UNITED
STATES


SECURITIES AND EXCHANGE
COMMISSION


WASHINGTON, D.C.
20549


FORM 10-Q


(Mark
One)





þ
            QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
the quarterly period ended: June 30,
2009


OR





 ̈
            TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For
the transition period from: 
to


Commission
File Number: 000-53105


CLEAR SKIES SOLAR,
INC.


(Exact
name of Registrant as Specified in Its Charter)


DELAWARE
                          
                          30-0401535(State
      or Other Jurisdiction of Incorporation or
                          
                          (I.R.S.
      Employer Identification No.)Organization)200
      Old Country Road, Suite 610Mineola, New
      York
                          
                          11501-4241(Address
      of Principal Executive Offices)
                          
                          (Zip
      code)


(516) 282-7652


(Registrant’s Telephone Number, Including Area Code)




(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)


Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.


YES þNO
 ̈


Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of regulation S-T (sec. 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).


YES  ̈NO  ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):





Large
      accelerated filer  ̈
            
            Accelerated
      filer  ̈
            
            Non-accelerated
      filer  ̈
            
            Smaller
      reporting
              company
      þ(Do
      not check if a smaller
              reporting
      company)




Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).


YES oNO þ


As of
August 4, 2009, 43,072,567 shares of the issuer’s common stock, $0.001 par value
per share, were outstanding.









Table of
Contents





PagePART
      I FINANCIAL INFORMATION
                
                
                3Item 1.
      Financial Statements
                
                
                3Condensed
      Consolidated Balance Sheet as at June 30, 2009 (unaudited) and
      Condensed Consolidated Balance Sheet as at December 31,
      2008
                
                
                3Unaudited
      Condensed Consolidated Statements of Operations for the three and six
      months ended June 30, 2009 and June 30, 2008
                
                
                4Unaudited
      Condensed Consolidated Statements of Cash Flows for the six months ended
      June 30, 2009 and June 30, 2008
                
                
                5Notes
      to Unaudited Condensed Consolidated Financial Statements
                
                
                6Item 2.
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations
                
                
                15Item 3.
      Quantitative and Qualitative Disclosures About Market Risk
                
                
                19Item 4T.
      Controls and Procedures
                
                
                20PART
      II OTHER INFORMATION
                
                
                21Item 2.
      Unregistered Sales of Equity Securities and Use of
Proceeds
                
                
                21Item 6.
      Exhibits
                
                
                21Section
      302 Certification of Principal Executive OfficerSection
      302 Certification of Principal Financial OfficerSection
      906 Certification of Principal Executive Officer and Principal Financial
      OfficerSignatures
                
                
                22










PART I — FINANCIAL
INFORMATION





Item 1.
Financial Statements


CLEAR
SKIES SOLAR, INC.


Condensed
Consolidated Balance Sheets





June 30, 2009
                                
                                
                                December 31, 2008(unaudited)ASSETSCurrent
      Assets:Cash
      and cash equivalents
                                
                                $
                                18,817
                                
                                
                                $
                                155,577Accounts
      receivable, less allowance for doubtful accounts of $65,275 at June 30,
      2009 and at December 31, 2008, respectively
                                
                                
                                29,542
                                
                                
                                
                                157,225Inventory
                                
                                
                                -
                                
                                
                                
                                11,113Costs
      and estimated earnings in excess of billings
                                
                                
                                19,841Total
      current assets
                                
                                
                                68,200
                                
                                
                                
                                323,915Property
      and equipment, net
                                
                                
                                172,580
                                
                                
                                
                                192,653Prepaid
      expenses and investor relations fees
                                
                                
                                525,622
                                
                                
                                
                                195,273Security
      deposit
                                
                                
                                113,634
                                
                                
                                
                                113,634Other
      assets
                                
                                
                                57,579
                                
                                
                                
                                44,801Total
      Assets
                                
                                $
                                937,615
                                
                                
                                $
                                870,276LIABILITIES
      AND STOCKHOLDERS' (DEFICIT)Liabilities:Accounts
      payable and accrued expenses
                                
                                $
                                1,410,007
                                
                                
                                $
                                1,274,563Billing
      in excess of costs and estimated earnings
                                
                                
                                42,553
                                
                                
                                
                                40,332Customer
      deposits
                                
                                
                                28,386Obligation
      to issue options and warrants
                                
                                
                                -
                                
                                
                                
                                47,500Notes
      and loan payable
                                
                                
                                400,033Payroll
      liabilities
                                
                                
                                176,461
                                
                                
                                
                                31,047Provision
      for estimated warranty liability
                                
                                
                                56,964
                                
                                
                                
                                56,964Estimated
      loss on uncompleted contracts
                                
                                
                                109,305
                                
                                
                                
                                109,305Total
      current liabilities
                                
                                
                                2,223,709
                                
                                
                                
                                1,559,711Long-term
      liabilities:Notes
      payable
                                
                                
                                41,057
                                
                                
                                
                                -Total
      long-term liabilities
                                
                                
                                41,057
                                
                                
                                
                                -Commitments
      and contingenciesStockholders'
      (Deficit)Preferred
      stock, $.001 par value, 10,000,000 shares authorized,
      none  issued and outstandingCommon
      stock, $.001 par value, 100,000,000 shares
      authorized,   42,002,945 and 31,696,066 shares issued and
      outstanding at  June 30, 2009 and December 31, 2008,
      respectively
                                
                                
                                42,003
                                
                                
                                
                                31,696Additional
      paid-in capital
                                
                                
                                12,436,338
                                
                                
                                
                                10,767,217Accumulated
      (deficit)
                                
                                
                                (13,805,492
                                )
                                
                                
                                (11,488,348
                                )Total
      stockholders' (deficit)
                                
                                
                                (1,327,151
                                )
                                
                                
                                (689,435
                                )TOTAL
      LIABILITIES AND STOCKHOLDERS' (DEFICIT)
                                
                                $
                                937,615
                                
                                
                                $
                                870,276





See
Accompanying Notes to Unaudited Condensed Consolidated Financial
Statements


3




CLEAR
SKIES SOLAR, INC.


Unaudited Condensed Consolidated
Statements of Operations





For the three months endedJune 30,
                  
                  
                  For the six months ended June 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008RevenuesContract
      revenue
                  
                  
                  -
                  
                  
                  $
                  1,133,440
                  
                  
                  
                  -
                  
                  
                  $
                  1,271,664Subcontract
      revenue
                  
                  
                  
                  
                  
                  
                  -Other
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  11,113
                  
                  
                  
                  15,000Total
      revenues
                  
                  
                  -
                  
                  
                  
                  1,133,440
                  
                  
                  
                  11,113
                  
                  
                  
                  1,286,664Cost
      of revenues
                  
                  
                  -
                  
                  
                  
                  852,554
                  
                  
                  
                  27,946
                  
                  
                  
                  1,045,902Gross
      margin
                  
                  
                  -
                  
                  
                  
                  280,886
                  
                  
                  
                  (16,833
                  )
                  
                  
                  240,762Operating
      expensesSelling
      expenses
                  
                  
                  86,140
                  
                  
                  
                  251,137
                  
                  
                  
                  177,395
                  
                  
                  
                  484,814General
      and administrative expenses
                  
                  
                  1,045,639
                  
                  
                  
                  1,531,055
                  
                  
                  
                  2,086,113
                  
                  
                  
                  2,933,292Research
      and development
                  
                  
                  176
                  
                  
                  
                  4,659
                  
                  
                  
                  2,311
                  
                  
                  
                  7,273Total
      operating expenses
                  
                  
                  1,131,955
                  
                  
                  
                  1,786,851
                  
                  
                  
                  2,265,819
                  
                  
                  
                  3,425,379Loss
      from operations
                  
                  
                  (1,131,955
                  )
                  
                  
                  (1,505,965
                  )
                  
                  
                  (2,282,652
                  )
                  
                  
                  (3,184,617
                  )Other
      income (expense)Interest
      income
                  
                  
                  8
                  
                  
                  
                  9,968
                  
                  
                  
                  478
                  
                  
                  
                  42,315Interest
      expense
                  
                  
                  (29,619
                  )
                  
                  
                  (8,811
                  )
                  
                  
                  (34,971
                  )
                  
                  
                  (14,741
                  )Provision
      for income taxesNet
      loss
                  
                  $
                  (1,161,566
                  )
                  
                  $
                  (1,504,808
                  )
                  
                  $
                  (2,317,145
                  )
                  
                  $
                  (3,157,043
                  )Loss
      per share, basic and diluted
                  
                  $
                  (0.03
                  )
                  
                  $
                  (0.05
                  )
                  
                  $
                  (0.07
                  )
                  
                  $
                  (0.10
                  )Weighted
      average common shares outstanding, basic and diluted
                  
                  
                  38,679,545
                  
                  
                  
                  30,886,678
                  
                  
                  
                  35,305,025
                  
                  
                  
                  31,093,778





See
Accompanying Notes to Unaudited Condensed Consolidated Financial
Statements


4





CLEAR SKIES SOLAR,
INC.


Unaudited Condensed Consolidated
Statements of Cash Flows





For
      the six months ended June 30,
                                          
                                          2009
                                          
                                          
                                          2008Net
      loss
                                          
                                          $
                                          (2,317,145
                                          )
                                          
                                          $
                                          (3,157,043
                                          )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
                                          
                                          
                                          12,076
                                          
                                          
                                          
                                          5,319Stock-based
      compensation
                                          
                                          
                                          1,397,712
                                          
                                          
                                          
                                          501,019Estimated
      loss on contracts
                                          
                                          
                                          
                                          
                                          
                                          
                                          41,842Bad
      debt expense
                                          
                                          
                                          
                                          
                                          
                                          
                                          9,000Increase
      (decrease) in cash and cash equivalents attributable to changes in
      operating assets and liabilities:Accounts
      receivable
                                          
                                          
                                          127,683
                                          
                                          
                                          
                                          (46,171
                                          )Inventories
                                          
                                          
                                          11,113
                                          
                                          
                                          
                                          (932,728
                                          )Costs
      and estimated earnings in excess of billings
                                          
                                          
                                          (19,841
                                          )
                                          
                                          
                                          (438,446
                                          )Prepaid
      expenses and investor relations fees
                                          
                                          
                                          (330,349
                                          )
                                          
                                          
                                          225,492Security
      deposits
                                          
                                          
                                          
                                          
                                          
                                          
                                          (113,634
                                          )Other
      assets
                                          
                                          
                                          (12,780
                                          )
                                          
                                          
                                          (13,819
                                          )Accounts
      payable and accrued expenses
                                          
                                          
                                          417,160
                                          
                                          
                                          
                                          406,235Provision
      for estimated warranty liability
                                          
                                          
                                          
                                          
                                          
                                          
                                          25,158Customer
      deposits
                                          
                                          
                                          28,386
                                          
                                          
                                          
                                          5,000Billings
      in excess of costs and estimated earnings
                                          
                                          
                                          2,221
                                          
                                          
                                          
                                          7,277Payroll
      liabilities
                                          
                                          
                                          145,414
                                          
                                          
                                          
                                          (121,478
                                          )Obligations
      to issue option and warrant
                                          
                                          
                                          (47,500
                                          )
                                          
                                          
                                          31,962Net
      cash (used in) operating activities:
                                          
                                          
                                          (585,850
                                          )
                                          
                                          
                                          (3,565,015
                                          )Net
      cash provided by (used in) investing activities:Purchases
      of equipment
                                          
                                          
                                          
                                          
                                          
                                          
                                          (166,374
                                          )Sales
      of equipment
                                          
                                          
                                          8,000Net
      cash provided by (used in) investing
    activities:
                                          
                                          
                                          8,000
                                          
                                          
                                          
                                          (166,374
                                          )Net
      cash provided by (used in) financing activities:Advances
      received from (paid to) related party
                                          
                                          
                                          
                                          
                                          
                                          
                                          (104,410
                                          )Repayment
      of loans payable
                                          
                                          
                                          (9,000
                                          )Notes
      payable
                                          
                                          
                                          450,090Net
      cash provided by (used in) financing activities:
                                          
                                          
                                          441,090
                                          
                                          
                                          
                                          (104,410
                                          )Net
      (decrease) in cash and cash equivalents:
                                          
                                          
                                          (136,760
                                          )
                                          
                                          
                                          (3,835,799
                                          )Cash
      and cash equivalents, beginning of period
                                          
                                          
                                          155,577
                                          
                                          
                                          
                                          4,866,842Cash
      and cash equivalents, end of period
                                          
                                          $
                                          18,817
                                          
                                          
                                          $
                                          1,031,043Supplemental
      disclosure of cash flow information:Cash
      paid for interest
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          14,741Supplemental
      disclosure of non-cash financing and investment
activities:Value
      of shares of common stock issued to consultants
                                          
                                          $
                                          217,104
                                          
                                          
                                          $
                                          525,250Reclassification
      of prepaid investor relations to other receivables
                                          
                                          
                                          
                                          
                                          
                                          $
                                          167,988





See
Accompanying Notes to Unaudited Condensed Consolidated Financial
Statements




5





NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS





1. Basis of presentation, current
status and nature of operations





The
accompanying unaudited condensed consolidated financial statements as of June
30, 2009 and for the three and six month periods ended June 30, 2009 and 2008
have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information, and with the
rules and regulations of the Securities and Exchange Commission regarding
interim financial reporting. Accordingly, these interim financial statements do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of the Company, these unaudited condensed
consolidated financial statements include all adjustments necessary to present
fairly the information set forth therein. All such adjustments are of a normal
recurring nature. Results for interim periods are not necessarily indicative of
results to be expected for a full year. The condensed consolidated balance sheet
information as of December 31, 2008 was derived from the audited financial
statements and notes thereto, together with management’s discussion and analysis
or plan of operations,  included in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2008. The interim financial
statements contained herein should be read in conjunction with that
Report.





In
preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, the Company is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses
during the reporting period. On an ongoing basis, the Company evaluates
estimates, including those related to bad debts, inventory reserves, and
warranty expense. The Company bases its estimates on historical data and
experience, when available, and on various other assumptions that are believed
to be reasonable under the circumstances, the combined results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results could differ
from those estimates.





Current
Status





At this
time, Clear Skies has no active commercial projects under
construction.  Our last contract was completed in December 2008,
except for several small residential projects that were ordered from us in 2007
or before and have been delayed for a variety of reasons.  We had no
revenue in the first quarter of 2009, except for the sale of approximately
$11,000 of excess solar panel inventory and we had no revenue in the second
quarter of 2009.  It is not certain when we will begin generating
revenues again.  We are negotiating with several parties for the
financing and construction of a number of solar energy projects, however there
can be no assurance that we will be successful in these negotiations or that
such projects would be profitable.  Even if we are successful in
negotiating finance and construction agreements, since we recognize revenue
under the percentage of completion method, it could be several months after
signing before we begin performance and are able to report revenue on our
financial statements.





As of
July 31, 2009, our available balance of cash and cash equivalents was
approximately $61,000 which amount is after receipt of the proceeds from a
financing closed as of July 28, 2009 (the “July 2009 Financing”).  See
Note 4. Liquidity and Capital Resources and Item 2 – Management’s Discussion –
Liquidity and Capital Resources. Notwithstanding the receipt of $260,000 from
the July 2009 Financing, our sale of convertible notes in May 2009 (the “May
2009 Financing”) for gross proceeds of $400,000 and for borrowings of $282,464
in the first half of 2009 from an unrelated third party, we will need to raise
additional funds to pay outstanding vendor invoices and operating
expenses.  Our future cash flows depend on our ability to enter into,
and be paid under, contracts for the construction of solar energy projects and
our ability to sell our debt and equity securities on terms satisfactory to
us.  While management believes these can be accomplished, there can be
no assurance that we will be successful in entering into construction contracts
or selling our securities, in which case we will probably not be able to
continue as a going concern.





Nature of
Operations





Clear
Skies Group, Inc. (“CSG”) was formed in New York for the purpose of providing
turnkey solar electricity installations and renewable energy technology
solutions to commercial and residential customers across the United States. CSG
commenced operations in August 2005 and received its initial funding in
September 2005. The Company also has proprietary and patented remote
monitoring technology under the name XTRAX® with
applications in the solar electricity production industry and other potential
markets.





Unless
the context requires otherwise, references to the “Company” for periods prior to
the closing of the Reverse Merger (see Note 2) on December 20, 2007 refer
to Clear Skies Group, Inc., a private New York corporation that is now Clear
Skies Solar, Inc.’s wholly-owned subsidiary, and such references for periods
subsequent to the closing of the Reverse Merger on December 20, 2007, refer
to Clear Skies Solar, Inc., a publicly traded Delaware corporation formerly
known as Clear Skies Holdings, Inc. (“CSH”), together with its subsidiaries,
including Clear Skies Group, Inc.


6





2. Business combination and
subsequent financing





The reverse
merger





On
December 13, 2007, BIP Oil, Inc., a Nevada corporation (“BIP”), and Clear
Skies Holdings, Inc., a Delaware corporation (“CSH”) and wholly owned subsidiary
of BIP, entered into an Agreement and Plan of Merger. On December 18, 2007,
BIP merged with and into CSH, so that BIP and CSH became a single corporation
named Clear Skies Holdings, Inc., which exists under, and is governed by, the laws of
the State of Delaware (the “Reincorporation”).  Immediately following
the Reincorporation, there were 59,841,923 shares of Clear Skies Holdings, Inc.
issued and outstanding to stockholders of record.





On
December 20, 2007, Clear Skies Acquisition Corp., a newly formed wholly
owned subsidiary of Clear Skies Holdings, Inc., was merged with and into Clear
Skies Group, Inc. (the “Reverse Merger”), and Clear Skies Group, Inc., as the
surviving corporation, became a wholly owned subsidiary of Clear Skies Holdings,
Inc. Prior to the Reverse Merger, certain stockholders of Clear Skies Group,
Inc. agreed to surrender an aggregate of 60,000 shares of Clear Skies Group,
Inc. (exchangeable for an aggregate of 116,276 shares of common stock of Clear
Skies Holdings, Inc. in the Reverse Merger) for cancellation. Pursuant to the
Reverse Merger, the outstanding shares of common stock of Clear Skies Group,
Inc. were exchanged for an aggregate of 8,492,067 shares of Clear Skies
Holdings, Inc. at a conversion rate of 1.937943 shares of Clear Skies Holdings,
Inc. for each share of Clear Skies Group, Inc. In addition, pursuant to the
Reverse Merger, outstanding warrants to purchase an aggregate of 760,000 shares
of common stock of Clear Skies Group, Inc. were exchanged for an aggregate of
416,656 shares of common stock of Clear Skies Holdings, Inc.





Immediately
following the closing of the Reverse Merger, Clear Skies Holdings, Inc.
transferred all of its pre-Reverse Merger operating assets and liabilities to
its newly formed wholly owned subsidiary, BIP Holdings, Inc., a Delaware
corporation, and transferred all of BIP Holdings, Inc.’s outstanding capital
stock to Clear Skies Holdings, Inc.’s then-majority stockholders in exchange for
cancellation of 53,866,923 shares of Clear Skies Holdings, Inc. common stock
held by those stockholders (such transaction, the “Split-Off”). The remaining
pre-Reverse Merger stockholders of Clear Skies Holdings, Inc. continued to hold
5,975,000 shares of Clear Skies Holdings, Inc. after the split-off. After the
Reverse Merger, Clear Skies Holdings, Inc. succeeded to the business and
activities of Clear Skies Group, Inc. as its sole line of business and all of
Clear Skies Holdings, Inc.’s then-current officers and directors resigned and
were replaced by Clear Skies Group, Inc.’s officers and directors.





On
January 25, 2008, Clear Skies Holdings, Inc. changed its name to Clear
Skies Solar, Inc.





The
Reverse Merger was accounted for as a reverse acquisition and recapitalization
of Clear Skies Group, Inc. for financial accounting purposes. Consequently, the
assets and liabilities and the historical operations that are reflected in the
Company’s consolidated financial statements for periods prior to the Reverse
Merger are those of Clear Skies Group, Inc. and have been recorded at the
historical cost basis of Clear Skies Group, Inc., and the Company’s consolidated
financial statements for periods after completion of the reverse merger include
both the Company’s and Clear Skies Group, Inc.’s assets and liabilities, the
historical operations of Clear Skies Group, Inc. prior to the Reverse Merger and
the Company’s operations from the closing date of the Reverse
Merger.





The December 2007
private placement





Following
the business combination discussed above, the Company completed a private
placement offering of 16,000,000 shares of its common stock for an aggregate
gross purchase price of $8,000,000, including $745,000 of exchanged debt. The
cash costs of the private placement of common stock and the prior issuance of
$745,000 of bridge notes were approximately $1.2 million in the aggregate,
and the Company issued warrants expiring in December 2010 in connection
with both financings to the placement agent and its designees to purchase an
aggregate of up to 732,401 shares of the Company’s common stock at $.50 per
share. The common stock of Clear Skies Solar, Inc. trades on the over the
counter bulletin board under the symbol CSKH.OB.


7




3. Summary of significant accounting
policies





Accounts
Receivable and Allowance for Doubtful Accounts


The
Company regularly evaluates the collectability of its accounts receivable. The
Company carries its accounts receivable at cost less an allowance for doubtful
accounts. On a periodic basis, the Company evaluates its accounts receivable and
establishes an allowance for doubtful accounts, if necessary, based on a history
of past bad debts and collections and current credit
conditions.  Accounts receivable are written-off as uncollectible on a
case-by-case basis at the discretion of management.  Accounts
receivable consist of trade receivables and when applicable amounts due from
state agencies for rebates on state-approved solar systems installed. A total of
$29,542 of rebates was included in accounts receivable at June 30, 2009.
When the Company sells systems with a rebate component, the savings is passed
directly to the customer and the Company takes ownership of the rebate
receivable from the applicable state agency.





Inventories


Inventories
are valued at the lower of cost or market. Cost is determined by the first-in,
first-out method or the weighted average method. Inventory includes materials,
labor and manufacturing overhead costs and is recorded net of an allowance for
obsolete or unmarketable inventories. Such allowance is based upon both
historical experience and management’s understanding of market conditions and
forecasts of future product demand. In addition, items in inventories in excess
of one year’s usage are compared to the allowance for adequacy. If the actual
amount of obsolete or unmarketable inventories significantly exceeds the
estimated allowance, the Company’s cost of sales, gross profit and net earnings
would be significantly affected.





Revenue
Recognition


The
Company delivers turnkey solar electricity installations and renewable energy
technology solutions to commercial, industrial and residential developer
customers. The Company’s primary business is the design and installation of
photovoltaic (sometimes called “solar electric” or “PV” for short) solar power
systems for the commercial, industrial and residential developer markets. Based
on its design the Company orders components from manufacturers, has them shipped
to the job site and then completes the job. The Company will also order extra
solar panels for inventories and hold them until needed for a particular
job.





The
Company recognizes revenue from its contracts over the contractual period under
the percentage-of-completion (“POC”) method of accounting. Under the POC method
of accounting, sales and gross profit are recognized as work is performed based
on the relationship between actual costs incurred and total estimated costs at
the completion of the contract. Recognized revenue that will not be billed under
the terms of the contract until a later date is recorded as an asset captioned
“Costs and estimated earnings in excess of billings on uncompleted contracts.”
Contracts where billings to date have exceeded recognized revenue are recorded
as a liability captioned “Billings in excess of costs and estimated earnings on
uncompleted contracts.”  Changes to the original estimates may be
required during the life of the contract.  Estimates are reviewed
monthly and the effect of any change in the estimated gross margin percentage
for a contract is reflected in cost of sales in the period the change becomes
known. The use of the POC method of accounting involves considerable use of
estimates in determining revenue, costs and profits and in assigning the amounts
to accounting periods. As a result, there can be a significant disparity between
earnings (both for accounting and taxes) as reported and actual cash received by
the Company during any reporting period. The Company continually evaluates all
of the issues related to the assumptions, risks and uncertainties inherent with
the application of the POC method of accounting; however, it is not assured that
its estimates will be accurate. If the Company’s estimates are not accurate or a
contract is terminated, it will be forced to adjust revenue in later periods.
Furthermore, even if its estimates are accurate, the Company may have a
shortfall in its cash flow and it may need to borrow money to fund its work in
process or to pay taxes until the reported earnings materialize in actual cash
receipts.


8


From time
to time, the Company performs installation and other services as a
subcontractor. These services differ from contract revenue in that the Company
is entitled to be compensated for subcontractor work performed prior to
completion of the system, because the Company has no obligation or ownership of
the system so long as it completes its tasks satisfactorily. Revenues from
subcontractor projects are realized as they are completed.





Cost
Recognition


Contract
costs include all direct material, labor, and equipment costs and those indirect
costs related to contract performance such as indirect labor, supply, and tool
costs. The Company makes provisions for estimated losses on uncompleted
contracts in the period in which such losses are determined. Changes in job
performance, job conditions, and estimated profitability, including those
arising from contract penalty provisions, and final contract settlements may
result in revisions to costs and income and are recognized in the period in
which the revenues are determined.





The
Company carries inventories as it needs to buy materials in advance of
anticipated orders due to possible long lead times at vendors. In addition, the
Company will have purchased material at job sites prior to installation and
completion of the job.





Loss Per
Share


The
Company complies with SFAS No. 128, “Earnings Per Share.” SFAS No. 128
requires dual presentation of basic and diluted income/loss per share for all
periods presented. Basic income/loss per share excludes dilution and is computed
by dividing income/loss available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted income/loss per
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then share in the income/loss of
the Company. The difference between the number of shares used to compute basic
income/loss per share and diluted income/loss per share relates to additional
shares to be issued upon the assumed exercise of stock options and warrants, net
of shares hypothetically repurchased at the average market price with the
proceeds of exercise. As the Company reported a net loss for the three and six
month periods ended June 30, 2009 and 2008, the effects of the 28,281,366
shares issuable on exercise of outstanding warrants and options and on the
conversion of notes and contractual obligations as of June 30, 2009 has not
been considered in the diluted net loss per common share since these dilutive
securities would reduce the loss per common share and become
anti-dilutive.





Recent Accounting
Pronouncements


In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 provides a
new single authoritative definition of fair value and provides enhanced guidance
for measuring the fair value of assets and liabilities and requires additional
disclosures related to the extent to which companies measure assets and
liabilities at fair value, the information used to measure fair value, and the
effect of fair value measurements on earnings. SFAS 157 is effective as of
November 15, 2007. The adoption of this statement did not have a material
effect on the Company’s financial position or results of
operations.





In
February 2007, the FASB issued SFAS No. 159, ''The Fair Value Option
for Financial Assets and Liabilities, Including an amendment of FASB Statement
No. 115”, (''SFAS 159’’). This Statement permits entities to choose to
measure many financial instruments and certain other items at fair value that
are not currently required to be measured at fair value. SFAS 159 is effective
as of the beginning of fiscal 2008. The adoption of this statement did not have
a material effect on our financial position or results of operations since the
Company did not elect to measure any applicable assets and liabilities at fair
value.


9




In
December 2007, the FASB issued SFAS No. 141(R), “Business
Combinations.” SFAS No. 141(R) provides companies with principles and
requirements on how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, liabilities assumed, and any
non-controlling interest in the acquiree as well as the recognition and
measurement of goodwill acquired in a business combination. SFAS No. 141(R)
also requires certain disclosures to enable users of the financial statements to
evaluate the nature and financial effects of the business combination.
Acquisition costs associated with the business combination will generally be
expensed as incurred. SFAS No. 141(R) is effective for business
combinations occurring in fiscal years beginning after December 15, 2008,
which will require the Company to adopt these provisions for business
combinations occurring in fiscal 2009 and thereafter. Early adoption of SFAS
No. 141(R) is not permitted.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statements — An Amendment of ARB No. 51”. SFAS
No. 160 requires reporting entities to present noncontrolling
(minority) interests as equity as opposed to as a liability or mezzanine
equity and provides guidance on the accounting for transactions between an
entity and noncontrolling interests. SFAS No. 160 is effective the first
fiscal year beginning after December 15, 2008, and interim periods within
that fiscal year. SFAS No. 160 applies prospectively as of the beginning of
the fiscal year SFAS No. 160 is initially applied, except for the
presentation and disclosure requirements which are applied retrospectively for
all periods presented subsequent to adoption. The adoption of SFAS No. 160
will not have a material impact on the financial statements; however, it could
impact future transactions entered into by the Company.





In
May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally
Accepted Accounting Principles.” SFAS No. 162 identifies the sources of
accounting principles and provides entities with a framework for selecting the
principles used in preparation of financial statements that are presented in
conformity with GAAP. The current GAAP hierarchy has been criticized because it
is directed to the auditor rather than the entity, it is complex, and it ranks
FASB Statements of Financial Accounting Concepts, which are subject to the same
level of due process as FASB Statements of Financial Accounting Standards, below
industry practices that are widely recognized as generally accepted but that are
not subject to due process. The FASB believes the GAAP hierarchy should be
directed to entities because it is the entity (not its auditors) that is
responsible for selecting accounting principles for financial statements that
are presented in conformity with GAAP. The adoption of FASB 162 is not expected
to have a material impact on the Company’s consolidated financial
statements.




On May
28, 2009, the FASB issued FASB Statement No. 165, “Subsequent Events” (“SFAS No.
165”). Statement 165 establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. Specifically,
Statement 165 provides:
 
 1.
                The
      period after the balance sheet date during which management of a reporting
      entity should evaluate events or transactions that may occur for potential
      recognition or disclosure in the financial
  statements.
 2.
                The
      circumstances under which an entity should recognize events or
      transactions occurring after the balance sheet date in its financial
      statements.
 3.
                The
      disclosures that an entity should make about events or transactions that
      occurred after the balance sheet
date.
 
 In
accordance with this Statement, an entity should apply the requirements to
interim or annual financial periods ending after June 15, 2009. Management of
the Company does not expect the adoption of this pronouncement to have material
impact on its financial statements.





Stock Based
Compensation


The FASB
issued SFAS No. 123(R), “Accounting for Stock-Based Compensation
(Revised).” SFAS No. 123(R) focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions.
SFAS 123(R) requires an entity to measure the cost of employee services received
in exchange for an award of equity instruments based on the grant-date fair
value of the award (with limited exceptions). That cost will be recognized
during the period in which an employee is required to provide service in
exchange for the award. No compensation costs are recognized for equity
instruments for which employees do not render the requisite service. The Company
adopted SFAS No. 123(R) at commencement of operations.





4. Liquidity and capital
resources





Since
inception, the Company has incurred losses and negative cash flows from
operations and at June 30, 2009, the Company had an accumulated deficit of
approximately $13.8 million.  At June 30, 2009 we had
approximately $18,000 in cash and cash equivalents.  As of July 31,
2009, our available balance of cash and cash equivalents was approximately
$61,000, which amount is after the receipt of the $260,000 proceeds from the
July 2009 Financing, in which we sold (i) secured convertible promissory notes
in the aggregate principal amount of $286,000 and (ii) warrants to purchase up
to 4,085,714 shares of the Company’s common stock.  The bulk of these
proceeds were to pay a portion of the overdue employee salaries and reimbursable
expenses as well as employee benefits and insurance costs.  As part of
the July 2009 Financing, the conversion price of the convertible notes and the
purchase price of the warrants issued in the May 2009 Financing were reduced
from $.10 and $.15, respectively, to $.07. See our Form 8-K filed with the
Securities and Exchange Commission on August 3, 2009 and our Form 8-K/A filed
with the Securities and Exchange Commission on August 5, 2009.





Based on
our current plans and assumptions, which include our expectations relating to
the future sale of our equity and debt securities and entering into contracts
for the financing and installation of solar energy systems and the resulting
cash flows and revenues, we believe that we will have adequate resources to fund
our operations in 2009.  While management believes these can be
accomplished, there can be no assurance that we will be successful in entering
into construction contracts or selling our securities, in which case we will
probably not be able to continue as a going
concern.   Notwithstanding the July 2009 Financing, the May 2009
Financing and borrowings of $282,464 in the first half of 2009 from an unrelated
third party, we will need to raise additional funds to pay outstanding vendor
invoices and operating expenses.


10




5. Prepaid expenses and investor
relations fees





Prepaid
expenses and prepaid investor relation fees at June 30, 2009 and
December 31, 2008 are as follows:




June 30,
                                                      
                                                      
                                                      December 31,2009
                                                      
                                                      
                                                      2008Payments
      to US public and investor relations firms
                                                      
                                                      $
                                                      141,667
                                                      
                                                      
                                                      $
                                                      191,667Prepayment
      to compensation to be amortized over the periods in which the services
      will be rendered
                                                      
                                                      
                                                      360,000
                                                      
                                                      
                                                      
                                                      0Prepaid
      – other
                                                      
                                                      
                                                      23,955
                                                      
                                                      
                                                      
                                                      0Prepaid
      insurance premiums
                                                      
                                                      
                                                      0
                                                      
                                                      
                                                      
                                                      3,606Totals
                                                      
                                                      $
                                                      525,622
                                                      
                                                      
                                                      $
                                                      195,273




The
Company has entered into agreements with several firms in the US to provide it
with both public relations and investor relations advice and services over
periods from six months to three years. These agreements call for payments in
both cash and common stock and payments are being amortized over the period of
each agreement.





6. Stock-based compensation and
common stock issued and agreed to be issued





Upon
commencement of operations, the Company entered into multiple agreements in
which the Company received consulting and other services in exchange for the
Company’s common stock or options to purchase the Company’s common stock. The
Company complies with SFAS 123(R) and records compensation expense for the fair
value of these services over the periods in which they are
provided.





In
September 2005, the Company agreed to grant 120,000 shares (exchanged for
232,553 shares in the Reverse Merger) to three individuals for agreeing to serve
on the Board of Directors for a three-year term. The fair value of these shares
at the date of such agreement was estimated to be approximately $96,000. For
the six months ended June 30, 2009 and 2008, the Company recorded Board of
Director fees and compensation expense, which are included in general and
administrative expenses, of approximately zero, and $21,333, respectively, for
these shares.  The balance of these costs was charged to earnings
during 2008 and therefore there were no amounts on the balance sheets as at June
30, 2009 or December 31, 2008.





As a
result of the above transactions, capital advances of $310,000 in
September 2005 and $200,000 in April 2006, and services performed in
exchange for shares issued prior to 2006, the Company became contractually
obligated to issue shares in excess of its 200 authorized shares (“Old Shares of
Clear Skies Group, Inc.”). As a result, the Company recorded a liability of
approximately $894,000 as of December 31, 2006 for the value of the
contractual obligations. Due to the contractual obligation to issue the excess
shares, the Board of Directors, with stockholder approval, passed a resolution
to increase the number of authorized shares to 10,000,000. On January 30,
2007, the certificate of incorporation (the “Charter”) was officially amended to
authorize the Company to issue 10,000,000 shares (“New Shares of Clear Skies
Group, Inc.”) of $0.01 par value common stock. Concurrently with the amendment
to the Charter, the Company’s sole shareholder was issued 1,570,000 New Shares
of Clear Skies Group, Inc. (exchanged for 3,042,570 shares in the Reverse
Merger) in exchange for the Old Shares of Clear Skies Group, Inc. previously
issued. Upon the amendment to the Charter, the obligation to issue 1,042,500
shares of CSG common stock (exchanged for 2,020,297 in the Reverse Merger) was
fulfilled and the liability was reclassified to Stockholders’ Equity as Common
Stock to the extent of par value with the excess classified as Additional
Paid-In Capital. The Company was obligated under a contract with a public
relations consultant to issue $4,500 worth of its common stock to the consultant
each month during the term of the contract which expired on September 30,
2008. The Board determined the value of the shares for each month at the closing
price of the Company’s common stock on the last trading day of the prior
month.


11




7. Related party
transactions





In
April 2007, the Company issued 40,000 shares (exchanged for 77,517 shares
in the Reverse Merger) to an individual who was a director as compensation for
services rendered other than as a director. The fair value of these shares at
issuance was estimated to be approximately $33,000 which was recorded as service
fees and included in general and administrative expenses for the nine months
ended September 30, 2007. In June 2008, the Company issued an option
to an individual who was a director at that time as compensation for services
rendered other than as a director. The option allows the individual to purchase
up to 50,000 shares of the Company’s common stock at $1.21 per share and expires
in December 2009. The fair value of the option at issuance was estimated to
be $33,000 which was recorded as a service fee and included in general and
administrative expenses when the option was issued.





Several
of the Company’s officers and directors, or their affiliates, have from time to
time extended loans to the Company or agreed to defer compensation payable to
them in order to fund the Company’s operating expenses. In this regard:
(i) Quixotic Systems, Inc. (“Quixotic”) loaned $285,000 at 10% interest
compounded daily, which had been repaid in full as of December 31, 2007;
and (ii) Gelvin Stevenson loaned $20,000 all of which had been repaid in
full as of December 31, 2007. Furthermore, Ezra Green, the Company’s
Chairman and Chief Executive Officer, agreed to the deferral of $73,259 of his
compensation (of which $69,366 was unpaid and included in accrued expenses as of
December 31, 2007). As of March 18, 2008, Mr. Green’s deferred
compensation had been repaid in full. Mr. Green advanced $30,275 to the
Company in 2006 and an additional $70,037 in 2007 (which has been recorded as a
balance of $100,312 due to related party at December 31, 2007). This
related party balance was also repaid in full by March 18, 2008. Such loans
and other arrangements were interest free (except for Quixotic) and have not
been memorialized by written promissory notes. At December 31, 2007, there
were miscellaneous amounts due to related parties of approximately $4,000 which
were paid in March, 2008.  As of June 30, 2009 and December 31,
2008 no related party loans were outstanding.





8. Stock Options and
Warrants





In
accordance with Statement on Auditing Standards ("SAS") No. 123(R), the
Company uses the Black-Scholes option pricing model to measure the fair value of
its Option awards granted in 2007 as part of or after the Reverse Merger
described in Note 1. All Option awards granted prior to the Reverse Merger
transaction described in Note 2 were exchanged for common stock as part of that
transaction. The Black-Scholes model requires the input of highly subjective
assumptions including volatility, expected term, risk-free interest rate and
dividend yield. As the Options were granted to non-employee consultants the
resulting fair value is recorded as consulting expense on a straight-line basis
over the period of service of the consultants, in this case one year. The amount
of this expense charged to earnings for the three and six month periods ended
June 30, 2009 and 2008 were zero, zero, $33,750 and $13,924, respectively. There
will be no charge against earnings in 2009.


12




In
December 2007, the Company’s shareholders approved its 2007 Equity
Incentive Plan which provides for the granting to both employees and
non-employees of up to 2,500,000 shares of the Company’s common stock pursuant
to awards of options and/or restricted stock. The 2007 Plan is administered by
the Company’s Board of Directors or a committee appointed by the Board. On
July 28, 2008, the Board adopted our 2008 Equity Incentive Plan and on
March 17, 2009 it adopted our 2009 Equity Incentive Plan.  At June 30,
2009, the Company had outstanding options granted under the 2007, 2008 and 2009
Plans to purchase an aggregate of 6,000,000 shares of the Company’s common
stock. On May 1, 2008 the Company adopted the Clear Skies Solar, Inc. 2008
Non-Employee Director Compensation Plan, which it amended on November 12, 2008
and, pursuant to that Plan as amended, each of the non-employee directors were
granted options expiring in ten years to purchase 90,000 shares, 90,000 shares
and 220,000 shares at $1.30, $.2725 and $.12 per share, respectively. A summary
of the Company’s stock option activity in the first six months of 2009 for
employees and three non-employees is as follows:





WeightedWeighted
                              
                              
                              AverageAverage
                              
                              
                              RemainingNumber
                              
                              
                              Exercise
                              
                              
                              Contractualof
                              
                              
                              Price
      per
                              
                              
                              TermOptions
                              
                              
                              Option
                              
                              
                              (Years)Employees:Outstanding,
      January 1, 2009
                              
                              
                              3,030,000
                              
                              
                              $
                              0.99
                              
                              
                              
                              7.40Granted
      — March 17 - 2009
                              
                              
                              2,555,000
                              
                              
                              $
                              0.12
                              
                              
                              
                              9.02Cancelled/forfeited
                              
                              
                              -35,000
                              
                              
                              $
                              0.49Outstanding,
      June 30, 2009
                              
                              
                              5,550,000Non-employees:Granted
      — March 17 & April 14, 2009
                              
                              
                              450,000
                              
                              
                              $
                              0.12
                              
                              
                              
                              10.00Outstanding, 
      June 30, 2009
                              
                              
                              6,000,000





The
following table summarizes additional information about the assumptions used to
determine the fair value of stock options granted during the three and six
months ended June 30, 2009:





Risk
      free rate
                  
                  2.00%
      - 2.64%Stock
      price volatility
                  
                  121%Dividend
      yield
                  
                  0Term
                  
                  4.5
      - 6 years





The
estimated stock price volatility was derived based on the average volatility of
34 companies that the Company considered reasonably similar to it. The risk free
rate of return was based on the yield of US Treasury debt of comparable
maturities on the date of issuance of the Options.





During
the three and six month periods ended June 30, 2009 and 2008, the Company
recorded approximately $248,000, $476,000, $294,000 and $211,000, respectively,
of stock-based compensation for issuances under these Plans. The amount of
compensation expense not yet recognized is $1,744,445 which will be
recognized over the next three years.





On
July 28, 2008 and March 17, 2009, the Company’s Board of Directors adopted
the Clear Skies Solar, Inc. 2008 and 2009 Equity Incentive Plans, respectively,
each of which permits the granting of up to 2,500,000 shares of the Company’s
common stock pursuant to awards of incentive and non-qualified stock options
and/or restricted stock. The Company no longer plans to seek shareholder
approval of the 2008 Plan, as, in order for any awards thereunder to qualify as
incentive stock options, the Company would have had to obtain such approval by
July 27, 2009.  The Company does plan to seek shareholder
approval of the 2009 Plan by March 16, 2010. Options granted under each of the
2008 and 2009 Plans must have a duration of not more than ten years and, if an
incentive stock option, then it must have an exercise price of not less than the
Fair Market Value (as defined in each Plan) on the date of
grant.  Options granted under these Plans are included in the table
above.





On July
29, 2009 the Board of Directors agreed to grant employees and non-employee
directors ten year fully vested options to purchase our common stock equal to
the number of shares covered by existing options with an exercise price of $.50
or higher on the condition that the holders of the existing options agree to
their cancellation.  The exercise price of options that would be
granted to employees would be $.09 and the exercise price of options that would
be granted to non-employee directors would be $.13, in both cases the fair
market value on July 29, 2009 as defined in the relevant option
plans.  The maximum number of options that might be granted to
employees would be 1,955,000 and to non-employee directors would be
180,000.





As of
June 30, 2009, the Company’s outstanding options granted prior to July 1, 2009
had no intrinsic value due to the stock price on the date of grant.





As of
June 30, 2009, options granted to non-employees may be exercised to
purchase a total of 410,000 shares and options granted to employees may be
exercised to purchase a total of 485,000 shares.


13




9. Contracts


The
Company generates billings based on the fulfillment of milestones, which are set
forth in the signed contract for each project. Milestones may include, but are
not limited to, initial permits being obtained, delivery of materials, and when
installation is subsequently complete.




As
      of June 30, 2009 and December 31, 2008
                                                        
                                                        2009
                                                        
                                                        
                                                        2008Costs
      incurred on contracts
                                                        
                                                        $
                                                        2,441,162
                                                        
                                                        
                                                        $
                                                        2,381,574Estimated
      earnings, less foreseeable losses
                                                        
                                                        
                                                        423,899
                                                        
                                                        
                                                        
                                                        483,4882,865,061
                                                        
                                                        
                                                        
                                                        2,865,062Billings
      to date
                                                        
                                                        
                                                        (2,907,614
                                                        )
                                                        
                                                        
                                                        (2,905,394
                                                        )Net
      costs and estimated earnings/losses in excess of billings
                                                        
                                                        $
                                                        (42,553
                                                        )
                                                        
                                                        $
                                                        (40,332
                                                        )These
      amounts are included in the accompanying June 30, 2009 and
      December 31, 2008 balance sheets under the following
      captions:Costs
      and estimated earnings in excess of billings
                                                        
                                                        $
                                                        
                                                        
                                                        
                                                        $Billings
      in excess of costs and estimated earnings
                                                        
                                                        
                                                        (42,553
                                                        )
                                                        
                                                        
                                                        (40,332
                                                        )$
                                                        (42,553
                                                        )
                                                        
                                                        $
                                                        (40,332
                                                        )




10. Commitments and
Contingencies





Litigation





From time
to time, the Company is a party to various legal matters in the normal course of
business, the outcome of which, in the opinion of management, will not have a
material adverse effect on the financial position, results of operations or cash
flows of the Company.





Lease
commitments





The
Company occupies premises, since June 25, 2008, consisting of 3,356 square
feet in a modern office building pursuant to a seven year lease. Annual fixed
rent under this lease is $93,968 in the first year escalating to $115,510 in the
seventh year. Additional payments are due for electricity and tax escalation in
amounts to be determined in each future year. The Company has provided a letter
of credit as security under this lease in the initial amount of $113,634 which
reduces to $56,817 after two years and to $28,408 after four years.





Employment
agreements





The
Company has entered into three year employment agreements with several employees
providing for severance arrangements. The severance arrangements become Company
obligations if the Company terminates such contract without “cause” or if the
covered employee terminates his contract with “good reason” (as such terms are
defined in the relevant agreement) and vary in amount (based on the salary in
effect on such termination date) and duration from three months to the remainder
of the contract term.


14




Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of
Operations.





This discussion should be read in
conjunction with our unaudited condensed consolidated financial statements
included in this Quarterly Report on Form 10-Q and the notes thereto, as well as
the other sections of this Quarterly Report and our Annual Report for the year
ended December 31, 2008 on Form 10-K, including the “Certain Risks and
Uncertainties” and “Description of Business” sections thereof. This discussion
contains a number of forward-looking statements, all of which are based on our
current expectations and could be affected by the uncertainties and risk factors
described throughout this Quarterly Report and our Annual Report for the year
ended December 31, 2008 on Form 10-K. Our actual results may differ
materially.





Forward
Looking Statements




Certain
statements in this Quarterly Report on Form 10-Q constitute "forward-looking
statements". The words or phrases "can be," may," "could," "would,"
"expects,""believes," "seeks," "estimates," "projects" and similar words and
phrases are intended to identify such forward-looking statements. Such
forward-looking statements are subject to various risks and uncertainties,
including those described in the section "Risk Factors" included in our form
10-K for the year ended December 31, 2008, and we caution you that any
forward-looking information provided by or on behalf of us is not a guarantee of
future performance. Our actual results could differ materially from those
anticipated by such forward-looking statements due to a number of factors, some
of which are beyond our control. All such forward-looking statements are current
only as of the date on which such statements were made. We do not undertake any
obligation to publicly update any forward-looking statement to reflect events or
circumstances after the date on which any such statement is made or to
reflect the occurrence of unanticipated events.





Overview





We
deliver turnkey solar electricity installations and renewable energy technology
solutions to commercial, industrial and residential developer customers. Our
primary business is the design and installation of photovoltaic (sometimes
called “solar electric” or “PV” for short) solar power systems for the
commercial, industrial and residential developer markets. We have developed
certain proprietary photovoltaic panel mounting systems and trade secrets that
we believe reduce the required man-hours for system installations. We have also
developed XTRAX®, our
patented remote monitoring solution for measuring the production of renewable
energy systems, among other things. We have served customers in California, New
York and New Jersey. We also plan to expand to other locations where the amount
of sunshine, the cost of electricity and/or the availability of governmental
rebates make prospects of solar energy system sales appear
attractive.





Clear
Skies Group, Inc. was incorporated in New York in 2003 and began operations in
August 2005. As a result of the reverse merger transaction that we
consummated on December 20, 2007, our historical financial statements for
periods prior to the reverse merger are those of Clear Skies Group,
Inc.





Since we
began operations we have incurred annual net losses. As of June 30, 2009,
we had an accumulated deficit of $13,805,492 and we expect to incur
additional losses in the foreseeable future. Our revenues during the three month
periods ended June 30, 2009 and 2008 were zero and $1,133,440, respectively, and
for the six month periods ended June 30, 2009 and 2008 were $11,113 and
$1,286,664, respectively. We recognized net losses of $1,161,566 and $1,504,808
(or a basic and diluted loss of $.03 and $.05, respectively, per common share)
for the three months ended June 30, 2009 and 2008.  We recognized net
losses of $2,317,145 and $3,157,043 (or a basic and diluted loss of $.07 and
$.10, respectively, per common share) for the six month periods ended June 30,
2009 and 2008.





Since our
inception, we have financed our operations primarily through sales of equity and
debt securities. From inception through June 30, 2009, we received aggregate net
offering proceeds from private sales of equity and debt securities (after
deducting placement agents’ discounts, commissions and expenses, and our
offering expenses) of approximately $7,445,000.


15





Based on
our current plans and assumptions, which include our expectations relating to
the future sale of our equity and debt securities and entering into contracts
for the financing and installation of solar energy systems and the resulting
cash flows and revenues, we believe that we will have adequate resources to fund
our operations in 2009.  However, there can be no assurances that we
will be successful in entering into such contracts or arranging financing on
terms satisfactory to us, in which case there would be significant doubt as to
our ability to continue as a going concern.





As of
July 31, 2009, our available balance of cash and cash equivalents was
approximately $61,000, which amount is after receipt of the $260,000 proceeds
from the July 2009 Financing in whch we sold  (i) secured convertible
promissory notes in the aggregate principal amount of $286,000 and (ii) warrants
to purchase up to 4,085,714 shares of the Company’s common stock.  The
bulk of the proceeds were to pay a portion of the overdue employee salaries and
reimbursable expenses as well as employee benefits and insurance
costs.  As part of the July 2009 Financing, the conversion price of
the convertible notes and the purchase price of the warrants issued in the May
2009 Financing were reduced from $.10 and $.15, respectively, to
$.07.  See our Forms 8-K and 8-K/A filed with the Securities and
Exchange Commission on August 3 and August 5, 2009,
respectively.  Notwithstanding the July 2009 Financing, our May 2009
sale of convertible notes for gross proceeds of $400,000 and borrowings of
$282,464 in the first half of 2009 from an unrelated third party, we will need
to raise additional funds to pay outstanding vendor invoices and operating
expenses.




Depending
upon the needs of our customers, we may have to increase our installation staff
significantly in 2009 to ensure that installations can be completed while
applicable rebates remain in effect. We expect that our selling and general and
administrative expenses will increase in future periods, as we expand our
administrative, sales and installation workforce.





We
outgrew our original offices and in June 2008 leased new office space in
Mineola, New York as our headquarters which can accommodate our expected needs
for the next three years. See Lease Commitments.  In addition, we
anticipate establishing regional field offices for our sales teams. Accordingly,
we expect the rental expense component of our general and administrative
expenses to increase in future periods.





We expect
our immediate capital expenditures, which we do not expect to exceed
approximately $400,000, will be related to obtaining various approvals and
completing the Beta tests and initial launch of XTRAX®. Subject
to industry and governmental approvals, and availability of funds, we expect to
be able to have a commercial XTRAX® product
during 2009; however, no assurance can be given that our expectations will be
met. Cranes and other solar energy system installation equipment are generally
available for rental on reasonable terms, and we do not have plans to acquire
any.





Generally,
we anticipate that our operating costs and expenses will increase in the future
to support a higher level of revenues. Increased costs will be attributable to
increased personnel, principally sales and installation personnel and support
staff for a multi-office infrastructure and increased marketing expenditures to
promote our services.


16




Results of Operations: Comparison of
Three Month Periods Ended June 30, 2009 and 2008





Revenues
in the second quarter of 2009 were zero, a decrease from the $1,133,440 of
revenue for the three months ended June 30, 2008. In the 2009 period, we had no
revenue as we had completed all work on our jobs in 2008, while in the 2008
quarter we billed for contract work then underway. Cost of revenue in the second
quarter of 2009 was also zero compared to $852,554 in the three months ended
June 30, 2008. The gross margin in the second quarter of 2008 was $280,886,
or 24.8%.





Selling
expenses decreased by $164,997 from the $251,137 incurred in the second quarter
of 2008 to $86,140 in the comparable 2009 quarter. The decrease is largely
accounted for by decreases in salaries of $65,000, public relations of $76,000
and travel of $20,000.





General
and administrative expenses were $1,045,639 for the three months ended June 30,
2009 compared to $1,531,055 in the three months ended June 30, 2008, for a
decrease of $485,416. This decrease is largely accounted for by approximately
(a) a decrease in legal fees of $78,000, (b) investor relations
expenses decreasing by $193,000, (c) a $107,000 decrease in non-cash stock
compensation expense offset by an increase in cash salaries of $37,000, (d) a
decrease in consulting expenses of $38,000, (e) a decrease to zero in liquidated
damages compared to the payment in the second quarter of 2008 of $34,000 and (f)
a decrease in business travel costs of $28,000.





Interest
income of $9,968 for the three months ended June 30, 2008 resulted from the
investment of excess cash from the private placement described in Note 2 above
compared to $8 of interest income in the 2009 comparable period.





Results of Operations: Comparison of
Six Month Periods Ended June 30, 2009 and 2008





Revenues
in the first half of 2009 were $11,113, a decrease of $1,275,551 from the
$1,286,664 of revenue for the six months ended June 30, 2008. In the 2009
period, revenue decreased as we had completed all work on our jobs in 2008 and
sold excess solar panel inventory, while in the 2008 quarter we only billed
relatively small contract and sub-contract work. Cost of revenue in the first
half of 2009 was $27,946, down $1,017,956 from the cost of revenue of $1,045,902
in the six months ended June 30, 2008. The gross margin loss in the 2009
quarter was $16,833, a decrease of $257,595 from the gross margin of $240,762 in
the first half of 2008.





Selling
expenses decreased by $307,419 from the $484,814 incurred in the first half of
2008 to $177,395 in the comparable 2009 period. The decrease is largely
accounted for by decreases in salaries of $122,000, public relations of
$113,000, travel of $25,000 and advertising and trade show costs of
$12,000.





General
and administrative expenses were $2,086,113 for the six months ended June 30,
2009 compared to $2,933,292 in the six months ended June 30, 2008, for a
decrease of $847,179. This decrease is largely accounted for by approximately
(a) a decrease in legal fees of $360,000, (b) investor relations
expenses decreasing by $458,000, (c) a $68,000 decrease in cash salaries and
offset in part by an increase in non-cash stock compensation expense of
$180,000, (d) an increase in rent of $30,000, (e) a decrease to zero in
liquidated damages compared to the payment in the second quarter of 2008 of
$34,000, (f) a decline in accounting fees of $37,000, (g) a decline in travel
costs of $42,000 and (h) a decline in consulting costs of $31,000.





Interest
income of $42,315 for the six months ended June 30, 2008 resulted from the
investment of excess cash from the private placement described in Note 2 above
compared to $478 of interest income in the 2009 comparable
period.


17




Liquidity and Capital
Resources





At June
30, 2009, we had an accumulated deficit of $13,805,492 and we expect to incur
additional losses in the foreseeable future. While we have funded our operations
since inception through private placements of equity and bridge loans, there can
be no assurance that adequate financing will continue to be available to us and,
if available, on terms that are favorable to us.





As of
July 31, 2009, our available balance of cash and cash equivalents was
approximately $61,000, which amount is after receipt of the $260,000 proceeds
from the July 2009 Financing in which we sold (i) secured convertible promissory
notes in the aggregate principal amount of $286,000 and (ii) warrants to
purchase up to 4,085,714 shares of the Company’s common stock.  The
bulk of the proceeds were to pay a portion of the overdue employee salaries and
reimbursable expenses as well as employee benefits and insurance
costs.  As part of the July 2009 Financing the conversion price of the
convertible notes and the purchase price of warrants issued in the May 2009
Financing were reduced from $.10 and $.15, respectively, to $.07. See our Forms
8-K and 8-K/A filed with the Securities and Exchange Commission on August 3 and
August 5, 2009, respectively.





Based on
our current plans and assumptions, which include our expectations relating to
the future sale of our equity and debt securities and entering into contracts
for the financing and installation of solar energy systems and the resulting
cash flows and revenues, we believe that we will have adequate resources to fund
our operations in 2009. However, there can be no assurances that we will be
successful in entering into such contracts or arranging financing on terms
satisfactory to us, in which case there would be significant doubt as to our
ability to continue as a going concern. Notwithstanding the July 2009 Financing,
the May 2009 Financing and borrowings of $282,464 in the first half of 2009 from
an unrelated third party, we will need to raise additional funds to pay
outstanding vendor invoices and operating expenses.





Clear
Skies Group, Inc. began operations in August 2005, and raised $310,000 of gross
proceeds from a private placement offering of securities to Rudd-Klein
Alternative Energy, LLC (“Rudd-Klein”) that closed on September 30, 2005. On
April 18, 2006, Rudd-Klein funded the remaining $100,000 of the purchase price
in such private placement. On April 25, 2006, Clear Skies Group, Inc. sold its
common stock in an additional private placement transaction that raised gross
proceeds of $100,000. From April 26, 2007 through July 26, 2007, Clear Skies
Group, Inc. sold its common stock and warrants to two separate purchasers in a
series of private placement transactions that raised aggregate gross proceeds of
$95,000. In the quarter ended September 30, 2007, Clear Skies Group, Inc. issued
an aggregate of $745,000 principal amount of bridge notes in a private placement
transaction. The purchasers of such bridge notes paid an aggregate gross
purchase price of $745,000 for such Bridge Notes and shares of common stock of
Clear Skies Group, Inc. In accordance with the terms of the Bridge Notes, the
holders of all $745,000 of outstanding principal amount of Bridge Notes invested
in our private placement that closed in December 2007 by exchanging the Bridge
Notes for an aggregate of 1,490,000 shares of our common stock (i.e. the number
of shares of our common stock offered for sale in the Private Placement for an
aggregate purchase price of $745,000). The accrued interest on the Bridge Notes
was paid out of the proceeds of the December 2007 private placement. In the
fourth quarter of 2007, Clear Skies Group, Inc. borrowed an aggregate of
$250,000 and issued 8% promissory notes to evidence such borrowing, which notes
were repaid upon closing of the private placement in December 2007. In closings
on December 20, 2007 and December 24, 2007, we raised an aggregate of
approximately $5,931,000 in net proceeds (in addition to eliminating $745,000 of
indebtedness) from the private placement of 16,000,000 shares of our common
stock.





Several
of our officers and directors, or their affiliates, have from time to time
extended loans to Clear Skies Group, Inc. or agreed to defer compensation
payable to them in order to fund our operating expenses. In this regard: (i)
Quixotic Systems, Inc. (“Quixotic”), an affiliate of Richard Klein, who is a
member of our board of directors, loaned $285,000 ($175,000 of which constitute
amounts Quixotic has paid in connection with a settlement agreement among
Quixotic, Alpha Energy and Clear Skies Group, Inc., dated as of August 30,
2007), which loan had been repaid in full, together with 10% interest compounded
daily, by December 31, 2007; and (ii) Gelvin Stevenson, our Secretary and
Treasurer loaned $20,000, which had been repaid in full as of December 31, 2007.
Furthermore, Ezra Green, our Chairman and Chief Executive Officer, agreed to the
deferral of $73,259 of his compensation, of which $69,366 remained unpaid as of
December 31, 2007 (and was recorded as a balance due to related party at
December 31, 2007). As of March 18, 2008, Mr. Green’s deferred
compensation had been paid in full. In addition, Mr. Green had advanced
$30,275 to us in 2006 and an additional $70,037 to us in 2007 (which has been
recorded as a balance of $100,312 due to related party at December 31,
2007). This related party amount was also repaid in full by March 18, 2008.
Such loans and other arrangements were interest free (except for Quixotic) and
had not been memorialized by written promissory notes. In consideration for the
extension and maintenance of such credit and deferral of salary, on May 7,
2007, Clear Skies Group, Inc. granted Mr. Green, Quixotic and
Dr. Stevenson securities that were exchanged for 610,452, 290,691 and
77,517 shares of our common stock, respectively, in our reverse
merger.




18




We will
need to raise additional funds through either the licensing or sale of our
technologies, products and services or additional public or private offerings of
our securities. There can be no assurance that we will be able to obtain further
financing, do so on reasonable terms, or do so on terms that would not
substantially dilute our current stockholders’ equity interests in us. If we are
unable to raise additional funds on a timely basis, or at all, there would be
significant doubt as to our ability to continue as a going concern.





We expect
to put our present and anticipated capital resources to the following
uses:





•
                  
                  payment
      of outstanding vendor invoices and operating expenses;•
                  
                  towards
      our budget for the engagement of investor relations and public relations
      firms;•
                  
                  possibly
      for strategic acquisitions, if and to the extent we determine
      appropriate;•
                  
                  completion
      of qualification, beta testing and commercialization of XTRAX®;
      and•
                  
                  for
      general working capital
purposes.




Commitments and
Contingencies





We occupy
premises consisting of 3,356 square feet in a modern office building pursuant to
a seven year lease. Annual fixed rent under this lease is $93,968 in the first
year escalating to $115,510 in the seventh year. Additional payments are due for
electricity and real estate tax escalation in amounts to be determined in each
future year. We have provided a letter of credit as security under this lease in
the initial amount of $113,634 which reduces to $56,817 after two years and to
$28,408 after four years. Our obligations for each of the next five calendar
years are:


2009
                
                $
                100,0532010
                
                $
                103,3992011
                
                $
                104,6432012
                
                $
                106,0072013
                
                $
                109,717





Certain Risks and
Uncertainties





Our
Annual Report on Form 10-K for the year ended December 31, 2008 includes a
detailed discussion of our risk factors under the heading “Certain Risks and
Uncertainties.” The information presented in this 10-Q should be read in
conjunction with the risk factors and information disclosed in such Form
10-K.





Off-Balance Sheet
Arrangements





We did
not engage in any off-balance sheet arrangements during the six month periods
ended June 30, 2009 and 2008.





Item 3. Quantitative and
Qualitative Disclosures About Market Risk.





Due to
our status as a smaller reporting company, this Item is not
required.




19




Item 4T. Controls and
Procedures.





Disclosure
Controls and Procedures




Under the
supervision and with the participation of management, including our Chief
Executive Officer and our Chief Financial Officer, we have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Exchange Act Rule 13a-15(e).  Such
disclosure controls and procedures are designed to provide reasonable assurance
that information, which is required to be disclosed in our reports filed
pursuant to the Securities Exchange Act of 1934 (the “Exchange Act”), is
recorded, processed, accumulated, and communicated to management within the time
periods specified in the SEC’s rules and forms.  Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures were effective as of the
end of the period covered by this quarterly report.




Changes
in Internal Control over Financial Reporting




There
were no changes in our internal control over financial reporting during the
quarter ended June 30, 2009. Our management, including the Chief Executive
Officer and Chief Financial Officer, does not expect that our disclosure
controls and procedures or our internal control over financial reporting will
prevent all errors and all fraud.  A control system, no matter how
well designed and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met.  Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the company have been detected.




20




PART
II


OTHER INFORMATION





Item 2. Unregistered Sales of
Equity Securities and Use of Proceeds.





During
the three months ended June 30, 2009, we have issued unregistered securities to
the persons described below. These transactions did not involve any
underwriters, underwriting discounts or commissions, or any public offering.
Each sale of these securities was deemed to be exempt from the registration
requirements of the Securities Act of 1933 by virtue of Section 4(2)
thereof, and/or Rule 506 of Regulation D promulgated thereunder, as a
transaction by an issuer not involving a public offering.





On April
1, June 8 and June 9, 2009, we issued a total of 706,879 shares of our common
stock to two law firms as compensation for services provided to
us.  On April 3, 2009 we issued 3,000,000 shares of our common stock
to our Chief Executive Officer as additional compensation to him.  On
April 7, 2009 we issued 250,000 shares of our common stock to a marketing
consulting firm.   On May 8 and June 10, 2009 we issued a total
of 1,975,000 shares of our common stock to three investor relations consulting
firms.  On May 8, 2009 we issued 4,150,000 shares of our common stock
in connection with a financing completed that day and reported on our Form 8-K
filed on May 13, 2009.  During this period we issued two year
promissory notes in the total face amount of $102,000 convertible into 1,466,667
shares of our common at prices from $.06 to $.08 per share and a $9,000
non-convertible note. Simultaneously therewith we issued warrants to the lender
to purchase a like number of shares at prices of $.14 to $.16 per
share.  Each issuance above was valued at or based on the closing
price of the Company’s common stock on the last trading day preceding the date
of issue. Each certificate carries a restricted stock legend on its
face.





Item 6.
Exhibits.





The
following exhibits are filed as part of, or incorporated by reference into, this
Report:




Exhibit
      No.
                        
                        Description10.1
                        
                        Consulting
      Services Agreement, dated as of April 30, 2009, between the Company and
      Ice Cold Stocks (1)10.2
                        
                        Consulting
      Agreement, dated as of May 8, 2009, between the Company and Barry Honig
      (1)10.3
                        
                        Amendment
      to Consulting Agreement, dated as of May 8, 2009, between the Company and
      Barry Honig (1)10.4
                        
                        Subscription
      Agreement, dated as of May 8, 2009, by and among the Company and the
      subscribers listed therein (1)10.5
                        
                        Form
      of Convertible Promissory Note (1)10.6
                        
                        Form
      of Warrant to Purchase Common Stock (1)10.7
                        
                        Security
      Agreement, dated as of May 8, 2009, by and among the Company and the
      signatories thereon (1)10.8
                        
                        Form
      of Subscription Agreement, dated as of July 28, 2009, by and among the
      Company and the subscribers listed therein. (2)10.9
                        
                        Form
      of Convertible Promissory Note (2)10.10
                        
                        Form
      of Warrant to Purchase Common Stock (2)31.1
      *
                        
                        Section 302
      Certification of Principal Executive Officer31.2
      *
                        
                        Section 302
      Certification of Principal Financial Officer32.1
      *
                        
                        Section 906
      Certification of Principal Executive Officer and Principal Financial
      Officer


*
              
              Filed
      herewith(1)
              
              Incorporated
      hereby by reference to the copy of such document included as an exhibit to
      our Form 8-K filed on May 13, 2009.(2)
              
              Incorporated
      hereby by reference to the copy of such document included as an exhibit to
      our Form 8-K filed on August 3,
2009.





21




SIGNATURES


Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.


CLEAR
      SKIES SOLAR, INC.Date:
      August 7, 2009
                  By:
                  /s/
      Ezra J. GreenName:
                  Ezra
      J. GreenTitle:
                  Chairman
      & Chief Executive Officer
                    (Principal
      Executive Officer)Date:
      August 7, 2009
                  By:
                  /s/
      Arthur L. GoldbergName:
                  Arthur
      L. GoldbergTitle:
                  Chief
      Financial Officer
                    (Principal
      Financial and Accounting Officer)




22




EXHIBIT
INDEX




Exhibit
      No.
                      
                      Description10.1
                      
                      Consulting
      Services Agreement, dated as of April 30, 2009, between the Company and
      Ice Cold Stocks (1)10.2
                      
                      Consulting
      Agreement, dated as of May 8, 2009, between the Company and Barry Honig
      (1)10.3
                      
                      Amendment
      to Consulting Agreement, dated as of May 8, 2009, between the Company and
      Barry Honig (1)10.4
                      
                      Subscription
      Agreement, dated as of May 8, 2009, by and among the Company and the
      subscribers listed therein (1)10.5
                      
                      Form
      of Convertible Promissory Note (1)10.6
                      
                      Form
      of Warrant to Purchase Common Stock (1)10.7
                      
                      Security
      Agreement, dated as of May 8, 2009, by and among the Company and the
      signatories thereon (1)10.8
                      
                      Form
      of Subscription Agreement, dated as of July 28, 2009, by and among the
      Company and the subscribers listed therein. (2)10.9
                      
                      Form
      of Convertible Promissory Note (2)10.10
                      
                      Form
      of Warrant to Purchase Common Stock (2)31.1
      *
                      
                      Section 302
      Certification of Principal Executive Officer31.2
      *
                      
                      Section 302
      Certification of Principal Financial Officer32.1
      *
                      
                      Section 906
      Certification of Principal Executive Officer and Principal Financial
      Officer


*
              
              Filed
      herewith(1)
              
              Incorporated
      hereby by reference to the copy of such document included as an exhibit to
      our Form 8-K filed on May 13,
2009.




(2)    Incorporated
hereby by reference to the copy of such document included as an exhibit to our
Form 8-K filed on August 3, 2009.




23