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.

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 and six months ended June 30, 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 Lowe's Companies, Inc. (Lowe's), a leading residential solar energy installation company/integrator. For the three and six months ended June 30, 2012 and 2011, the percentages of sales to Lennar, Lennox and Lowe's are as follows:

                                               Three Months Ended June 30,             Six Months Ended June 30,
                                               2012                  2011              2012                 2011

Lennar Corporation                                     -                  21.2 %            12.6 %              14.6 %
Lennox International Inc.                           26.0 %                25.2 %            39.2 %              32.3 %
Lowe's Companies, Inc.                              13.7 %                 1.8 %             8.0 %               1.6 %

We had no receivable balance from Lennar as of June 30, 2012 or December 31, 2011. Lennox accounted for 23.5% and 23.1% of our gross accounts receivable as of June 30, 2012, and December 31, 2011, respectively. Lowe's accounted for 10.5% and 13.9% of our gross accounts receivable as of June 30, 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 46.2% and 58.0% of materials purchased during the six months ended June 30, 2012 and 2011, respectively. At June 30, 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 an adequate amount of inventory on hand as of June 30, 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 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 June 30, 2012 as Compared to Three Months Ended June 30, 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 June 30,
                                                      2012                            2011
Net revenue                                $  1,209,211         100.0 %    $  2,757,729         100.0 %
Cost of goods sold                            1,243,034         102.8 %       2,563,842          93.0 %
    Gross profit                                (33,823 )        (2.8 )%        193,887           7.0 %
Operating expenses
Sales and marketing                             467,523          38.7 %         700,103          25.4 %
General and administrative                    1,663,885         137.6 %       1,464,269          53.1 %
Total operating expenses                      2,131,408         176.3 %       2,164,372          78.5 %
Loss from continuing operations              (2,165,231 )      (179.1 )%     (1,970,485 )       (71.5 )%
Other income (expense)
Interest income (expense), net                  (39,006 )        (3.2 )%        (35,148 )        (1.3 )%
Adjustment to the fair value of common
stock warrants                                   10,303           0.9 %         668,041          24.2 %
Total other income (expense)                    (28,703 )        (2.4 )%        632,893          22.9 %
Loss before provision for income taxes
and discontinued operations                  (2,193,934 )      (181.4 )%     (1,337,592 )       (48.5 )%
Provision for income taxes                            -           0.0 %               -           0.0 %
Net loss from continuing operations
(Note 3)                                     (2,193,934 )      (181.4 )%     (1,337,592 )       (48.5 )%
Gain (loss) from discontinued
operations, net of tax                           (2,880 )        (0.2 )%          9,830           0.4 %
Net loss                                     (2,196,814 )      (181.7 )%     (1,327,762 )       (48.1 )%
Preferred stock dividend                        (21,028 )        (1.7 )%              -           0.0 %
Preferred deemed dividend                             -           0.0 %               -           0.0 %
Net loss attributable to common
stockholders                               $ (2,217,842 )      (183.4 )%   $ (1,327,762 )       (48.1 )%


Net loss per common and common
equivalent share (basic and diluted)       $      (0.12 )                  $      (0.11 )

Weighted average shares used in
computing loss per common share: (basic
and diluted)                                 18,459,159                      11,387,854

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 June 30, 2012, we generated $1.2 million of revenue, a decrease of $1.5 million, or 56.2%, compared to $2.8 million of revenue in the three months ended June 30, 2011. The decrease in revenue was due to a decrease in sales to strategic partners, lower average selling prices and the overall soft solar market conditions following punitive tariff announcements in the U.S. related to solar modules manufactured in China.

Cost of goods sold

Cost of goods sold as a percent of revenue during the three months ended June 30, 2012, was 102.8% of net revenue, compared to 93.0% during the three months ended June 30, 2011. Gross loss for the three months ended June 30, 2012 was $34,000, or 2.8% of revenue, compared to gross profit of $194,000 or 7.0% of revenue for the same period in 2011. The decrease in gross margin in the three months ended June 30, 2012 compared to the three months ended June 30, 2011, was due to year-to-date impact of imposed tariffs on Chinese modules and lower average selling prices, partially offset by a decline in panel and component costs. Excluding the tariff expense of $86,000, gross profit would have been $52,000 or 4.3% of revenue.

Sales and marketing expenses

Sales and marketing expenses for the three months ended June 30, 2012 were $468,000, or 38.7% of net revenue as compared to $700,000, or 25.4% of net revenue during the same period of the prior year. The decrease in sales and marketing expense for the three months ended June 30, 2012, reflects lower advertising and trade shows of $141,000, travel costs of $41,000, payroll and commissions of $30,000 and timing of the Westinghouse licensing fees of $49,000.

General and administrative expenses

General and administrative expenses for the three months ended June 30, 2012 were $1.7 million, or 137.6% of net revenue as compared to $1.5 million, or 53.1% of net revenue during the same period of the prior year. The increase in general and administrative expense for the three months ended June 30, 2012 was due primarily to increases in legal fees of $311,000 and professional fees of $234,000, related to the pending CBD merger transaction and recently settled patent litigation, partially offset by lower payroll costs of $258,000.

Interest, net

During the three months ended June 30, 2012, net interest expense was approximately $39,000 compared with net interest expense of $35,000 for the same period in 2011.

Adjustment to the fair value of common stock warrants

During the three months ended June 30, 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 gain of $10,000 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 June 30, 2011, we recorded mark-to-market adjustments resulting in a $668,000 unrealized gain in our condensed consolidated statements of operations.

Income taxes

During the three months ended June 30, 2012 and June 30, 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 June 30, 2012 was $2.2 million, or $0.12 per share, compared to a net loss from continuing operations of $1.3 million, or $0.11 per share, for the quarter ended June 30, 2011. For the quarter ended June 30, 2012, the net loss includes a favorable non-cash adjustment to the fair value of common stock warrants of $10,000 compared with a favorable non-cash adjustment to the fair value of the common stock warrants of $668,000 for the quarter ended June 30, 2011. Excluding the impact of the common stock warrant adjustments in both periods, net loss from continuing operations for the quarter ended June 30, 2012 was $2.2 million, or $0.12 per share, compared to a net loss of $2.0 million, or $0.17 per share, for the same quarter of 2011.

Gain (loss) from discontinued operations

During the quarter ended June 30, 2012, we recorded a $3,000 net loss from the discontinuance of our installation business segment, compared with a gain of $10,000 during the same period in 2011.

Six Months Ended June 30, 2012 as Compared to Six Months Ended June 30, 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:

                                                           Six Months Ended June 30,
                                                      2012                            2011
Net revenue                                $  3,631,551         100.0 %    $  4,752,091         100.0 %
Cost of goods sold                            3,423,003          94.3 %       4,280,405          90.1 %
    Gross profit                                208,548           5.7 %         471,686           9.9 %
Operating expenses
Sales and marketing                           1,090,703          30.0 %       1,046,431          22.0 %
General and administrative                    3,727,294         102.6 %       3,143,214          66.1 %
Total operating expenses                      4,817,997         132.7 %       4,189,645          88.2 %
Loss from continuing operations              (4,609,449 )      (126.9 )%     (3,717,959 )       (78.2 )%
Other income (expense)
Interest income (expense), net                  (34,786 )        (1.0 )%        (57,849 )        (1.2 )%
Adjustment to the fair value of common
stock warrants                                 (426,640 )       (11.7 )%      1,130,989          23.8 %
Total other income (expense)                   (461,426 )       (12.7 )%      1,073,140          22.6 %
Loss before provision for income taxes
and discontinued operations                  (5,070,875 )      (139.6 )%     (2,644,819 )       (55.7 )%
Provision for income taxes                            -           0.0 %               -           0.0 %
Net loss from continuing operations
(Note 3)                                     (5,070,875 )      (139.6 )%     (2,644,819 )       (55.7 )%
Gain (loss) from discontinued
operations, net of tax                           22,973           0.6 %           3,568           0.1 %
Net loss                                     (5,047,902 )      (139.0 )%     (2,641,251 )       (55.6 )%
Preferred stock dividend                        (42,287 )        (1.2 )%              -           0.0 %
Preferred deemed dividend                             -           0.0 %        (975,460 )       (20.5 )%
Net loss attributable to common
stockholders                               $ (5,090,189 )      (140.2 )%   $ (3,616,711 )       (76.1 )%


Net loss per common and common
equivalent share (basic and diluted)       $      (0.29 )                  $      (0.23 )

Weighted average shares used in
computing loss per common share: (basic
and diluted)                                 17,302,561                      11,374,872

Net revenue

In the six months ended June 30, 2012, we generated $3.6 million of revenue, a decrease of $1.2 million, or 23.6%, compared to $4.8 million of revenue in the six months ended June 30, 2011. The decrease in revenue was due to a decrease in unit volume of product sales to our dealer network and strategic partners, lower average selling prices and the overall soft solar market conditions following punitive tariff announcements in the U.S. related to solar modules manufactured in China.

Cost of goods sold

Cost of goods sold as a percent of revenue during the six months ended June 30, 2012, was 94.3% of net revenue, compared to 90.1% during the six months ended June 30, 2011. Gross profit for the three months ended June 30, 2012 was $209,000, or 5,7% of revenue, compared to gross profit of $472,000 or 9.9% of revenue for the same period in 2011. The decrease in gross margin in the six months ended June 30, 2012 compared to the six months ended June 30, 2011, was due to year-to-date impact of imposed tariffs on Chinese modules and lower average selling prices, partially offset by a decline in panel and component costs. Excluding the tariff expense of $86,000, gross profit would have been $295,000 or 8.1% of revenue.

Sales and marketing expenses

Sales and marketing expenses for the six months ended June 30, 2012 were $1.1 million, or 30.0% of net revenue as compared to $1.0 million, or 22.0% of net revenue during the same period of the prior year. The increase in sales and marketing expense for the six months ended June 30, 2012, is primarily due to an increase in Westinghouse licensing fees of $125,000, offset by lower expenditures for advertising and trade shows of $80,000, travel of $37,000 and payroll and commission costs of $9,000.

General and administrative expenses

General and administrative expenses for the six months ended June 30, 2012 were $3.7 million, or 102.6% of net revenue as compared to $3.1 million, or 66.1% of net revenue during the same period of the prior year. The increase in general and administrative expense for the six months ended June 30, 2012 was due primarily to increases in legal fees of $813,000 and professional fees of $299,000, related to the pending CBD merger transaction and recently settled patent litigation, and due to higher insurance costs of $59,000 and tax consulting costs of $26,000, partially offset by lower payroll costs of $372,000.

Interest, net

During the six months ended June 30, 2012, net interest expense was approximately $35,000 compared with net interest expense of $58,000 for the same period in 2011.

Adjustment to the fair value of common stock warrants

During the six months ended June 30, 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 $427,000 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 six months ended June 30, 2011, we recorded mark-to-market adjustments resulting in a $1.1 million unrealized gain in our condensed consolidated statements of operations.

Income taxes

During the six months ended June 30, 2012 and June 30, 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 six months ended June 30, 2012 was $5.1 million, or $0.29 per share, compared to a net loss from continuing operations of $2.6 million, or $0.23 per share, for the six months ended June 30, 2011. For the six months ended June 30, 2012, the net loss includes an unfavorable non-cash adjustment to the fair value of common stock warrants of $427,000 compared with a favorable non-cash adjustment to the fair value of the common stock warrants of $1.1 million for the six months ended June 30, 2011. Excluding the impact of the common stock warrant adjustments in both periods, net loss from continuing operations for the six months ended June 30, 2012 was $4.6 million, or $0.26 per share, compared to a net loss of $3.8 million, or $0.41 per share, for the same period in 2011.

Gain (loss) from discontinued operations

During the six months ended June 30, 2012, we recorded a $23,000 net gain from the discontinuance of our installation business segment, compared with a gain of $4,000 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 six months ended June 30, 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, 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 June 30, 2012, we had approximately $193,000 in cash on hand and $656,000 available under our credit facility. As an additional source of capital, outstanding warrants provide the possibility for us to receive additional . . .