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 September 30, 2009, we had seven offices. Our offices are located in Los Gatos, Fresno (Clovis), Lake Forest, Santa Rosa, Palm Springs, San Diego and Thousand Oaks (Westlake Village), California. 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 has significantly reduced 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. 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."

Concentration of Risk

A large portion of our recent sales and accounts receivable relate to sales of our systems to SunRun, a company that finances the purchase of residential solar systems and offers home solar power as a monthly service for consumers. As one of the available financing alternatives for residential customers, we may sell and install residential solar power systems financed for homeowners through SunRun. SunRun pays us for the system, owns the residential solar system and sells the electricity that is generated from that system to the homeowner. In the three and nine months ended September 30, 2009, $3.4 million and $6.6 million, respectively, of our net sales were derived from SunRun, representing 43.8% and 31.3%, respectively, of our net sales. As of September 30, 2009, we had $1.0 million in accounts receivable from SunRun, which represented 23.0% of our gross accounts receivable. If sales of our solar power systems that are financed through SunRun decline or cease, or if SunRun fails to pay us, our operating results could decline.

Contingencies

A U.S. Federal Custom Agency ruling from the New York region (NY Ruling) from January 9, 2009 is imposing a 2.5% tariff on the solar module imports of one U.S. based solar company. The tariff classification ordered in the NY Ruling is different than the one historically used in the solar industry for module imports. We along with the solar industry's main trade group, SEIA (Solar Energy Industry Association), are evaluating the NY Ruling both technically and legally. We have obtained a legal opinion that states we are currently categorizing our solar module imports under the correct U.S. tariff classification. However, we have reserved $38,000 under accrued liabilities in our condensed consolidated balance sheet as of September 30, 2009 in the event that the current classification being used industry wide for solar module imports is changed to impose the 2.5% tariff described in the NY Ruling.

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 September 30, 2009 as compared to Three Months Ended
September 30, 2008

                                                     Three Months Ended September 30, 2009
                                                      2009                            2008
Net sales                                  $  7,671,420         100.0 %    $ 10,595,632         100.0 %
Cost of sales                                 5,775,309          75.3 %       9,249,600          87.3 %
Gross profit                                  1,896,111          24.7 %       1,346,032          12.7 %
Operating expenses:
Sales and marketing                           1,438,299          18.7 %       2,312,006          21.8 %
General and administrative                    3,634,320          47.4 %       4,512,817          42.6 %
Total operating expenses                      5,072,619          66.1 %       6,824,823          64.4 %
Loss from operations                         (3,176,508 )       (41.4 )%     (5,478,791 )       (51.7 )%
Other income (expense):
Interest income (expense), net                   13,945           0.2 %         (13,767 )        (0.1 )%
Adjustment to the fair value of common
stock warrants                                  758,352           9.9 %               -           0.0 %
Total other income (expense)                    772,297          10.1 %         (13,767 )        (0.1 )%
Loss before provision for income taxes       (2,404,211 )       (31.3 )%     (5,492,558 )       (51.8 )%
Provision for income taxes                            -           0.0 %               -           0.0 %
Net loss                                   $ (2,404,211 )       (31.3 )%   $ (5,492,558 )       (51.8 )%

Net sales

Net sales totaled $7.7 million for the three months ended September 30, 2009 as compared to $10.6 million for the same period in 2008, or a decrease of 27.6% from 2008. We installed 1,026,953 kilowatts (kW) for the three months ended September 30, 2009 as compared to 1,290,230 kW for the same period in 2008, a decline of 20.4%, primarily due to a decrease in commercial installations. During the three months ended September 30, 2009, we were operating seven offices in California, as compared to nine offices in California and one office each in Colorado, Connecticut and New Jersey for the three months ended September 30, 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 September 30, 2009 was 75.3% of net sales as compared to 87.3% during the three months ended September 30, 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 our Andalay panels. Gross profit margin for the three months ended September 30, 2009 was 24.7% of net sales compared to 12.7% for the three months ended September 30, 2008.

Sales and marketing expenses

Sales and marketing expenses for the three months ended September 30, 2009 were $1.4 million, or 18.7% of net sales as compared to $2.3 million, or 21.8% of net sales during the same period of the prior year. The decrease in sales and marketing expenses for the three months ended September 30, 2009 was primarily due to lower sales and marketing payroll and sales commissions of $337,000 related to a headcount decrease by thirty-six employees in sales and marketing as of September 30, 2009 compared to September 30, 2008. Expenditures for advertising, public relations, trade shows and conferences decreased $435,000 as compared to the prior year. Sales and marketing stock-based compensation decreased approximately $52,000 as compared to the prior year.

General and administrative expenses

General and administrative expenses for the three months ended September 30, 2009 were $3.6 million, or 47.4% of net sales as compared to $4.5 million, or 42.6% of net sales during the same period of the prior year. The decrease in general and administrative expenses for the three months ended September 30, 2009 was primarily due to lower general and administrative payroll and bonus expenses of $405,000 related to a headcount decrease by 13 employees in general and administrative as of September 30, 2009 compared to September 30, 2008. Other general and administrative expense declines compared to the prior year included research and development costs of $104,000, travel and entertainment costs of $47,000, insurance expense of $55,000 and rent of $55,000. General and administrative stock-based compensation decreased approximately $152,000 as compared to the prior year.

Interest, net

During the three months ended September 30, 2009, interest income was approximately $26,000 and was offset by interest expense of $12,000. Interest income was approximately $92,000 during the same period of 2008, which was offset by interest expense of $106,000. The decrease in interest income and interest expense for the three months ended September 30, 2009 compared to the prior year is related to our full repayment of our outstanding 2007 Credit Facility with Comerica Bank utilizing our restricted cash during March 2009.

Adjustment to the fair value of common stock warrants

During the three months ended September 30, 2009, we recorded mark-to-market adjustments to reflect the fair value of common stock warrants accounted for as a liability in accordance with provisions of the warrant agreements resulting in a favorable $758,000 non-cash adjustment in our condensed consolidated statements of operations.

Income taxes

During the three months ended September 30, 2009 and September 30, 2008, there was no income tax expense or benefit for federal and state income taxes reflected in our condensed consolidated statements of operations due to the our net loss and a valuation allowance on the resulting deferred tax asset.

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:

Nine months Ended September 30, 2009 as compared to Nine months Ended September

30, 2008

                                                       Nine months Ended September 30, 2009
                                                      2009                             2008
Net sales                                  $  21,171,370         100.0 %    $  29,905,703         100.0 %
Cost of sales                                 15,858,235          74.9 %       25,101,727          83.9 %
Gross profit                                   5,313,135          25.1 %        4,803,976          16.1 %
Operating expenses:
Sales and marketing                            4,574,208          21.6 %        6,557,229          21.9 %
General and administrative                    10,541,539          49.8 %       13,565,117          45.4 %
Total operating expenses                      15,115,747          71.4 %       20,122,346          67.3 %
Loss from operations                          (9,802,612 )       (46.3 )%     (15,318,370 )       (51.2 )%
Other income (expense):
Interest income (expense), net                   (46,357 )        (0.2 )%         148,172           0.5 %
Adjustment to the fair value of common
stock warrants                                (2,320,167 )       (11.0 )%               -           0.0 %
Total other income (expense)                  (2,366,524 )       (11.2 )%         148,172           0.5 %
Loss before provision for income taxes       (12,169,136 )       (57.5 )%     (15,170,198 )       (50.7 )%
Provision for income taxes                             -           0.0 %                -           0.0 %
Net loss                                   $ (12,169,136 )       (57.5 )%   $ (15,170,198 )       (50.7 )%

Net sales

Net sales totaled $21.2 million for the nine months ended September 30, 2009 as compared to $29.9 million for the same period in 2008, or a decrease of 29.2% from 2008. We installed 2,687,140 kilowatts (kW) for the nine months ended September 30, 2009 as compared to 3,753,390 kW for the same period in 2008, a decline of 28.4%, primarily due to a decrease in commercial installations. During the nine months ended September 30, 2009, we were operating seven offices in California and one office each in Colorado and Connecticut, as compared to nine offices in California and one office each in Colorado, Connecticut and New Jersey for the nine months ended September 30, 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 nine months ended September 30, 2009 was 74.9% of net sales as compared to 83.9% during the nine months ended September 30, 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 our Andalay panels. Gross profit margin for the nine months ended September 30, 2009 was 25.1% of net sales compared to 16.1% for the nine months ended September 30, 2008.

Sales and marketing expenses

Sales and marketing expenses for the nine months ended September 30, 2009 were $4.6 million, or 21.6% of net sales as compared to $6.6 million, or 21.9% of net sales during the same period of the prior year. The decrease in sales and marketing expenses for the nine months ended September 30, 2009 was primarily due to lower sales and marketing payroll and sales commissions of $1.1 million related to a headcount decrease by thirty-six employees in sales and marketing employees as of September 30, 2009 compared to September 30, 2008. Expenditures for advertising, public relations, trade shows and conferences decreased $693,000 as compared to the prior year. Sales and marketing stock-based compensation decreased approximately $104,000 as compared to the prior year.

General and administrative expenses

General and administrative expenses for the nine months ended September 30, 2009 were $10.5 million, or 49.8% of net sales as compared to $13.6 million, or 45.4% of net sales during the same period of the prior year. The decrease in general and administrative expenses for the nine months ended September 30, 2009 was primarily due to lower general and administrative payroll and bonus expenses of $1.3 million related to a headcount decrease by 13 employees in general and administrative as of September 30, 2009 compared to September 30, 2008. Other general and administrative expense declines compared to the prior year included research and development costs of $322,000, professional fees of $213,000, travel and entertainment costs of $232,000 and SOX implementation costs of $73,000. General and administrative stock-based compensation decreased approximately $757,000 as compared to the prior year.

Interest, net

During the nine months ended September 30, 2009, interest expense was approximately $131,000 and was offset by interest income of $85,000. Interest expense was $203,000 during the same period in 2008, which was more than offset by interest income of $351,000 during the same period of 2008.

Adjustment to the fair value of common stock warrants

During the nine months ended September 30, 2009, we recorded adjustments to the fair value of common stock warrants accounted for as a liability resulting in a $2.3 million non-cash charge in our condensed consolidated statement of operations. The adjustments included mark-to-market adjustments and adjustments to reflect extensions in warrant terms and the issuance of additional warrants in accordance with provisions of the warrant agreements.

Income taxes

During the nine months ended September 30, 2009 and September 30, 2008, there was no income tax expense or benefit for federal and state income taxes reflected in our condensed consolidated statements of operations due to our 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 coming year, 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 March 2009. 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 have adjusted our capacity to a level that reflects our current customer demand and our improved efficiency in sales, design and installation. These changes have resulted 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, our revenue levels remain difficult to predict, and 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 stock and warrant offerings in March, April and June 2009 (described below). In addition to the proceeds from those offerings, 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 March 2009 office closures. We believe the combination of our improved gross margins (as a result of lower world-wide panel prices), a more streamlined cost structure, and tight expense control will allow us to achieve cash flow breakeven in the coming year. 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, April and June 2009 equity offerings 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. In October 2009, we entered into a securities purchase agreement intended to provide us with flexibility to raise additional working capital through sales of common stock as needed 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 September 30, 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 were approximately $1.4 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 were 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 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 had a term of 67 trading days from the Closing (the "Original Series G Warrants"). 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 the Original Series G Warrants. 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 had a term that is extended until August 10, 2009, and to issue to the investors additional, newly issued Series G Warrants to purchase up to an aggregate of 1,275,000 shares of our common stock on the same terms as the amended Original Series G Warrants at a strike price of $1.12 per share (the "Additional 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 at our election, which commenced 31 days from the date of issuance, provided that specified trading . . .