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 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, 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 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.

Results of Operations

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



                                                            Three Months Ended
                                                                March 31,
                                                            2009          2008
  Net revenue                                                100.0%        100.0%
  Cost of goods sold                                          75.8%         72.0%

  Gross profit                                                24.2%         28.0%


  Expenses:
  Selling and operating                                       43.2%         31.3%
  General and administrative                                   4.6%          4.1%

  Total expenses                                              47.8%         35.4%


  Loss before income taxes and noncontrolling interest       -23.6%         -7.4%

  Income tax benefit                                          -9.2%         -2.9%


  Net loss                                                   -14.4%         -4.5%

  Net income attributable to noncontrolling interest             -%         -0.2%


  Net loss attributable to Real Goods Solar, Inc.            -14.4%         -4.7%

Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008

Net revenue. Net revenue increased $3.0 million, or 45.1%, to $9.5 million during the first quarter of 2009 from $6.6 million during the first quarter of 2008. This increase in net revenue is primarily the result of our acquisitions of Independent Energy Systems in the third quarter of 2008 and Regrid Power in the fourth quarter of 2008.

Gross profit. Gross profit increased $0.5 million, or 25.3%, to $2.3 million during the first quarter of 2009 from $1.8 million during the first quarter of 2008. As a percentage of net revenue, gross profit decreased to 24.2% during the first quarter of 2009 from 28.0% during the first quarter of 2008. The decrease in gross profit percentage partially reflects the consolidation of acquisitions which have traditionally produced lower gross profit margins.

Selling and operating expenses. Selling and operating expenses increased $2.1 million, or 100.2%, to $4.1 million during the first quarter of 2009 from $2.1 million during the first quarter of 2008. As a percentage of net revenue, selling and operating expenses increased to 43.2% during the first quarter of 2009 from 31.3% during the first quarter of 2008. The increase in selling and operating expenses primarily reflects the impact of the consolidation of Regrid Power, integration costs related to our 2008 acquisitions and severance costs from a reduction in work force.

General and administrative expenses. General and administrative expenses increased $167,000 to $437,000 during the first quarter of 2009 from $270,000 during the first quarter of 2008. As of percentage of net revenue, general and administrative expenses increased to 4.6% during the first quarter of 2009 from 4.1% during the first quarter of 2008, reflecting an increase in our infrastructure to support our recent acquisitions, severance costs from a reduction in work force, and incremental costs associated with being a public company.

Net loss attributable to Real Goods Solar, Inc. As a result of the above factors, net loss attributable to Real Goods Solar, Inc. increased $1.1 million to $1.4 million during the first quarter of 2009 from $0.3 million during the first quarter of 2008. Net loss per share attributable to our shareholders increased $0.05 per share to a net loss of $0.08 per share during the first quarter of 2009 from $0.03 per share during the first quarter of 2008.

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 our business in past years has been offset by the timing of 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, 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 March 31, 2009, 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:



                                                        Three Months Ended
                                                            March 31,
         (in thousands)                                 2009          2008
         Net cash provided by (used in):
         Operating activities                        $     (740)    $ (2,301)
         Investing activities                               (21)      (2,889)
         Financing activities                             1,309        6,257

         Net increase in cash and cash equivalents   $      548     $  1,067

Operating activities. Our operating activities used net cash of $0.7 million and $2.3 million during the first quarters of 2009 and 2008, respectively. Our net cash used in operating activities during the first quarter of 2009 was primarily attributable to decreased accounts payable of $4.5 million, net loss of $1.4 million and other noncash adjustments of $0.8 million, partially offset by decreased inventory and accounts receivable of $3.8 million and $2.0 million, respectively. Our net cash used in operating activities during the first quarter of 2008 was primarily attributable to decreased accounts payable and accrued liabilities of $1.3 million, the majority 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 deferred costs of $0.4 million, and the net loss and other noncash adjustments of $0.3 million.

Investing activities. Our investing activities used net cash of $21,000 and $2.9 million during the first quarters of 2009 and 2008, respectively. Our cash used in investing activities during the first quarter of 2009 was used to acquire property and equipment. The cash used in investing activities during the first quarter 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 $1.3 million and $6.3 million during the first quarters of 2009 and 2008, respectively. The financing provided during the first quarters of both 2009 and 2008 primarily reflects borrowings from Gaiam which were used to fund our daily operations and acquire Carlson Solar in January 2008. Each month we repay the balance owed to Gaiam as of the previous month end. The first quarter of 2008 also reflects prepayments of initial public offering fees of $0.5 million that ultimately were offset against the proceeds from the consummation of our initial public offering in May 2008.

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.

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 our operating leases:

(in thousands) Total < 1 year 1-3 years 3-5 years > 5 yrs Operating lease obligations $ 1,050 $ 558 $ 463 $ 29 $ -

To the extent we become entitled to utilize pre-IPO 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 May 13, 2008, the effective date of our tax sharing agreement with Gaiam. As of that date, we had net operating loss carryforwards, or NOLs, 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 NOLs expire beginning in 2020 if not utilized. Due to Gaiam's step acquisitions of our businesses, we experienced "ownership changes" as defined in the Internal Revenue Code. Accordingly, our use of these NOLs is limited by annual limitations described in the Internal Revenue Code. However, we expect our NOL balances at March 31, 2009 to be fully recoverable.

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 Annual Report on Form 10-K for the year ended December 31, 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.