 5-25 years. We assist the customer in the event that the manufacturer warranty needs to be used to replace a defective panel or inverter. We provide for 5-year and 10-year warranties 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. We record a provision for the 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.

Recent Accounting Pronouncements

Effective January 1, 2009, the Company adopted the provisions of Emerging Issues . . .