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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

**(Mark One)**

 

| **x**  | ** ** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                                                                                                    |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                                                                                                                                                     |
|   | ** ** | **For the fiscal year ended December 31, 2008**                                                                                                                                                                                                     |
|   |       |                                                                                                                                                                                                                                                     |
| **or** |
|   |       |                                                                                                                                                                                                                                                     |
| **o**  | ** ** | **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 0-27517**

 

**GAIAM, INC.**

(Exact name of registrant as specified in itscharter)

 

| **COLORADO**                                                    | ** ** | **84-1113527**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

**833 WEST SOUTH BOULDER ROAD,LOUISVILLE, CO 80027**(Address of principalexecutive offices)

 

**(303) 222-3600**(Registrant’stelephone number, including area code)

 

Securities registered pursuant to Section 12(b) ofthe Act:

 

| **Title of Each Class**                         | ** ** | **Name of  Each Exchange on Which Registered** |
|-------------------------------------------------|------------|------------------------------------------------|
| **Class A Common Stock, $.0001 par value** | ** ** | **NASDAQ Stock Market LLC**                    |

 

Securities registered pursuant tosection 12(g) of the Act:**None**

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.YES **o**  NO **x**

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act.YES **o**  NO **x**

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  YES **x**  NO **o**

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K (§229.405 of this chapter) is not contained herein, and will notbe contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.  **o**

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definitions of “largeaccelerated filer,” ,”accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

| Large accelerated filer **o**                                                   |   | Accelerated filer **x**     |
|---------------------------------------------------------------------------------|--------|-----------------------------|
| Non-accelerated filer **o **(Do  not check if a smaller reporting company) |   | Smaller reporting company o |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Act.)  YES **o**  NO **x**

 

Theaggregate market value of the voting common equity held by non-affiliates ofthe registrant was approximately $231,822,048 as of June 30, 2008, basedupon the closing price on the NASDAQ Global Market on that date.  The registrant does not have non-votingcommon equity.

 

Asof March 9, 2009, 18,541,201 shares of the registrant’s Class Acommon stock and 5,400,000 shares of the registrant’s Class B common stockwere outstanding.

 

**DOCUMENTS INCORPORATED BYREFERENCE**

 

Thefollowing documents (or portions thereof) are incorporated by reference intothe Parts of this Form 10-K noted:

 

Part IIIincorporates by reference from the definitive proxy statement for theregistrant’s 2009 Annual Meeting of Shareholders to be filed with theCommission pursuant to Regulation 14A not later than 120 days after the end ofthe fiscal year covered by this Form.

 

 

 

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**GAIAM, INC.**

 

Annual Report on Form 10-K

 

For the Fiscal Year Ended December 31, 2008

 

INDEX

 
|               | ** **                                                                                                          | **Page  Number** |
|---------------|---------------------------------------------------------------------------------------------------------------------|------------------|
| PART I   |                                                                                                                |             |
|          |                                                                                                                |             |
| Item 1.       | Business                                                                                                            | 3                |
| Item 1A.      | Risk Factors                                                                                                        | 9                |
| Item 1B.      | Unresolved Staff  Comments                                                                                          | 13               |
| Item 2.       | Properties                                                                                                          | 14               |
| Item 3.       | Legal Proceedings                                                                                                   | 14               |
| Item 4.       | Submission of  Matters to a Vote of Security Holders                                                                | 14               |
|          |                                                                                                                |             |
| PART II  |                                                                                                                | 14               |
| Item 5.       | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities | 14               |
| Item 6.       | Selected Financial  Data                                                                                            | 16               |
| Item 7.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         | 17               |
| Item 7A.      | Quantitative  and Qualitative Disclosures About Market Risk                                                         | 26               |
| Item 8.       | Financial  Statements and Supplementary Data                                                                        | 27               |
| Item 9.       | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                               | 50               |
| Item 9A.      | Controls and  Procedures                                                                                            | 50               |
| Item 9B.      | Other Information.                                                                                                  | 51               |
|          |                                                                                                                |             |
| PART III |                                                                                                                | 51               |
| Item 10.      | Directors,  Executive Officers and Corporate Governance                                                             | 51               |
| Item 11.      | Executive  Compensation                                                                                             | 51               |
| Item 12.      | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    | 51               |
| Item 13.      | Certain Relationships  and Related Transactions, and Director Independence                                          | 51               |
| Item 14.      | Principal  Accountant Fees and Services                                                                             | 51               |
|          |                                                                                                                |             |
| PART IV  |                                                                                                                | 51               |
| Item 15.      | Exhibits and  Financial Statement Schedules                                                                         | 51               |
|          |                                                                                                                |             |
| SIGNATURES    | 54                                                                                                                  |

 

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**Part I**

 

**Item 1.  Business**

 

## **Our Business**

##  

Weare a lifestyle media company providing a broad selection of information,media, products and services to customers who value personal development,wellness, ecological lifestyles, responsible media and conscious community. Weoffer our customers the ability to make purchasing decisions and findresponsible content based on these values while providing quality offerings ata price comparable to mainstream alternatives. We market our content, media andproducts through a multi-channel approach including traditional and digitalmedia channels, direct to consumers via catalogs, the Internet, direct responsetelevision, broadband, subscriptions and communities as well as traditionalretail stores. At the end of 2008, our home media was carried by approximately73,000 retail stores in the United States alone, and we had approximately 8million direct customers.

 

Wehave established ourselves as a lifestyle media brand, content producer andlicensor, information resource and authority in the Lifestyles of Health andSustainability (“LOHAS”) market including the emerging Conscious Media market.We seek to become a unifying symbol of these emerging media and lifestylegenres. Our lifestyle brand is built around our ability to develop and offermedia content, products, lifestyle solutions and community to consumers in theLOHAS and Conscious Media markets. Our content forms the basis of ourproprietary offerings, on which we realize our highest margins, which thendrive demand for parallel product and service offerings. Our operations arevertically integrated from content creation, through product development andsourcing, to customer service and distribution. We market our products andservices across three segments: business, direct-to-consumer, and solar. We distribute the majority ofour products in our business and direct to consumer segments from ourfulfillment center or drop-ship products directly to customers.  We also utilize a third party replication andfulfillment center for some of our media distribution in our business segment.

 

**The LOHAS Market**

 

The LOHAS market,consists of five main sectors:

 
| · | ***Sustainable  Economy*.** Renewable energy, energy conservation,  recycled goods, environmental management services, sustainable manufacturing  processes and related information and services. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                              |
| · | ***Healthy  Living*.** Natural and organic foods, dietary supplements,  personal care products and related information and services.                                                              |
|   |                                                                                                                                                                                              |
| · | ***Alternative  Healthcare*.** Health and wellness solutions and  alternative health practices.                                                                                                   |
|   |                                                                                                                                                                                              |
| · | ***Personal  Development*.** Solutions, information, products and  experiences relating to mind, body and spiritual development.                                                                  |
|   |                                                                                                                                                                                              |
| · | ***Ecological  Lifestyles*.** Environmentally friendly cleaning and  household products, organic cotton clothing and bedding, and eco-tourism.                                                    |

 

We participate in allfive sectors of the LOHAS market, which represented $227 billion in sales in2000 according to the Natural Business Communication study, with an emphasis onPersonal Development, Ecological Lifestyles and Alternative Healthcare.

 

**The Conscious Media Market**

 

We consider the ConsciousMedia market to consist of five distinct sectors:

 
| · | ***Children’s.***Children’s entertainment and edutainment with a  positive message.                             |
|--------|---------------------------------------------------------------------------------------------------------------------------|
|   | *** ***                                                                                                              |
| · | ***Family  Entertainment.***Entertainment that can be enjoyed by the  entire family, containing no violence or profanity. |
|   | *** ***                                                                                                              |
| · | ***Documentaries.***Educational and informational programming (edutainment).                                              |

 

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| · | ***Inspirational  Entertainment.***Entertainment that inspires people to  expand their awareness and pursue positive changes in their lives. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------|
|   | *** ***                                                                                                                                 |
| · | ***Personal  Development.*** Informative and inspiring content that  helps people to live a better life.                                     |

 

**Our Content**

 

Our business modelrevolves around content creation, which forms the basis for our proprietary products.We have an “in house” production team that produces programming, which has won88 Telly awards and several medals at the International New York Film Festival.We are fully high definition and 5.1 surround sound capable and do the majorityof our authoring and editing at our Colorado facility ensuring the qualitystandards that drive our awards. We also develop children’s programming, whichhas been the recipient of several Parent’s Choice and Kids First Awardsrecognizing new products that help children grow imaginatively, physically, andmentally. During 2008, we added 245 titles to our DVD library increasing ourlibrary to over 2,700 titles. We also develop and market music and audio CDsand publish printed content.

 

**Our Products**

 

Our visual media programsrepresent an integral part of our proprietary product offering. We currentlystock approximately 12,000 stock keeping units, of which approximately 8,000are branded proprietary offerings, including media, accessories and soft goods.In 2008, excluding the solar segment, our proprietary products constituted over88% of our product sales.

 

**Our Sales Channels**

 

We conduct our businessacross three segments. Our business segment customers are primarily nationalretailers, corporate accounts and the media. We conduct our direct to consumerbusiness through our direct response marketing programs, catalogs, the Internetand subscription community sales channels. We design and install solar energy systems and related renewable energyproducts and sustainable living resources through our solar segment.

 

*Media*

 

We develop, produce andlicense information and programming targeted to consumers who value personaldevelopment, wellness, spirituality, inspirational entertainment and consciouscommunity. We have an award-winning library of titles that we sell toretailers, license to selected distributors operating outside of the UnitedStates, and license or sublicense for broadcast and download. Some of our mediapartners include Google, Comcast, LodgeNet, and Entertainment One. All of ourlicensing arrangements require our branding to be prominent on the programmingand are subject to royalty agreements with our performing artists. While ourlicensing of the rights to manufacture and distribute certain of our medialowers recognized revenue, we improve contribution margins and branding throughthis licensing. We intend to continue to seek new licensees for our brandinternationally and to move all of our current distribution agreements tolicensing agreements.

 

*DRTV*

 

We use direct responsetelevision (“DRTV”) marketing to promote LOHAS products and services,particularly those aimed at the fitness/wellness market. DRTV marketing is ahighly-scalable distribution channel for segments of our LOHAS product suite,and also provides broad marketing support for our retail partners, as well ascreating new direct customers to which we cross-market a wide range of LOHASproducts and services via our catalog, Internet, and subscription segments. Wecapitalize on both long-form DRTV shows as well as leading home shoppingchannels such as QVC. In 2008, we used the DRTV channel to launch a new productfor our mass market brand “The Firm”.

 

*Retailers*

 

Since the inception ofour retailer channel in 1998, we have increased our breadth and diversity. Asof the end of 2008, our media titles could be found in approximately 73,000stores in the United States, up from 70,000 at the end of 2007. We currentlysell our media and other products across a variety of leading retailers, includingbookstores such as Barnes & Noble and Borders; media stores such asBest Buy and Blockbuster; beauty stores such as Ulta; home furnishing storessuch as Bed, Bath and Beyond and ABC Carpet and Home; natural food stores suchas Whole Foods Market; sporting goods stores such as Dick’s and REI; massmerchants such as Target, our largest customer and WalMart; e-tailers such asAmazon.com and Drugstore.com; and wholesale clubs such as Costco and Sam’sClub. Many of these retailers display our products in brandedstore-within-store lifestyle presentations that may include custom fixturesthat we design. We implemented our first store-within-store concept late in2000 and the concept has grown to over 10,000 stores by the end of 2008, upfrom 7,000 stores at the end of 2007.  During 2008 we expanded our market reach by purchasing SPRI Products, Inc., a leading marketerof resistance exercise products for the professional health and fitnessindustry.

 

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Our branded products arefound in Canada, Mexico, Japan, the United Kingdom and Australia. We sell ourmedia products to international accounts primarily under licensing agreements.  During the first quarter of 2008, weconverted any remaining distributor relationships to license arrangements.

* *

*Services*

 

Weconduct operations as a solar energy integrator through our wholly ownedsubsidiary Real Goods Solar, Inc., offering turnkey services including thedesign, procurement, installation, grid connection, monitoring, maintenance andreferrals for third-party financing of solar energy systems.  We also sell renewable energy products andsustainable living resources through Real Goods’ nationally distributed catalogand website.  On May 13, 2008, RealGoods consummated its initial public offering of 5.5 million shares of its Class Acommon stock. During 2008, we completed acquisitions targeted towards expandingand enhancing our solar market,  Theseacquisitions were Carlson Solar, Inc., Independent Energy Systems, Inc.,and Regrid Power, Inc., solar energy integrators, located in both southernand northern California.

 

*Catalogs*

 

We offer a variety ofLOHAS products directly to the consumer through our catalogs and through someconsumer lifestyle publications. We mailed approximately 16.0 million catalogsin 2008. Our customer demographics are highly regarded with our customershaving an average income over $84,000 and over 70% of them being collegeeducated.

 

*Internet*

 

We use the Internet tosell our products and to provide information on the LOHAS lifestyle.  We currently offer approximately 10,000 stockkeeping units on our websites.  We promoteour website through our visual media, catalogs, print publications, productpackaging and Internet links. We provide customer support for Internet salesfrom our in-house call center as a key component of our Internet approach.

 

*Communityand Subscription Services*

 

We offer a variety ofsubscription paid services.  Theseservices include online communities under various brands and subscriptionclubs.  In 2008 we launched a master sitefor our community at www.gaia.com.

 

**Our Operations**

 

*Sales Channels, ProductDevelopment and Sourcing*

 

We sell our brandedproducts across various sales channels. Non-proprietary products are onlyavailable through our catalogs and over the Internet. We use our catalog andInternet channels to test products before we develop products under our brandand distribute them through our other sales channels. Because we use amulti-channel approach to our business we are able to leverage our media andproduct development costs across all channels of our business.

 

Our development teamdesigns our proprietary offerings, our merchandisers source these products bothdomestically and internationally and third party suppliers produce theseproducts to our specifications. We design our products to supply information,enhance customers’ lifestyles and experiences and provide healthy, naturalsolutions while being eco-friendly and promoting a sustainable economy. We alsoscreen the environmental and social responsibility of our suppliers. In orderto minimize risk we often identify an alternate supplier for our products in aseparate location.

 

*CustomerService*

 

We focus on building andmaintaining customer relationships that thrive on loyalty and trust. Wemaintain a “no-risk guarantee” policy, whereby we provide a customer a fullrefund for our products that are returned at any time, for any reason. We haveestablished a most valued customer program, which extends added benefits to ourmost loyal catalog and Internet customers. Our in-house customer servicedepartment includes product specialists who have specific product knowledge andassist customers in selecting products and solutions that meet their needs. Weemploy telephone routing software that directs each call to the appropriaterepresentative. Our policy is to ship orders no later than the next businessday, which we accomplish by stocking inventory that supports over 85% of ourorders. We believe that by offering exceptional customer service we encouragerepeat purchases by our customers, enhance our brand identity and reputationand build stronger relationships with our customers.

 

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*Established Infrastructure*

 

We operate a 282,000square foot distribution center near Cincinnati, Ohio, which providesfulfillment for the majority of our current domestic business needs and has thecapacity to support the growth of our business. This central U.S. locationallows us to achieve shipping cost efficiencies to most locations. The centeris also located within 30 minutes of several major shipping company hubs. Weuse a supply chain management system that supports our entire operation,including fulfillment, inventory management, and customer service. Ourfulfillment center is connected to our other facilities by a state-of-the artvoice-over-Internet telecom network that allows us to maintain a high degree ofconnectivity within our organization.

 

**Our Growth Strategies**

 

*Expand our Media Offering*

 

Proprietary and authenticcontent lies at the core of our business model. Our media offerings introducecustomers to us and help establish us as an authority in the LOHAS market. Ourprimary focus is on leveraging our content with branded lifestyle offeringsthrough various media, catalogs, the Internet, and national retailers. Webelieve that the content-centric strategy is a competitive advantage and themulti-channel approach allows us the broadest possible consumer reach. It alsoprovides the optimal “context” for us to market lifestyle products that areappropriate companions to the media.

 

We will continue todevelop authentic content that caters to the LOHAS lifestyle in DVD, book andaudio formats and also accelerate our efforts in the digital media, broadcastand online categories. For example, we developed a wellness component of  our media library by producing DVDs with theMayo Clinic as a partner. We intend to continue to expand our brand to theConscious Media market, which incorporates children’s, family, inspirationaland edutainment media. We believe we can establish our brand as a leading brandin some of these media categories.

 

We have expanded ourvisual media offerings internationally and plan to continue to expand thisopportunity. We also intend to broaden the variety of formats we offer, fromour traditional “physical media” (DVD, CD, etc), to making our contentavailable online to our consumers in both one-shot “purchase” format orsubscription services.

 

*Capitalize on our market share positioning*

 

Based on Nielsen’sVideoscan, we grew our U.S. DVD market share in the fitness/wellness categoryfrom 26% in 2005 to over 40% in 2008. We will utilize our leadership positionand sacrifice some of our market share in fitness in order to assume a categorymanagement role bringing competitive product into the mix to establish the mostcomplete fitness assortment in the business. We tested this concept with Targetin 2008 and are now expanding the category management concept to otherspecialty channels.  By assuming thiscategory management role, we improved our revenues and profits as well asexpanded the exposure of the category. Based on the same Nielsen report, weended 2008 sixth in the non-theatrical U.S. DVD category with 6% market share.We intend to continue to grow our market share in the non-theatrical categorythrough the production and acquisition of Conscious Media titles, focusing onchildren’s, edutainment, and family entertainment.  We also plan to extend our line of offeringsinto wellness and green living with solution based programming and media basedkits, building store within store wellness offerings and continuing to grow ourretail presence.

 

*Improve our Profit Margins*

 

We believe we can improveour profit margins with several distinct strategies. We will continue to focus oursales strategy on media that carries over 70% gross margins. We areestablishing ourselves as a brand in the Conscious Media and wellness/fitnessmedia market as well as in a genre we call edutainment. By continuing to growour market share in media, we believe we can attract more media producers towork with our brand instead of the traditional studio or distributor model.

 

We launched a continuityand subscription business with our acquisition of a majority of the equity ofSpiritual Cinema.. These businesses carry over 85% gross margins and connectour media content directly to the consumer. We expect to continue to invest inthis channel of business. We believe that with the increase in broadbandacceptance in the consumer marketplace, coupled with our specialized medialibrary and loyal direct customer base, we have an opportunity for stronggrowth at high margins as digital downloads of media become mainstream.

 

We expect to grow ourinternational business through licensing arrangements that carry low cost ofgoods. We have a valuable library of branded products, with only a smallportion being monetized outside North America.

 

*Strengthen our Lifestyle Brand*

 

Our goal is to maintainour brand as an authority in the LOHAS market (including the Conscious Mediamarket) and to establish our brand as a unifying symbol of the emerging LOHASlifestyle. We plan to strengthen our brand by growing our 

 

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media, making our brandmore prominent across our catalog efforts, focusing on category managementinitiatives, increasing our store-within-store presence across nationalretailers, increasing our marketing and public relations efforts, andaggressively developing and marketing proprietary products while maintainingour high level of customer service. We initiated a branding study in late 2006that drove this initiative during 2007 and 2008.

 

*Launch aMass Market Brand in Fitness*

 

We launched mass marketmedia and products in fitness under “The Firm” brand in late 2006. We believethat the aging baby boomers at all income levels will be looking forfitness/wellness products. We do not market our brand except in media in certainmass market channels and believe there is growth opportunity for us in thosechannels under a different brand with our same attention to quality. Wesupported The Firm brand through DRTV dollars during 2007 and 2008 and ended2008 with over 2,700 doors carrying The Firm brand through a store-within-storedisplay.

 

*Expand our Proprietary Products*

 

Excluding our partiallyowned subsidiaries, our proprietary products, which we introduced in 1997,represented over 88% of our revenues in fiscal year 2008. These products carrya higher margin, provide for branding opportunity and distinguish us from ourcompetitors. We currently offer proprietary products that range from mediaproducts to sleep, stress relief, yoga and Pilates accessories to organiccotton bedding and bath products. We have also expanded our exclusive medialibrary to over 2,700 titles through acquisitions and internal development. Wecontinue to develop and market proprietary products across the LOHAS sectors.We will continue to look for additional library acquisitions as we expand ourcontent across the Conscious Media market. We are strengthening our supplychain globally by sourcing a greater number of products offshore and leveragingour expanding media sales to acquire lower costs from our replicators. Weleverage our product development costs over all sales channels.

 

*Capitalize on our Multi-channel Approach*

 

Our multi-channelstrategy affords us the broadest possible customer reach, as well as allowingour customers to buy from us “what they want, when they want, where they wantto.” This approach makes purchasing our lifestyle products convenientregardless of the channel that a customer prefers. It also allows us to migratesegments of our customer base across channels to develop deeper, longer-lastingrelationships with them, and to convert them from purchasers of individualmedia products into subscribers to our “continuity programs,” whether those areDVD-based, or online access to communities and content on a continuity basis.Additionally, this diversified, strategic approach should provide for continuedoperating and business stability as we have the ability to cross-marketlifestyle products and services regardless of the customer location or thechannel to which we are marketing.

 

In our direct to consumerbusiness we are open 24 hours a day, offering approximately 10,000 stockkeeping units on our Internet sites. As we increase the depth of media andcommunity functionality available to our consumers, our Internet presence willtransform from being merely a place to “order” product to a place to “consume”it  in real-time when digital downloadsbecome more mainstream.

 

In our business segment,we continue to expand our presence in national retailers and currently haveplacements in approximately 73,000 retail points in the United States, up from70,000 at the end of 2007. We also continue to expand our store-within-storeconcept in a variety of stores, including Whole Foods Market, Barnes &Noble Bookstores, Borders, Target, Ulta, Dick’s Sporting Goods, REI, ABC Carpetand Home and other national retailers. We currently have over 10,000 storewithin store concepts.

 

*Complement our Existing Business with SelectiveStrategic Acquisitions*

 

Our growth strategy isnot dependent on acquisitions. However, we will consider those strategicacquisitions in the LOHAS market that complement our existing business,increase our media and related product offerings, expand our geographicalreach, extend our channel distribution, and add to our direct customer base. Weespecially focus on companies with media content, a strong brand identity andcustomer and product information databases that augment our existing databases.We often allow some of the acquired company’s management team to retain responsibilityfor front-end business functions such as creative presentation and marketing,while consolidating operational functions under our existing infrastructurewhen we can realize economies of scale.

 

*Establisha lifestyle community*

 

During 2008, we continuedto develop the online “space” for our customers to come together with eachother and with our cadre of experts in core LOHAS areas, to share ideas,discuss new trends and solutions, and allow our customers access to 

 

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world-class resources todeepen their understanding of issues that are central to how they choose tolive their lives. During 2008, we launched our new community site atwww.gaia.com.

 

**Our Business Segments**

 

We separate our businessinto three business segments: the business segment which includes sales tobusinesses, retailers, international licenses, corporate accounts and mediaoutlets; the direct to consumer segment, which includes DRTV, catalogs,E-commerce, and subscription community services; and the solar segment, whichincludes the design and installation of solar energy systems and the sale ofrelated renewable energy products and sustainable living resources.

 

The business, direct toconsumer, and solar segments represented 34.6%, 50.5%, and 14.9% of the 2008net revenues, respectively. Our business segment is dependent upon a few majorcustomers for a significant portion of its revenues. See Note 13 to ourconsolidated financial statements for further information on our segments.

 

**Our Intellectual Property**

 

Our tradename Gaiam andvarious product and Internet domain names are subject to trademark or pendingtrademark applications of Gaiam or a Gaiam company. We believe these trademarksare significant assets to our business.

 

**Our Competitive Position**

 

Webelieve that fragmented supplier and distribution networks characterize theLOHAS market, and we are not aware of a dominant leader. Our goal is toestablish ourselves as the market leader.

 

Our business is evolvingand competitive. Larger and better-established entities may acquire, invest inor form joint ventures with our competitors. Some of these entities have longeroperating histories and have greater financial and marketing resources than wehave. Increased competition from these or other competitors could reduce ourrevenue and profits. In addition, the smaller businesses we compete against maybe able to more effectively personalize their relationships with customers.

 

Because we usemulti-channel distribution for our products, we compete with various producersof similar products and services. Our competitors include Warner, Disney,Paramount, Fox, Lions Gate, Liberty Media, Nike, Reebok, thousands of small,local and regional businesses, and product lines or items offered by largeretailers, manufacturers, publishers and media producers.

 

We believe the principalcompetitive factors in the LOHAS market are authenticity of information, uniquecontent and distinctiveness of products and services, quality of product, brandrecognition and price, and distribution capabilities. We believe we competefavorably on all these relevant factors.

 

We expect industryconsolidation to increase competition. As our competitors grow, they may adoptaggressive pricing or inventory policies, which could result in reducedoperating margins and loss of market share.

 

Our success also dependsupon the willingness of consumers to purchase media, goods and services thatpromote the values we espouse. While we believe our business plan andassumptions are reasonable, the demographic trends on which they are based maychange and the current consumption levels may not be sustained. The decrease ofconsumer interest in purchasing goods and services that promote the values weespouse would materially and adversely affect our customer base and revenuesand, accordingly, our financial prospects.

 

**Our Employees**

 

As of February 23,2009, we employed approximately 526 individuals. None of our employees arecovered by a collective bargaining agreement.

 

**Regulatory Matters**

 

A number of existing andproposed laws restrict disclosure of consumers’ personal information, which maymake it more difficult for us to generate additional names for our directmarketing, and restrict our ability to send unsolicited electronic mail orprinted materials. Although we believe we are generally in compliance withcurrent laws and regulations and that these laws and regulations have not had asignificant impact on our business to date, it is possible that existing orfuture regulatory requirements will impose a significant burden on us.

 

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We generally collectsales taxes only on sales to residents of states in which we havelocations.  Currently, we collect salestaxes on certain sales to residents of California, Colorado, Illinois, New Yorkand Ohio. A number of legislative proposals have been made at the federal,state and local level, and by foreign governments, that would impose additionaltaxes on the sale of goods and services over the Internet and certain stateshave taken measures to tax Internet-related activities. If legislation isenacted that requires us to collect sales taxes on sales to residents of otherstates or jurisdictions, sales in our direct to consumer businesses may beadversely affected.

 

Our business is alsosubject to a number of other governmental regulations, including the Mail orTelephone Order Merchandise Rule and related regulations of the FederalTrade Commission. These regulations prohibit unfair methods of competition andunfair or deceptive acts or practices in connection with mail and telephoneorder sales and require sellers of mail and telephone order merchandise toconform to certain rules of conduct with respect to shipping dates andshipping delays. We are also subject to regulations of the U.S. Postal Serviceand various state and local consumer protection agencies relating to matterssuch as advertising, order solicitation, shipment deadlines and customerrefunds and returns. In addition, merchandise that we import is subject toimport and customs duties and, in some cases, import quotas.

 

**Seasonality**

 

See the “Quarterly andSeasonal Fluctuations” section of Item 7, Management’s Discussion andAnalysis of Financial Condition and Results of Operations, for informationpertaining to the seasonal aspects of our business.

 

**Available Information**

 

Our corporate website atwww.gaiam.com/corporate provides information about us, our history, goals andphilosophy, as well as certain financial reports and corporate press releases.Our www.gaiam.com website features a library of information and articles onpersonal development, healthy lifestyles and environmental issues, along withan extensive offering of media, products and services. We believe our websiteprovides us with an opportunity to deepen our relationships with our customersand investors, educate them on a variety of issues, and improve our service. Aspart of this commitment, we have added a link on our corporate website to ourSecurities and Exchange Commission filings, including our reports on Form 10-K,10-Q and 8-K and all amendments to such reports. We make those reportsavailable through our website, free of charge, as soon as reasonablypracticable after these reports are filed with the Securities and ExchangeCommission.

 

We have included ourwebsite addresses only as inactive textual reference, and the informationcontained on our website is not incorporated by reference into the Form 10-K.

 

**Item 1A.  Risk factors**

 

We wish to caution youthat there are risks and uncertainties that could cause our actual results tobe materially different from those indicated by forward looking statements thatwe make from time to time in filings with the Securities and ExchangeCommission, news releases, reports, proxy statements, registration statementsand other written communications as well as oral forward looking statementsmade from time to time by our representatives. These risks and uncertaintiesinclude, but are not limited to, those risks described below that we arepresently aware of. Additional risks and uncertainties that we currently deemimmaterial may also impair our business operations, and historical results arenot necessarily an indication of the future results. The cautionary statementsbelow discuss important factors that could cause our business, financialcondition, operating results and cash flows to be materially adverselyaffected.

 

*Changes in general economic conditions could have a material impact onour business*

 

Changes in overalleconomic conditions that impact consumer spending could impact our results ofoperations. Future economic conditions affecting disposable income such asemployment levels, consumer confidence, credit availability, businessconditions, stock market volatility, weather conditions, acts of terrorism,threats of war, and interest and tax rates could reduce consumer spending orcause consumers to shift their spending away from our products. If the economicconditions and performance of the retail and media environment worsen, we mayexperience material adverse impacts on our business, operating results andfinancial condition.

 

*Increasedcompetition could impact our financial results*

 

We believe that the LOHASmarket includes thousands of small, local and regional businesses. Some smallerbusinesses may be able to more effectively personalize their relationships withcustomers, thereby gaining a competitive advantage. Although we believe that wedo not compete directly with any single company that offers our entire range ofmerchandise and services, within each category we have competitors and we mayface competition from new entrants. Some of our competitors or our 

 

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potential competitors mayhave greater financial and marketing resources and greater brand recognition.In addition, larger, well-established and well-financed entities may acquire,invest in or form joint ventures with our competitors. Increased competitionfrom these or other competitors could negatively impact our business.

 

*Changingconsumer preferences may have an adverse effect on our business*

 

We target our business atconsumers who assign high value to personal development, healthy lifestyles,responsible media, renewable energy and the environment. A decrease of consumerinterest in purchasing goods and services that promote the values we espousewould materially and adversely affect our customer base and sales revenues and,accordingly, our financial prospects. Further, consumer preferences and producttrends are difficult to predict. Our future success depends in part on ourability to anticipate and respond to changes in consumer preferences and we maynot respond in a timely or commercially appropriate manner to such changes.Failure to anticipate and respond to changing consumer preferences and producttrends could lead to, among other things, lower sales of our products,increased merchandise returns and lower margins, which could have a materialadverse effect on our business.

 

*Ourstrategy of offering branded products could lead to inventory risk and highercosts*

 

An important part of ourstrategy is to feature branded products. These products are sold under ourbrand names and are manufactured to our specifications. We expect our relianceon branded merchandise to increase. The use of branded merchandise requires usto incur costs and risks relating to the design and purchase of products,including submitting orders earlier and making longer initial purchase commitments.

 

In addition, the use ofbranded merchandise limits our ability to return unsold products to vendors,which can result in higher markdowns in order to sell excess inventory. Ourcommitment to customer service typically results in us keeping a high level ofmerchandise in stock so we can fill orders quickly. Consequently, we run therisk of having excess inventory, which may also contribute to higher markdowns.Our failure to successfully execute a branded merchandise strategy or toachieve anticipated profit margins on these goods, or a higher than anticipatedlevel of overstocks, may materially adversely affect our revenues.

 

We offer our customersliberal merchandise return policies. Our consolidated financial statementsinclude a reserve for anticipated merchandise returns, which is based onhistorical return rates. It is possible that actual returns may increase as aresult of factors such as the introduction of new merchandise, changes inmerchandise mix or other factors. Any increase in our merchandise returns willcorrespondingly reduce our revenues.

 

*Acquisitionsmay harm our financial results*

 

We have historicallyexpanded our operations in part through strategic acquisitions. We cannotaccurately predict the timing, size and success of our acquisition efforts. Ouracquisition strategy involves significant risks that could inhibit our growthand negatively impact our operating results, including the following: ourability to identify suitable acquisition candidates at acceptable prices; ourability to complete successfully the acquisitions of candidates that weidentify; our ability to compete effectively for available acquisitionopportunities; increases in asking prices by acquisition candidates to levelsbeyond our financial capability or to levels that would not result in thereturns required by our acquisition criteria; diversion of management’sattention to expansion efforts; unanticipated costs and contingent liabilitiesassociated with acquisitions; failure of acquired businesses to achieveexpected results; our failure to retain key customers or personnel of acquiredbusinesses and difficulties entering markets in which we have no or limitedexperience. In addition, the size, timing and success of any futureacquisitions may cause substantial fluctuations in our operating results fromquarter to quarter. Consequently, our operating results for any quarter may notbe indicative of the results that may be achieved for any subsequent quarter orfor a full fiscal year. These fluctuations could adversely affect the marketprice of our Class A common stock.

 

*The lossof the services of our key personnel could disrupt our business*

 

We depend on thecontinued services and performance of our senior management and other keypersonnel, particularly Jirka Rysavy and Lynn Powers. Our strategy of allowingthe management teams of some acquired companies to continue to exercisesignificant management responsibility for those companies makes it importantthat we retain key employees, particularly the sales and creative teams, of thecompanies we might acquire.

 

*Ourfounder and chairman Jirka Rysavy controls us*

 

Mr. Rysavy holds100% of our 5,400,000 outstanding shares of class B common stock and also owns868,682 shares of Class A common stock. The shares of Class B commonstock are convertible into shares of Class A common stock at any 

 

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time. Each share of Class Bcommon stock has ten votes per share, and each share of Class A commonstock has one vote per share. Consequently, Mr. Rysavy is able to vote amajority of our stock, to exert substantial influence over us and to controlmatters requiring approval by our shareholders, including the election ofdirectors, increasing our authorized capital stock, or a merger or sale of ourassets. As a result of Mr. Rysavy’s control, no change of control of uscan occur without Mr. Rysavy’s consent.

 

*Oursuccess depends on the value of our brand*

 

Because of our relianceon sales of proprietary products, our success depends on our brand. Buildingand maintaining recognition of our brand are important to attracting andexpanding our customer base. If the value of our brand were adversely affected,we cannot be certain that we will be able to attract new customers, retainexisting customers or encourage repeat purchases, and if the value of our brandwere to diminish, our revenues, results of operations and prospects would beadversely affected.

 

*The operating results of our solar energy business couldadversely affect our operating results.*

 

The operating results ofour 56%-owned subsidiary, Real Goods Solar, Inc. (“RGSI”), areconsolidated into our reported results from operations. To the extent that RGSIreports a loss for any given period, this will adversely affect our operatingresults for that period. RGSI reported a net loss for its fiscal year ended December 31,2008 of $28.0 million, which included a net loss of $27.4 million for thefiscal quarter ended December 31, 2008. RGSI’s business is affected bygeneral business factors, including prevailing economic conditions,competition, declining consumer credit market conditions, and similar factors.RGSI business may also be affected by many factors that specifically affect thedemand for solar energy systems and the solar energy industry, including thefollowing:

 
| · | fluctuations in  economic and market conditions that affect the viability of conventional and  non-solar renewable energy sources, such as increases or decreases in the  price of oil and other fossil fuels; |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · | availability of  government subsidies and incentives to support the development of the solar  energy industry;                                                                                                 |
| · | cost-effectiveness,  performance and reliability of solar energy systems compared with  conventional and other non-solar renewable energy sources and products;                                                |
| · | success of other  renewable energy generation technologies, such as hydroelectric, wind,  geothermal, solar thermal, concentrated solar and biomass;                                                           |
| · | fluctuations in  expenditures by purchasers of solar energy systems, which tend to decrease in  slower economic environments and periods of rising interest rates;                                             |
| · | deregulation of the  electric power industry and the broader energy industry;                                                                                                                                  |
| · | shortages in the supply  of any of the components used for solar energy systems; and                                                                                                                           |
| · | changes in governmental  regulations that affect the installation of solar energy systems, which can  make installation more difficult, more expensive, or impracticable.                                      |

 

*Disputesconcerning media content and intellectual property may adversely affect us*

 

Most of our media contentis subject to arrangements with third parties pursuant to which we havelicensed certain rights to use and distribute media content owned by thirdparties or have licensed to third parties certain rights to use and distributemedia content that we own. In addition, we have a number of agreements withthird parties concerning the use of our media content and intellectualproperty, including agreements regarding royalties, distribution, duplication,etc. Allegations that we do not have rights to use media content and otherdisputes arising from such arrangements can be costly and may have a materialadverse impact on our results.

 

*Product liability claims against us could result inadverse publicity and potentially significant monetary damages.*

 

As a seller of consumerproducts, we face an inherent risk of exposure to product liability claims inthe event that use of products we sell results in injuries. If such injuries orclaims of injuries were to occur, we could incur monetary damages and ourbusiness could be adversely affected by any resulting negative publicity. Thesuccessful assertion of product liability claims against us also could result inpotentially significant monetary damages and, if our insurance protection isinadequate to cover these claims, could require us to make significant paymentsfrom our own resources.

 

*We aredependent on third party suppliers for the success of our proprietary products*

 

We are dependent on thesuccess of our proprietary products, and we rely on a select group ofmanufacturers to provide us 

 

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with sufficientquantities to meet our customers’ demands in a timely manner, produce theseproducts in a humane and safe environment for both their workers and theplanet, maintain quality standards consistent with our brand, and meet certainpricing guarantees. Our overseas sourcing arrangements carry risks associatedwith relying on products manufactured outside of the U.S., including politicalunrest and trade restrictions, currency fluctuations, transportationdifficulties, work stoppages, and other uncertainties. In addition, a number ofour suppliers are small companies, and some of these vendors may not havesufficient capital, resources or personnel to increase their sales to us or tomeet our needs for increased commitments from them. The failure of oursuppliers to provide sufficient quantities of our proprietary products coulddecrease our revenues, increase our costs, and damage our customer servicereputation.

 

*We relyon communications and shipping networks to deliver our products*

 

Given our emphasis oncustomer service, the efficient and uninterrupted operation of order-processingand fulfillment functions is critical to our business. To maintain a high levelof customer service, we rely heavily on a number of different outside serviceproviders, such as printers, telecommunications companies and deliverycompanies. Any interruption in services from our principal outside serviceproviders, including delays or disruptions resulting from labor disputes, poweroutages, human error, adverse weather conditions or natural disasters, couldmaterially adversely affect our business. In addition, freight carriers mustship products that we source overseas to our distribution center, and a workstoppage or political unrest could adversely affect our ability to fulfillour customer orders.

 

*Informationsystems upgrades or integrations may disrupt our operations or financialreporting*

 

We continually evaluateand upgrade our management information systems, which are critical to ourbusiness. These systems assist in processing orders, managing inventory,purchasing and shipping merchandise on a timely basis, responding to customerservice inquiries, and gathering and analyzing operating data by businesssegment, customer, and stock keeping unit (a specific identifier for eachdifferent product). We are required to continually update these systems.Furthermore, if we acquire other companies, we will need to integrate theacquired companies’ systems with ours, a process that could be time-consumingand costly. If our systems cannot accommodate our growth or if they fail, wecould incur substantial expenses and our business could be adversely affected.

 

Additionally, our successin E-commerce will depend upon our ability to provide a compelling andsatisfying shopping experience. To remain competitive, we must continue toenhance and improve the responsiveness, functionality and features of ouronline technology, and if we are unable to do this, our business could beadversely affected.

 

*Amaterial security breach could cause us to lose sales, damage our reputation orresult in liability to us*

 

Our computer servers maybe vulnerable to computer viruses, physical or electronic break-ins and similardisruptions. We may need to expend significant additional capital and otherresources to protect against a security breach or to alleviate problems causedby any breaches. Our relationships with our customers may be adversely affectedif the security measures that we use to protect personal information such ascredit card numbers are ineffective. We currently rely on security andauthentication technology that we license from third parties. We may notsucceed in preventing all security breaches and our failure to do so couldadversely affect our business.

 

*Oursystems may fail or limit user traffic, which would cause us to lose sales*

 

We support most of ourbusiness through our call center in Louisville, Colorado. Even though we haveback up arrangements, we are dependent on our ability to maintain our computerand telecommunications equipment in this center in effective working order andto protect against damage from fire, natural disaster, power loss,telecommunications failure or similar events. In addition, growth of ourcustomer base may strain or exceed the capacity of our computer andtelecommunications systems and lead to degradations in performance or systemsfailure. We have experienced capacity constraints and failure of informationsystems in the past that have resulted in decreased levels of service deliveryor interruptions in service to customers for limited periods of time. Althoughwe continually review and consider upgrades to our technical infrastructure andprovide for system redundancies and backup power to limit the likelihood of systemsoverload or failure, substantial damage to our systems or a systems failurethat causes interruptions for a number of days could adversely affect ourbusiness. Additionally, if we are unsuccessful in updating and expanding ourinfrastructure, including our call center, our ability to grow may beconstrained.

 

*Governmentregulation of the Internet and E-commerce is evolving and unfavorable changescould harm our business*

 

We are subject to generalbusiness regulations and laws, as well as regulations and laws specificallygoverning the Internet and E-commerce. Such existing and future laws andregulations may impede the growth of the Internet or other onlineservices.  These regulations and laws maycover taxation, user privacy, pricing, content, copyrights, distribution,consumer 

 

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protection, the provisionof online payment services and quality of products and services.  There is lack of clarity on how existing lawsgoverning issues such as property ownership, sales and other taxes and personalprivacy apply to the Internet and E-commerce. Unfavorable resolution of these issues may harm our business.

 

*We mayface legal liability for the content contained on our websites*

 

We could face legalliability for defamation, negligence, copyright, patent or trademarkinfringement, personal injury or other claims based on the nature and contentof materials that we publish or distribute on our websites. If we are heldliable for damages for the content on our websites, our business may suffer.Further, one of our goals is for our websites to be trustworthy and dependableproviders of information and services. Allegations of impropriety, even ifunfounded, could therefore have a material adverse effect on our reputation andour business.

 

*Relyingon our centralized fulfillment center could expose us to losing revenue*

 

Prompt and efficientfulfillment of our customers’ orders is critical to our business. Our facilityin Cincinnati, Ohio handles our fulfillment functions and some customer-servicerelated operations, such as returns processing. A majority of our orders arefilled and shipped from the Cincinnati facility. The balance is shippeddirectly from suppliers. Because we rely on a centralized fulfillment center,our fulfillment functions could be severely impaired in the event of fire,extended adverse weather conditions, transportation difficulties or naturaldisasters. Because we recognize revenue only when we ship orders, interruptionof our shipping would diminish our revenues.

 

*We mayface quarterly and seasonal fluctuations that could harm our business*

 

Our revenue and resultsof operations have fluctuated and will continue to fluctuate on a quarterlybasis as a result of a number of factors, including the timing of catalogofferings, timing of orders from retailers, recognition of costs or net salescontributed by new merchandise, fluctuations in response rates, fluctuations inpaper, production and postage costs and expenses, merchandise returns, adverseweather conditions that affect distribution or shipping, shifts in the timingof holidays and changes in our merchandise mix. In particular, our net salesand profits have historically been higher during the fourth quarter holidayseason. We believe that this seasonality will continue in the future.

 

*Postageand shipping costs may increase and therefore increase our expenses*

 

We ship our products,catalogs, and lifestyle publications to consumers and the cost of shipping is amaterial expenditure. Postage and shipping prices increase periodically and canbe expected to increase in the future. Any inability to secure suitable orcommercially favorable prices or other terms for the delivery of ourmerchandise and catalogs could have a material adverse effect on our financialcondition and results of operations.

 

*Ourbusiness is subject to reporting requirements that continue to evolve andchange, which could continue to require significant compliance effort andresources.*

 

Because our common stockis publicly traded, we are subject to certain rules and regulations offederal, state and financial market exchange entities charged with theprotection of investors and the oversight of companies whose securities arepublicly traded. These entities, including the Public Company AccountingOversight Board, the SEC and the NASDAQ, periodically issue new requirementsand regulations and legislative bodies also review and revise applicable lawssuch as the Sarbanes-Oxley Act of 2002. As interpretation and implementation ofthese laws and rules and promulgation of new regulations continues, wewill continue to be required to commit significant financial and managerialresources and incur additional expenses.

 

**Item 1B.         Unresolved staff comments**

 

None.

 

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### **Item2.****           Properties**

###  

Our principal executiveoffices are located in Louisville, Colorado. Our fulfillment center is locatedin the Cincinnati, Ohio area. The following table sets forth certaininformation relating to our primary facilities:

 
| **Primary  Locations** | ** ** | **Size**        | ** ** | **Use**                    | ** ** | **Lease  Expiration** | ** ** |
|------------------------|------------|-----------------|------------|----------------------------|------------|-----------------------|------------|
| ** **             | ** ** | ** **      | ** ** | ** **                 | ** ** | ** **            | ** ** |
| Louisville, CO         |       | 148,400 sq. ft. |       | Headquarters and studio    |       | Owned                 |       |
|                   |       |            |       |                       |       |                  |       |
| Cincinnati, OH         |       | 281,900 sq. ft. |       | Fulfillment center         |       | June 2010        |       |
|                   |       |            |       |                       |       |                  |       |
| New York, NY           |       | 12,700 sq. ft.  |       | Media office               |       | March 2015       |       |
|                   |       |            |       |                       |       |                  |       |
| Hopland, CA            |       | 12 acres        |       | Renewable energy demo site |       | Owned                 |       |

 

We have an option torenew the existing lease for our fulfillment center. We believe our facilitiesare adequate to meet our current needs and that suitable additional facilitieswill be available for lease or purchase when, and as, we need them.

 

### **Item3.****           Legalproceedings**

###  

From time to time,we are involved in legal proceedings that we consider to be in the normalcourse of business. We do not believe that any of these proceedings will have amaterial adverse effect on our business.

 

### **Item4.****           Submissionof matters to a vote of security holders**

#####  

No matters were broughtto a vote of our shareholders in the fourth quarter of the fiscal year ended December 31,2008.

 

**Part II**

 

### **Item5.****           Marketfor registrant’s common equity, related stockholder matters and issuerpurchases of equity securities**

######  

**Stock Price History**

 

Our Class A commonstock is listed on the NASDAQ Global Market under the symbol “GAIA”. On March 2,2009, we had 6,888 shareholders of record and 18,541,201 shares of $.0001 parvalue Class A common stock outstanding. We have 5,400,000 shares of $.0001par value Class B common stock outstanding, held by one shareholder.

 

The following table setsforth certain sales price and trading volume data for our Class A commonstock for the period indicated:

 
| ** **     | ** ** | **High** | ** ** | **Low** | ** ** | **Close** | ** ** | **Average**

**Daily**

**Volume** | ** ** |
|----------------|------------|----------|------------|---------|------------|-----------|------------|------------------------------------|------------|
| Fiscal 2008:   |       |     |       |    |       |      |       |                               |       |
| Fourth Quarter |       | $        | 10.63      |    | $          | 3.03      |       | $                                  | 4.62       |   | 146,903 |   |
| Third Quarter  |       | $        | 15.00      |    | $          | 10.51     |       | $                                  | 10.60      |   | 214,791 |   |
| Second Quarter |       | $        | 20.18      |    | $          | 12.25     |       | $                                  | 13.51      |   | 342,969 |   |
| First Quarter  |       | $        | 29.57      |    | $          | 16.65     |       | $                                  | 17.32      |   | 315,387 |   |
|           |       |     |       |    |       |      |       |                               |       |
| Fiscal 2007:   |       |     |       |    |       |      |       |                               |       |
| Fourth Quarter |       | $        | 30.73      |    | $          | 19.50     |       | $                                  | 29.68      |   | 227,383 |   |
| Third Quarter  |       | $        | 24.14      |    | $          | 14.67     |       | $                                  | 24.03      |   | 213,300 |   |
| Second Quarter |       | $        | 18.50      |    | $          | 14.15     |       | $                                  | 18.23      |   | 200,805 |   |
| First Quarter  |       | $        | 15.85      |    | $          | 11.65     |       | $                                  | 15.74      |   | 195,993 |   |

 

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**Issuer Purchases of Registered Equity Securities**

 

The following tablesummarizes purchases of 1,322,285 of our Class A common stock that werepurchased in the open market during the periods indicated:

 
| **Period**                     | ** ** | **(a) Total Number of  Shares (or Units)  Purchased** | ** ** | **(b) Average Price Paid**

**per Share (or Unit)** | ** ** | **(c) Total Number of**

**Shares (or Units)  Purchased as Part of  Publicly Announced  Plans or Programs** | ** ** | **(d) Maximum Number  (or Approximate Dollar  Value) of Shares (or  Units) that May Yet Be  Purchased Under the  Plans or Programs** | ** ** |
|--------------------------------|------------|--------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Quarter ended  March 2008 |       | 75,800                                                                         |       | $                                                                                 | 17.5500    |                                                                                                                                                               | —     |                                                                                                                                                                                                            | —     |   |
| Quarter ended  June 2008  |       | 1,159,288                                                                      |       | $                                                                                 | 14.4215    |                                                                                                                                                               | —     |                                                                                                                                                                                                            | —     |   |
| November 2008             |       | 68,497                                                                         |       | $                                                                                 | 3.5146     |                                                                                                                                                               | —     |                                                                                                                                                                                                            | —     |   |
| December 2008             |       | 18,700                                                                         |       | $                                                                                 | 4.3494     |                                                                                                                                                               | —     |                                                                                                                                                                                                            | —     |   |

 

**Dividend Policy**

 

We have never declared orpaid any cash dividends on our capital stock. Our bank line of credit agreementpermits, upon advance notification and maintaining of certain financial ratios,payment of dividends to our shareholders.

 

**Sales of Unregistered Securities**

 

None.

 

**Equity Compensation PlanInformation**

 

The following tablesummaries equity compensation plan information for our Class A commonstock:

 
| **Plan Category**                                      | ** ** | **Number of securities  to be issued upon  exercise of outstanding  options, warrants and  rights** | ** ** | **Weighted average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available for  future issuance under**

**equity compensation  plans** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                        |       |                                                                                                                                             |       |                                                                                                             |       |                                                                                                                                        |       |
| Equity  compensation plans approved by security holders     |       | 1,219,310                                                                                                                                        |       | $                                                                                                                | 10.17      |                                                                                                                                        | 509,971    |   |
| Equity  compensation plans not approved by security holders |       | —                                                                                                                                           |       | —                                                                                                           |       | —                                                                                                                                      |       |
| Total                                                       |       | 1,219,310                                                                                                                                        |       | $                                                                                                                | 10.17      |                                                                                                                                        | 509,971    |   |

 

**Stock Performance Graph**

 

The Graph below shows,for the five years ended December 31, 2008, the cumulative total return onan investment of $100 in our Class A common stock, assuming the investmentwas made on December 31, 2003 and the relative stock performances of our Class Acommon stock from Gaiam’s initial public offering on October 29, 1999until December 31, 2003.  The graphcompares such return with that of comparable investments assumed to have beenmade on the same date in (a) the NASDAQ Stock Market (U.S. Companies)Index and (b) a media peer group, comprised of Martha Steward LivingOmnimedia, Inc.; The Walt Disney Company; and Lions Gate EntertainmentCorp.  Although total return for theassumed investment reflects a reinvestment of all dividends on December 31st of the year in which such dividends are paid,no cash dividends were paid on our common stock during the periodspresented.  Our Class A common stockis quoted by The NASDAQ Stock Market’s Global Market under the trading symbolGAIA.

 

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**COMPARISON OF CUMULATIVE TOTAL RETURN***

Among Gaiam, Inc., The NASDAQ Composite Index

And A Media Peer Group

 

 

----

* $100 invested on 12/31/03 in stock or index,including reinvestment of dividends. Gaiam’s fiscal year ends on December 31.

 

### **Item6.****           Selectedfinancial data**

 

We derived the selectedconsolidated statement of operations data for the years ended December 31,2008, 2007 and 2006 and consolidated balance sheet data as of December 31,2008 and 2007 set forth below from our audited consolidated financialstatements which are included elsewhere in this Form 10-K. We derived theselected consolidated statement of operations data for the years ended December 31,2005 and 2004 and consolidated balance sheet data as of December 31, 2006,2005 and 2004 set forth below from our audited consolidated financialstatements which are not included in this Form 10-K. The historicaloperating results are not necessarily indicative of the results to be expectedfor any other period. You should read the data set forth below in conjunctionwith “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” and our consolidated financial statements and related notes,included elsewhere in this Form 10-K.

 

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| ** **                                                                       | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **(in thousands, except per share data)**               | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                             |       |                                        |       |   |   |   |   |   |   |   |   |
| **Consolidated  Statements of Operations Data:**                                 |       |                                        |       |   |   |   |   |   |   |   |   |
| Net revenues                                                                     |       | $                                           | 257,172    |   | $ | 262,943 |   | $ | 219,480 |   | $ | 142,492 |   | $ | 96,657 |   |
| Cost of goods  sold                                                              |       | 107,927                                     |       | 94,565 |   | 79,150 |   | 61,977 |   | 48,646 |   |
| Gross profit                                                                     |       | 149,245                                     |       | 168,378 |   | 140,330 |   | 80,515 |   | 48,011 |   |
| Expenses:                                                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Selling and  operating                                                           |       | 142,401                                     |       | 144,768 |   | 119,700 |   | 67,639 |   | 46,060 |   |
| Corporate,  general and administration                                           |       | 13,059                                      |       | 13,157 |   | 14,989 |   | 9,790 |   | 8,241 |   |
| Other general  income and expense                                                |       | 82,928                                      |       | — |   | — |   | — |   | — |   |
| Total expenses                                                                   |       | 238,388                                     |       | 157,925 |   | 134,689 |   | 77,429 |   | 54,301 |   |
|                                                                             |       |                                        |       |   |   |   |   |   |   |   |   |
| Income (loss)  from operations                                                   |       | (89,143                                     | )          | 10,453 |   | 5,641 |   | 3,086 |   | (6,290 | ) |
|                                                                             |       |                                        |       |   |   |   |   |   |   |   |   |
| Gain from  issuance of subsidiary stock                                          |       | 32,800                                      |       | — |   | — |   | — |   | — |   |
| Interest and  other income (expense)                                             |       | 1,216                                       |       | 4,148 |   | 3,905 |   | (175 | ) | 109 |   |
|                                                                             |       |                                        |       |   |   |   |   |   |   |   |   |
| Income (loss)  before income taxes and minority interest                         |       | (55,127                                     | )          | 14,601 |   | 9,546 |   | 2,911 |   | (6,181 | ) |
|                                                                             |       |                                        |       |   |   |   |   |   |   |   |   |
| Income tax  expense (benefit)                                                    |       | (7,542                                      | )          | 5,767 |   | 3,774 |   | 974 |   | (2,440 | ) |
| Minority  interest in net (income) loss of consolidated subsidiaries, net of tax |       | 11,962                                      |       | (310 | ) | (128 | ) | (601 | ) | (897 | ) |
| Net income  (loss)                                                               |       | $                                           | (35,623    | ) | $ | 8,524 |   | $ | 5,644 |   | $ | 1,336 |   | $ | (4,638 | ) |
|                                                                             |       |                                        |       |   |   |   |   |   |   |   |   |
| Net income  (loss) per share:                                                    |       |                                        |       |   |   |   |   |   |   |   |   |
| Basic                                                                            |       | $                                           | (1.46      | ) | $ | 0.34 |   | $ | 0.23 |   | $ | 0.08 |   | $ | (0.32 | ) |
| Diluted                                                                          |       | $                                           | (1.46      | ) | $ | 0.34 |   | $ | 0.23 |   | $ | 0.08 |   | $ | (0.32 | ) |
| Shares  outstanding:                                                             |       |                                        |       |   |   |   |   |   |   |   |   |
| Basic                                                                            |       | 24,452                                      |       | 24,962 |   | 24,349 |   | 17,140 |   | 14,684 |   |
| Diluted                                                                          |       | 24,452                                      |       | 25,214 |   | 24,617 |   | 17,354 |   | 14,684 |   |

 
| ** **                            | ** ** | **As of December 31,** | ** ** |
|---------------------------------------|------------|---------------------------------------|------------|
| **(in thousands)**               | ** ** | **2008**                              | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                  |       |                                  |       |   |   |   |   |   |   |   |   |
| **Consolidated  Balance Sheet Data:** |       |                                  |       |   |   |   |   |   |   |   |   |
| Cash                                  |       | $                                     | 31,965     |   | $ | 66,258 |   | $ | 104,876 |   | $ | 15,028 |   | $ | 10,439 |   |
| Working capital                       |       | 95,780                                |       | 106,815 |   | 140,147 |   | 37,216 |   | 31,488 |   |
| Total assets                          |       | 202,098                               |       | 240,712 |   | 250,968 |   | 156,101 |   | 88,287 |   |
| Total  liabilities                    |       | 33,452                                |       | 34,251 |   | 26,700 |   | 40,716 |   | 17,472 |   |
| Shareholders’  equity            |       | 153,468                               |       | 200,388 |   | 218,606 |   | 107,286 |   | 66,346 |   |
|                                       |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

During the last twoyears, we used $51.3 million to repurchase our common stock.

 

### **Item7.****           Management’sdiscussion and analysis of financial condition and results of operations**

 

**Forward-Looking Statements**

 

This reportcontains forward-looking statements that involve risks and uncertainties. Whenused in this discussion, we intend the words “anticipate,” “believe,” “plan,”“estimate,” “expect,” “strive,” “future,” “intend” and similar expressions asthey relate to us to identify such forward-looking statements. Our actualresults could differ materially from the results anticipated in theseforward-looking statements as a result of certain factors set forth under“Management’s Discussion and Analysis of Financial Condition and Results ofOperations,” “Market Risk” and elsewhere in this report. Risks anduncertainties that could cause actual results to differ include, withoutlimitation, general economic conditions, competition, loss of key personnel,pricing, brand reputation, acquisitions, new initiatives we undertake, securityand information systems, legal

 

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liability forwebsite content, merchandise supply problems, failure of third parties toprovide adequate service, reliance on centralized customer service, overstocksand merchandise returns, our reliance on a centralized fulfillment center,increases in postage and shipping costs, E-commerce trends, future Internetrelated taxes, our founder’s control of us, fluctuations in quarterly operatingresults, consumer trends, customer interest in our products, the effect ofgovernment regulation and programs and other risks and uncertainties includedin our filings with the Securities and Exchange Commission. We caution you thatno forward-looking statement is a guarantee of future performance, and youshould not place undue reliance on these forward-looking statements whichreflect our views only as of the date of this report. We undertake noobligation to update any forward-looking information.

 

You should read thefollowing discussion and analysis of our financial condition and results ofoperations in conjunction with the consolidated financial statements andrelated notes included elsewhere in this document.**Thissection is designed to provide information that will assist readers inunderstanding our consolidated financial statements, changes in certain itemsin those statements from year to year, the primary factors that caused thosechanges and how certain accounting principles, policies and estimates affectthe consolidated financial statements.

 

**Overview and Outlook**

 

# We are a lifestylemedia company providing a broad selection of information, media, products andservices to customers who value personal development, wellness, ecologicallifestyles, responsible media and conscious community. Our media brand is built around our ability to develop and offer mediacontent, products, lifestyle solutions and community to consumers in the LOHASmarket.

#  

# We offer our customers the ability to make purchasing decisions and findresponsible content based on these values while providing quality offerings ata price comparable to mainstream alternatives. We market our media and productsthrough a multi-channel approach including traditional media channels, directto consumers via the Internet, direct response marketing, community,subscriptions, catalog, and through national retailers and corporate accounts.

#  

# Our content forms the basis of our proprietary offerings, which thendrive demand for parallel product and service offerings. Our operations arevertically integrated from content creation, through product development andsourcing, to customer service and distribution. We market our products andservices across three segments: business, direct to consumer, and solar. Wedistribute the majority of our products in our business and direct to consumersegments from our fulfillment center or drop-ship products directly tocustomers.  We also utilize a third partyreplication and fulfillment center for media distribution in our businesssegment.

#  

# Our businesssegment sells directly to retailers, with our products available inapproximately 73,000 retail doors in the United States. During 2008, thissegment generated revenue of $88.9 million, down from $111.5 million during2007. The business segment revenue increased 6.4% excluding internationalrevenues, which were affected by the transition from product sales to licensingarrangements and the disposition of our UK subsidiary. During the year weexpanded our store-within-store presentations, which include customer fixtures thatwe design, to over 10,000 locations, up from 7,000 at the end of 2007.

 

Through its diverse mediareach, the direct to consumer segment provides an opportunity to launch andsupport new media releases, a sounding board for new product testing, promotionalopportunities, a growing online and off-line community, and customer feedbackon us and the LOHAS industry’s focus and future. During 2008, this segmentgenerated revenues of $129.8 million, down from $132.5 million during 2007.  This decrease reflects a planned reduction toour catalog circulation of 16%, a decline in direct response marketing mediaspend and the overall economic environment.

 

On May 13, 2008, oursolar energy business consummated an initial public offering and has since beenmanaged as a separate segment.  Throughrecent acquisitions, this business has grown its sales and expanded its marketterritories.  During 2008, this segmentgenerated revenues of $39.2 million, up from $18.9 million during 2007.  We have and will continue to use the IPOproceeds to fund this segment’s working capital needs and general corporatepurposes, which may include future acquisitions of businesses.

 

During 2008, we completedacquisitions targeted towards expanding and enhancing our solar market,community reach and media content. The solar energy integrator acquisitionswere Carlson Solar, Inc., located in southern California, and IndependentEnergy Systems, Inc. and Regrid Power, Inc., both located northernCalifornia.  We also purchased SPRIProducts, Inc. (“SPRI”), a leading marketer of exercise products for theprofessional health and fitness industry.

 

Given the adversefinancial market conditions,  the currentand projected economic conditions, we evaluated the recoverability of certainassets.  As a result of this evaluation,we impaired $80.0 million of goodwill and other intangibles, acquired medialibraries, and other assets during 2008. The impairment of goodwill, resulting from the application SFAS No.

 

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142, *Goodwill andOther Intangible Assets*, is primarily driven by adverse financialmarket conditions (a decline in our stock price as quoted on NASDAQ) that havereduced our market capitalization below net carrying value on our balancesheet.  The impairment takes into accountthe deteriorating macro-economic environment, the reduced accessibility to thecredit markets for customers, and the high degree of uncertainty about theeventual return to normalcy.

 

We believe our growthwill be driven by information, media content, products, and online communityofferings delivered to the consumer via Internet, retailers, internationallicensing, electronic downloads and subscription systems. We have increased ourfocus on our media content creation and distribution, which strategicallyprovides increased branding opportunities, higher operating contribution andgreater mainstream penetration.

 

We believe a number offactors are important to our long-term success, including building our brands,increasing international growth by expanding into new markets primarily throughlicense arrangements, extending our product lines into wellness, edutainment,and children’s programs, and enhancing our multimedia platform communitythrough new media opportunities, new membership programs, initiatives andacquisitions.

 

**Critical Accounting Policies**

 

We prepare ourconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States, which requires us to make judgments,estimates and assumptions that affect the amounts reported in the consolidatedfinancial statements and accompanying notes. Note 2 to the consolidatedfinancial statements in Item 8 of this Form 10-K summarizes thesignificant accounting policies and methods used in the preparation of ourconsolidated financial statements.

 

We believe the followingto be critical accounting policies whose application has a material impact onour financial presentation, and involve a higher degree of complexity, as theyrequire us to make judgments and estimates about matters that are inherentlyuncertain.

 

*Allowances for Doubtful Accounts and Product Returns*

 

We maintain allowancesfor doubtful accounts for estimated losses resulting from the inability of ourcustomers to make required payments. We make estimates of the collectibility ofour accounts receivable by analyzing historical bad debts, specific customercreditworthiness, and current economic trends. If the financial condition ofour customers were to deteriorate such that their ability to make payments tous was impaired, additional allowances could be required.

 

We record allowances forproduct returns to be received in future periods at the time we recognize theoriginal sale. We base the amounts of the returns allowances upon historicalexperience and future expectations.

 

*Inventory*

 

Inventory consistsprimarily of finished goods held for sale and is stated at the lower of cost (first-in,first-out method) or market. We identify the inventory items to be written downfor obsolescence based on the item’s current sales status and condition. Wewrite down discontinued or slow moving inventories based on an estimate of themarkdown to retail price needed to sell through our current stock level of theinventories.

 

*Goodwill and Other Intangibles*

 

Goodwill represents theexcess of the purchase consideration over the estimated fair value of assetsacquired less liabilities assumed in a business acquisition. Our otherintangibles mainly consist of customer and marketing related assets. We nolonger amortize goodwill, but instead we review it for impairment annually ormore frequently if impairment indicators arise, on a reporting unit level. Wecompare the estimated fair value of a reporting unit with its carrying amount,including goodwill. If the estimated fair value of a reporting unit exceeds itscarrying amount, we consider the goodwill of the reporting unit not impaired.If the carrying amount of a reporting unit exceeds its estimated fair value, weperform the goodwill impairment test to measure the amount of impairment loss.We use a traditional present value method for the purposes of testing forpotential impairment. The process of evaluating the potential impairment ofgoodwill is highly subjective and requires significant judgment at many pointsduring the analysis. Application of alternative assumptions and definitionscould yield significantly different results.

 

*Investments*

 

We account forinvestments in limited liability companies in which we have the ability toexercise significant influence or control, or in which we hold a five percentor more membership interest, under the equity method. We account forinvestments in corporations in which we have the ability to exercisesignificant influence or control, or in which we hold a

 

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twenty percent or moreownership, under the equity method. Under the equity method, we record ourshare of the income or losses of the investment by increasing or decreasing thecarrying value of our investment and recording the income or expense throughthe consolidated statement of operations. Under the cost method of accounting,we carry investments in private companies at cost and adjust them only forother-than-temporary declines in fair value. Determining whether we have theability to exercise significant influence or control over a company is highlysubjective and requires a high degree of judgment.

 

*Purchase Accounting*

 

We account for theacquisition of a controlling interest in a business using the purchase method.In determining the estimated fair value of certain acquired assets andliabilities, we make assumptions based upon many different factors, such ashistorical and other relevant information and analysis performed by independentparties. Assumptions may be incomplete, and unanticipated events and circumstancesmay occur that could affect the validity of such assumptions, estimates, oractual results.

 

*Media Library*

 

Themedia library asset represents the fair value of the library of produced videosacquired through business combinations, the purchase price of media rights toboth video and audio titles, and the capitalized cost to produce mediaproducts, all of which we market to retailers and to direct-mail and onlinecustomers. We amortize the fair value of acquired or purchased media titles andcontent on a straight-line basis over succeeding periods on the basis of theirestimated useful lives. We defer capitalized production costs for financialreporting purposes until the media is released and, then, we amortize thesecosts over succeeding periods on the basis of estimated sales. Historical salesstatistics are the principal factor used in estimating the amortization rate.

 

*Share-Based Compensation*

 

As of January 1,2006, we adopted the provisions of SFAS No. 123(R), *Share-Based Payment*, which requirescompanies to recognize compensation cost for share-based awards based on theestimated fair value of the award on date of grant. We measure compensationcost at the grant date based on the fair value of the award and recognizecompensation cost upon the probable attainment of a specified performancecondition or over a service period. We use the Black-Scholes option valuationmodel to calculate the fair value disclosures under SFAS 123(R). In calculatingthis fair value, there are certain assumptions that we use, as disclosed inNote 12, Share-Based Compensation, consisting of the expected life of theoption, risk-free interest rate, dividend yield, and volatility. The use of adifferent estimate for any one of these components could have a material impacton the amount of calculated compensation expense.

 

**Results of Operations**

 

The following table sets forth certain financial dataas a percentage of revenues for the periods indicated:

 
| ** **                                                                       | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                       | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net revenue                                                                      |       | 100.0                                       | %          | 100.0 | % | 100.0 | % |
| Cost of goods  sold                                                              |       | 42.0                                        | %          | 36.0 | % | 36.1 | % |
| Gross profit                                                                     |       | 58.0                                        | %          | 64.0 | % | 63.9 | % |
|                                                                             |       |                                        |       |   |   |   |   |
| Expenses:                                                                        |       |                                        |       |   |   |   |   |
| Selling and  operating                                                           |       | 55.4                                        | %          | 55.0 | % | 54.6 | % |
| Corporate,  general and administration                                           |       | 5.1                                         | %          | 5.0 | % | 6.8 | % |
| Other general  income and expense                                                |       | 32.2                                        | %          | — | % | — | % |
| Total expenses                                                                   |       | 92.7                                        | %          | 60.0 | % | 61.4 | % |
|                                                                             |       |                                        |       |   |   |   |   |
| Income (loss)  from operations                                                   |       | -34.7                                       | %          | 4.0 | % | 2.5 | % |
|                                                                             |       |                                        |       |   |   |   |   |
| Gain from  issuance of subsidiary stock                                          |       | 12.8                                        | %          | — | % | — | % |
| Other income  (expense), net                                                     |       | 0.5                                         | %          | 1.5 | % | 1.8 | % |
| Income (loss)  before income taxes and minority interest                         |       | -21.4                                       | %          | 5.5 | % | 4.3 | % |
| Income tax  expense (benefit)                                                    |       | -2.9                                        | %          | 2.2 | % | 1.7 | % |
| Minority  interest in net (income) loss of consolidated subsidiaries, net of tax |       | 4.6                                         | %          | -0.1 | % | — | % |
| Net income  (loss)                                                               |       | -13.9                                       | %          | 3.2 | % | 2.6 | % |

 

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***YearEnded December 31, 2008 Compared to Year Ended December 31, 2007***

 

*Net revenue*. Net revenue decreased $5.8 million, or 2.2%, to $257.2million during 2008 from $262.9 million during 2007. Net revenue in our directto consumer segment decreased $2.7 million to $129.8 million during 2008 from$132.5 million during 2007. This decrease in the direct to consumer segment netrevenue primarily reflects overall slower consumer spending and our decision toreduce catalog circulation by 16%.  Netrevenue in our business segment decreased $22.6 million to $88.9 million during2008 from $111.5 million during 2007, primarily reflecting lower internationalproduct sales, which includes the shift to licensing arrangements and thedisposition of our UK operations. Excluding international revenues, ourbusiness segment net revenues increased $5.0 million, or 6.4%, to $83.8 millionduring 2008 from $78.8 million during 2007, primarily reflecting theacquisition of SPRI.  Net revenue in oursolar segment increased $20.3 million to $39.2 million during 2008 from $18.9million during 2007, primarily due to the acquisition of Carlson Solar in thefirst quarter of 2008, Independent Energy Systems in the third quarter of 2008,and Regrid Power in the fourth quarter of 2008.

 

*Gross profit*.Gross profit decreased $19.1 million, or 11.3%, to $149.3 million during 2008from $168.4 million during 2007. As a percentage of net revenue, gross profitdecreased to 58.1% during 2008 from 64.0% during 2007.  Gross profit in our direct to consumersegment decreased $3.4 million, or 3.7%, to $87.2 million during 2008 from$90.6 million during 2007 and, as a percentage of net revenue, decreased to67.2% during 2008 from 68.4% during 2007, primarily reflecting our decision toutilize aggressive promotional strategies, including offering free shippingduring the holiday season.  Gross profitin our business segment decreased $19.5 million, or 27.4%, to $51.8 millionduring 2008 from $71.2 million during 2007 and, as a percentage of net revenue,decreased to 58.2% during 2008 from 63.9% during 2007, primarily reflecting thechange  in international business, oursuccess in expanding our category manager role in media at retailers, andexpanding our distribution footprint by maintaining retail prices whileabsorbing cost increases from higher freight charges and the dollardecline.  Gross profit in our solarsegment increased $4.0 million, or 60.7%, to $10.4 million during 2008 from$6.5 million during 2007 and, as a percentage of net revenue, decreased to26.6% during 2008 from 34.3% during 2007, primarily reflecting the acquisitionof Independent Energy Systems and Regrid Power which have larger average installationsizes that traditionally produce lower gross profit margins.

 

*Selling andoperating expenses*. Selling and operatingexpenses decreased $2.4 million, or 1.6%, to $142.4 million during 2008 from$144.8 million during 2007.  This changeis primarily a result from reduced catalog circulation,  lower royalty payments, and lowercompensation costs, partially offset by investments made in our onlinecommunity and increased bad debt reserve, and lower amortization from theimpairment of certain intangibles assets.   As a percentage of net revenue, selling and operating expenses increasedto 55.4% during 2008 from 55.0% during 2007.

 

*Corporate, general and administration expenses*. Corporate, general and administrationexpenses decreased $0.1 million, or 0.7%, to $13.1 million during 2008 from$13.2 million during 2007.  As ofpercentage of net revenue, corporate, general and administration expensesincreased slightly to 5.1% during 2008 from 5.0% during 2007.

 

*Other generalincome and expense.* Other general incomeand expense was $82.9 million during 2008 and was comprised of impairmentcharges of $44.4 million of goodwill, $27.1 million of media libraries(primarily from the GoodTimes and Lime acquisitions), $1.5 million of otherintangibles, $2.2 million of property and equipment (primarily web sitedevelopment), $1.5 million of deferred advertising costs, and $3.3 million ofother related assets,  and operating expenses related to theconsummation of the Real Goods initial public offering and guaranteed paymentsthat we are obligated to make, but for which we expect to receive no benefit,including reduction in force costs, totaling $2.9 million.

 

*Gain fromissuance of subsidiary stock*.  Gain from issuance of subsidiary stock was$32.8 million during 2008 and represented the increase in carrying value of ourinvestment in Real Goods as a result of its issuance of new stock.

 

*Interest andother income*. Interest and otherincome decreased $2.9 million to $1.2 million during 2008 from $4.1 millionduring 2007.  The decrease reflects lowerinterest earnings as we used cash to acquire our corporate facilities, acquirebusinesses and assets and repurchase 1.3 million shares of our Class Acommon stock for $19.3 million, and the decline of average interest ratesreceived on our cash investments from 4.6% as of December 31, 2007 to 0.2%at December 31, 2008.  At December 31,2008, the majority of our cash was in short-term treasuries.

 

*Minorityinterest in net (income) loss of consolidated subsidiaries, net of income taxes*. Minority interest in net loss of consolidated subsidiaries,net of income taxes, increased to $12.0 million during 2008 from minorityinterest net income of $0.3 million during 2007 primarily as a result ofimpairment of goodwill in the solar segment.

 

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*Net income(loss)*.  As a result of the above factors, net incomedecreased $44.1 million to a net loss of $35.6 million during 2008 from netincome of $8.5 million during 2007.  Netincome per share decreased to a net loss of $1.46 per share during 2008 fromnet income of $0.34 per share during 2007. Excluding the impairment charges, disposition of businesses and the lossfrom consolidating Real Goods Solar, our net income would have been $0.8million, or $0.03 per share, for 2008. Refer to the Non-GAAP Financial Measures table immediately below.

 

**Non-GAAPFinancial Measures**

 

We have utilized thenon-GAAP information set forth below as an additional device to aid inunderstanding and analyzing our financial results for the year ended December 31,2008. We believe that these non-GAAP measures will allow for a betterevaluation of the operating performance of our business and facilitatemeaningful comparison of the results in the current period to those in priorperiods and future periods. Reference to these non-GAAP measures should not beconsidered a substitute for results that are presented in a manner consistentwith GAAP.

 

A reconciliation of theour year ended December 31, 2008 GAAP net loss to our year ended December 31,2008 non-GAAP net loss is set forth below (in millions except share and pershare data):

 
| ** **                                                                         | ** ** | **For the Year  Ended  December 31, 2008** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
|                                                                               |       |                                                           |       |
| **Net  loss**                                                                      | ** ** | **$**                                                          | **(35.6**  | **)** |
|                                                                               |       |                                                           |       |
| Exclusion of  Real Goods Solar net loss                                            |       | 28.0                                                           |       |
|                                                                               |       |                                                           |       |
| Exclusion of  minority interest in Real Goods Solar                                |       | (12.1                                                          | )          |
|                                                                               |       |                                                           |       |
| Exclusion of  non-cash gain on issuance of Real Goods Solar stock                  |       | (20.1                                                          | )          |
|                                                                               |       |                                                           |       |
| Exclusion for  disposition of businesses                                           |       | 1.4                                                            |       |
|                                                                               |       |                                                           |       |
| Exclusion of  non-cash impairment of goodwill and intangible assets                |       | 39.2                                                           |       |
|                                                                               |       |                                                           |       |
| **Non-GAAP  net income**                                                           | ** ** | **$**                                                          | **0.8**    | ** ** |
|                                                                               |       |                                                           |       |
| Non-GAAP  weighted average shares used in earnings per share calculation (diluted) |       | 24,599,000                                                     |       |
|                                                                               |       |                                                           |       |
| **Non-GAAP  earnings per share (diluted)**                                         | ** ** | **$**                                                          | **0.03**   | ** ** |

 

***YearEnded December 31, 2007 Compared to Year Ended December 31, 2006***

 

*Net revenue*. Net revenue increased $43.5 million, or 19.8%, to $262.9million during 2007 from $219.5 million during 2006. During the year, we addeddistribution to over 2,000 new retail doors, bringing the total number ofretail doors in the United States to approximately 70,000. Net revenue in ourdirect to consumer segment increased $23.6 million, or 21.7%, to $132.5 millionduring 2007 from $108.9 million during 2006. This increase in the direct toconsumer segment net revenue primarily reflects the continued success of ourdirect response marketing revenues and increased revenues from businessesacquired during 2007.  Net revenue in ourbusiness segment increased $17.7 million, or 18.9%, to $111.5 million during2007 from $93.8 million during 2006, primarily reflecting our success in theinternational market.  Net revenue in oursolar segment increased $2.1 million, or 12.6%, to $18.9 million during 2007from $16.8 million during 2006, primarily due to the acquisition of Marin Solarin November 2007 and increased penetration in existing markets.

 

*Gross profit*. Gross profit increased $28.0 million, or 20.0%, to $168.4million during 2007 from $140.3 million during 2006. As a percentage of netrevenue, gross profit increased slightly to 64.0% during 2007 from 63.9% during2006. Gross profit in

 

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our direct to consumer segment increased$14.9 million, or 19.6%, to $90.6 million during 2007 from $75.8 million during2006 and, as a percentage of net revenue, increased to 68.4% during 2007 from59.6% during 2006, primarily reflecting our investment in higher margin onlinecommunity businesses.  Gross profit inour business segment increased $12.6 million, or 21.5%, to $71.2 million during2007 from $58.6 million during 2006 and, as a percentage of net revenue, increasedto 63.9% during 2007 from 62.5% during 2006. Gross profit in our solar segment increased $0.5 million, or 9.2%, to$6.5 million during 2007 from $6.0 million during 2006 and, as a percentage ofnet revenue, decreased to 34.3% during 2007 from 35.4% during 2006, primarilyreflecting the acquisition of Marin Solar, which historically has producedlower margins.

 

*Selling andoperating expenses*. Selling and operatingexpenses increased $22.0 million, or 18.4%, to $141.7 million during 2007 from$119.7 million during 2006, resulting primarily from increased sales andinvestments made in community, branding, personnel, advertising, and marketingprograms.  As a percentage of netrevenue, selling and operating expenses decreased to 53.9% during 2007 from 54.6%during 2006.

 

*Corporate, general and administration expenses*. Corporate, general and administrationexpenses increased $1.2 million, or 7.9%, to $16.2 million during 2007 from$15.0 million during 2006, primarily due to our planned investments to supportthe increased revenue base.  As ofpercentage of net revenue, corporate, general and administration expensesdecreased to 6.1% during 2007 from 6.8% during 2006, primarily reflecting theleverage on the higher revenue base.

 

*Other income*. Other income increased $0.2 million, or 6.2%, to $4.1million during 2007 from $3.9 million during 2006.  As a percentage of net revenue, other incomedeceased to 1.5% during 2007 from 1.8% during 2006. The increase reflects the interestearnings from proceeds of our sale of our Class A common stock in oursecondary offering during May 2006, partially offset by our use of cash torepurchase 2.5 million shares of our Class A common stock during 2007.

 

*Minorityinterest in net income of consolidated subsidiaries, net of income taxes*. Minority interest in net income of consolidatedsubsidiaries, net of income taxes, increased by $0.2 million, or 142.2%, to$0.3 million during 2007 from $0.1 million during 2006.

 

*Net income*.  Net income increased$2.9 million, or 51.0%, to $8.5 million during 2007 from $5.6 million during2006. Earnings per share increased 47.8% to $0.34 per share during 2007 from$0.23 per share during 2006. The above factors improved our financialperformance over 2006.

 

**Quarterly and Seasonal Fluctuations**

 

The followingtable sets forth our unaudited results of operations for each of the quartersin 2008 and 2007. In our opinion, this unaudited financial information includesall adjustments, consisting solely of normal recurring accruals andadjustments, necessary for a fair presentation of the results of operations forthe quarters presented. You should read this financial information inconjunction with our consolidated financial statements and related notesincluded elsewhere in this Form 10-K. The results of operations for anyquarter are not necessarily indicative of future results of operations.

 

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| ** **                                                         | ** ** | **Year 2008 Quarters Ended** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **(in thousands, except per share data)** | ** ** | **March 31**                           | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|                                                               |       |                                        |       |   |   |   |   |   |   |
| Net revenue                                                        |       | $                                           | 65,173     |   | $ | 57,217 |   | $ | 60,285 |   | $ | 74,497 |   |
| Gross profit                                                       |       | 40,978                                      |       | 36,153 |   | 33,845 |   | 38,269 |   |
| Income (loss)  before income taxes and minority interests (a)      |       | 3,135                                       |       | 4,184 |   | (16,922 | ) | (45,524 | ) |
| Net income  (loss)                                                 |       | 2,213                                       |       | 2,581 |   | (10,115 | ) | (30,302 | ) |
| Diluted net  income (loss) per share                               |       | $                                           | 0.09       |   | $ | 0.10 |   | $ | (0.42 | ) | $ | (1.26 | ) |
| Weighted average  shares outstanding-diluted                       |       | 25,352                                      |       | 24,895 |   | 24,020 |   | 23,980 |   |

 
| ** **                                                         | ** ** | **Year 2007 Quarters Ended** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **(in thousands, except per share data)** | ** ** | **March 31**                           | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|                                                               |       |                                        |       |   |   |   |   |   |   |
| Net revenue                                                        |       | $                                           | 58,458     |   | $ | 52,361 |   | $ | 70,318 |   | $ | 81,806 |   |
| Gross profit                                                       |       | 37,476                                      |       | 33,631 |   | 46,144 |   | 51,127 |   |
| Income (loss)  before income taxes and minority interests          |       | 2,828                                       |       | (783 | ) | 5,224 |   | 7,332 |   |
| Net income  (loss)                                                 |       | 1,752                                       |       | (346 | ) | 2,918 |   | 4,200 |   |
| Diluted net  income (loss) per share                               |       | $                                           | 0.07       |   | $ | (0.01 | ) | $ | 0.12 |   | $ | 0.17 |   |
| Weighted average  shares outstanding-diluted                       |       | 25,813                                      |       | 24,655 |   | 24,970 |   | 25,154 |   |

 

----

(a)             During2008, we recognized gains on the issuance of our subsidiary’s stock and chargesfor impaired goodwill, intangibles, and other related assets and expenses,resulting in a net gain of $4.6 million in the second quarter of 2008 and netlosses of $13.9 million and $40.8 million in the third and fourth quarters of2008, respectively.  See Note 6, AssetImpairment and Other General Expenses and Income.

 

Quarterlyfluctuations in our revenues and operating results are due to a number offactors, including changes in market conditions, the timing of new productintroductions and mailings to customers, advertising, acquisitions (includingcosts of acquisitions and expenses related to integration of acquisitions),competition, pricing of products by vendors and expenditures on our systems andinfrastructure. The impact on revenue and operating results due to the timingand extent of these factors can be significant. Our sales are also affected byseasonal influences. On an aggregate basis, we generate our strongest revenuesin the fourth quarter due to increased holiday spending and retailer fitnesspurchases.

 

**Liquidity and Capital Resources**

 

Our capital needsarise from working capital required to fund operations, capital expendituresrelated to acquisition and development of media content, development of ourInternet and community platforms and new products, acquisitions of newbusinesses, replacements, expansions and improvements to our infrastructure,and future growth. These capital requirements depend on numerous factors,including the rate of market acceptance of our product offerings, the abilityto expand our customer base, the cost of ongoing upgrades to our productofferings, the level of expenditures for sales and marketing, the level ofinvestment in distribution systems and facilities and other factors. The timingand amount of these capital requirements are variable and we cannot accuratelypredict them. Additionally, we will continue to pursue opportunities to expandour media libraries, evaluate possible investments in businesses, products andtechnologies, and increase our sales and marketing programs and brandpromotions as needed.

 

We have a revolving lineof credit agreement with a financial institution that expires in October 2009.  The credit agreement permitsborrowings up to the lesser of $15 million or our borrowing base which iscalculated based upon the collateral value of our accounts receivable,inventory, and certain property and equipment. Borrowings under this agreementbear interest at the lower of prime rate less 75 basis points or LIBOR plus 275basis points. Borrowings are secured by a pledge of certain of our assets, andthe agreement contains various financial covenants, including those requiringcompliance with certain financial ratios. At December 31, 2008, we had noamounts outstanding under this agreement; however, $1.4 million was reservedfor outstanding letters of credit.  Webelieve we have complied with all of the financial covenants under this creditagreement.

 

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***Cash Flows***

 

The following tablesummarizes our primary sources (uses) of cash during the periods presented:

 
| ** **                                              | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------|------------|
| **(in thousands)**                                 | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net cash  provided by (used in):                        |       |                                        |       |   |   |   |   |
| Operating  activities                                   |       | $                                           | (20,414    | ) | $ | 13,445 |   | $ | (504 | ) |
| Investing  activities                                   |       | (43,858                                     | )          | (22,787 | ) | (9,742 | ) |
| Financing  activities                                   |       | 29,996                                      |       | (29,432 | ) | 99,270 |   |
| Effects of  exchange rates on cash and cash equivalents |       | (17                                         | )          | 156 |   | 824 |   |
| Net (decrease)  increase in cash and cash equivalents   |       | $                                           | (34,293    | ) | $ | (38,618 | ) | $ | 89,848 |   |

 

*Operatingactivities*. Our operating activities used net cash of $20.4million during 2008. Of this amount, $19.0 million is attributable to $8.4million of income tax benefits that we expect to be refunded in 2009 primarilyas a result of the impairment of assets in 2008 and $10.6 million ofliabilities assumed in business acquisitions which are shown in operatingactivities in accordance with GAAP.  Theremaining purchase price for these acquisitions is shown in investingactivities.  Also included in the netdecrease of cash from operating activities are additional inventory purchasesof $3.5 million, partially offset by other net sources of cash of $2.1 million.Our net cash generated from operating activities during 2007 of $13.4 millionwas primarily attributable to net income of $8.5 million, net non-cash expensesof $13.1 million, and other net increases of $0.6 million, partially offset byadditional inventory of $5.5 million and increased accounts receivable of $3.3million.

 

*Investingactivities*. Our investing activities used net cash of $43.9million and $22.8 million during 2008 and 2007, respectively. The net cash usedin investing activities during 2008 was used primarily to acquire our newcorporate headquarters and related property and equipment for $19.4 million,purchase other property and equipment for $3.1 million, acquire businesses andother investments for $13.9 million, and purchase and produce media rights for$6.0 million. The net cash used in investing activities during 2007 was usedprimarily to acquire businesses, property, equipment and other investments for$20.3 million and purchase media for $6.3 million, partially offset by proceedsfrom the sale of our investment in LIME for $1.4 million and prepayment of arelated promissory note for $2.4 million.

* *

*Financingactivities*. Our financing activities provided net cash of$30.0 million during 2008 and used net cash of $29.4 million during 2007. Ournet cash provided by financing activities during 2008 primarily reflected netproceeds from Real Goods’ IPO of $48.2 million and issuances of our commonstock and related tax benefits of $1.5 million, partially offset by the use offunds to repurchase approximately 1.3 million shares of our Class A commonstock for $18.4 million and payoff of $1.3 million on a line of credit of anacquired solar business. We used net cash in financing activities during 2007primarily to repurchase 2.5 million shares of our Class A common stock for$32.9 million, which was partially offset by net proceeds and income taxbenefits of $3.5 million from the exercise of stock options under our 1999Long-Term Incentive Plan.

 

On November 8,2007, we filed a shelf registration statement on Form S-3 with theSecurities and Exchange Commission for 5,000,000 shares of our Class Acommon stock.  During the year ended December 31,2008, we issued 221,152 of these shares to acquire business ownershipinterests.

 

We believe ouravailable cash, cash expected to be generated from operations, cash generatedby the sale of our stock, and borrowing capabilities should be sufficient tofund our operations on both a short-term and long-term basis. However, ourprojected cash needs may change as a result of acquisitions, productdevelopment, unforeseen operational difficulties or other factors.

 

In the normalcourse of our business, we investigate, evaluate and discuss acquisition, jointventure, minority investment, strategic relationship and other businesscombination opportunities in the LOHAS market. For any future investment,acquisition or joint venture opportunities, we may consider usingthen-available liquidity, issuing equity securities or incurring additionalindebtedness.

 

**Contractual Obligations**

 

We havecommitments pursuant to operating lease obligations, but do not have anyoutstanding commitments pursuant to purchase agreements. The following tableshows our commitments to make future payments under operating leases:

 

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| **(in thousands)**      | ** ** | **Total** | ** ** | **< 1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **> 5 yrs** | ** ** |
|------------------------------|------------|-----------|------------|---------------------------|------------|--------------------|------------|--------------------|------------|--------------------------|------------|
|                         |       |      |       |                      |       |               |       |               |       |                     |       |
| Operating lease  obligations |       | $         | 9,903      |                      | $          | 2,802              |       | $                  | 3,418      |                     | $          | 2,387 |   | $ | 1,296 |   |
|                              |            |           |            |                           |            |                    |            |                    |            |                          |            |  |  |  |  |  |

 

**Off-Balance Sheet Arrangements**

 

We do not participate in transactions that generate relationships withunconsolidated entities or financial partnerships, such as special purposeentities or variable interest entities, which have been established for thepurpose of facilitating off-balance sheet arrangements or other limitedpurposes.

 

**Item 7A.          Quantitative and qualitativedisclosures about market risk**

#####  

We are exposed to marketrisks, which include changes in U.S. interest rates and foreign exchange rates.We do not engage in financial transactions for trading or speculative purposes,but do have forward contracts for foreign currency transactions for whichhistorically the gains and losses have been immaterial.

 

Any borrowings we mightmake under our bank credit facility would bear interest at the lower of primerate less 75 basis points or LIBOR plus 275 basis points. We do not have anyamounts outstanding under our credit line, so any unfavorable change ininterest rates would not have a material impact on our results from operationsor cash flows unless we make borrowings in the future.

 

We purchase a significantamount of inventory from vendors outside of the U.S. in transactions that areprimarily U.S. dollar denominated transactions. A decline in the relative valueof the U.S. dollar to other foreign currencies has and may continue to lead toincreased purchasing costs.

 

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**Item 8.             Financial statements andsupplementary data**

 
| **Index to consolidated financial  statements** |                                                                    |   |   |
|-------------------------------------------------|-------------------------------------------------------------------------|--------|--------|
|                                            |                                                                    |   |   |
|                                            | Report of Independent Registered Public Accounting  Firm                |   | 28     |
|                                            |                                                                    |   |   |
|                                            | Gaiam, Inc. Consolidated Financial Statements:                     |   |   |
|                                            |                                                                    |   |   |
|                                            | Consolidated  balance sheets                                            |   | 29     |
|                                            |                                                                    |   |   |
|                                            | Consolidated statements of operations                                   |   | 30     |
|                                            |                                                                    |   |   |
|                                            | Consolidated statement of shareholders’ equity                     |   | 31     |
|                                            |                                                                    |   |   |
|                                            | Consolidated statements of cash flows                                   |   | 32     |
|                                            |                                                                    |   |   |
|                                            | Notes to  consolidated financial statements                             |   | 33     |
|                                            |                                                                    |   |   |
|                                            | **Financial Statement Schedule:**                                       |   |   |
|                                            | Schedule II — Consolidated valuation and  qualifying accounts |   | 50     |
|                                                 |                                                                         |        |        |  |  |  |

 

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**Report of independent registered publicaccounting firm**

 

To the Board of Directorsand Shareholders of

Gaiam, Inc.

Louisville, Colorado

 

We have audited theaccompanying consolidated balance sheets of Gaiam Inc. and subsidiaries (the “Company”)as of December 31, 2008 and 2007, and the related consolidated statementsof operations, shareholders’ equity and cash flows for each of the three yearsin the period ended December 31, 2008. Our audits also included thefinancial statement schedule II for each of the three years in the periodended December 31, 2008.  We alsohave audited the Company’s internal control over financial reporting as of December 31,2008, based on criteria established in *InternalControl-Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (the “COSO Criteria”). The Company’smanagement is responsible for these consolidated financial statements, formaintaining effective internal control over financial reporting, and for itsassessment of the effectiveness of internal control over financial reporting,included in the accompanying Management’s Report on Internal Control overFinancial Reporting included in Item 9A. Our responsibility is to express anopinion on these consolidated financial statements and an opinion on theCompany’s internal control over financial reporting based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudits to obtain reasonable assurance about whether the consolidated financialstatements are free of material misstatement and whether effective internal controlover financial reporting was maintained in all material respects. Our audits ofthe consolidated financial statements included examining, on a test basis,evidence supporting the amounts and disclosures in the consolidated financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation. Our audit of internal control over financial reporting includedobtaining an understanding of internal control over financial reporting,assessing the risk that a material weakness exists, and testing and evaluatingthe design and operating effectiveness of internal control based on theassessed risk. Our audits also included performing such other procedures as weconsidered necessary in the circumstances. We believe that our audits provide areasonable basis for our opinions.

 

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with accountingprinciples generally accepted in the United States. A company’s internalcontrol over financial reporting includes those policies and procedures that (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the Company; (2) providereasonable assurance that transactions are recorded as necessary to permit preparationof financial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the Company are being madeonly in accordance with authorizations of management and directors of theCompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of theCompany’s assets that could have a material effect on the financial statements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

 

As discussed in Note 2 to the consolidatedfinancial statements, in 2006, Gaiam, Inc. and subsidiaries changed itsmethod of accounting for share-based payments in accordance with the guidanceprovided in Statement of Financial Accounting Standards No. 123(R),Share-Based Payment. As discussed in Note 10 to the consolidated financialstatements, in 2007, Gaiam, Inc. and subsidiaries adopted FinancialAccounting Standards Board Interpretation No. 48, Accounting forUncertainty in Income Taxes—an interpretation of FASB Statement No.109.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Gaiam Inc. and subsidiaries as of December 31,2008 and 2007, and the results of their operations and their cash flows foreach of the three years in the period ended December 31, 2008 inconformity with accounting principles generally accepted in the United Statesof America. Also, in our opinion, the related financial statementschedule II for each of the three years in the period ended December 31,2008, when considered in relation to the basic financial statements taken as awhole, presents fairly in all material respects the information set forththerein. Also in our opinion, Gaiam Inc. and subsidiaries maintained, in allmaterial respects, effective internal control over financial reporting as of December 31,2008, based on the COSO Criteria.

 
|                | /s/ Ehrhardt Keefe Steiner &  Hottman PC |
|---------------------|---------------------------------------------------|
|                |                                              |
| March 12, 2009 |                                              |
| Denver, Colorado    |                                              |

 

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**GAIAM, INC.Consolidated balance sheets**

 
| ** **                                                                                                                                                                              | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| **(in thousands, except share and per share data)**                                                                                                  | ** ** | **2008**              | ** ** | **2007** | ** ** |
| **ASSETS**                                                                                                                                                                              |       |                  |       |   |   |
| Current assets:                                                                                                                                                                         |       |                  |       |   |   |
| Cash and cash  equivalents                                                                                                                                                              |       | $                     | 31,965     |   | $ | 66,258 |   |
| Accounts  receivable, net                                                                                                                                                               |       | 33,664                |       | 30,157 |   |
| Inventory, less  allowances                                                                                                                                                             |       | 35,736                |       | 29,839 |   |
| Deferred  advertising costs                                                                                                                                                             |       | 2,578                 |       | 3,602 |   |
| Income taxes  receivable                                                                                                                                                                |       | 8,410                 |       | — |   |
| Deferred tax  assets                                                                                                                                                                    |       | 7,038                 |       | 6,005 |   |
| Other current  assets                                                                                                                                                                   |       | 9,841                 |       | 5,205 |   |
| Total current  assets                                                                                                                                                                   |       | 129,232               |       | 141,066 |   |
|                                                                                                                                                                                    |       |                  |       |   |   |
| Property and  equipment, net                                                                                                                                                            |       | 27,381                |       | 9,509 |   |
| Media library,  net                                                                                                                                                                     |       | 12,102                |       | 37,566 |   |
| Deferred tax  assets, net                                                                                                                                                               |       | 6,076                 |       | 4,057 |   |
| Goodwill                                                                                                                                                                                |       | 23,180                |       | 42,856 |   |
| Other  intangibles, net                                                                                                                                                                 |       | 880                   |       | 1,554 |   |
| Notes receivable  and other assets                                                                                                                                                      |       | 3,247                 |       | 4,104 |   |
| Total assets                                                                                                                                                                            |       | $                     | 202,098    |   | $ | 240,712 |   |
| ** **                                                                                                                                                                              | ** ** | ** **            | ** ** | ** ** | ** ** |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                           |       |                  |       |   |   |
| Current  liabilities:                                                                                                                                                                   |       |                  |       |   |   |
| Accounts payable                                                                                                                                                                        |       | $                     | 26,567     |   | $ | 23,620 |   |
| Accrued  liabilities                                                                                                                                                                    |       | 6,885                 |       | 10,631 |   |
| Total current  liabilities                                                                                                                                                              |       | 33,452                |       | 34,251 |   |
|                                                                                                                                                                                    |       |                  |       |   |   |
| Minority  interest                                                                                                                                                                      |       | 15,178                |       | 6,073 |   |
|                                                                                                                                                                                    |       |                  |       |   |   |
| Commitments and  contingencies                                                                                                                                                          |       |                  |       |   |   |
|                                                                                                                                                                                    |       |                  |       |   |   |
| Shareholders’  equity:                                                                                                                                                             |       |                  |       |   |   |
| Class A  common stock, $.0001 par value, 150,000,000 shares authorized, 18,541,201 and  19,553,631 shares issued and outstanding at December 31, 2008 and 2007,  respectively |       | 2                     |       | 2 |   |
| Class B  common stock, $.0001 par value, 50,000,000 shares authorized, 5,400,000  shares issued and outstanding at December 31, 2008 and 2007                                 |       | 1                     |       | 1 |   |
| Additional  paid-in capital                                                                                                                                                             |       | 163,652               |       | 174,046 |   |
| Accumulated  other comprehensive income                                                                                                                                                 |       | 88                    |       | 991 |   |
| (Accumulated  deficit) retained earnings                                                                                                                                                |       | (10,275               | )          | 25,348 |   |
| Total  shareholders’ equity                                                                                                                                                        |       | 153,468               |       | 200,388 |   |
| Total liabilities  and shareholders’ equity                                                                                                                                        |       | $                     | 202,098    |   | $ | 240,712 |   |

 

See accompanying notes to the consolidated financial statements.

 

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**GAIAM,INC.**

**Consolidated statements of operations**

 
| ** **                                                                                 | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **(in thousands, except per share data)**                         | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                                 | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net revenue                                                                                |       | $                                           | 257,172    |   | $ | 262,943 |   | $ | 219,480 |   |
| Cost of goods  sold                                                                        |       | 107,927                                     |       | 94,565 |   | 79,150 |   |
| Gross profit                                                                               |       | 149,245                                     |       | 168,378 |   | 140,330 |   |
|                                                                                       |       |                                        |       |   |   |   |   |
| Expenses:                                                                                  |       |                                        |       |   |   |   |   |
| Selling and  operating                                                                     |       | 142,401                                     |       | 141,749 |   | 119,700 |   |
| Corporate,  general and administration                                                     |       | 13,059                                      |       | 16,176 |   | 14,989 |   |
| Other general  income and expense                                                          |       | 82,928                                      |       | — |   | — |   |
| Total expenses                                                                             |       | 238,388                                     |       | 157,925 |   | 134,689 |   |
|                                                                                       |       |                                        |       |   |   |   |   |
| Income (loss)  from operations                                                             |       | (89,143                                     | )          | 10,453 |   | 5,641 |   |
|                                                                                       |       |                                        |       |   |   |   |   |
| Gain from  issuance of subsidiary stock                                                    |       | 32,800                                      |       | — |   | — |   |
| Interest and  other income                                                                 |       | 1,216                                       |       | 4,148 |   | 3,905 |   |
|                                                                                       |       |                                        |       |   |   |   |   |
| Income (loss)  before income taxes and minority interest                                   |       | (55,127                                     | )          | 14,601 |   | 9,546 |   |
|                                                                                       |       |                                        |       |   |   |   |   |
| Income tax  expense (benefit)                                                              |       | (7,542                                      | )          | 5,767 |   | 3,774 |   |
| Minority  interest in net (income) loss of consolidated subsidiaries, net of income  taxes |       | 11,962                                      |       | (310 | ) | (128 | ) |
| Net income  (loss)                                                                         |       | $                                           | (35,623    | ) | $ | 8,524 |   | $ | 5,644 |   |
|                                                                                       |       |                                        |       |   |   |   |   |
| Net income  (loss) per share:                                                              |       |                                        |       |   |   |   |   |
| Basic                                                                                      |       | $                                           | (1.46      | ) | $ | 0.34 |   | $ | 0.23 |   |
| Diluted                                                                                    |       | $                                           | (1.46      | ) | $ | 0.34 |   | $ | 0.23 |   |
|                                                                                       |       |                                        |       |   |   |   |   |
| Weighted average  shares outstanding:                                                      |       |                                        |       |   |   |   |   |
| Basic                                                                                      |       | 24,452                                      |       | 24,962 |   | 24,349 |   |
| Diluted                                                                                    |       | 24,452                                      |       | 25,214 |   | 24,617 |   |

 

See accompanying notes to consolidated financial statements.

 

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**GAIAM,INC.**

**Consolidated statement of shareholders’ equity**

 
| ** **                                                                                                            | ** ** | **Class A  Common  Stock** | ** ** | **Class B  Common  Stock** | ** ** | **Additional  Paid-In** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Retained  Earnings  (Accumulated** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|-------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|------------|------------|
| **(in thousands, except share data)**                                                             | ** ** | **Shares**                      | ** ** | **Amount**                      | ** ** | **Shares**              | ** ** | **Amount**                            | ** ** | **Capital**                          | ** ** | **Income** | ** ** | **Deficit)** | ** ** | **Total** | ** ** |
|                                                                                                                  |       |                            |       |                            |       |                    |       |                                  |       |                                 |       |       |       |   |   |   |   |
| Balance at  December 31, 2005                                                                                    |       | 15,010,736                      |       | $                               | 1          |                    |       | 5,400,000                             |       | $                                    | 1          |       | $          | 95,840 |   | $ | 264 |   | $ | 11,180 |   | $ | 107,286 |   |
|                                                                                                                  |       |                            |       |                            |       |                    |       |                                  |       |                                 |       |       |       |   |   |   |   |
| Sale of common  stock in underwritten offerings                                                                       |       | 5,690,000                       |       | 1                               |       | —                  |       | —                                |       | 93,601                               |       | —     |       | — |   | 93,602 |   |
| Issuance of  common stock in conjunction with acquisitions and compensation                                           |       | 1,049,200                       |       | —                          |       | —                  |       | —                                |       | 11,465                               |       | —     |       | — |   | 11,465 |   |
| Comprehensive  income:                                                                                                |       |                            |       |                            |       |                    |       |                                  |       |                                 |       |       |       |   |   |   |   |
| Net income                                                                                                            |       | —                          |       | —                          |       | —                  |       | —                                |       | —                               |       | —     |       | 5,644 |   | 5,644 |   |
| Foreign currency  translation adjustment, net of income taxes of $393                                                 |       | —                          |       | —                          |       | —                  |       | —                                |       | —                               |       | 609        |       | — |   | 609 |   |
| Comprehensive  income                                                                                                 |       | —                          |       | —                          |       | —                  |       | —                                |       | —                               |       | —     |       | — |   | 6,253 |   |
|                                                                                                                  |       |                            |       |                            |       |                    |       |                                  |       |                                 |       |       |       |   |   |   |   |
| Balance at  December 31, 2006                                                                                    |       | 21,749,936                      |       | 2                               |       | 5,400,000               |       | 1                                     |       | 200,906                              |       | 873        |       | 16,824 |   | 218,606 |   |
|                                                                                                                  |       |                            |       |                            |       |                    |       |                                  |       |                                 |       |       |       |   |   |   |   |
| Issuance of  common stock in conjunction with acquisitions and compensation                                           |       | 303,695                         |       | —                          |       | —                  |       | —                                |       | 6,047                                |       | —     |       | — |   | 6,047 |   |
| Repurchase of  stock                                                                                                  |       | (2,500,000                      | )          | —                          |       | —                  |       | —                                |       | (32,907                              | )          | —     |       | — |   | (32,907 | ) |
| Comprehensive  income:                                                                                                |       |                            |       |                            |       |                    |       |                                  |       |                                 |       |       |       |   |   |   |   |
| Net income                                                                                                            |       | —                          |       | —                          |       | —                  |       | —                                |       | —                               |       | —     |       | 8,524 |   | 8,524 |   |
| Foreign currency  translation adjustment, net of income taxes of $77                                                  |       | —                          |       | —                          |       | —                  |       | —                                |       | —                               |       | 118        |       | — |   | 118 |   |
| Comprehensive  income                                                                                                 |       | —                          |       | —                          |       | —                  |       | —                                |       | —                               |       | —     |       | — |   | 8,642 |   |
| Balance at  December 31, 2007                                                                                    |       | 19,553,631                      |       | 2                               |       | 5,400,000               |       | 1                                     |       | 174,046                              |       | 991        |       | 25,348 |   | 200,388 |   |
|                                                                                                                  |       |                            |       |                            |       |                    |       |                                  |       |                                 |       |       |       |   |   |   |   |
| Issuance of  common stock and other equity changes related to acquisitions, compensation,  and affiliate transactions |       | 359,855                         |       | —                          |       | —                  |       | —                                |       | 8,883                                |       | —     |       | — |   | 8,883 |   |
| Repurchase of  stock                                                                                                  |       | (1,372,285                      | )          | —                          |       | —                  |       | —                                |       | (19,277                              | )          | —     |       | — |   | (19,277 | ) |
| Comprehensive  loss:                                                                                                  |       |                            |       |                            |       |                    |       |                                  |       |                                 |       |       |       |   |   |   |   |
| Net loss                                                                                                              |       | —                          |       | —                          |       | —                  |       | —                                |       | —                               |       | —     |       | (35,623 | ) | (35,623 | ) |
| Foreign currency  translation adjustment, net of reclassification and related tax benefit of  $590                    |       | —                          |       | —                          |       | —                  |       | —                                |       | —                               |       | (903       | )          | — |   | (903 | ) |
| Comprehensive  loss                                                                                                   |       | —                          |       | —                          |       | —                  |       | —                                |       | —                               |       | —     |       | — |   | (36,526 | ) |
| Balance at  December 31, 2008                                                                                    |       | 18,541,201                      |       | $                               | 2          |                    | 5,400,000  |                                  | $          | 1                                    |       | $          | 163,652    |   | $ | 88 |   | $ | (10,275 | ) | $ | 153,468 |   |
|                                                                                                                       |            |                                 |            |                                 |            |                         |            |                                       |            |                                      |            |            |            |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanying notes to consolidated financial statements.

 

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**GAIAM,INC.**

**Consolidated statements of cash flows**

 
|                                                                                                 |   | **Years ended December 31,** |    |
|------------------------------------------------------------------------------------------------------|--------|---------------------------------------------|---------|
| **(in thousands)**                                                                              |   | **2008**                                    |    | **2007** |   | **2006** |   |
| Operating  activities:                                                                               |   |                                        |    |   |   |   |   |
| Net income  (loss)                                                                                   |   | $                                           | (35,623 | ) | $ | 8,524 |   | $ | 5,644 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |   |                                        |    |   |   |   |   |
| Depreciation                                                                                         |   | 3,110                                       |    | 2,120 |   | 1,926 |   |
| Amortization                                                                                         |   | 5,525                                       |    | 10,169 |   | 5,883 |   |
| Share-based  compensation expense                                                                    |   | 1,506                                       |    | 1,024 |   | 623 |   |
| Minority  interest in consolidated subsidiaries, net of tax                                          |   | (11,962                                     | )       | 310 |   | 128 |   |
| Net (gain) loss  on investments and property                                                         |   | (579                                        | )       | 265 |   | — |   |
| Noncash gain  from equity method investment                                                          |   | —                                      |    | (127 | ) | (680 | ) |
| Deferred and  stock option income tax (benefit) expense                                              |   | (15,358                                     | )       | (701 | ) | 730 |   |
| Gain on issuance  of subsidiary stock, net of tax                                                    |   | (20,138                                     | )       | — |   | — |   |
| Impairment loss                                                                                      |   | 80,021                                      |    | — |   | — |   |
| Changes in  operating assets and liabilities, net of effects from acquisitions and  dispositions:    |   |                                        |    |   |   |   |   |
| Accounts  receivable, net                                                                            |   | (922                                        | )       | (3,330 | ) | 3,319 |   |
| Inventory, net                                                                                       |   | (3,629                                      | )       | (5,546 | ) | (5,373 | ) |
| Deferred  advertising costs                                                                          |   | (1,564                                      | )       | (1,230 | ) | (531 | ) |
| Income tax  receivable                                                                               |   | (7,751                                      | )       | — |   | — |   |
| Other assets                                                                                         |   | (5,240                                      | )       | (771 | ) | (1,413 | ) |
| Accounts payable                                                                                     |   | (856                                        | )       | 345 |   | (6,859 | ) |
| Accrued  liabilities                                                                                 |   | (6,954                                      | )       | 2,393 |   | (3,901 | ) |
| Net cash (used  in) provided by operating activities                                                 |   | (20,414                                     | )(a)    | 13,445 |   | (504 | ) |
|                                                                                                 |   |                                        |    |   |   |   |   |
| Investing  activities:                                                                               |   |                                        |    |   |   |   |   |
| Purchase of  property, equipment and media rights                                                    |   | (28,585                                     | )       | (9,536 | ) | (3,412 | ) |
| Proceeds from  sale of property and equipment                                                        |   | —                                      |    | — |   | 668 |   |
| Purchase of  acquisitions, investments, and note, net of cash acquired                               |   | (13,892                                     | )       | (17,122 | ) | (6,998 | ) |
| Disposition of  investments, net                                                                     |   | (1,381                                      | )       | 3,871 |   | — |   |
| Net cash used in  investing activities                                                               |   | (43,858                                     | )       | (22,787 | ) | (9,742 | ) |
|                                                                                                 |   |                                        |    |   |   |   |   |
| Financing activities:                                                                                |   |                                        |    |   |   |   |   |
| Proceeds from  Real Goods stock issuances, net                                                       |   | 48,154                                      |    | — |   | — |   |
| Repurchase of  Class A common stock, including related costs                                    |   | (18,411                                     | )       | (32,907 | ) | — |   |
| Net proceeds  from issuance of common stock and tax benefits from option exercises                   |   | 1,556                                       |    | 3,475 |   | 99,270 |   |
| Net payments on  acquired business’ line of credit                                              |   | (1,303                                      | )       | — |   | — |   |
| Net cash  provided by (used in) financing activities                                                 |   | 29,996                                      |    | (29,432 | ) | 99,270 |   |
|                                                                                                 |   |                                        |    |   |   |   |   |
| Effects of  exchange rates on cash and cash equivalents                                              |   | (17                                         | )       | 156 |   | 824 |   |
|                                                                                                 |   |                                        |    |   |   |   |   |
| Net (decrease)  increase in cash and cash equivalents                                                |   | (34,293                                     | )       | (38,618 | ) | 89,848 |   |
| Cash and cash  equivalents at beginning of year                                                      |   | 66,258                                      |    | 104,876 |   | 15,028 |   |
| Cash and cash  equivalents at end of year                                                            |   | $                                           | 31,965  |   | $ | 66,258 |   | $ | 104,876 |   |
|                                                                                                 |   |                                        |    |   |   |   |   |
| **Supplemental  cash flow information:**                                                             |   |                                        |    |   |   |   |   |
| Interest paid                                                                                        |   | $                                           | 41      |   | $ | 174 |   | $ | 23 |   |
| Income taxes  paid                                                                                   |   | 3,006                                       |    | 6,746 |   | 949 |   |
| Liabilities  assumed from acquisitions                                                               |   | 10,624                                      |    | 4,683 |   | 284 |   |
| Common stock  issued for acquisitions                                                                |   | 16,187                                      |    | 1,504 |   | 4,943 |   |

 

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| (a) |   | Cash used in 2008’s  operating activities includes $19.0 million that is attributable to $8.4  million of income tax benefits that we expect to be refunded in 2009  primarily as a result of the impairment of assets in 2008 and $10.6 million  of liabilities assumed in business acquisitions which are shown in operating  activities in accordance with GAAP. The remaining purchase price for these  acquisitions is shown in investing activities. |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

See accompanying notes to consolidated financial statements.

 

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**Notes to consolidated financial statements**

 

**1.Organization, Nature of Operations, and Principles of Consolidation**

 

References in this reportto “we”, “us”, “our” or “Gaiam” refer to Gaiam, Inc. and its consolidatedsubsidiaries, unless we indicate otherwise. We are a lifestyle media companyproviding a broad selection of information, media, products and services tocustomers who value personal development, wellness, ecological lifestyles,responsible media and conscious community. We were incorporated under the lawsof the State of Colorado on July 7, 1988.

 

We have prepared theaccompanying consolidated financial statements in accordance with accountingprinciples generally accepted in the United States, or GAAP, and they includeour accounts and those of our subsidiaries. Intercompany transactions and balances have been eliminated.

 

**2.  Significant Accounting Policies**

 

No changes were made to our significantaccounting policies during the year ended December 31, 2008, except forthe adoption of Financial Accounting Standards Board, or FASB, Statement No. 157,*Fair Value Measurement* for items thatare recognized or disclosed at fair value in the financial statements on arecurring basis (at least annually) and the adoption of Staff AccountingBulletin No. 51, *Accounting for Sales ofStock by a Subsidiary*, whereby we elected the income statementapproach for the recognition of gains and losses resulting from the issuance ofsubsidiary stock .  SFAS 157 defines fairvalue, establishes a framework for measuring fair value in GAAP, and expandsdisclosures about fair value measurements. The implementation of SFAS 157 didnot have a material impact on our consolidated financial statements for theyear ended December 31, 2008.

 

*Cashand Cash Equivalents*

 

Cash and cash equivalentsinclude demand deposit accounts with financial institutions and highly liquidinvestments, which mature within three months of date of purchase. The fairvalue of the cash and cash equivalents approximates their carrying value due totheir short maturities.

 

*Concentrationof Risk and Allowances for Doubtful Accounts*

 

We have potentialconcentration of credit risk in our accounts receivable in that two of our topcustomers, Target and Walmart, accounted for 30.2% of accounts receivable, netas of December 31, 2008.  Thesecustomers are major retailers in the United States to which we made significantsales during the calendar year end holiday season.

 

We maintain allowancesfor doubtful accounts for estimated losses resulting from the inability of ourcustomers to make required payments. We make estimates of the collectibility ofour accounts receivable by analyzing historical bad debts, specific customercreditworthiness, and current economic trends. The allowance for doubtfulaccounts was $2.7 million and $1.3 million as of December 31, 2008 and2007, respectively. If the financial condition of our customers were todeteriorate such that their ability to make payments to us was impaired,additional allowances could be required.

 

*Product Returns*

 

We record allowances forproduct returns to be received in future periods at the time we recognize theoriginal sale. We base the amounts of the returns allowances upon historicalexperience and future expectations.

 

*Inventory*

 

Inventory consistsprimarily of finished goods held for sale and is stated at the lower of cost(first-in, first-out method) or market. We identify the inventory items to bewritten down for obsolescence based on the item’s current sales status andcondition. We write down discontinued or slow moving inventories based on anestimate of the markdown to retail price needed to sell through our currentstock level of the inventories. As of December 31, 2008 and 2007, weestimated obsolete or slow-moving inventory to be $1.6 million and $3.5million, respectively.

 

*AdvertisingCosts*

 

Deferred advertising costs relate to thepreparation, printing, advertising and distribution of infomercials andcatalogs. We defer such costs for financial reporting purposes until thecatalogs and infomercials are distributed and advertised, then we amortizethese costs over succeeding periods on the basis of estimated directrelationship sales. We amortize seasonal catalogs within six months and ourannual catalogs within one year. Forecasted sales statistics are the principalfactor we use 

 

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in estimating the amortization rate. Weexpense other advertising and promotional costs as incurred. Amounts recordedas advertising expense were $43.3 million, $39.9 million, and $35.5 million forthe years ended December 31, 2008, 2007, and 2006, respectively, and weinclude these amounts in selling and operating expense.

 

We record sales discountsor other sales incentives as a reduction to revenues. We identify and record asexpense those cooperative advertising expenses we pay, which are foradvertisements meeting the separable benefit and fair value tests, as part ofselling and operating expense.

 

*Propertyand Equipment*

 

We state property andequipment at cost less accumulated depreciation and amortization. We includedin property and equipment the cost of internal-use software, including softwareused in connection with our websites. We expense all costs related to thedevelopment of internal-use software other than those incurred during theapplication development stage. We capitalize the costs we incur during theapplication development stage and amortize them over the estimated useful lifeof the software, which is typically three years. We compute depreciation ofproperty and equipment on the straight-line method over estimated useful lives,generally three to forty-five years. We amortize leasehold and buildingimprovements over the shorter of the estimated useful lives of the assets orthe remaining term of the lease or remaining life of the building,respectively.

 

*Investments*

 

We account forinvestments in limited liability companies in which we have the ability toexercise significant influence or control, or in which we hold a five percentor more membership interest, under the equity method. We account forinvestments in corporations in which we have the ability to exercisesignificant influence or control, or in which we hold a twenty percent or moreownership, under the equity method. Under the equity method, we record ourshare of the income or losses of the investment by increasing or decreasing thecarrying value of our investment and recording the income or expense throughthe consolidated statement of operations. Under the cost method of accounting,we carry investments in private companies at cost and adjust only forother-than-temporary declines in fair value. We include investments under thecost and equity methods in notes receivable and other assets.

 

*Purchase Accounting*

 

We account for theacquisition of a controlling interest in a business using the purchase method.In determining the estimated fair value of certain acquired assets andliabilities, we make assumptions based upon many different factors, such ashistorical and other relevant information and analysis performed by independentparties. Assumptions may be incomplete, and unanticipated events andcircumstances may occur that could affect the validity of such assumptions,estimates, or actual results. The estimated fair value of assets andliabilities acquired in recent business combinations are preliminary as of December 31,2008. We expect to obtain information necessary to finalize the estimatedvalues during 2009.

 

*MediaLibrary*

 

The media library assetrepresents the estimated fair value of our library of produced videos acquiredthrough business combinations, the purchase price of media rights to both videoand audio titles, and the capitalized cost to produce media products, all ofwhich we market to retailers and to direct-mail and online customers. We havepresented the media library net of accumulated amortization of approximately$19.1 million and $23.2 million at December 31, 2008 and 2007,respectively, which is being amortized over the estimated useful life of thetitles, which range from five to fifteen years. Additionally, we anticipateincurring during 2009 approximately $1.6 million in participation expenses,primarily royalties, related to acquired and produced media content.

 

Media library costs toproduce media content consist of costs incurred to produce the media content,net of accumulated amortization. We recognize these costs, as well asparticipation costs, as operating expenses on an individual film basis in theratio that the current year’s gross revenues bear to our estimate of totalultimate gross revenues from all sources to be earned over a seven-year period.We state capitalized production costs at the lower of unamortized cost orestimated fair value on an individual film basis. We continually review revenueforecasts, based primarily on historical sales statistics, and revise theseforecasts when warranted by changing conditions. When estimates of totalrevenues and other events or changes in circumstances indicate that a film hasan estimated fair value that is less than its unamortized cost, we recognize animpairment loss in the current period for the amount by which the unamortizedcost exceeds the film’s estimated fair value.

 

During 2008, capitalizedproduction cost for released films was approximately $2.9 million, and forthose films not yet released was approximately $1.6 million. Additionally, asof December 31, 2008, we estimate that approximately $1.4 million or 20.0%of the unamortized costs for released films will be amortized during 2009, andapproximately 60.3% of the unamortized costs for released films will beamortized within the next three years. Accumulated amortization for produced 

 

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media content at December 31,2008 and 2007 was approximately $19.1 million and $11.0 million, respectively.Amortization expense for produced media content for the years ended December 31,2008, 2007 and 2006 was $2.0 million, $2.9 million and $1.4 million,respectively.

 

The acquired media rightshave $4.9 million of remaining unamortized costs as of December 31, 2008that will be amortized on a straight-line basis over 12 to 96 months.Amortization expense for acquired and purchased media rights for the yearsended December 31, 2008, 2007, and 2006 was $3.1 million, $4.7 million,and $4.1 million, respectively. Based upon the acquired media titles and rightsat December 31, 2008, we expect the annual amortization expense for thenext five years to approximate $1.0 million per annum.

 

Based on total medialibrary costs at December 31, 2008 and assuming no subsequent impairmentof the underlying assets or a material increase in the video productions ormedia acquired, we expect the amortization expense for the next five years tobe approximately $2.4 million per annum.

 

*Goodwilland Other Intangibles*

 

Goodwill represents theexcess of the purchase consideration over the estimated fair value of assetsacquired less liabilities assumed in a business acquisition. Our otherintangibles mainly consist of customer and marketing related assets. We nolonger amortize goodwill, but instead we review it for impairment annually ormore frequently if impairment indicators arise, on a reporting unit level. Wecompare the estimated fair value of a reporting unit with its carrying amount,including goodwill. If the estimated fair value of a reporting unit exceeds itscarrying amount, we consider the goodwill of the reporting unit not impaired.If the carrying amount of a reporting unit exceeds its estimated fair value, weperform the goodwill impairment test to measure the amount of impairment loss.We use a traditional present value method for the purposes of testing forpotential impairment. The process of evaluating the potential impairment ofgoodwill is highly subjective and requires significant judgment at many pointsduring the analysis. Application of alternative assumptions and definitionscould yield significantly different results.

 

We have allocated theentire goodwill balance of $23.1 million at December 31, 2008 to our threesegments: direct to consumer, business and solar.  The following table sets forth the changes ingoodwill for the period December 31, 2006 through December 31, 2008by segment.

 
| **(in thousands)**            | ** ** | **Direct to  Consumer  Segment** | ** ** | **Business  Segment** | ** ** | **Solar  Segment** | ** ** | **Total**  | ** ** |
|------------------------------------|------------|---------------------------------------|------------|-----------------------|------------|--------------------|------------|------------|------------|
| ** **                         | ** ** | ** **                            | ** ** | ** **            | ** ** | ** **         | ** ** | ** ** | ** ** |
| Balance at  December 31, 2006 |       | $                                     | 8,555      |                  | $          | 17,035             |       | $          | 2,759      |   | $ | 28,349 |   |
| Acquisitions                       |       | 7,400                                 |       | 3,871                 |       | 3,168              |       | 14,439     |       |
| Foreign currency  rate change      |       | —                                |       | 68                    |       | —             |       | 68         |       |
| Balance at  December 31, 2007 |       | 15,955                                |       | 20,974                |       | 5,927              |       | 42,856     |       |
| Acquisitions                       |       | 939                                   |       | 7,044                 |       | 20,484             |       | 28,467     |       |
| Impairment  losses recognized      |       | (14,192                               | )          | (3,835                | )          | (26,411            | )          | (44,438    | )          |
| Business  dispositions             |       | —                                |       | (3,705                | )          | —             |       | (3,705     | )          |
| Balance at  December 31, 2008 |       | $                                     | 2,702      |                  | $          | 20,478             |       | $          | —     |   | $ | 23,180 |   |

 

The gross carrying amountof our domain name intangibles, which were not subject to amortization, at December 31,2007 was $0.3 million.  These domain nameintangibles were fully impaired during the third quarter of 2008.  The following table represents our otherintangibles subject to amortization by major class as of December 31, 2008and 2007.

 
| ** **                | ** ** | **As of December 31,** | ** ** |
|---------------------------|------------|---------------------------------------|------------|
| **(in thousands)**   | ** ** | **2008**                              | ** ** | **2007** | ** ** |
|                      |       |                                  |       |   |   |
| Customer  related:        |       |                                  |       |   |   |
| Gross carrying  amount    |       | $                                     | 250        |   | $ | 1,434 |   |
| Accumulated  amortization |       | (52                                   | )          | (727 | ) |
|                      |       | $                                     | 198        |   | $ | 707 |   |
| Marketing  related:       |       |                                  |       |   |   |
| Gross carrying  amount    |       | $                                     | 817        |   | $ | 638 |   |
| Accumulated  amortization |       | (135                                  | )          | (41 | ) |
|                      |       | $                                     | 682        |   | $ | 597 |   |

 

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The amortization periodsrange from 36 to 84 months. Amortization expense for the years ended December 31,2008 and 2007 was $1.1 million and $0.6 million, respectively. Based on the December 31,2008 balance of other intangibles, we estimate amortization expense to be $0.2million each year for 2009 through 2011, $0.1 million in 2012, and $0.04million in 2013.

 

*Long-Lived Assets*

 

We evaluate the carryingvalue of long-lived assets held and used, other than goodwill, when events orchanges in circumstances indicate the carrying value may not be recoverable. Weconsider the carrying value of a long-lived asset impaired when the totalprojected undiscounted cash flows from such asset are separately identifiableand are less than the carrying value. We recognize a loss based on the amountby which the carrying value exceeds the estimated fair value of the long-livedasset. We determine the estimated fair value primarily using the projected cashflows from the asset discounted at a rate commensurate with the risk involved.

 

*Income Taxes*

 

We provide for income taxes pursuant to theliability method as prescribed in SFAS No. 109, *Accounting for Income Taxes*. The liability method requiresrecognition of deferred income taxes based on temporary differences betweenfinancial reporting and income tax bases of assets and liabilities, usingcurrent enacted income tax rates and regulations. These differences will resultin taxable income or deductions in future years when the reported amount of theasset or liability is recovered or settled, respectively. Considerable judgmentis required in determining when these events may occur and whether recovery ofan asset is more likely than not.

 

*Revenues*

 

Revenue consists of salesof products, media licensing, and solar energy integration contract fees. Werecognize revenue from the sale of products and the licensing of media when thefollowing four basic criteria are met: (1) persuasive evidence of anarrangement exists; (2) delivery has occurred or services rendered; (3) theseller’s price to the buyer is fixed and determinable; and (4) collectibilityis reasonably assured. We recognize revenue from fixed price contracts usingeither the completed contract or percentage-of-completion method, based on theenergy size of the solar energy integration project. We had two solar energyintegration contracts accounted for under the percentage-of-completion methodas of December 31, 2008 and none for 2007 and 2006. We present revenuesnet of taxes collected from customers. We recognize amounts billed to customersfor postage and handling as revenue at the same time we recognize the revenuesarising from the product sale. We include postage and handling costs, whichwere approximately $13.1 million for 2008, $12.0 million for 2007, and $13.0million for 2006, in selling and operating expense along with other fulfillmentcosts.

 

*Share-BasedCompensation*

 

As of January 1,2006, we adopted the provisions of SFAS No. 123(R), *Share-Based Payment*, which requirescompanies to recognize compensation cost for share-based awards based on theestimated fair value of the award on date of grant. We measure compensationcost at the grant date based on the estimated fair value of the award andrecognize compensation cost upon the probable attainment of a specifiedperformance condition or over a service period. We use the Black-Scholes optionvaluation model to estimate the fair value of the award. In estimatingthis fair value, we use certain assumptions, as disclosed in Note 12,Share-Based Compensation, consisting of the expected life of the option,risk-free interest rate, dividend yield, and volatility. The use of a differentestimate for any one of these components could have a material impact on theamount of calculated compensation expense. We elected the modified-prospectivemethod, under which prior periods are not revised for comparative purposes. Thevaluation provisions of SFAS 123(R) apply to new grants and to grants thatwere outstanding as of the effective date and are subsequently modified. Wewill recognize estimated compensation for grants that were outstanding as ofthe effective date over the remaining service periods using the compensationcost estimated for the SFAS 123(R) pro forma disclosures.

 

*Use of Estimates andReclassifications*

 

The preparation offinancial statements in accordance with GAAP requires us to make estimates andassumptions that affect the amounts reported in the accompanying financialstatements and disclosures. Although we base these estimates on our bestknowledge of current events and actions that we may undertake in the future,actual results may be different from the estimates. We have made certainreclassifications to prior period amounts to conform to the current periodpresentations.

 

*DefinedContribution Plan*

 

In 1999, we adopted adefined contribution retirement plan under Section 401(k) of theInternal Revenue Code, which covers

 

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substantially allemployees. Eligible employees may contribute amounts to the plan, via payrollwithholding, subject to certain limitations. The 401(k) plan permits, butdoes not require, us to make additional matching contributions to the 401(k) planon behalf of all participants in the 401(k) plan. Effective June 1,2007, we began matching 50% of an employee’s contribution, up to an annualmaximum matching contribution of $1,500, and during the year ended December 31,2008, we made matching contributions of $0.3 million to the 401(k) plan.

 

*ForeignCurrency Translation*

 

Our foreign subsidiariesuse their local currency as their functional currency. We translate assets andliabilities into U.S. dollars at exchange rates in effect at the balance sheetdate. We translate income and expense accounts at the average monthly exchangerates during the year. We record resulting translation adjustments, net ofincome taxes, as a separate component of accumulated other comprehensiveincome.

 

*ComprehensiveIncome (Loss)*

 

Our comprehensive income (loss) iscomprised of net income (loss) and foreign currency translation adjustments,net of income taxes. The disposition of our investment in our UK operationsduring the year ended December 31, 2008 resulted in a net loss whichlowered our net income.  The foreigncurrency translation amount attributable to that entity and accumulated in thetranslation adjustment component of equity was removed from the othercomprehensive income component of equity and reported as part of the loss onthe sale of the investment.

 

*NetIncome (Loss) Per Share*

 

Basic net income (loss)per share excludes any dilutive effects of options. We compute basic net income(loss) per share using the weighted average number of common shares outstandingduring the period. We compute diluted net income (loss) per share using theweighted average number of common and common stock equivalent shares outstandingduring the period. We excluded common equivalent shares of 717,000, 186,000 and262,000 from the computation of diluted net income (loss) per share for 2008,2007 and 2006, respectively, because their effect was antidilutive.

 

The following table setsforth the computation of basic and diluted net income (loss) per share:

 
| ** **                                                         | ** ** | **For the Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| **(In thousands, except per share data)** | ** ** | **2008**                                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                         | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Numerator for  basic and diluted net income (loss) per share       |       | $                                                             | (35,623    | ) | $ | 8,524 |   | $ | 5,644 |   |
|                                                               |       |                                                          |       |   |   |   |   |
| Denominator:                                                       |       |                                                          |       |   |   |   |   |
| Weighted average  shares for basic net income (loss) per share     |       | 24,452                                                        |       | 24,962 |   | 24,349 |   |
|                                                               |       |                                                          |       |   |   |   |   |
| Effect of  dilutive securities:                                    |       |                                                          |       |   |   |   |   |
| Weighted average  of common stock and stock options                |       | —                                                        |       | 252 |   | 268 |   |
|                                                               |       |                                                          |       |   |   |   |   |
| Denominators for  diluted net income (loss) per share              |       | 24,452                                                        |       | 25,214 |   | 24,617 |   |
|                                                               |       |                                                          |       |   |   |   |   |
| Net income  (loss) per share—basic                            |       | $                                                             | (1.46      | ) | $ | 0.34 |   | $ | 0.23 |   |
| Net income  (loss) per share—diluted                          |       | $                                                             | (1.46      | ) | $ | 0.34 |   | $ | 0.23 |   |

 

*Recently Issued Accounting Pronouncements*

 

In December 2007,the FASB issued FASB Statement No. 141 (Revised 2007), *Business Combinations*. Under SFAS 141(R),an acquiring entity will be required to recognize all the assets acquired andliabilities assumed in a transaction at the acquisition-date fair value withlimited exceptions. SFAS 141(R) will change the accounting treatment forcertain specific items, including the following:

 
| · |   | acquisition costs will  be generally expensed as incurred;                                                                                                                                                                               |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | noncontrolling  interests (formerly known as “minority interests”—see SFAS 160 discussion  below) will be valued at fair value at the acquisition date;                                                                   |
| · |   | acquired contingent  liabilities will be recorded at fair value at the acquisition date and  subsequently measured at either the higher of such amount or the amount  determined under existing guidance for non-acquired contingencies; |

 

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| · |   | in-process research and development will  be recorded at fair value as an indefinite-lived intangible asset at the  acquisition date;                  |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | restructuring costs associated with a  business combination will be generally expensed subsequent to the acquisition  date and                         |
| · |   | changes in deferred tax asset valuation  allowances and income tax uncertainties after the acquisition date generally  will affect income tax expense. |

 

Also included in SFAS 141(R) are asubstantial number of new disclosure requirements. SFAS 141(R) appliesprospectively to business combinations for which the acquisition date is on orafter the beginning of the first annual reporting period beginning on or after December 15,2008. Earlier adoption is prohibited. Consequently, we will adopt theprovisions of SFAS 141(R) for our fiscal year beginning January 1,2009. We believe that SFAS 141(R) is applicable to us, but such impactwill be dependent on the nature of future acquisitions, if any.

 

In December 2007, FASB issued FASBStatement No. 160, *NoncontrollingInterests in Consolidated Financial Statements—An Amendment of ARB No. 51*.SFAS 160 establishes new accounting and reporting standards for anoncontrolling interest in a subsidiary and for the deconsolidation of asubsidiary. Specifically, this statement requires the recognition of anoncontrolling interest (minority interest) as equity in the consolidatedfinancial statements and separate from the parent’s equity. The amount of netincome attributable to the noncontrolling interest will be included inconsolidated net income on the face of the income statement. SFAS 160 clarifiesthat changes in a parent’s ownership interest in a subsidiary that do notresult in deconsolidation are equity transactions if the parent retains itscontrolling financial interest. In addition, SFAS 160 requires that a parentrecognize a gain or loss in net income when a subsidiary is deconsolidated.Such gain or loss will be measured using the estimated fair value of thenoncontrolling equity investment on the deconsolidation date. SFAS 160 alsoincludes expanded disclosure requirements regarding the interests of the parentand its noncontrolling interest. SFAS 160 is effective for fiscal years, andinterim periods within those fiscal years, beginning on or after December 15,2008. Earlier adoption is prohibited. We will adopt SFAS 160 at the beginningof our fiscal year commencing January 1, 2009. We believe SFAS 160 will beapplicable to us in that minority interest will be listed separately inshareholders’ equity, but we cannot yet reasonably estimate the other impactsto our consolidated financial statements.

 

In September 2006, FASB issued FASBStatement No. 157, *Fair Value Measurements*.SFAS 157 defines fair value, establishes a framework for measuring fair valuein GAAP, and expands disclosures about fair value measurements. SFAS 157applies under other accounting pronouncements that require or permit fair valuemeasurements, the FASB having previously concluded in those accountingpronouncements that fair value is the relevant measurement attribute.Accordingly, SFAS 157 does not require any new fair value measurements. SFAS157 is effective for non-recurring nonfinancial assets and nonfinancialliabilities for financial statements issued for fiscal years beginning after November 15,2008, and interim periods within those fiscal years. Earlier application isencouraged, provided that the reporting entity has not yet issued financialstatements for that fiscal year, including financial statements for an interimperiod within that fiscal year. We will adopt the provisions of SFAS 157 fornon-recurring nonfinancial assets and nonfinancial liabilities in our fiscalyear commencing January 1, 2009. We currently believe that adoption of theprovisions of SFAS 157 will not have a material impact on our consolidatedfinancial statements.

 

On March 19, 2008,the FASB issued FASB Statement No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities – an Amendment of FASBStatement 133*.  SFAS 161enhances required disclosures regarding derivatives and hedging activities,including enhanced disclosures regarding how: (a) an entity usesderivative instruments; (b) derivative instruments and related hedge itemsare accounted for under FASB Statement No. 133, *Accountingfor Derivative Instruments and Hedging Activities*; and (c) derivativeinstruments and related hedged items affect an entity’s financial position,financial performance, and cash flows. Specifically, SFAS 161 requires:

 
| · |   | disclosure of the  objectives for using derivative instruments be disclosed in terms of  underlying risk and accounting designation; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------|
| · |   | disclosure of the fair  values of derivative instruments and their gains and losses in a tabular  format;                            |
| · |   | disclosure of  information about credit-risk-related contingent features; and                                                        |
| · |   | cross-reference from  the derivative footnote to other footnotes in which derivative-related  information is disclosed.              |

 

SFAS 161 is effective for fiscal years andinterim periods beginning after November 15, 2008.  We will adopt the provisions of SFAS 161 inour fiscal year commencing January 1, 2009. We currently believe thatadoption of the provisions of SFAS 161 will not have a material impact on ourconsolidated financial statements.

 

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**3.****                  ****Notes Receivable and Other Assets**

 

As of December 31,2008, our notes receivable and other assets consisted of $2.7 million in notesand $0.3 million in investments, and $0.2 million in other long-term assets.

 

As of December 31,2007, our notes receivable and other assets consisted of $2.7 million in notes,$0.3 million in investments, and $1.1 million in other long-term assets.  On November 7, 2007, we entered into acooperative business arrangement with Care2.com, Inc., whereby Care2agreed that we will become the e-commence provider for Care2 in return for apercentage of our revenue generated from such customer leads.  Additionally, Care2 agreed to promote Gaiamsubscriptions to Care2 customers and to not pursue subscription business.  We loaned Care2 $2.7 million, evidenced by a6% interest bearing senior secured promissory note due November 7, 2011,purchased 254,237 shares of Care2 Series D-1 Preferred Stock for cash of$300,000, and received warrants to subscribe for and purchase from Care2additional stock.  The warrants had noestimated fair value as of December 31, 2008 and 2007.

 

**4.      Mergers andAcquisitions**

 

We include results fromoperations of acquired companies in our consolidated financial statements fromtheir respective effective acquisition dates.

 

During 2007 and 2008, weacquired businesses in all of our reporting segments.  The acquisitions in our direct to consumersegment strengthened our online community and expanded our offline distributionthrough print media.  Our businesssegment acquisitions broadened our professional fitness product line andincreased our distribution channels in the professional markets.  Our solar segment acquisitions allowed us toexpand our geographic presence in Northern California and establish a salesoffice in the sizable Southern California solar installation market.  The factors that contributed to purchaseprices that resulted in recognition of goodwill were the target companies’ newand varied product and service offerings, anticipated and historical revenueand increased market share potential through broadened geographical reach andnew market channels.

 

During the first quarterof 2008, Real Goods’ subsidiary, Real Goods Carlson, acquired certain assets ofCarlson Solar, Inc., and we acquired 100% ownership interest of SPRI andthe remaining 49.9% ownership interest of Conscious Enlightenment.  On May 23, 2008, Real Goods exchanged 280,000shares of its Class A common stock for Real Goods’ current Chief FinancialOfficer’s 11.6% ownership in Real Goods Carlson, Inc.  Consideration paid for the minority interestof Real Goods Carlson was the same relative fair value as the equity received.  The assets acquired from Carlson Solar weredetermined to have all inputs and processes necessary for the transferredassets to continue to conduct normal operations after acquisition; accordingly,the purchase was treated as a business combination.  Also during 2008, Real Goods acquired 100%ownership of Independent Energy Systems and Regrid Power, Inc.  The total initial cost of all the 2008business acquisitions was $32.6 million, including direct acquisition costs,consisting of $14.2 million in cash, $5.1 million in our Class A commonstock, $11.1 million in Real Goods Class A common stock, and $2.2 millionin assumed liabilities. We used a period beginning two days before and two daysafter the date that the terms of the acquisition were agreed and announced indetermining the estimated fair value of the securities issued in connectionwith these business acquisitions.

 

As additionalconsideration for Carlson Solar, Real Goods’ granted to the sellers warrants topurchase 30,000 shares of Real Goods’ Class A common stock at an exerciseprice of $3.20 per share.  The warrantscommenced vesting upon the initial public offering of Real Goods’ Class Acommon stock.  In addition, the RegridPower acquisition has contingent share consideration up to a maximum of 800,000shares of Real Goods’ Class A common stock, based on Regrid Power’srevenue and earnings performance over its first 12 months followingacquisition, but in no event will total consideration paid exceed one times thetrailing twelve months revenues as of September 30, 2009.

 

For these acquisitions,we preliminarily recognized $20.3 million, $7.0 million, and $0.9 million ofsolar, business, and direct to consumer segment goodwill, respectively, ofwhich $2.5 million is expected to be deductible for tax purposes, and $1.6million of intangibles subject to amortization (50 month weighted-averageuseful life).  The marketing relatedintangibles were $1.3 million (51 month weighted-average useful life) and thecustomer related intangibles were $0.3 million (45 month weighted-averageuseful life).

 

Also during 2008, wevested 50% of the contingent consideration warrants related to the Marin Solarand Carlson Solar acquisitions as a result of the consummation of Real Goods’initial public offering on May 13, 2008, for a total additional cost of$0.2 million, which we allocated to the solar segment goodwill. We are still inthe process of finalizing our assessment of the estimated fair value of the netassets acquired during 2008 and, thus, the amount of goodwill and otherintangibles is subject to refinement.

 

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In 2008, we sold ourinvestment in the non-LOHAS business publications that were acquired as part ofa previous acquisition and sold our 51% ownership interest in Gaiam Limited,our UK subsidiary.  We received 50,000shares of Gaiam Class A common stock, valued at $0.9 million, as part ofthe consideration for our UK subsidiary. We also closed one of our direct to consumer segment businesses.

 

The following is supplemental unaudited proforma information for the aggregated 2008 acquisitions and dispositions as ifthey had occurred on January 1, 2007. The pro forma adjustments are basedon currently available information and upon assumptions that we believe arereasonable in order to reflect, on a pro forma basis, the impact of these 2008acquisitions on our historical financial information.  The unaudited pro forma information shouldnot be relied upon as being indicative of our results of operations had theacquisitions occurred on the dates assumed. The unaudited pro forma financial information also does not project theresults of operations for any future period or date.

 
| ** **                                                         | ** ** | **Pro Forma**                     | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                         | ** ** | **Year ended  December 31,** | ** ** |
| **(in thousands, except per share data)** | ** ** | **2008**                               | ** ** | **2007** | ** ** |
| ** **                                                         | ** ** | **(unaudited)**                        | ** ** |
| Net revenue (a)                                                    |       | $                                      | 267,259    |   | $ | 285,747 |   |
| Income before  income taxes and minority interest                  |       | $                                      | (50,795    | ) | $ | 16,617 |   |
| Net income                                                         |       | $                                      | (33,675    | ) | $ | 9,663 |   |
|                                                               |       |                                   |       |   |   |
| Net income per  share:                                             |       |                                   |       |   |   |
| Basic                                                              |       | $                                      | (1.38      | ) | $ | 0.38 |   |
| Diluted                                                            |       | $                                      | (1.38      | ) | $ | 0.38 |   |

 

----

| (a) |   | International revenues,  excluding our disposed UK operation, were $2.9 million during 2008 and $25.3  million during 2007.  This supplemental  pro forma information has not been adjusted for our change in the first  quarter of 2008 from traditional product sales to licensing arrangements for  our international operations.  |
|-----|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

During 2007, we, and oursolar subsidiary, acquired varying amounts of controlling ownership interest inseveral entities for a total initial cost of approximately $17.9 million,including direct acquisition costs and other liabilities, of which $14.5million was paid in cash, $1.5 million in shares of our Class A commonstock, and $1.9 million in assumed liabilities. We used a period beginning two days before and two days after the datethat the terms of the acquisition were agreed and announced in determining theestimated fair value of the securities issued in connection with these businessacquisitions. Three of the acquisitions call for additional consideration,payable in cash or shares of our Class A common stock (up to a maximum of50,000 shares), contingent upon the achievement of a certain membership thresholdwithin the next two years or our sale of the acquired business or its assets,the amount of revenue generated from certain potential customers and thecollection of certain rebates, or the attaining of a certain level of pre-taxprofits in our community business over its first twelve months ofoperations.  As additional considerationfor the Marin Solar acquisition, Real Goods, granted to the sellers warrants topurchase 40,000 shares of Real Goods’ Class A common stock at an exerciseprice of $3.20 per share.  The warrantscommenced vesting upon the initial public offering of Real Goods’ Class Acommon stock.

 

The acquired companiesincluded Zaadz, a leading social networking site in the LOHAS space; Lime, amultimedia lifestyle company; Conscious Enlightenment, an on-line and off-linecommunity; and a solar system integration company. With regards to theacquisitions, we assumed liabilities for severance ($0.2 million) due todownsizing of the workforce, facility lease obligations ($0.2 million) as a resultof relocation, and a noncancellable contract ($0.6 million) which obligated usto perform services with no future benefit to the combined companies.  During 2007, we charged $0.1 million to theseverance liability, $0.1 million to the facility lease obligation liability,and $0.5 million to the noncancellable contract liability.  As of December 31, 2007, the remainingbalances were immaterial.  In connectionwith the 2007 acquisitions, we recognized $7.3 million, $3.8 million and $3.2million of direct to consumer, business and solar segment goodwill,respectively, of which we expect $3.8 million to be deductible for taxpurposes, $1.4 million of intangibles subject to amortization (37 monthweighted-average useful life), and $0.3 million of indefinite life domainnames.  The amortizable intangibles arecustomer related of $0.8 million (23 month weighted-average useful life) andmarketing related of $0.6 million (53 month weighted-average useful life).

 

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At the time any the ofremaining contingent consideration becomes determinable beyond a reasonabledoubt, we will recognize it as additional purchase price and allocate it togoodwill and other intangibles, as appropriate.

 

**5.             Property and Equipment**

 

Property and equipment,stated at lower of cost or estimated fair value, consists of the following asof December 31:

 
| **(in thousands)**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|
| Land                                          |       | $        | 8,533      |     | $          | 3,100 |   |
| Buildings                                     |       | 13,875   |       | 1,587    |       |
| Furniture,  fixtures and equipment            |       | 6,112    |       | 6,198    |       |
| Leasehold  improvements                       |       | 1,668    |       | 1,754    |       |
| Website  development costs and other software |       | 6,656    |       | 5,962    |       |
| Studio, computer  and telephone equipment     |       | 7,655    |       | 8,842    |       |
| Vehicles                                      |       | 731      |       | 191      |       |
| Warehouse and  distribution equipment         |       | 1,406    |       | 1,730    |       |
|                                          |       | 46,636   |       | 29,364   |       |
| Accumulated  depreciation and amortization    |       | (19,255  | )          | (19,855  | )          |
|                                          |       | $        | 27,381     |     | $          | 9,509 |   |

 

**6.             Asset Impairment and Other General Expense and Income**

 

As a result ofchanges in the retail business climate,we impaired $44.4 million of goodwill, $27.1 million of media libraries, $1.5million of other intangibles, $2.2 million of property and equipment (primarilyweb site development), $1.5 million of deferred advertising costs, and $3.3million of other related assets during year ended December 31, 2008.  The impairment of goodwill, resulting fromthe application SFAS No. 142, *Goodwill and OtherIntangible Assets*, was primarily driven by adverse financial marketconditions that reduced our market capitalization below the net carrying valueof our assets on our consolidated balance sheet as of December 31,2008.  The impairment takes into accountthe deteriorating macro-economic environment, the reduced accessibility to thecredit markets for customers, and the high degree of uncertainty about theeventual return to normalcy.  These noncash, partially tax deductibleimpairments (mostly goodwill) reduced the carrying value of these assets on ourconsolidated balance sheet for our business, direct to consumer, and solar segments by $33.7 million, $19.1 million,and $27.2 million, respectively.  Weestimated the fair value of each impaired asset category using a traditionalpresent value technique, relying upon varioussources of information for our assumptions, such as estimated future sales,internal budgets and projections, and judgment about existing brandpotential.  Other general expense andincome on our consolidated statement of operations for the year ended December 31,2008 included these asset impairment losses of $80.0 million, and operatingexpenses related to the consummation of the Real Goods initial public offeringand guaranteed payments that we are obligated to make, but for which we expectto receive no benefit, including reduction of force costs, totaling $2.9million.

 

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**7.             Commitments and Contingencies**

 

We lease office andwarehouse space through operating leases. Some of the leases have renewal clauses, which range from 1 to 10 years.

 

The following schedulerepresents the annual future minimum payments under these commitments, as of December 31,2008:

 
| **(in thousands)**       | ** ** | **Operating** | ** ** |
|-------------------------------|------------|---------------|------------|
| 2009                          |       | $             | 2,802      |   |
| 2010                          |       | 2,027         |       |
| 2011                          |       | 1,391         |       |
| 2012                          |       | 1,211         |       |
| 2013                          |       | 1,176         |       |
| 2014                          |       | 1,042         |       |
| 2015                          |       | 254           |       |
| Total minimum  lease payments |       | $             | 9,903      |   |

 

We incurred rent expenseof $3.8 million, $4.2 million and $4.3 million for the years ended December 31,2008, 2007 and 2006, respectively.

 

**8.             Accrued Liabilities**

 

Accrued liabilitiesconsist of the following as of December 31:

 
| **(in thousands)**    | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|
| Accrued  royalties         |       | $        | 1,572      |     | $          | 3,242 |   |
| Accrued  compensation      |       | 3,652    |       | 4,348    |       |
| Income taxes  payable      |       | —   |       | 832      |       |
| Other accrued  liabilities |       | 1,661    |       | 2,209    |       |
|                       |       | $        | 6,885      |     | $          | 10,631 |   |

 

**9.             Line of Credit**

 

We have a revolving lineof credit agreement with a financial institution, which expires in October 2009.  The credit agreement permits borrowings up tothe lesser of $15 million or our borrowing base which is calculated based uponthe collateral value of our accounts receivable, inventory, and certainproperty and equipment. Borrowings under this agreement bear interest at thelower of prime rate less 75 basis points or LIBOR plus 275 basis points.Borrowings are secured by a pledge of certain of our assets, and the agreementcontains various financial covenants, including those requiring compliance withcertain financial ratios. At December 31, 2008, we had no amountsoutstanding under this agreement; however, $1.4 million was reserved foroutstanding letters of credit.  Webelieve we have complied with all of the financial covenants.

 

**10.          IncomeTaxes**

 

Our provision for incometax expense (benefit) is comprised of the following:

 
| ** **              | ** ** | **For the Years Ended December 31,** | ** ** |
|-------------------------|------------|---------------------------------------------------------------|------------|
| **(in thousands)** | ** ** | **2008**                                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Current:                |       |                                                          |       |   |   |   |   |
| Federal                 |       | $                                                             | (5,099     | ) | $ | 5,404 |   | $ | 2,115 |   |
| State                   |       | 122                                                           |       | 1,196 |   | 474 |   |
| International           |       | —                                                        |       | (132 | ) | (362 | ) |
|                    |       | (4,977                                                        | )     | 6,468 |   | 2,227 |   |
| Deferred:               |       |                                                          |       |   |   |   |   |
| Federal                 |       | (1,321                                                        | )          | (624 | ) | 916 |   |
| State                   |       | (1,048                                                        | )          | (138 | ) | 207 |   |
| International           |       | (196                                                          | )          | 61 |   | 424 |   |
|                    |       | (2,565                                                        | )          | (701 | ) | 1,547 |   |
| Total                   |       | $                                                             | (7,542     | ) | $ | 5,767 |   | $ | 3,774 |   |

 

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Variations from thefederal statutory rate are as follows:

 
| **(in thousands)**                                                 | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                    |       |     |       |     |       |     |       |
| Expected federal  income tax expense (benefit) at statutory rate of 34% |       | $        | (18,743    | )        | $          | 4,944    |       | $ | 3,246 |   |
| Effect of  permanent impairment differences                             |       | 13,766   |       | —   |       | —   |       |
| Effect of  permanent other differences                                  |       | (139     | )          | 92       |       | 48       |       |
| State income tax  expense (benefit), net of federal benefit             |       | (2,165   | )          | 721      |       | 433      |       |
| Federal tax  credits                                                    |       | (315     | )          | —   |       | —   |       |
| Other                                                                   |       | (26      | )          | —   |       | —   |       |
| Effect of  differences between U.S. taxation and foreign taxation       |       | 80       |       | 10       |       | 47       |       |
| Income tax  expense (benefit)                                           |       | $        | (7,542     | )        | $          | 5,767    |       | $ | 3,774 |   |

 

Deferred income taxesreflect net tax effects of temporary differences between the carrying amountsof assets and liabilities for financial reporting purposes and the amounts usedfor income tax purposes. The components of the net accumulated deferred incometax assets as of December 31, 2008 and 2007 are as follows:

 
| ** **                                     | ** ** | **December 31,** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|
| **(in thousands)**                        | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Deferred tax  assets (liabilities):            |       |                  |       |   |   |
| Current:                                       |       |                  |       |   |   |
| Provision for  doubtful accounts               |       | $                     | 1,049      |   | $ | 491 |   |
| Inventory-related  expense                     |       | 781                   |       | 1,322 |   |
| Accrued  liabilities                           |       | 3,866                 |       | 4,365 |   |
| Worthless investment                           |       | 1,598                 |       | — |   |
| Net operating  loss, or NOL, carryforward      |       | —                |       | 337 |   |
| Prepaid and  deferred catalog costs            |       | (256                  | )          | (584 | ) |
| Charitable  carryforward                       |       | —                |       | 44 |   |
| Foreign tax  credit                            |       | —                |       | 30 |   |
| Total current  deferred tax assets             |       | $                     | 7,038      |   | $ | 6,005 |   |
| Non-current:                                   |       |                  |       |   |   |
| Depreciation and  amortization                 |       | $                     | (764       | ) | $ | 420 |   |
| Section 181  qualified production expense |       | (3,071                | )          | (2,770 | ) |
| NOL carryforward                               |       | 11,871                |       | 6,891 |   |
| Charitable  carryforward                       |       | 592                   |       | — |   |
| Gain from  issuance of subsidiary stock        |       | (12,662               | )          | — |   |
| Impairment of  assets                          |       | 10,291                |       | — |   |
| Tax credits                                    |       | 863                   |       | 30 |   |
| Foreign exchange  rate gain                    |       | (590                  | )          | (551 | ) |
| Other                                          |       | (454                  | )          | 37 |   |
| Total  non-current deferred tax assets         |       | $                     | 6,076      |   | $ | 4,057 |   |
| Total net  deferred tax assets                 |       | $                     | 13,114     |   | $ | 10,062 |   |

 

Thesources of income (loss) before income taxes and minority interests are asfollows:

 
| **(in thousands)** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|----------|------------|
| Domestic                |       | $        | (53,999    | )        | $          | 14,841   |       | $ | 9,339 |   |
| International           |       | (1,128   | )          | (240     | )          | 207      |       |
|                    |       | $        | (55,127    | )        | $          | 14,601   |       | $ | 9,546 |   |

 

At December 31,2008, we had made no provision for U.S. federal and state income taxes onapproximately $331,000 of undistributed foreign losses, which are expected toremain outside of the U.S. indefinitely. Upon any future distribution offoreign earnings in the form of dividends or otherwise, we would be subject toU.S. income taxes (subject to an adjustment for foreign tax credits), stateincome taxes, and withholding taxes payable to the various foreign countries.Determination of the amount of unrecognized deferred U.S. income tax liabilityis not practicable because of the complexities associated with its hypotheticalcalculation. Our foreign subsidiaries generated losses before minority interestand income taxes of approximately $473,000 during 2008.

 

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At December 31, 2008and 2007, we had NOL carryforwards of approximately $22.7 million and $18.7million, respectively, which may be used to offset future taxable income. Thesecarryforwards expire between 2019 and 2028. The Internal Revenue Code containsprovisions that limit the NOL available for use in any given year upon theoccurrence of certain events, including significant changes in ownershipinterest. A change in ownership of a company of greater than 50% within athree-year period results in an annual limitation on the utilization of NOLcarryforwards from tax periods prior to the ownership changes. Our NOLcarryforwards as of December 31, 2008 are subject to annual limitationsdue to changes in****ownership.

 

An alternative minimumtax credit carryforward of approximately $480,000 is available to offset futureregular tax liabilities and has no expiration date.  We also have general business tax creditcarryforwards for federal income tax purposes at December 31, 2008 ofapproximately $238,000, which are available to reduce future federal incometaxes, if any, and expire through 2028.

 

We expect all thedeferred tax assets at December 31, 2008 to be fully recoverable throughthe reversal of taxable temporary differences in future years as a result ofnormal business activities. We had no valuation allowance as of December 31,2008 or 2007.  We realized $0.2 millionand $0.7 million in tax benefits recorded to additional paid-in capital as aresult of the exercise of stock options for the years ended December 31,2008 and 2007, respectively.

 

EffectiveJanuary 1, 2007, we adopted the provisions of the Financial AccountingStandards Board (“FASB”) Interpretation No. 48, *Accounting of Uncertainty in Income Taxes—An Interpretation of FASBStatement No. 109*. Under FIN 48, we must recognize the taxbenefit from an uncertain tax position only if it is more likely than not thatthe tax position will be sustained on examination by the taxing authorities,based on the technical merits of the position. We measure the tax benefitsrecognized in the consolidated financial statements from such a position basedon the largest benefit that has a greater than 50% likelihood of being realizedupon ultimate resolution. The application of income tax law is inherentlycomplex. Laws and regulations in this area are voluminous and are oftenambiguous. As such, we are required to make many subjective assumptions and judgmentsregarding our income tax exposures. Interpretations of and guidance surroundingincome tax law and regulations change over time and may result in changes toour subjective assumptions and judgments which can materially affect amountsrecognized in our Consolidated balance sheets and Consolidated statements ofoperations. The result of the reassessment of our tax positions in accordancewith FIN 48 did not have a material impact on our consolidated financialstatements. Our federal tax returns for all years after 2004 and our state taxreturns after 2003 are subject to future examination by tax authorities for allour tax jurisdictions.  We recognizeinterest and penalties related to income tax matters in other income (expense)and corporate, general and administration expenses, respectively.

 

**11.          Shareholders’ Equity**

 

During 2008, we issued atotal of 2,810 shares of our Class A common stock to our independentdirectors, in lieu of cash compensation, for services rendered in 2007 and2008; issued 221,152 shares of our Class A common stock as part of theconsideration to acquire the remaining and controlling ownership interests intwo businesses (see Note 4, Mergers and Acquisitions); and issued 133,360shares of our Class A common stock upon exercise of options under our 1999Long-Term Incentive Plan, including 110,000 shares exercised and held by ourPresident.

 

Additionally, during2008, we repurchased 1,372,285 shares of our Class A common stock for atotal cost of $19.3 million.  See alsoNote 4, Mergers and Acquisitions.  Werecorded these repurchases of our shares in accordance with the cost method ofaccounting for treasury stock.  Since wehave not yet decided the ultimate disposition of the re-acquired shares, theircombined cost is reflected in the consolidated balance sheet at December 31,2008 as a $19.3 million reduction to additional paid-in capital.

 

During 2008, Real Goodscompleted an initial public offering of 5.5 million shares resulting in netproceeds of $48.2 million to Real Goods, issued 280,000 shares valued at $1.9million to acquire a minority interest in one of its subsidiaries and issued2,094,679 shares valued at $9.2 million as partial consideration to acquire100% ownership of two businesses (see Note 4, Mergers and Acquisitions), issuedan additional 15,297 shares valued at $94,000 to compensate nonemployee boardmembers for services rendered, and made other non-stock related equitytransactions, for a net gain of $33.7 million to us.  Real Goods uses a period beginning two daysbefore and two days after the date that the terms of the acquisition are agreedto and announced in determining the estimated fair value of the securitiesissued.  Following these transactions weowned 55.9% of Real Goods.  The RealGoods shares are generally valued based upon the closing price of Real Goods’ Class Acommon stock, which has ranged from $3.65 to $7.50 per share during the periodfrom May 13, 2008 to December 31, 2008.  The portion of our gain resulting from RealGoods selling new shares, $32.8 million, is reflected in gain from issuance ofsubsidiary stock on our consolidated statements of operations for the yearended December 31, 2008 and has been tax affected.  The remaining net gain resulting from otherReal Goods non-stock related equity transactions, which consisted of 

 

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the assumption by RealGoods’ minority interest shareholders of their respective portion of Real Goods’tax sharing agreement obligation to us, the recognition of the Carlson Solarand Marin Solar contingent warrant consideration upon consummation of RealGoods’ IPO (see Note 4, Mergers and Acquisitions), and stock option share-basedcompensation expense, none of which were tax effected, are recorded asincreases to additional paid-in capital on our consolidated balance sheet at December 31,2008.

 

As of December 31,2008, we had the following Class A common shares reserved for futureissuance:

 
| Conversion of  Class B common shares                                                          |   | 5,400,000 |   |
|----------------------------------------------------------------------------------------------------|--------|-----------|--------|
| Awards under the  1999 Long-Term Incentive Plan:                                                   |   |      |   |
| Stock options  outstanding                                                                         |   | 1,219,310 |   |
| Shares reserved  for issuance to directors in lieu of cash compensation for 2008 services rendered |   | 2,543     |   |
| Total shares  reserved for future issuance                                                         |   | 6,621,853 |   |

 

Each holder of shares of our Class Acommon stock is entitled to one vote for each share held on all matterssubmitted to a vote of shareholders. Each share of our Class B common stockis entitled to ten votes on all matters submitted to a vote of shareholders.There are no cumulative voting rights. All holders of shares of our Class Acommon stock and shares of our Class B common stock vote as a single classon all matters that are submitted to the shareholders for a vote. Accordingly,holders of a majority of the shares of our Class A common stock and sharesof our Class B common stock entitled to vote in any election of directorsmay elect all of the directors who stand for election. Shareholders may consentto an action in writing and without a meeting under certain circumstances.

 

Shares of our Class A common stock andshares of our Class B common stock are entitled to receive dividends, ifany, as may be declared by the board of directors out of legally availablefunds. In the event of a liquidation, dissolution or winding up of our Company,the shares of our Class A common stock and shares of our Class Bcommon stock are entitled to share ratably in our assets remaining after the paymentof all of our debts and other liabilities. Holders of shares of our Class Acommon stock and shares of our Class B common stock have no preemptive,subscription or redemption rights, and there are no redemption or sinking fundprovisions applicable to the shares of our Class A common stock and our Class Bcommon stock.

 

Our Class B commonstock may not be transferred unless converted into shares of our Class Acommon stock, other than certain transfers to affiliates, family members, andcharitable organizations. The shares of our Class B common stock areconvertible one-for-one into shares of our Class A common stock, at theoption of the holder of the shares of our Class B common stock.

 

As part of additional consideration for theacquisition of solar energy integrator businesses, Real Goods issued, during2007 and 2008, seven-year warrants to purchase 70,000 shares of Real Goods’ Class Acommon stock at an exercise price of $3.20 per share. See Note 4, Mergers andAcquisitions.

 

During 2007, we issued atotal of 4,955 shares of our Class A common stock to our independentdirectors, in lieu of cash compensation, for services rendered in 2006 and2007; issued 1,875 restricted shares of our Class A common stock to two ofour named executive officers as bonus compensation; issued 80,795 shares of ourClass A common stock as part of the consideration to acquire controllingownership interests in two businesses (see Note 4, Mergers and Acquisitions);and issued 216,070 shares of our Class A common stock upon exercise ofoptions under our 1999 Long-Term Incentive Plan.

 

On February 6, 2007,we entered into a stock repurchase agreement with Revolution Living and Alps,whereby we repurchased 2.5 million of our Class A common stock fromRevolution Living for $13.14 per share or $32.8 million in cash, Alps prepaidits promissory note principal plus accrued interest in the amount of $2.4million, Alps acquired our investment in Lime for $1.5 million in cash, andDavid Golden, Chief Financial Officer of Revolution, resigned from the Board ofDirectors of Gaiam. Also as part of the Agreement, Jirka Rysavy, our Chairmanand largest shareholder, purchased for $7.2 million Revolution Living’s optionto acquire approximately 2.3 million of his Gaiam shares at $10 per share. Theprice to repurchase the option was calculated as the spread between thenegotiated $13.14 share price for our purchase of the shares from RevolutionLiving and the $10 option exercise price. The $13.14 per share price agreed toby the parties was the average price over the last 90 days of our shares priorto the closing. We accounted for the re-acquired stock under the cost method.Since we have not yet decided the ultimate disposition of the re-acquiredstock, we reflected its cost at December 31, 2007 as a $32.9 millionreduction to additional paid-in capital.

 

During 2006, we issued atotal of 7,692 shares of our Class A common stock to our independentdirectors, in lieu of cash compensation, for services rendered in 2005 and 2006and issued 671,784 shares of our Class A common stock upon exercise 

 

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of options granted underour 1999 Long-Term Incentive Plan. On May 24, 2006, we sold 5,000,000shares of our Class A common stock and on June 13, 2006 we sold690,000 shares of our Class A common stock in an underwritten offering.The combined sale generated gross proceeds of $99.6 million. We issued 149,698and 220,026 shares of our Class A common stock on September 29, 2006and November 8, 2006, respectively, to acquire additional ownership ofConscious Media. See Note 4, Mergers and Acquisitions.

 

**12.          Share-Based Compensation**

 

Our share-based compensation program is along-term retention program that is intended to attract, retain and provideincentives for talented employees, officers, and directors, and to alignshareholder and employee interests. We grant options under our 1999 Long-TermIncentive Plan, which provides for the granting of options to purchase up to 3million shares of our Class A common stock and terminates no later than June 1,2009. We generally grant options under our Plan with an exercise price equal tothe closing market price of our stock at the date of the grant and the optionsnormally vest and become exercisable at 2% per month for the 50 monthsbeginning in the eleventh month after date of grant. We recognize thecompensation expense related to share-based payment awards on a straight-linebasis over the requisite service periods of the awards, which are generallyfive years for employee options and two years for Board members’ options andnamed executive officers’ restricted stock awards. Grants typically expireseven years from the date of grant.

 

The determination of theestimated fair value of share-based payment awards on the date of grant usingthe Black-Scholes option-pricing model is affected by our stock price as wellas assumptions regarding a number of complex and subjective variables. Wederive the expected terms from the historical behavior of participantgroupings.  We base expected volatilitieson the historically realized volatility of our stock over the expected term.Our use of historically realized volatilities is based upon the expectationthat future volatility over the expected term is not likely to differ fromhistorical results. We base the risk-free interest rate used in the optionvaluation model on U.S. Treasury zero-coupon issues with remaining termssimilar to the expected term on the options. We do not anticipate paying anycash dividends in the foreseeable future and, therefore, we use an expecteddividend yield of zero in the option valuation model. In accordance with SFAS No. 123R,we are required to estimate forfeitures at the time of grant and revise thoseestimates in subsequent periods if actual forfeitures differ from thoseestimates. We use historical data by participant groupings to estimate optionforfeitures and record share-based compensation expense only for those awardsthat are expected to vest.

 
| ** **                   | ** ** | **2008**       | ** ** | **2007**       | ** ** | **2006**       | ** ** |
|------------------------------|------------|----------------|------------|----------------|------------|----------------|------------|
|                         |       |           |       |           |       |           |       |
| Expected  volatility         |       | 52% - 60       | %          | 49% - 59       | %          | 51% - 61       | %          |
| Weighted-average  volatility |       | 56             | %          | 57             | %          | 59             | %          |
| Expected  dividends          |       | 0              | %          | 0              | %          | 0              | %          |
| Expected term  (in years)    |       | 5.0 – 6.5 |       | 2.0 – 5.8 |       | 1.5 – 5.9 |       |
| Risk-free rate               |       | 2.50% - 4.13   | %          | 4.13% - 4.88   | %          | 4.27% - 5.13   | %          |

 

The table below presentsa summary of option activity under the Plan as of December 31, 2008, andchanges during the year then ended:

 
| ** **                             | ** ** | **Shares** | ** ** | **Weighted-Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|----------------------------------------|------------|------------|------------|---------------------------------------|------------|------------------------------------------------------|------------|---------------------------------|------------|
|                                   |       |       |       |                                  |       |                                                 |       |                            |       |
| Outstanding at  January 1, 2008   |       | 883,670    |       | $                                     | 11.02      |                                                 |       |                            |       |   |
| Granted                                |       | 509,500    |       | 9.15                                  |       |                                                 |       |                            |       |
| Exercised                              |       | (133,360   | )          | 10.00                                 |       |                                                 |       |                            |       |
| Forfeited or  expired                  |       | (40,500    | )          | 18.35                                 |       |                                                 |       |                            |       |
| Outstanding at  December 31, 2008 |       | 1,219,310  |       | $                                     | 10.17      |                                                 | 4.8        |                            | $          | — |   |
| Exercisable at  December 31, 2008 |       | 424,700    |       | $                                     | 8.37       |                                                 | 2.6        |                            | $          | — |   |

 

We issue new shares uponthe exercise of options. We received $1.3 million and $2.7 million in cash fromstock options exercised during 2008 and 2007, respectively. Theweighted-average grant-date fair value of options granted during the years2008, 2007, and 2006 was $4.67, $8.28, and $8.06, respectively.  The total intrinsic value of optionsexercised during the years ended December 31, 2008, 2007, and 2006, was$0.6 million, $2.1 million, $6.3 million, respectively. The total fair 

 

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value of shares vestedduring the years ended December 31, 2008, 2007, and 2006 was and $0.9million, $0.7 million, and $0.4 million, respectively.

 

Our share-basedcompensation cost charged against income was $1.5 million, $1.1 million, and$0.7 million during 2008, 2007, and 2006, respectively, and is shown incorporate, general and administration expenses. The total income tax benefitrecognized for share-based compensation was $0.2 million, $0.4 million, and$0.3 million for 2008, 2007, and 2006, respectively.  As of December 31, 2008, there was $3.7million of unrecognized cost related to nonvested shared-based compensationarrangements granted under the Plan.  Weexpect that cost to be recognized over a weighted-average period of 3.33 years.

 

During 2008, Real Goods granted 257,000 newstock options and cancelled 69,000 stock options under the Real Goods 2008Long-Term Incentive Plan. Some of the stock options vest 2% per monthcommencing on the eleventh month following date of grant and the remaindercommence vesting 2% over 50 months only upon the attainment of a certain amountof pre-tax income for the year ended December 31, 2008. For theperformance based stock options, the performance condition was not attained andtherefore no compensation expense for those grants was recorded.

 

In 2007, Real Goods’ predecessor grantedstock options at $0.20 per share that Real Goods assumed on January 31,2008 at an exercise price of $3.20 per share. The options assumed are for RealGoods Class A common stock and have a total cost of $0.5 million. Theseoptions vested 50% on May 13, 2008 when Real Goods’ initial publicoffering was consummated (see Note 11 , Shareholders’ Equity) and this vestedportion was recorded as an offering cost. The remaining options vest 2% eachmonth after May 2008.

 

**13.          Segment and Geographic Information**

 

SegmentInformation

 

We manage our businessand aggregate our operational and financial information in accordance withthree reportable segments. The direct to consumer segment contains directresponse marketing programs, catalogs, Internet, and subscription communitysales channels, the business segment comprises retailers, media and corporateaccount channels, and the solar segment reflects solar energy businesses.

 

Although we are able totrack revenues by sales channel, the management, allocation of resources andanalysis and reporting of expenses is presented on a combined basis, at thereportable segment level. Prior period amounts have been recast to reflect theaddition of our solar reporting segment. Contribution margin is defined as net revenue, less cost of goods soldand total operating expenses.

 

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Financial information forour segments is as follows:

 
| ** **                                                                       | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **(in thousands)**                                                          | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net revenue:                                                                     |       |                                       |       |   |   |   |   |
| Direct to  consumer                                                              |       | $                                          | 129,832    |   | $ | 132,540 |   | $ | 108,896 |   |
| Business                                                                         |       | 88,912                                     |       | 111,481 |   | 93,772 |   |
| Solar                                                                            |       | 38,428                                     |       | 18,922 |   | 16,812 |   |
| Consolidated net  revenue                                                        |       | 257,172                                    |       | 262,943 |   | 219,480 |   |
| Contribution  margin (loss):                                                     |       |                                       |       |   |   |   |   |
| Direct to  consumer                                                              |       | (29,871                                    | )(a)       | (3,091 | ) | (2,710 | ) |
| Business                                                                         |       | (28,277                                    | )(a)       | 13,358 |   | 7,932 |   |
| Solar                                                                            |       | (30,995                                    | )(a)       | 186 |   | 419 |   |
| Consolidated  contribution margin (loss)                                         |       | (89,143                                    | )          | 10,453 |   | 5,641 |   |
| Reconciliation  of contribution margin (loss) to net income (loss):              |       |                                       |       |   |   |   |   |
| Gain from  issuance of subsidiary stock                                          |       | 32,800                                     |       | — |   | — |   |
| Interest and  other income                                                       |       | 1,216                                      |       | 4,148 |   | 3,905 |   |
| Income tax  expense (benefit)                                                    |       | (7,542                                     | )          | 5,767 |   | 3,774 |   |
| Minority  interest in net (income) loss of consolidated subsidiaries, net of tax |       | 11,962                                     |       | (310 | ) | (128 | ) |
| Net income  (loss)                                                               |       | $                                          | (35,623    | ) | $ | 8,524 |   | $ | 5,644 |   |

 

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| (a) |   | For the year ended  December 31, 2008, the contribution margins for the direct to consumer,  business and solar segments include asset impairment and related charges of  $20.4 million, $35.3 million and $27.2 million, respectively. See Note 6,  Asset Impairment and Other General Expenses and Income. |
|-----|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

The following is areconciliation of reportable segments’ assets to our consolidated totalassets.  The amounts as of December 31,2007 and 2006 have been recast for our new solar segment and unallocatedcorporate amounts.  Other unallocatedcorporate amounts are comprised of cash, current and deferred taxes andproperty and equipment.

 
| ** **                           | ** ** | **As of December 31,** | ** ** |
|--------------------------------------|------------|---------------------------------------|------------|
| **(in thousands)**              | ** ** | **2008**                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Total assets:                        |       |                                  |       |   |   |   |   |
| Direct to  consumer                  |       | $                                     | 30,857     |   | $ | 61,235 |   | $ | 35,119 |   |
| Business                             |       | 90,133                                |       | 115,940 |   | 108,553 |   |
| Solar                                |       | 38,954                                |       | 4,701 |   | 8,691 |   |
| Other  unallocated corporate amounts |       | 42,154                                |       | 58,836 |   | 98,605 |   |
|                                 |       | $                                     | 202,098    |   | $ | 240,712 |   | $ | 250,968 |   |

 

Major Customer

 

Sales to our largestcustomer for 2008, 2007 and 2006 accounted for less than 8.9%, 10.0% and 10.1%of total revenue, respectively, during these periods and are reported in ourbusiness segment.

 

GeographicInformation

 

We sell and distributeessentially the same products in the United States and several foreigncountries. The major geographic territories are the U.S., Canada, Mexico,Japan, and the U.K., and are based on the location of the customer. Thefollowing represents geographical data for our operations as of and for theyears ended December 31, 2008, 2007 and 2006:

 
| **(in thousands)** | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-------------------------|------------|------------|------------|------------|------------|------------|------------|
| Revenue:                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| United States           |       | $          | 250,062    |       | $          | 229,279    |       | $ | 206,584 |   |
| International           |       | 7,110      |       | 33,664     |       | 12,896     |       |
|                    |       | $          | 257,172    |       | $          | 262,943    |       | $ | 219,480 |   |
| Long-Lived  Assets:     |       |       |       |       |       |       |       |
| United States           |       | $          | 39,855     |       | $          | 47,794     |       | $ | 44,172 |   |
| International           |       | 555        |       | 1,521      |       | 1,750      |       |
|                    |       | $          | 40,410     |       | $          | 49,315     |       | $ | 45,922 |   |

 

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| ** **                            | ** ** | **As of December 31,** | ** ** |
|---------------------------------------|------------|---------------------------------------|------------|
| **(in thousands)**               | ** ** | **2008**                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Components of  Long-Lived Assets (a): | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Property and  equipment, net          |       | $                                     | 27,381     |   | $ | 9,509 |   | $ | 7,784 |   |
| Media Library,  net                   |       | 12,102                                |       | 37,566 |   | 37,201 |   |
| Other  Intangibles, net               |       | 880                                   |       | 1,554 |   | 530 |   |
| Notes receivable  and other assets    |       | 47                                    |       | 686 |   | 407 |   |
|                                  |       | $                                     | 40,410     |   | $ | 49,315 |   | $ | 45,922 |   |

 

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| (a) |   | Excludes other  non-current assets (non-current deferred tax assets, net, goodwill,  investments, notes receivable, and security deposits) of $32,456, $50,331, and  $38,199 for 2008, 2007, and 2006, respectively. |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**14.          Quarterly Results of Operations(Unaudited)**

 

The following is asummary of the quarterly results of operations for the years ended December 31,2008 and 2007:

 
| ** **                                                         | ** ** | **Fiscal Year 2008 Quarters Ended** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(in thousands, except per share data)** | ** ** | **March 31**                                       | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| ** **                                                         | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net revenue                                                        |       | $                                                       | 65,173     |   | $ | 57,217 |   | $ | 60,285 |   | $ | 74,497 |   |
| Gross profit                                                       |       | 40,978                                                  |       | 36,153 |   | 33,845 |   | 38,269 |   |
| Income (loss)  before income taxes and minority interests (a)      |       | 3,135                                                   |       | 4,184 |   | (16,922 | ) | (45,524 | ) |
| Net income  (loss)                                                 |       | 2,213                                                   |       | 2,581 |   | (10,115 | ) | (30,302 | ) |
| Diluted net  income (loss) per share                               |       | $                                                       | 0.09       |   | $ | 0.10 |   | $ | (0.42 | ) | $ | (1.26 | ) |
| Weighted average  shares outstanding-diluted                       |       | 25,352                                                  |       | 24,895 |   | 24,020 |   | 23,980 |   |

 
| ** **                                                         | ** ** | **Fiscal Year 2007 Quarters Ended** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(in thousands, except per share data)** | ** ** | **March 31**                                       | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|                                                               |       |                                                    |       |   |   |   |   |   |   |
| Net revenue                                                        |       | $                                                       | 58,458     |   | $ | 52,361 |   | $ | 70,318 |   | $ | 81,806 |   |
| Gross profit                                                       |       | 37,476                                                  |       | 33,631 |   | 46,144 |   | 51,127 |   |
| Income (loss)  before income taxes and minority interests          |       | 2,828                                                   |       | (783 | ) | 5,224 |   | 7,332 |   |
| Net income  (loss)                                                 |       | 1,752                                                   |       | (346 | ) | 2,918 |   | 4,200 |   |
| Diluted net  income (loss) per share                               |       | $                                                       | 0.07       |   | $ | (0.01 | ) | $ | 0.12 |   | $ | 0.17 |   |
| Weighted average  shares outstanding-diluted                       |       | 25,813                                                  |       | 24,655 |   | 24,970 |   | 25,154 |   |

 

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| (a) |   | During 2008, we  recognized gains on the issuance of our subsidiary’s stock and charges for  impaired goodwill, intangibles, and other related assets and expenses,  resulting in a net gain of $4.6 million in the second quarter of 2008 and net  losses of $13.9 million and $40.8 million in the third and fourth quarters of  2008, respectively. See Note 6, Asset Impairment and Other General Expenses  and Income. |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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**GAIAM,INC.**

 

**FinancialStatement Schedule II**

 

**Consolidatedvaluation and qualifying accounts**

 
| **(in thousands)**           | ** ** | **Balance at  Beginning of  Year** | ** ** | **Additions  Charged to  Costs and  Expenses (a)** | ** ** | **Deductions** | ** ** | **Balance at  End of  Year (a)** | ** ** |
|-----------------------------------|------------|----------------------------------------------|------------|-------------------------------------------------------------------|------------|----------------|------------|-------------------------------------------------|------------|
|                              |       |                                         |       |                                                              |       |           |       |                                            |       |
| Allowance  for Doubtful Accounts: |       |                                         |       |                                                              |       |           |       |                                            |       |
| 2008                              |       | $                                            | 1,279      |                                                              | $          | 2,592          |       | $                                               | 1,167      |   | $ | 2,704 |   |
| 2007                              |       | $                                            | 1,443      |                                                              | $          | 312            |       | $                                               | 476        |   | $ | 1,279 |   |
| 2006                              |       | $                                            | 826        |                                                              | $          | 2,917          |       | $                                               | 2,300      |   | $ | 1,443 |   |
|                              |       |                                         |       |                                                              |       |           |       |                                            |       |
| Allowance  for Product Returns:   |       |                                         |       |                                                              |       |           |       |                                            |       |
| 2008                              |       | $                                            | 6,759      |                                                              | $          | 22,245         |       | $                                               | 24,604     |   | $ | 4,400 |   |
| 2007                              |       | $                                            | 6,891      |                                                              | $          | 30,216         |       | $                                               | 30,348     |   | $ | 6,759 |   |
| 2006                              |       | $                                            | 4,819      |                                                              | $          | 17,457         |       | $                                               | 15,385     |   | $ | 6,891 |   |

 

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(a)             Includesreserves associated with acquired assets/companies.

 

**Item 9.****       ****Changes in and Disagreementswith Accountants on Accounting and Financial Disclosure**

 

None.

 

**Item 9A.****    ****Controls and Procedures.**

 

**Evaluationof Disclosure Controls and Procedures**

 

Our principal executiveofficer and principal financial officer conducted an evaluation of theeffectiveness of the design and operation of our disclosure controls andprocedures, as defined in Rules 13a-15(e) and Rule 15d-15(e) underthe Exchange Act. Based upon their evaluation as of December 31, 2008,they have concluded that those disclosure controls and procedures areeffective.

 

**Changesin Internal Control over Financial Reporting**

 

There have been nochanges in our internal control over financial reporting during the quarterended December 31, 2008 that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

**Management’sReport on Internal Control over Financial Reporting**

 

We are responsible forestablishing and maintaining adequate internal control over financial reportingas defined in Rule 13a-15(f) under the Exchange Act. Our internal control overfinancial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with accountingprinciples generally accepted in the United States of America. Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements. Also, projections of any evaluation of effectivenessto future periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

 

We assessed theeffectiveness of our internal control over financial reporting as of December 31,2008. In making the assessment, we used the criteria set forth by the Committeeof Sponsoring Organizations of the Treadway Commission in “*Internal Control-Integrated Framework*.”  Based on that assessment, we concluded that,as of December 31, 2008, our internal control over financial reporting iseffective based on those criteria.

 

The operatingeffectiveness of our internal control over financial reporting as of December 31,2008 has been audited by Ehrhardt Keefe Steiner & Hottman PC, anindependent registered public accounting firm, as stated in their report, whichis included herein.

 

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**Item 9B.****    ****Other Information**

 

Not applicable.

 

**PART III**

 

**Item 10.****     ****Directors, ExecutiveOfficers and Corporate Governance**

 

We incorporateherein the information required by this Item by reference to our ProxyStatement for our Annual Meeting of Shareholders, to be held on April 23,2009, to be filed with the Commission pursuant to Regulation 14A.

 

On March 9, 2009,Lynn Powers, Gaiam’s President and Chief Executive Officer of North Americanoperations, assumed the position of Chief Executive Officer and President.  Jirka Rysavy, Gaiam’s Chairman of the Board,Previously held the title of Chief executive Officer and will continue to serveas Chairman.

 

*Code ofEthics*

 

We have adopted a Code ofEthics applicable to our employees, including our principal executive officer,principal financial officer, principal accounting officer and personsperforming similar functions. We have posted a copy of our Code of Ethics onthe corporate section of our Internet website at www.gaiam.com/corporate. Ourfull Board of Directors must approve in advance any waivers of the Code ofEthics. We will post any amendments or waivers from our Code of Ethics thatapply to our executive officers and directors on the “Code of Ethics” sectionof our Internet website located at www.gaiam.com/corporate.

 

**Item 11.****     ****Executive Compensation**

 

We incorporate herein theinformation required by this Item by reference to our Proxy Statement for ourAnnual Meeting of Shareholders, to be held on April 23, 2009, to be filedwith the Commission pursuant to Regulation 14A.

 

**Item 12.****     ****Security Ownership ofCertain Beneficial Owners and Management and Related Stockholder Matters**

 

We incorporate herein theinformation required by this Item by reference to our Proxy Statement for ourAnnual Meeting of Shareholders, to be held on April 23, 2009, to be filedwith the Commission pursuant to Regulation 14A.

 

**Item 13.****     ****Certain Relationships andRelated Transactions, and Director Independence**

 

We incorporate herein theinformation required by this Item by reference to our Proxy Statement for ourAnnual Meeting of Shareholders, to be held on April 23, 2009, to be filedwith the Commission pursuant to Regulation 14A.

 

**Item 14.****     ****Principal Accountant Feesand Services**

 

We incorporate herein theinformation required by this Item by reference to our Proxy Statement for ourAnnual Meeting of Shareholders, to be held on April 23, 2009, to be filedwith the Commission pursuant to Regulation 14A.

 

**PART IV**

 

**Item 15.****     ****Exhibits and FinancialStatement Schedules**

 

Documents filed as partof this report are as follows:

 

1.         Consolidated FinancialStatements.

 

See listing ofConsolidated Financial Statements included as part of this Form 10-K inItem 8 of Part II.

 

2.         Financial StatementSchedules.

 

Schedule II ConsolidatedValuation and Qualifying Accounts.

 

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| 3.     | Exhibits:                                                                                                             |
|--------|-----------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                  |
|   | The following exhibits  are incorporated by reference or are filed or furnished with this report as  indicated below: |

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                               |
|------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                                                                                                                                                                                                          |
| 3.1              |       | Amended and Restated  Articles of Incorporation of Gaiam, Inc. (incorporated by reference to  Exhibit 3.1 of Gaiam’s registration statement on Form S-1  (No. 333- 83283)).                                                                                                                                          |
|             |       |                                                                                                                                                                                                                                                                                                                                          |
| 3.2              |       | Amendment to Amended  and Restated Articles of Incorporation of Gaiam, Inc. (incorporated by  reference to Exhibit 3.1 of Gaiam’s quarterly report on Form 10-Q  for the quarter ended June 30, 2006).                                                                                                               |
|             |       |                                                                                                                                                                                                                                                                                                                                          |
| 3.3              |       | Amended and Restated  Bylaws of Gaiam, Inc. (incorporated by reference to Exhibit 3.1 of  Gaiam’s current report on Form 8-K dated November 29, 2007).                                                                                                                                                               |
|             |       |                                                                                                                                                                                                                                                                                                                                          |
| 4.1              |       | Form of  Gaiam, Inc. Stock Certificate (incorporated by reference to Exhibit 4.1  of Gaiam’s registration statement on Form S-1 (No. 333-83283).                                                                                                                                                                |
|             |       |                                                                                                                                                                                                                                                                                                                                          |
| 10.1             |       | Amended and Restated  Credit Agreement dated July 29, 2005 between Gaiam, Inc. and Wells  Fargo Bank, National Association (incorporated by reference to  Exhibit 10.2 of Gaiam’s quarterly report on Form 10-Q for the  quarter ended June 30, 2005).                                                          |
|             |       |                                                                                                                                                                                                                                                                                                                                          |
| 10.2             |       | First Amendment to  Credit Agreement executed October 22, 2007 between Gaiam, Inc. (and  other Gaiam subsidiaries identified therein) and Wells Fargo Bank, N.A.  (incorporated by reference to Exhibit 10.2 of Gaiam’s annual report on  Form 10-K for the year ended December 31, 2008).                      |
|             |       |                                                                                                                                                                                                                                                                                                                                          |
| 10.3             |       | Gaiam, Inc. 1999  Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 of  Gaiam’s quarterly report on Form 10-Q for the quarter ended  June 30, 2006).*                                                                                                                                              |
|             |       |                                                                                                                                                                                                                                                                                                                                          |
| 10.4             |       | Lease, dated  December 16, 1999, between Gaiam, Inc. and Duke-Weeks Realty  Limited Partnership (incorporated by reference to Exhibit 10.2 of  Gaiam’s registration statement on Form S-4 (No. 333-50560).                                                                                                      |
|             |       |                                                                                                                                                                                                                                                                                                                                          |
| 10.5             |       | First Lease Amendment,  dated April 12, 2000 and effective March 1, 2000, between  Gaiam, Inc. and Duke-Weeks Realty Limited Partnership (incorporated by  reference to Exhibit 10.4 of Gaiam’s annual report on Form 10-K for  the year ended December 31, 2002).                                         |
|             |       |                                                                                                                                                                                                                                                                                                                                          |
| 10.6             |       | Second Lease Amendment,  dated October 5, 2005 and effective October 1, 2005, between  Gaiam, Inc. and Dugan Financing LLC (successor to Duke-Weeks Realty  Limited Partnership) (incorporated by reference to Exhibit 10.5 of  Gaiam’s annual report on Form 10-K for the year ended December 31,  2005). |
|             |       |                                                                                                                                                                                                                                                                                                                                          |
| 10.7             |       | Lease Agreement, dated  October 5, 2005, between Gaiam, Inc. and Dugan Realty L.L.C.  (incorporated by reference to Exhibit 10.6 of Gaiam’s annual report on  Form 10-K for the year ended December 31, 2005).                                                                                                  |
|             |       |                                                                                                                                                                                                                                                                                                                                          |
| 10.8             |       | Form of Employment  Agreement between Gaiam, Inc. and Jirka Rysavy (incorporated by  reference to Exhibit 10.3 of Gaiam’s current report on Form 8-K  dated August 3, 2005).*                                                                                                                                   |
|             |       |                                                                                                                                                                                                                                                                                                                                          |
| 10.9             |       | Form of Employment  Agreement between Gaiam, Inc. and Lynn Powers (incorporated by reference  to Exhibit 10.4 of Gaiam’s current report on Form 8-K dated  August 3, 2005).*                                                                                                                                    |
|             |       |                                                                                                                                                                                                                                                                                                                                          |
| 10.10            |       | Insurance and Stock  Redemption Agreement dated as of August 4, 2005 between Gaiam, Inc.  and Jirka Rysavy (incorporated by reference to Exhibit 10.5 of Gaiam’s  current report on Form 8-K dated August 3, 2005).                                                                                             |
|             |       |                                                                                                                                                                                                                                                                                                                                          |
| 10.11            |       | Form of Stock  Option Agreement under Gaiam’s 1999 Long-Term Incentive Plan (incorporated by  reference to Exhibit 10.1 of Gaiam’s quarterly report on Form 10-Q  for the quarter ended June 30, 2005).*                                                                                                        |
|             |       |                                                                                                                                                                                                                                                                                                                                          |
| 21.1             |       | List of Gaiam  Subsidiaries (filed herewith).                                                                                                                                                                                                                                                                                                 |
|             |       |                                                                                                                                                                                                                                                                                                                                          |
| 23.1             |       | Consent letter from  Ehrhardt Keefe Steiner & Hottman PC (filed herewith).                                                                                                                                                                                                                                                           |

 

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| 31.1   |   | Certification of the  Chairman pursuant to Rule 13a-14(a) under the Securities Exchange  Act of 1934 (filed herewith).                         |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                     |
| 31.2   |   | Certification of the  Chief Financial Officer pursuant to Rule 13a-14(a) under the  Securities Exchange Act of 1934 (filed herewith).          |
|   |   |                                                                                                                                                     |
| 32.1   |   | Certification pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002 (furnished herewith). |
|   |   |                                                                                                                                                     |
| 32.2   |   | Certification pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002 (furnished herewith). |

 

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* Indicates managementcontract or compensatory plan or arrangement.

 

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities and ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 

 
|   | GAIAM, INC. |
|--------|-------------|
|   |        |   |
|   |        |   |
|   | By:         | /s/ Jirka Rysavy |
|   |        | Jirka Rysavy |
|   |        | Chairman  March 3, 2009 |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 

 
| **Signature**          | ** ** | **Title**                           | ** ** | **Date**            |
|------------------------|------------|-------------------------------------|------------|---------------------|
|                   |       |                                |       |                |
| /s/ Jirka Rysavy       |       | Chairman of the Board  and Chairman |       | March 3,  2009 |
| Jirka Rysavy           |       | (Principal Executive  Officer)      |       |                |
|                   |       |                                |       |                |
| /s/ Lynn Powers        |       | Chief Executive  Officer,           |       | March 3,  2009 |
| Lynn Powers            |       | President and Director              |       |                |
|                   |       |                                |       |                |
| /s/ James Argyropoulos |       | Director                            |       | March 3,  2009 |
| James Argyropoulos     |       |                                |       |                |
|                   |       |                                |       |                |
| /s/ Barnet M. Feinblum |       | Director                            |       | March 3,  2009 |
| Barnet M. Feinblum     |       |                                |       |                |
|                   |       |                                |       |                |
| /s/ Barbara Mowry      |       | Director                            |       | March 3,  2009 |
| Barbara Mowry          |       |                                |       |                |
|                   |       |                                |       |                |
| /s/ Paul H. Ray        |       | Director                            |       | March 3,  2009 |
| Paul H. Ray            |       |                                |       |                |
|                   |       |                                |       |                |
| /s/ Vilia Valentine    |       | Chief Financial Officer             |       | March 3,  2009 |
| Vilia Valentine        |       | (Principal Accounting  Officer)     |       |                |

 

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