All references to the "Company," "we," "our," and "us" refer to Westinghouse Solar, Inc. and its subsidiaries ("Westinghouse 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 and financial condition 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 and manufacturer of solar power systems and solar panels with integrated microinverters (which we call AC solar panels). We design, market and sell these solar power systems to solar installers, trade workers and do-it-yourself customers in the United States and Canada through distribution partnerships, our dealer network and retail outlets. Our products are designed for use in solar power systems for residential and commercial rooftop customers. Prior to September 2010, we were also in the solar power installation business.

In September 2007, we introduced our new "plug and play" solar panel technology (under the brand name "Andalay"), which we believe significantly reduces the installation time and costs, and provides superior reliability and aesthetics, when compared to other solar panel mounting products and technology. Our 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. We have three U.S. patents (Patent No. 7,406,800, Patent No. 7,832,157 and Patent No. 7,866,098) that cover key aspects of our solar panel technology, as well as U.S. Trademark No. 3481373 for registration of the mark "Andalay." In addition to these U.S. patents, we received three foreign patents in 2010: Australian Patent No. 2,005,248,343; Indian Patent No. 243,626; and Mexican Patent No. 274,182. A Korean Patent No. 751,614 was issued in 2007. Currently, we have seven issued patents and eighteen other pending U.S. and foreign patent applications that cover the Andalay technology working their way through the USPTO and foreign patent offices.

In February 2009, we announced a strategic relationship with Enphase, a leading manufacturer of microinverters, to develop and market solar panel systems with ordinary AC house current output instead of high voltage DC output. We introduced Andalay AC panel products and began offering them to our customers in the second quarter of 2009. Andalay AC panels cost less to install, are safer, and generally provide higher energy output than ordinary DC panels. Andalay AC panels deliver 5-25% more energy compared to ordinary panels, produce safe household AC power, and have built-in panel level monitoring, racking, wiring, grounding and microinverters. With 80% fewer parts and 5 - 25% better performance than ordinary DC panels, we believe Andalay AC panels are an ideal solution for solar installers, trade workers and do-it-yourself customers.

On May 17, 2010, we entered into an exclusive worldwide license agreement that permits us to distribute and market our solar panels under the Westinghouse name. On July 22, 2010, we announced that we will operate under the name "Westinghouse Solar" and, effective July 23, 2010 at the opening of the market, our stock began trading under the stock symbol "WEST" on the NASDAQ Capital Market, and we are listed as Westinghouse Solar, Inc.

As a result of our announced exit from the solar panel installation business, our installation business has been reclassified in our financial statements as discontinued operations. The exit from the installation business was essentially completed by the end of the fourth quarter of 2010.

At the Annual Meeting of Stockholders held on March 31, 2011, our stockholders approved an amendment to our Certificate of Incorporation to formally change our name from "Akeena Solar, Inc." to "Westinghouse Solar, Inc.". The name change became effective on April 6, 2011. Also on April 6, 2011, we filed a Certificate of Amendment to our Certificate of Incorporation with the Secretary of State of the State of Delaware to effect a reverse split of our common stock at a ratio of 1-for-4. The reverse stock split became effective at the close of business on April 13, 2011.

On May 7, 2012, we entered into a Merger Agreement with CBD. Under the terms of the Merger Agreement, a subsidiary of CBD will be merged with and into the Company, with the Company to be the surviving corporation and a wholly-owned subsidiary of CBD. Completion of the Merger is subject to customary conditions, including shareholder approvals by the Company and CBD. See Item 5, Part II (Other Information) for additional information.

Concentration of Risk in Customer and Supplier Relationships

The relative magnitude and the mix of revenue from our largest customers have varied significantly quarter to quarter. During the three months ended March 31, 2012 and 2011, three customers have accounted for significant revenues, varying by period, to our company: Lennar Corporation (Lennar), a leading national homebuilder, Lennox International Inc. (Lennox), a global leader in the heating and air conditioning markets, and Real Goods Solar (Real Goods), a leading residential solar energy installation company/integrator. For the three months ended March 31, 2012 and 2011, the percentages of sales to Lennar, Lennox and Real Goods are as follows:

                                Three Months Ended March 31,
                                 2012                   2011

Lennar Corporation                    18.9 %                  5.6 %
Lennox International Inc.             45.8 %                 42.1 %
Real Goods Solar                         -                   12.7 %

Lennar had no receivable balance as of March 31, 2012 and December 31, 2011. Lennox accounted for 32.3% and 23.1% of our gross accounts receivable as of March 31, 2012, and December 31, 2011, respectively. Real Goods accounted for 1.7% and 1.2% of our gross accounts receivable as of March 31, 2012, and December 31, 2011, respectively.

Over time, as we work to add additional distributors to our network and to grow our distribution business, we anticipate the relative significance to our revenue of any particular customer will decline.

We maintain reserves for potential credit losses and such losses, in the aggregate, have generally not exceeded management's estimates. Our top three vendors accounted for approximately 61.8% and 37.8% of materials purchased during the three months ended March 31, 2012 and 2011, respectively. At March 31, 2012, accounts payable included amounts owed to these top three vendors of approximately $1.1 million. At December 31, 2011, accounts payable included amounts owed to the top three vendors of approximately $3.3 million.

Historically, we obtained virtually all of our solar panels from Suntech. On March 25, 2011, we entered into a volume supply agreement for a new generation of our solar panel products with Light Way Green New Energy Co., Ltd (Lightway), and in August 2011, we began purchasing solar panels from Lightway. Both Suntech and Lightway manufacture panels for us that are built to our unique specifications. We currently purchase all of the microinverters used in our AC solar panels from Enphase. Although we had a significant amount of inventory on hand as of March 31, 2012, and although we believe we could find alternative suppliers for solar panels manufactured to our specifications, and alternative suppliers for microinverters, on comparable terms, the sudden loss of any of our current primary component supply relationships could cause a delay in manufacturing and be disruptive to our operations. In recent months, because of our cash position and liquidity constraints, we have been late in making payments to both of our panel suppliers. On March 30, 2012, pursuant to our Supply Agreement with Lightway, we issued 1,900,000 shares of our common stock to Lightway in partial payment of our past due account payable to them. The shares were valued at $1,045,000. On May 1, 2012, Suntech America filed a lawsuit against us for breach of contract, alleging that it delivered products to us and has not received full payment. We currently do not have any unshipped orders for solar panel product pending with Suntech. We have pending and planned orders for additional shipments of product from Lightway. Unless we are able to satisfy our panel suppliers that we will make timely payment for future product orders, our suppliers may delay further shipments to us, which could result in decreased sales and revenue for us, and adversely affect our customer relationships and result in cancelled orders.

Three Months Ended March 31, 2012 as Compared to Three Months Ended March 31, 2011

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,
                                                      2012                            2011
Net revenue                                $  2,422,340         100.0 %    $  1,994,362         100.0 %
Cost of goods sold                            2,179,969          90.0 %       1,716,563          86.1 %
    Gross profit                                242,371          10.0 %         277,799          13.9 %
Operating expenses
Sales and marketing                             623,180          25.7 %         346,328          17.4 %
General and administrative                    2,063,409          85.2 %       1,678,945          84.2 %
Total operating expenses                      2,686,589         110.9 %       2,025,273         101.5 %
Loss from continuing operations              (2,444,218 )      (100.9 )%     (1,747,474 )       (87.6 )%
Other income (expense)
Interest income (expense), net                    4,220           0.2 %         (22,701 )        (1.1 )%
Adjustment to the fair value of common
stock warrants                                 (436,943 )       (18.0 )%        462,948          23.2 %
Total other income (expense)                   (432,723 )       (17.9 )%        440,247          22.1 %
Loss before provision for income taxes
and discontinued operations                  (2,876,941 )      (118.8 )%     (1,307,227 )       (65.5 )%
Provision for income taxes                            -           0.0 %               -           0.0 %
Net loss from continuing operations
(Note 3)                                     (2,876,941 )      (118.8 )%     (1,307,227 )       (65.5 )%
Gain (loss) from discontinued
operations, net of tax                           25,853           1.1 %          (6,262 )        (0.3 )%
Net loss                                     (2,851,088 )      (117.7 )%     (1,313,489 )       (65.9 )%
Preferred stock dividend                        (21,259 )        (0.9 )%              -           0.0 %
Preferred deemed dividend                             -           0.0 %        (975,460 )       (48.9 )%
Net loss attributable to common
stockholders                               $ (2,872,347 )      (118.6 )%   $ (2,288,949 )      (114.8 )%


Net loss per common and common
equivalent share (basic and diluted)       $      (0.17 )                  $      (0.20 )

Weighted average shares used in
computing loss per common share: (basic
and diluted)                                 16,145,962                      11,361,726

Discontinued operations

As a result of the exit from the installation business on September 7, 2010, and in accordance with generally accepted accounting principles, the installation business operation has been reclassified to discontinued operations in our Consolidated Balance Sheets and our Consolidated Statements of Operations. The installation business segment had historically been our core business and represented most of our revenue.

Net revenue

We generate revenue from the sale of solar power systems. In the three months ended March 31, 2012, we generated $2.4 million of revenue, an increase of $428,000, or 21.5%, compared to $2.0 million of revenue in the three months ended March 31, 2011. The increase in revenue was due to a larger unit volume of product sales as a result of the growth of our network of distribution dealers, increased sales to our strategic partners and more competitive pricing.

Cost of goods sold

Cost of goods sold as a percent of revenue during the three months ended March 31, 2012, was 90.0% of net revenue, compared to 86.1% during the three months ended March 31, 2011. Gross profit for the three months ended March 31, 2012 was $242,000, or 10.0% of revenue, compared to $278,000 or 13.9% of revenue for the same period in 2011. The decrease in gross margin in the three months ended March 31, 2012 compared to the three months ended March 31, 2011, was due to lower average selling prices, partially offset by a decline in panel and component costs.

Sales and marketing expenses

Sales and marketing expenses for the three months ended March 31, 2012 were $623,000, or 25.7% of net revenue as compared to $346,000, or 17.4% of net revenue during the same period of the prior year. The increase in sales and marketing expense for the three months ended March 31, 2012, reflects higher expenditures for Westinghouse licensing fees, trade shows and advertising expense of $235,000, supporting the expansion of our distribution business, payroll and commissions of $20,000 and stock compensation expense of $18,000.

General and administrative expenses

General and administrative expenses for the three months ended March 31, 2012 were $2.1 million, or 85.2% of net revenue as compared to $1.7 million, or 84.2% of net revenue during the same period of the prior year. The increase in general and administrative expense for the three months ended March 31, 2012 was due primarily to increases in professional fees of $585,000, insurance costs of $57,000, bad debt expense of $46,000 and research and development costs of $37,000, partially offset by decreases in stock compensation expense of $140,000, and payroll costs of $114,000.

Interest, net

During the three months ended March 31, 2012, net interest income was approximately $4,000 compared with net interest expense of $23,000 for the same period in 2011.

Adjustment to the fair value of common stock warrants

During the three months ended March 31, 2012, we recorded mark-to-market adjustments to reflect the fair value of outstanding common stock warrants accounted for as a liability, resulting in an unrealized loss of $437,000 in our condensed consolidated statements of operations. The fair value of the warrants is lower now primarily due to a decrease in the price of our common stock and a shorter life for the remainder of our outstanding warrants. During the three months ended March 31, 2011, we recorded mark-to-market adjustments resulting in a $463,000 unrealized gain in our condensed consolidated statements of operations.

Income taxes

During the three months ended March 31, 2012 and March 31, 2011, 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.

Net loss from continuing operations

Net loss from continuing operations for the quarter ended March 31, 2012 was $2.9 million, or $0.17 per share, compared to a net loss from continuing operations of $1.3 million, or $0.11 per share, for the quarter ended March 31, 2012. For the quarter ended March 31, 2012, the net loss includes an unfavorable non-cash adjustment to the fair value of common stock warrants of $437,000 compared with a favorable non-cash adjustment to the fair value of the common stock warrants of $463,000 for the quarter ended March 31, 2011. Excluding the impact of the common stock warrant adjustments in both periods, net loss from continuing operations for the quarter ended March 31, 2012 was $2.4 million, or $0.15 per share, compared to a net loss of $1.8 million, or $0.15 per share, for the first quarter of 2011.

Gain (loss) from discontinued operations

During the quarter ended March 31, 2012, we recorded a $26,000 net gain from the discontinuance of our installation business segment, compared with a loss of $6,000 during the same period in 2011.

Liquidity and Capital Resources

The current economic downturn presents us with challenges in meeting the working capital needs of our business. Our primary requirements for working capital are to fund purchases for solar panels and microinverters, and to cover our payroll and lease expenses. For the quarter ended March 31, 2012 and for each of the two years in the period ending December 31, 2011, we had incurred net losses and negative cash flows from operations. In addition, we expect to incur a net loss from operations for the year ending December 31, 2012. During recent years, we have undertaken several equity financing transactions to provide the capital needed to sustain and to grow our business. Based on current cash projections for 2012, which contemplate a smaller operating loss and reaching breakeven cash flow from operations in the second half of the year, we intend to address ongoing working capital needs through cost reduction measures recently implemented and utilization of existing inventory, along with utilizing our available credit facility and raising additional equity. In the event that revenue is lower, further staffing reductions and expense cuts could occur. 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.

As of March 31, 2012, we had approximately $615,000 in cash on hand and $750,000 available under our credit facility. As an additional source of capital, outstanding warrants provide the possibility to receive additional proceeds upon exercise, depending on market conditions. During the quarter ending March 31, 2012, warrants to purchase 472,222 shares of common stock with an exercise price of $0.60 per share were exercised, resulting in approximately $283,000 in proceeds. We are seeking potential investors to obtain additional funding, and we have engaged an investment banker to facilitate these efforts.

The accompanying consolidated financial statements have been prepared assuming we will continue as a going concern. Our significant operating losses and negative cash flow from operations raise substantial uncertainty about our ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty, and contemplate the realization of assets and the settlement of liabilities and commitments in the normal course of business. We believe our current cash balance, projected financial results from our operations, and the amounts that should be available to us through debt and equity financing provide sufficient resources and operating flexibility to fund our anticipated cash needs, through at least the next 12 months; however, there can be no assurance that we will be able to raise additional funds on commercially reasonable terms, if at all. 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 on common stock in the foreseeable future.

On May 7, 2012, we entered into a Merger Agreement with CBD. Under the Merger Agreement, we are required to raise sufficient equity capital, with the cooperation and support of CBD to meet our liquidity and working capital requirements. In addition, prior to closing of the merger, CBD has agreed to provide capital funding support to the Company if necessary, and subject to conditions and limitations as provided in the Merger Agreement.

Our Line of Credit

On February 15, 2011, we entered into the 2011 Credit Facility with Bridge Bank to finance our accounts receivables. The 2011 Credit Facility provides for a credit limit of $750,000, representing the maximum amount of advances based on up to 50% of $1.5 million of gross eligible accounts receivables. The 2011 Credit Facility may be terminated at any time by either party and may be renewed under similar terms if acceptable and agreed to by the parties. If any advance is not repaid in full within 90 days from the earlier of (a) invoice date, or
(b) the date on which such advance is made, we are obligated to immediately pay the outstanding amount to Bridge Bank. Outstanding loans under the 2011 Credit Facility will accrue interest at the Bridge Bank Prime rate plus 3.0% (annualized) of the daily gross financed amount outstanding. The 2011 Credit Facility is secured by substantially all of our assets. As of March 31, 2012, there was nothing borrowed under the 2011 Credit Facility.

Equity Financing Activity

On February 17, 2011, we entered into a securities purchase agreement with certain institutional accredited investors relating to the sale of 4,000 units at a price of $900 per unit. Each unit consists of (i) one share of Series B Preferred Stock, with each such share of Series B Preferred Stock initially convertible into 500 shares of common stock at an initial conversion price of $1.80 per share, subject to future adjustment for various events, and (ii) warrants to purchase 425 shares of common stock at an initial exercise price of $2.40 per share, subject to future adjustment for various events, which warrants are not exercisable until six months after issuance and have a term of five years from the date of first exercisability. The aggregate purchase price for the Securities was $3,600,000. As of May 10, 2012, 1,727 shares of preferred stock had been converted into 891,601 shares of common stock.

On August 16, 2011, we entered into a securities purchase agreement with an institutional accredited investor relating to the sale of 990,099 shares of common stock at a price of $1.01 per share, along with the sale of Series L Warrants to purchase up to 643,564 shares of common stock (65% of the number of shares of common stock initially issued) at an exercise price of $1.17 per share. The warrants are not exercisable until six months after issuance and have a term of five years from the date they are first exercisable. The aggregate purchase price for the shares and the warrants was $1,000,000. Under the securities purchase agreement, we agreed to amend the outstanding Series J Warrants, such that the exercise price of the Series J Warrants is reduced from $2.44 per share to $1.17 per share. In addition, each of the Series J Warrants,
(i) is not exercisable until the six month anniversary of the closing under the August 16, 2011 securities purchase agreement, and (ii) the expiration date is extended such that the warrant is exercisable for five years from the delayed initial exercise date. The outstanding Series J Warrants were originally issued on October 7, 2010, and represent the right to purchase up to an aggregate of 400,001 shares of common stock.

As a result of the August 16, 2011 securities sale, (i) the conversion price of the Series B Preferred was reduced from $1.80 per share of common stock to $1.01 per share of common stock, and (ii) the exercise price of the Series K Warrants was reduced from $2.40 to $1.01 per share. The Series K Warrants were originally issued on February 22, 2011 and represent the right to purchase up to an aggregate of 1,700,002 shares of common stock.

On September 28, 2011, we entered into a securities purchase agreement with an institutional accredited investor relating to the sale of 500,000 shares of common stock at a price of $0.80 per share, along with the sale of Series M Warrants to purchase up to 325,000 shares of common stock (65% of the number of shares of common stock initially issued) at an exercise price of $0.81 per share. The warrants are not exercisable until six months after issuance and have a term of five years from the date they are first exercisable. The aggregate purchase price for the shares and the warrants was $500,000. Under the securities purchase agreement, we agreed to amend the outstanding Series L Warrants, such that the exercise price of the Series L Warrants is reduced from $1.17 per share to $0.81 per share. In addition, each of the Series L Warrants,
(i) is not exercisable until the six month anniversary of the closing under the September 28, 2011 securities purchase agreement, and (ii) the expiration date is extended such that the warrant is exercisable for five years from the delayed initial exercise date. The outstanding Series L Warrants were originally issued on August 16, 2011, and represent the right to purchase up to an aggregate of 643,564 shares of common stock.

On December 30, 2011, we entered into a securities purchase agreement with CBD Energy Limited ("CBD"), an Australian corporation, relating to the sale of 1,666,667 shares of common stock at a price of $0.60 per share. The aggregate purchase price was $1,000,000. See previous discussion in Liquidity and Capital resources on proposed merger with CBD.

As a result of the December 30, 2011 security sale, the conversion price of the Series B Preferred was further reduced from $0.80 per share of common stock to $0.60 per share of common stock, and (ii) the exercise price of the Series K Warrants was further reduced from $0.80 to $0.60 per share. As of March 31, 2012, there were 2,273 shares of Series B Preferred outstanding. After adjustment to the conversion price as a result of the December 30, 2011 . . .