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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

**(Mark One)**

 

**x****      ****ANNUAL REPORT PURSUANT TOSECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thefiscal year ended December 31, 2009**

 

**or**

 

**o****         ****TRANSITION REPORT PURSUANT TOSECTION 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 ROADLOUISVILLE, CO 80027**(Address of principal executive offices)

 

**(303) 222-3600**(Registrant’s telephone 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**

 

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YES o  NO x

 

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act.  YES o  NO x

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90days.  YES x  NO o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months(or for such shorter period that the registrant was required to submit and postsuch files).  Yes o  No o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company.  See thedefinitions of “large accelerated filer,” ,“accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Act.)  YES o  NO x

 

Theaggregate market value of the voting common equity held by non-affiliates ofthe registrant was approximately $87,997,963 as of June 30, 2009, basedupon the closing price on the NASDAQ Global Market on that date.  The registrant does not have non-votingcommon equity.

 

Asof March 11, 2010, 17,778,822 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 2010 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 31,2009

 

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.       | Reserved                                                                                                            | 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                                                                                            | 17               |
| Item 7.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         | 18               |
| 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                               | 49               |
| Item 9A.      | Controls and  Procedures                                                                                            | 49               |
| Item 9B.      | Other Information                                                                                                   | 50               |
|          |                                                                                                                |             |
| PART III |                                                                                                                | 50               |
| Item 10.      | Directors,  Executive Officers and Corporate Governance                                                             | 50               |
| Item 11.      | Executive  Compensation                                                                                             | 50               |
| Item 12.      | Security Ownership  of Certain Beneficial Owners and Management and Related Stockholder Matters                     | 50               |
| Item 13.      | Certain  Relationships and Related Transactions, and Director Independence                                          | 50               |
| Item 14.      | Principal  Accountant Fees and Services                                                                             | 50               |
|          |                                                                                                                |             |
| PART IV  |                                                                                                                | 50               |
| Item 15.      | Exhibits  and Financial Statement Schedules                                                                         | 50               |
|          |                                                                                                                |             |
| SIGNATURES    |                                                                                                                | 53               |

 

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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, and responsible media. We offer our customersthe ability to make purchasing decisions and find responsible content based onthese values while providing quality offerings at a price comparable to mainstreamalternatives. We market our content, media and products through a multi-channelapproach including traditional and digital media channels, direct to consumersvia catalogs, the Internet, direct response television, broadband,subscriptions and communities as well as traditional retail stores. At the endof 2009, our home media was carried by approximately 70,000 retail stores inthe United States alone, and we had over 10 million 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 lifestyle genres.Our lifestyle brand is built around our ability to develop and offer mediacontent, products, lifestyle solutions and community to consumers in the LOHASand Conscious Media markets. Our content forms the basis of our proprietaryofferings, on which we realize our highest margins, which then drive demand forparallel product and service offerings. Our operations are verticallyintegrated from content creation, through product development and sourcing, tocustomer service and distribution. We market our products and services acrossthree segments:  business,direct-to-consumer, and solar. We distribute the majority of our products inour business and direct to consumer segments from our fulfillment center or drop-shipproducts directly to customers.  We alsoutilize a third party replication and fulfillment center for some of our mediadistribution in our business segment.

 

**The LOHAS Market**

 

TheLOHAS market consists of five main sectors:

 

·                 ***SustainableEconomy*****.** Renewable energy, energyconservation, recycled goods, environmental management services, sustainablemanufacturing processes and related information and services.

 

·                 ***HealthyLiving*****.** Natural and organic foods,dietary supplements, personal care products and related information andservices.

 

·                 ***AlternativeHealthcare*****.** Health and wellnesssolutions and alternative health practices.

 

·                 ***PersonalDevelopment*****.** Solutions, information,products and experiences relating to mind, body and spiritual development.

 

·                 ***EcologicalLifestyles*****.** Environmentally friendlycleaning and household products, organic cotton clothing and bedding, andeco-tourism.

 

Weparticipate in all five sectors of the LOHAS market, which generates over $200billion in annual sales according to a Natural Business Communication study,with an emphasis on Personal Development, Ecological Lifestyles and AlternativeHealthcare.

 

**The Conscious Media Market**

 

Weconsider the Conscious Media market to consist of five distinct sectors:

 

·                 ***Children’s.***Children’s entertainment and edutainment with a positive message.

*** ***

·                 ***FamilyEntertainment.***Entertainment that can be enjoyed by the entirefamily, containing no violence or profanity.

*** ***

·                 ***Documentaries.***Educational and informational programming (edutainment).

*** ***

·                 ***InspirationalEntertainment.***Entertainment that inspires people to expand theirawareness and pursue positive changes in their lives.

*** ***

·                 ***PersonalDevelopment.*** Informative and inspiring content that helps peopleto live a better life.

 

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**Our Content**

 

Ourbusiness model revolves around content creation, which forms the basis for ourproprietary products. We have an “in house” production studio and team whichproduces programming that has won 90 Telly awards and several medals at theInternational New York Film Festival. We are fully high definition and 5.1surround sound capable and do the majority of our authoring and editing inhouse at our Colorado facility ensuring the quality standards that drive ourawards. We also develop children’s programming, which has been the recipient ofseveral Parent’s Choice and Kids First Awards recognizing new products thathelp children grow imaginatively, physically, and mentally. During 2009, weadded 153 titles to our DVD library increasing our library to over 2,800titles. We also develop and market music and audio CDs and publish printedcontent.

 

**Our Products**

 

Ourvisual media programs represent an integral part of our proprietary productoffering. In 2009, excluding the solar segment, our proprietary productsconstituted over 86% of our product sales.

 

**Our Sales Channels**

 

Weconduct our business across three segments. Our business segment customers areprimarily national retailers, corporate accounts and the media. We conduct ourdirect to consumer business through our direct response marketing programs,catalogs, Internet and subscription community sales channels.  We design and install solar energy systemsand related renewable energy products and sustainable living resources throughour solar segment.

 

*Media*

 

Wedevelop, produce and license information and programming targeted to consumerswho value personal development, wellness, spirituality, and inspirationalentertainment. 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. We developed ourown channel, and strategically partnered with other media companies, todistribute our digital media content over the Internet.  Some of our media partners include Google,YouTube, Amazon, iTunes and Netflix. All of our licensing arrangements requireour branding to be prominent on the programming and are subject to royaltyagreements with our performing artists. While our licensing of the rights tomanufacture and distribute certain of our media lowers recognized revenue, weimprove contribution margins and branding through this licensing. We intend tocontinue to seek new licensees for our brand internationally.

 

*DRTV*

 

Weuse direct response television (“DRTV”) marketing to promote LOHAS products andservices, particularly those aimed at the fitness/wellness market. DRTVmarketing is a highly-scalable distribution channel for segments of our LOHASproduct suite, and also provides broad marketing support for our retailpartners, as well as creating new direct customers to which we cross-market awide range of LOHAS products and services via the Internet, and subscriptionsegments. We capitalize on both long-form DRTV shows as well as leading homeshopping channels such as QVC.

 

*Retailers*

 

Sincethe inception of our retailer channel in 1998, we have increased our breadthand diversity. As of the end of 2009, our media titles could be found inapproximately 70,000 stores in the United States. We currently sell our mediaand other products across a variety of leading retailers, including bookstoressuch as Barnes & Noble and Borders; media stores such as Best Buy andBlockbuster; beauty stores such as Ulta; home furnishing stores such as Bed,Bath and Beyond, ABC Carpet and Home, and Kohl’s; natural food stores such asWhole 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 branded store withinstore lifestyle presentations that may include custom fixtures that we design.We implemented our first store within store concept late in 2000 and theconcept has grown to over 11,000 stores by the end of 2009, up from 10,000 storesat the end of 2008.   In 2008 we expandedour market reach to the professional health and fitness industry by purchasingSPRI Products, Inc.

 

Ourbranded products are found in Canada, Mexico, Japan, Italy, the United Kingdomand Australia. We sell our media products to international accounts primarilyunder licensing agreements.  In 2008, weconverted our remaining distributor relationships to license arrangements.

 

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*Services*

 

Weconduct operations as a solar energy integrator through our majority 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.  During 2008, Real Goodsconsummated its initial public offering of its Class A common shares andcompleted acquisitions targeted towards expanding and enhancing its solarmarket.  These acquisitions were CarlsonSolar, Inc., Independent Energy Systems, Inc., and Regrid Power, Inc.,solar energy integrators, located in both southern and northern California.

 

*Catalogs*

 

Weoffer a variety of LOHAS products directly to the consumer through our catalogsand through some consumer lifestyle publications. During 2009, we strategicallyreduced our catalog circulation by 38%. Our customer demographics are highlyregarded with our customers having an average income over $84,000 and over 70%of them being college educated.

 

*Internet*

 

Weuse the Internet to sell our products and to provide information on the LOHASlifestyle.  We promote our websitethrough our visual media, catalogs, print publications, product packaging andInternet links. We provide customer support for Internet sales from our in-housecall center as a key component of our Internet approach.

 

*Subscription Services*

 

Weoffer a variety of subscription paid services. These services include online communities under various brands andsubscription clubs.  We currently offersubscription services under the following clubs:  The Firm; Kettlenetics, Spiritual CinemaCircle; and Gaiam Yoga Club with Rodney Yee and Colleen Saidman.

 

**Our Operations**

 

*SalesChannels, Product Development and Sourcing*

 

Wesell our branded products across various sales channels. Non-proprietary productsare only available through our catalogs and over the Internet. We use ourcatalog and Internet channels to test products before we develop products underour brand and distribute them through our other sales channels. Because we usea multi-channel approach to our business we are able to leverage our media andproduct development costs across all channels of our business.

 

Ourproprietary offerings are designed by our development team and sourced bothdomestically and internationally by our merchandisers through third partysuppliers that produce these products to our specifications. We design ourproducts to supply information, enhance customers’ lifestyles and experiencesand provide healthy, natural solutions while being eco-friendly and promoting asustainable economy. We also screen the environmental and social responsibilityof our suppliers. In order to minimize risk we often identify an alternatesupplier for our products in a separate location.

 

*Customer Service*

 

Wefocus on building and maintaining customer relationships that thrive on loyaltyand trust. We maintain a “no-risk guarantee” policy, whereby we provide acustomer a full refund for our products that are returned at any time, for anyreason. We have established a most valued customer program, which extends addedbenefits to our most loyal catalog and Internet customers. Our in-housecustomer service department includes product specialists who have specificproduct knowledge and assist customers in selecting products and solutions thatmeet their needs. We employ telephone routing software that directs each callto the appropriate representative. Our policy is to ship orders no later thanthe next business day, which we accomplish by stocking inventory that supportsover 85% of our orders. We believe that by offering exceptional customerservice we encourage repeat purchases by our customers, enhance our brandidentity and reputation and build stronger relationships with our customers.

 

*Established Infrastructure*

 

Wewill optimize and, thereby, realize significant costs savings by consolidatingour distribution center near Cincinnati, Ohio, into one building before ourlease expires in June 2010. This distribution center provides fulfillmentfor the majority of our current domestic business needs and has the capacity tosupport the growth of our business. This central U.S. location allows us toachieve shipping 

 

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costefficiencies to most locations. The center is also located within 30 minutes ofseveral major shipping company hubs. We use a supply chain management systemthat supports our entire operation, including fulfillment, inventorymanagement, and customer service. Our fulfillment center is connected to ourother facilities by a state-of-the art voice-over-Internet telecom network thatallows us to maintain a high degree of connectivity within our organization.

 

**Our Growth Strategies**

 

*Expand our Media Offering*

 

Proprietaryand authentic content lies at the core of our business model. Our mediaofferings introduce customers to us and help establish us as an authority inthe LOHAS market. Our primary focus is on leveraging our content with branded lifestyleofferings through various media, catalogs, the Internet, and nationalretailers. We believe that the content-centric strategy is a competitiveadvantage and the multi-channel approach allows us the broadest possibleconsumer reach. It also provides the optimal “context” for us to marketlifestyle products that are appropriate companions to the media.

 

Wewill continue to develop authentic content that caters to the LOHAS lifestyleand distribute it in DVD, book and audio formats and also accelerate ourefforts in the digital media, broadcast and online categories. During 2009, weexpanded our fitness media library by producing celebrity content with TrudieStyler, Bob Greene and Marisa Tomei. We intend to continue to expand our brandto the Conscious Media market, which incorporates children’s, family,inspirational and edutainment media. We believe we can establish our brand as aleading brand in some of these media categories.  In 2009, we partnered with The DiscoveryChannel to license Discovery branded content for sale in our retail channel anddigitally on the Internet.  We are nowthe exclusive licensee for new launches of all the Discovery Channel DVDs,including all properties of Animal Planet, TLC, Discovery Channel, HD Theater,the Science Channel ID and The Military Channel. We will also have access tothe entire Discovery branded library as the rights expire with their currentlicensees.

 

Wehave expanded our visual media offerings internationally and plan to continueto grow this opportunity. We also intend to broaden the variety of formats weoffer, from our traditional “physical media” (DVD, CD, etc), to making ourcontent available online to our consumers in both one-shot “purchase” format orsubscription services.  In 2009 wedeveloped our own channel to distribute our content digitally on the Internetand will launch gaiamTV in 2010.

 

*Capitalize on our market sharepositioning*

 

Basedon Nielsen’s Videoscan, since 2004 we have more than doubled our U.S. DVDmarket share in the fitness/wellness category to over 34% in 2009. In 2009, thefitness DVD category grew 22% while the total DVD category declined 5%. We willutilize our leadership position and sacrifice some of our market share infitness in order to assume a category management role bringing competitiveproduct into the mix to establish the most complete fitness assortment in thebusiness. We tested this concept with Target in 2008 and are now expanding thecategory management concept to other specialty channels.  By assuming this category management role, weimproved our revenues and profits as well as expanded the exposure of thecategory. This category management program is currently in 4,000 doors.

 

Basedon the same Nielsen report, we ended 2009 6th in the non-theatrical U.S. DVDcategory with over 5% market share. We intend to continue to grow our marketshare in the non-theatrical category through the production and acquisition ofConscious Media titles, focusing on children’s, edutainment, and familyentertainment.  We also plan to extendour line of offerings into wellness and green living with solution basedprogramming and media based kits, building store within store wellnessofferings and continuing to grow our retail presence.

 

*Improve our Profit Margins*

 

Webelieve we can improve our profit margins with several distinct strategies. Wewill continue to focus our sales strategy on media that carries over 70% grossmargins. We are establishing ourselves as a brand in the Conscious Media andwellness/fitness media market as well as in a genre we call edutainment. Bycontinuing to grow our market share in media, we believe we can attract moremedia producers to work with our brand instead of the traditional studio ordistributor model.

 

Welaunched a continuity and subscription business with our acquisition of amajority of the equity of Spiritual Cinema. This business carries over 75%gross margins and connects our media content directly to the consumer. Weexpect to continue to invest in this channel of business. We believe that withthe increase in broadband acceptance in the consumer marketplace, coupled withour specialized media library and loyal direct customer base, we have anopportunity for strong growth at high margins as digital downloads of mediabecome mainstream.

 

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Wehave focused on cost reduction and, therefore, expect to better leverage ourinfrastructure.  In addition, we haveidentified additional cost savings through consolidating warehouses and expectto begin realizing the benefits in the second half of 2010.  With our new state-of —the-art studio, wewill be focusing on producing lower cost LOHAS content for kits, DVDs, onlinecourses and web downloads.

 

*Strengthen our Lifestyle Brand*

 

Ourgoal is to maintain our brand as an authority in the LOHAS market (includingthe Conscious Media market) and to establish our brand as a unifying symbol ofthe emerging LOHAS lifestyle. We plan to strengthen our brand by growing ourmedia, making our brand more prominent across our direct to consumer efforts,focusing on category management initiatives, increasing our store within storepresence across national retailers, increasing our marketing and publicrelations efforts, marketing the Gaiam brand, and aggressively developing andmarketing proprietary products while maintaining our high level of customerservice.

 

*Launch Reebok Branded Accessories and Media at Retail*

 

In2009, we signed a multi-year licensing agreement with Reebok to manufacture andmarket Reebok fitness accessories and media to retailers.  In 2010 we will take over twelve linear feetof Reebok with store within store presentations in all Target stores.

 

*Expand ourProprietary Products*

 

Excludingour partially owned subsidiaries, our proprietary products, which we introducedin 1997, represented approximately 86% of our revenues in fiscal year 2009.These products carry a higher margin, provide for branding opportunity anddistinguish us from our competitors. We currently offer proprietary productsthat range from media products to sleep, stress relief, yoga and Pilatesaccessories to organic cotton bedding and bath products. We have also expandedour exclusive media library to over 2,800 titles through acquisitions andinternal development. We continue to develop and market proprietary productsacross the LOHAS sectors. We will continue to look for additional libraryacquisitions as we expand our content across the Conscious Media market. We arestrengthening our supply chain globally by sourcing a greater number ofproducts offshore and leveraging our expanding media sales to obtain lowercosts from our replicators. We leverage our product development costs over allsales channels.

 

*Capitalize on our Multi-channel Approach*

 

Ourmulti-channel strategy affords us the broadest possible customer reach, as wellas allowing our customers to buy from us “what they want, when they want, wherethey want to.” 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.

 

Inour direct to consumer business we are open 24 hours a day, offering productson our Internet sites. The future of our direct business (catalog, Internet,community and subscription) is evolving its platform to be more solutions-basedversus transaction-based.  As we increasethe depth of media and community functionality available to our consumers, ourInternet presence will transform from being merely a place to “order” productto a place to “consume” it in real-time when digital downloads become moremainstream.  This will allow ourcustomers to both stream or download content as well as buy products focused onfive solution-based segments: fitness; wellness; personal growth; relationshipsand green living.

 

Inour business segment, we continue to expand our presence in national retailersand currently have placements in approximately 70,000 retail points in theUnited States. We also continue to expand our store within store concept in avariety of stores, including Whole Foods Market, Barnes & NobleBookstores, Borders, Target, Ulta, Dick’s Sporting Goods, REI, ABC Carpet andHome and other national retailers. We currently have over 11,000 store withinstore concepts.  As digital becomes moremain stream, our strong relationships with retailers will allow us to migrateour media and products to retailers’ Internet sales channels.

 

*Complement our Existing Businesswith Selective Strategic Acquisitions*

 

Ourgrowth strategy is not dependent on acquisitions. However, we will considerthose strategic acquisitions in the LOHAS market that complement our existingbusiness, increase our media and related product offerings, expand ourgeographical reach, extend our channel distribution, and add to our directcustomer base. We especially focus on companies with media content, a strongbrand identity and customer databases that augment our existing databases. Weoften allow some of the acquired company’s management team to retainresponsibility for front-end business functions such as creative presentationand marketing, while consolidating 

 

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operationalfunctions under our existing infrastructure when we can realize economies ofscale.

 

*Launch a Digital Format Platform*

 

Whilethe adoption of digital media is still in the early stages, we expect thetransition from DVD to digital distribution of visual content to occur rapidlyin the future.  During 2009, we digitizedmost of our media library and built an internet platform for our content thatwill launch in 2010 under the channel gaiamTV. GaiamTV will provide leading fitness, wellness and non-theatricaldigital content for streaming, rental and subscription. In addition, we beganto establish digital distribution partners such as Amazon, YouTube, iTunes andNetflix.

 

**Our Business Segments**

 

Weseparate our business into three segments: the business segment which includessales to businesses, retailers, international licenses, corporate accounts andmedia outlets; 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.

 

Thebusiness, direct to consumer, and solar segments represented 35.3%, 41.6%, and23.1% of the 2009 net revenues, respectively. Our business segment is dependentupon a few major customers for a significant portion of its revenues. See Note13 to our consolidated financial statements for further information on oursegments.

 

**Our Intellectual Property**

 

Ourtradename Gaiam and various product and Internet domain names are subject totrademark or pending trademark applications of Gaiam or a Gaiam company. Webelieve these trademarks are 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.

 

Ourbusiness is evolving and competitive. Larger and better-established entitiesmay acquire, invest in or form joint ventures with our competitors. Some ofthese entities have longer operating histories and have greater financial andmarketing resources than we have. Increased competition from these or othercompetitors could reduce our revenue and profits. In addition, the smallerbusinesses we compete against may be able to more effectively personalize theirrelationships with customers.

 

Becausewe use multi-channel distribution for our products, we compete with variousproducers of similar products and services. Our competitors include WarnerBros., Disney, Paramount, Fox, Lions Gate, Liberty Media, thousands of small, localand regional businesses, and product lines or items offered by large retailers,manufacturers, publishers and media producers.

 

Webelieve the principal competitive factors in the LOHAS market are authenticityof information, unique content and distinctiveness of products and services,quality of product, brand recognition and price, and distribution capabilities.We believe we compete favorably on all these relevant factors.

 

Weexpect industry consolidation to increase competition. As our competitors grow,they may adopt aggressive pricing or inventory policies, which could result inreduced operating margins and loss of market share.

 

Oursuccess also depends upon the willingness of consumers to purchase media, goodsand services that promote the values we espouse. While we believe our businessplan and assumptions are reasonable, the demographic trends on which they arebased may change and the current consumption levels may not be sustained. Thedecrease of consumer interest in purchasing goods and services that promote thevalues we espouse would materially and adversely affect our customer base andrevenues and, accordingly, our financial prospects.

 

**Our Employees**

 

Asof February 26, 2010, we employed approximately 519 individuals. None ofour employees are covered by a collective bargaining agreement.

 

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**Regulatory Matters**

 

Anumber of existing and proposed laws restrict disclosure of consumers’ personalinformation, which may make it more difficult for us to generate additionalnames for our direct marketing, and restrict our ability to send unsolicitedelectronic mail or printed materials. Although we believe we are generally incompliance with current laws and regulations and that these laws andregulations have not had a significant impact on our business to date, it ispossible that existing or future regulatory requirements will impose asignificant burden on us.

 

Wegenerally collect sales taxes only on sales to residents of states in which wehave locations.  Currently, we collectsales taxes on certain sales to residents of California, Colorado, Illinois,New York and Ohio. A number of legislative proposals have been made at thefederal, state and local level, and by foreign governments, that would imposeadditional taxes on the sale of goods and services over the Internet andcertain states have taken measures to tax Internet-related activities. If legislationis enacted that requires us to collect sales taxes on sales to residents ofother states or jurisdictions, sales in our direct to consumer businesses maybe adversely affected.

 

Ourbusiness is also subject to a number of other governmental regulations,including the Mail or Telephone Order Merchandise Rule and relatedregulations of the Federal Trade Commission. These regulations prohibit unfairmethods of competition and unfair or deceptive acts or practices in connectionwith mail and telephone order sales and require sellers of mail and telephoneorder merchandise to conform to certain rules of conduct with respect toshipping dates and shipping delays. We are also subject to regulations of theU.S. Postal Service and various state and local consumer protection agenciesrelating to matters such as advertising, order solicitation, shipment deadlinesand customer refunds and returns. In addition, merchandise that we import issubject to import and customs duties and, in some cases, import quotas.

 

**Seasonality**

 

Seethe “Quarterly and Seasonal Fluctuations” section of Item 7, Management’sDiscussion and Analysis of Financial Condition and Results of Operations, forinformation pertaining to the seasonal aspects of our business.

 

**Available Information**

 

Ourcorporate website at www.gaiam.com/corporate provides information about us, ourhistory, goals and philosophy, as well as certain financial reports andcorporate press releases. Our www.gaiam.com website features a library ofinformation and articles on personal development, healthy lifestyles andenvironmental issues, along with an extensive offering of media, products andservices. We believe our website provides us with an opportunity to deepen ourrelationships with our customers and investors, educate them on a variety ofissues, and improve our service. As part of this commitment, we have added alink on our corporate website to our Securities and Exchange Commissionfilings, including our reports on Form 10-K, 10-Q and 8-K and allamendments to such reports. We make those reports available through ourwebsite, free of charge, as soon as reasonably practicable after these reportsare filed with the Securities and Exchange Commission.

 

Wehave included our website addresses only as inactive textual reference, and theinformation contained on our website is not incorporated by reference into the Form 10-K.

 

**Item 1A.  Risk factors**

 

Wewish to caution you that there are risks and uncertainties that could cause ouractual results to be materially different from those indicated by forwardlooking statements that we make from time to time in filings with theSecurities and Exchange Commission, news releases, reports, proxy statements,registration statements and other written communications as well as oral forwardlooking statements made from time to time by our representatives. These risksand uncertainties include, but are not limited to, those risks described belowof which we are presently aware. Additional risks and uncertainties that wecurrently deem immaterial may also impair our business operations, andhistorical results are not necessarily an indication of the future results. Thecautionary statements below discuss important factors that could cause ourbusiness, financial condition, operating results and cash flows to bematerially adversely affected.

 

*Changes in general economicconditions could have a material impact on our business*

 

Changesin overall economic conditions that impact consumer spending could impact ourresults of operations. Future economic conditions affecting disposable incomesuch as employment 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 

 

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mediaenvironment worsen, we may experience material adverse impacts on our business,operating results and financial condition.

 

*Increased competition could impact our financial results*

 

Webelieve that the LOHAS market includes thousands of small, local and regionalbusinesses. Some smaller businesses may be able to more effectively personalizetheir relationships with customers, thereby gaining a competitive advantage.Although we believe that we do not compete directly with any single companythat offers our entire range of merchandise and services, within each categorywe have competitors and we may face competition from new entrants. Some of ourcompetitors or our potential competitors may have greater financial andmarketing resources and greater brand recognition. In addition, larger,well-established and well-financed entities may acquire, invest in or formjoint ventures with our competitors. Increased competition from these or othercompetitors could negatively impact our business.

 

*Changing consumer preferences may have an adverse effect on ourbusiness*

 

Wetarget consumers who assign high value to personal development, healthylifestyles, responsible media, renewable energy and the environment. A decreaseof consumer interest in purchasing goods and services that promote the valueswe espouse would materially and adversely affect our customer base and salesrevenues and, accordingly, our financial prospects. Further, consumerpreferences and product trends are difficult to predict. Our future successdepends in part on our ability to anticipate and respond to changes in consumerpreferences and we may not respond in a timely or commercially appropriatemanner to such changes. Failure to anticipate and respond to changing consumerpreferences and product trends could lead to, among other things, lower salesof our products, increased merchandise returns and lower margins, which couldhave a material adverse effect on our business.

 

*Our strategy of offering branded products could lead to inventory riskand higher costs*

 

Animportant part of our strategy is to feature branded products. These productsare sold under our brand names and are manufactured to our specifications. Weexpect our reliance on branded merchandise to increase. The use of brandedmerchandise requires us to incur costs and risks relating to the design andpurchase of products, including submitting orders earlier and making longerinitial purchase commitments.

 

Inaddition, the use of branded merchandise limits our ability to return unsoldproducts to vendors, which can result in higher markdowns in order to sellexcess inventory. Our commitment to customer service typically results in ourkeeping a high level of merchandise in stock so we can fill orders quickly.Consequently, we run the risk of having excess inventory, which may alsocontribute to higher markdowns. Our failure to successfully execute a brandedmerchandise strategy or to achieve anticipated profit margins on these goods,or a higher than anticipated level of overstocks, may materially adverselyaffect our revenues.

 

Weoffer our customers liberal merchandise return policies. Our consolidatedfinancial statements include a reserve for anticipated merchandise returns,which is based on historical return rates. It is possible that actual returnsmay increase as a result of factors such as the introduction of newmerchandise, changes in merchandise mix or other factors. Any increase in ourmerchandise returns will correspondingly reduce our revenues and profits.

 

*Acquisitions may harm our financial results*

 

Wehave historically expanded our operations in part through strategicacquisitions. We cannot accurately predict the timing, size and success of ouracquisition efforts. Our acquisition strategy involves significant risks thatcould inhibit our growth and negatively impact our operating results, includingthe following: our ability to identify suitable acquisition candidates atacceptable prices; our ability to complete the acquisitions of candidates thatwe identify; 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 loss of the services of our key personnel could disrupt ourbusiness*

 

Wedepend on the continued services and performance of our senior management andother key personnel, particularly Jirka Rysavy and Lynn Powers. Our strategy ofallowing the management teams of some acquired companies to continue toexercise significant management responsibility for those companies makes itimportant that we retain key employees, particularly the sales and creative

 

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teams,of the companies we might acquire.

 

*Our founder and chairman Jirka Rysavy controls us*

 

Mr. Rysavyholds 100% of our 5,400,000 outstanding shares of class B common stock and alsoowns 868,682 shares of Class A common stock. The shares of Class Bcommon stock are convertible into shares of Class A common stock at anytime. Each share of Class B common stock has ten votes per share, and eachshare of Class A common stock has one vote per share. Consequently, Mr. Rysavyis able to vote a majority of our stock, to exert substantial influence over usand to control matters requiring approval by our shareholders, including theelection of directors, increasing our authorized capital stock, or a merger orsale of substantially all of our assets. As a result of Mr. Rysavy’scontrol of us, no change of control can occur without Mr. Rysavy’sconsent.

 

*Our success depends on the value of our brand*

 

Becauseof our reliance on sales of proprietary products, our success depends on ourbrand. Building and maintaining recognition of our brand are important forattracting and expanding our customer base. If the value of our brand wereadversely affected, we cannot be certain that we will be able to attract newcustomers, retain existing customers or encourage repeat purchases, and if thevalue of our brand were to diminish, our revenues, results of operations andprospects would be adversely affected.

 

*The operating results of our solarenergy business could adversely affect our operating results.*

 

Theoperating results of our 55%-owned subsidiary, Real Goods Solar, Inc. (“RealGoods”), are consolidated into our reported results from operations. To theextent that Real Goods reports a loss for any given period, this will adverselyaffect our operating results for that period. Real Goods reported a net lossfor its fiscal year ended December 31, 2009 of $1.6 million. Real Goods’business is affected by general business factors, including prevailing economicconditions, competition, declining consumer credit market conditions, andsimilar factors. Real Goods’ business may also be affected by many factors thatspecifically affect the demand for solar energy systems and the solar energyindustry, including the following:

 

·                 fluctuations in economic and marketconditions that affect the viability of conventional and non-solar renewableenergy sources, such as changes in the price of oil and other fossil fuels;

·                 availability of government subsidies andincentives to support the development of the solar energy industry;

·                 cost-effectiveness, performance andreliability of solar energy systems compared with conventional and othernon-solar renewable energy sources and products;

·                 success of other renewable energy generationtechnologies, such as hydroelectric, wind, geothermal, solar thermal,concentrated solar and biomass;

·                 fluctuations in expenditures by purchasers ofsolar energy systems, which tend to decrease in slower economic environmentsand periods of rising interest rates;

·                 deregulation of the electric power industryand the broader energy industry;

·                 shortages in the supply of any of thecomponents used for solar energy systems; and

·                 changes in governmental regulations thataffect the installation of solar energy systems, which may make installationmore difficult, more expensive, or impracticable.

 

*Disputes concerning media content and intellectual property mayadversely affect us*

 

Mostof our media content is subject to arrangements with third parties pursuant towhich we have licensed certain rights to use and distribute media content ownedby third parties or have licensed to third parties certain rights to use anddistribute media content that we own. In addition, we have a number ofagreements with third parties concerning the use of our media content andintellectual property, including agreements regarding royalties, distribution,duplication, etc. Allegations that our rights to use media content areincomplete or other disputes arising from such arrangements may be costly andmay have a material adverse impact on our results.

 

*Product liability claimsagainst us could result in adverse publicity and potentially significantmonetary damages.*

 

Asa seller of consumer products, we may face product liability claims in theevent that use of our products results in injuries. If such injuries or claimsof injuries were to occur, we could incur monetary damages and our businesscould be adversely affected by any resulting negative publicity. The successfulassertion 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.

 

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*We are dependent on third party suppliers for the success of ourproprietary products*

 

Weare dependent on the success of our proprietary products, and we rely on aselect group of manufacturers to provide us with sufficient quantities to meetour customers’ demands in a timely manner, produce these products in a humaneand safe environment for both their workers and the planet, maintain qualitystandards consistent with our brand, and meet certain pricing guarantees. Ouroverseas sourcing arrangements carry risks associated with productsmanufactured outside of the U.S., including political unrest and traderestrictions, currency fluctuations, transportation difficulties, workstoppages, and other uncertainties. In addition, a number of our suppliers aresmall companies, and some of these vendors may not have sufficient capital,resources or personnel to maintain or increase their sales to us or to meet ourneeds for commitments from them. The failure of our suppliers to providesufficient quantities of our proprietary products could decrease our revenues,increase our costs, and damage our customer service reputation.

 

*We rely on communications and shipping networks to deliver our products*

 

Givenour emphasis on customer service, the efficient and uninterrupted operation oforder-processing and fulfillment functions is critical to our business. Tomaintain a high level of customer service, we rely heavily on a number ofdifferent outside service providers, such as printers, telecommunicationscompanies and delivery companies. Any interruption in services from ourprincipal outside service providers, including delays or disruptions resultingfrom labor disputes, power outages, human error, adverse weather conditions ornatural disasters, could materially adversely affect our business. In addition,freight carriers must ship products that we source overseas to our distributioncenter, and a work stoppage or political unrest could adversely affect ourability to fulfill our customer orders.

 

*Information systems upgrades or integrations may disrupt our operationsor financial reporting*

 

Wecontinually evaluate and upgrade our management information systems, which arecritical to our business. These systems assist in processing orders, managinginventory, purchasing and shipping merchandise on a timely basis, responding tocustomer service inquiries, and gathering and analyzing operating data bybusiness segment, customer, and stock keeping unit (a specific identifier foreach different 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,success in E-commerce depends 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.

 

*A material security breach could cause us to lose sales, damage ourreputation or result in liability to us*

 

Ourcomputer servers may be vulnerable to computer viruses, physical or electronicbreak-ins and similar disruptions. We may need to expend significant additionalcapital and other resources to protect against a security breach or toalleviate problems caused by any breaches. Our relationships with our customersmay be adversely affected if the security measures that we use to protectpersonal information such as credit card numbers are ineffective. We currentlyrely on security and authentication technology that we license from thirdparties. We may not succeed in preventing all security breaches and our failureto do so could adversely affect our business.

 

*Our systems may fail or limit user traffic, which would cause us tolose sales*

 

Wesupport a portion of our business through our call center in Louisville,Colorado. Even though we have back up arrangements, we are dependent on ourability to maintain our computer and telecommunications equipment in thiscenter in effective working order and to protect against damage from fire,natural disaster, power loss, telecommunications failure or similar events. Inaddition, growth of our customer base may strain or exceed the capacity of ourcomputer and telecommunications systems and lead to degradations in performanceor systems failure. We have experienced capacity constraints and failure ofinformation systems in the past that have resulted in decreased levels ofservice delivery or interruptions in service to customers for limited periodsof time. Although we continually review and consider upgrades to our technicalinfrastructure and provide for system redundancies and backup power to limitthe likelihood of systems overload or failure, substantial damage to oursystems or a systems failure that causes interruptions for a number of dayscould adversely affect our business. Additionally, if we are unsuccessful in updatingand expanding our infrastructure, including our call center, our ability togrow may be constrained.

 

*Government regulation of the Internet and E-commerce is evolving andunfavorable changes could harm our business*

 

Weare subject to general business regulations and laws, as well as regulationsand laws specifically governing the Internet and E-commerce. Such existing andfuture laws and regulations may impede the growth of the Internet or otheronline services.  These regulations andlaws may cover taxation, user privacy, pricing, content, copyrights,distribution, consumer protection, the provision of 

 

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onlinepayment 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 may face legal liability for the content contained on our websites*

 

Wecould face legal liability for defamation, negligence, copyright, patent ortrademark infringement, personal injury or other claims based on the nature andcontent of materials that we publish or distribute on our websites. If we areheld liable for damages for the content on our websites, our business maysuffer. Further, one of our goals is for our websites to be trustworthy anddependable providers of information and services. Allegations of impropriety,even if unfounded, could therefore have a material adverse effect on ourreputation and our business.

 

*Relying on our centralized fulfillment center could expose us to losingrevenue*

 

Promptand efficient fulfillment of our customers’ orders is critical to our business.Our facility in Cincinnati, Ohio handles our fulfillment functions and somecustomer-service related operations, such as returns processing. A majority ofour orders are filled and shipped from the Cincinnati facility. The balance isshipped directly from suppliers. Because we rely on a centralized fulfillmentcenter, our fulfillment functions could be severely impaired in the event offire, extended adverse weather conditions, transportation difficulties ornatural disasters. Because we recognize revenue only when we ship orders,interruption of our shipping could diminish our revenues.

 

*We may face quarterly and seasonal fluctuations that could harm ourbusiness*

 

Ourrevenue and results of operations have fluctuated and will continue tofluctuate on a quarterly basis as a result of a number of factors, includingthe timing of catalog offerings, timing of orders from retailers, recognitionof costs or net sales contributed by new merchandise, fluctuations in responserates, fluctuations in paper, production and postage costs and expenses,merchandise returns, adverse weather conditions that affect distribution orshipping, shifts in the timing of holidays and changes in our merchandise mix.In particular, our net sales and profits have historically been higher duringthe fourth quarter holiday season. We believe that this seasonality willcontinue in the future.

 

*Postage and shipping costs may increase and therefore increase ourexpenses*

 

Weship our products, catalogs, and lifestyle publications to consumers and thecost of shipping is a material expenditure. Postage and shipping pricesincrease periodically and can be expected to increase in the future. Anyinability to secure suitable or commercially favorable prices or other termsfor the delivery of our merchandise and catalogs could have a material adverseeffect on our financial condition and results of operations.

 

*Our business is subject to reporting requirements that continue toevolve and change, which could continue to require significant complianceeffort and resources.*

 

Becauseour common stock is publicly traded, we are subject to certain rules andregulations of federal, state and financial market exchange entities chargedwith the protection of investors and the oversight of companies whosesecurities are publicly traded. These entities, including the Public CompanyAccounting Oversight Board, the SEC and the NASDAQ, periodically issue newrequirements and regulations and legislative bodies also review and reviseapplicable laws such as the Sarbanes-Oxley Act of 2002. As interpretation andimplementation of these laws and rules and promulgation of new regulationscontinues, we will continue to be required to commit significant financial andmanagerial resources and incur additional expenses.

 

**Item 1B.         Unresolved staff comments**

 

None.

 

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### **Item 2.****          ****Properties**

###  

Ourprincipal executive offices are located in Louisville, Colorado. Ourfulfillment center is located in the Cincinnati, Ohio area. The following tablesets forth certain information 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                 |

 

Weintend to optimize our fulfillment center down to 208,120 square feet by July 1,2010 and have already renewed the lease for that remaining space through June 2013.Our existing fulfillment center lease has renewal options permitting theextension of the lease for up to an additional six years. We believe ourfacilities are adequate to meet our current needs and that suitable additionalfacilities will be available for lease or purchase when, and as, we need them.

 

### **Item 3.****          ****Legalproceedings**

 

From time to time,we are involved in various legal proceedings that we consider to be in thenormal course of business. We do not believe that any of these proceedings willhave a material adverse effect on our business.

 

### **Item 4.****          ****Reserved**

 

**Part II**

 

### **Item 5.****          ****Market forregistrant’s common equity, related stockholder matters and issuer purchases ofequity securities**

 

**Stock Price History**

 

OurClass A common stock is listed on the NASDAQ Global Market under the symbol“GAIA”. On March 11, 2010, we had 6,702 shareholders of record and 17,778,822shares of $.0001 par value Class A common stock outstanding. We have5,400,000 shares of $.0001 par value Class B common stock outstanding,held by one shareholder.

 

Thefollowing table sets forth certain sales price and trading volume data for our Class Acommon stock for the period indicated:

 
| ** **     | ** ** | **High** | ** ** | **Low** | ** ** | **Close** | ** ** | **Average  Daily  Volume** | ** ** |
|----------------|------------|----------|------------|---------|------------|-----------|------------|----------------------------|------------|
| Fiscal 2009:   |       |     |       |    |       |      |       |                       |       |
| Fourth Quarter |       | $        | 8.24       |    | $          | 6.03      |       | $                          | 7.69       |   | 49,191 |   |
| Third Quarter  |       | $        | 7.04       |    | $          | 4.51      |       | $                          | 6.98       |   | 57,511 |   |
| Second Quarter |       | $        | 6.87       |    | $          | 3.16      |       | $                          | 5.47       |   | 127,698 |   |
| First Quarter  |       | $        | 4.81       |    | $          | 2.38      |       | $                          | 3.28       |   | 119,279 |   |
|           |       |     |       |    |       |      |       |                       |       |
| 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 |   |

 

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**Issuer Purchases of Registered Equity Securities**

 

Wepurchased shares of our Class A common stock in a negotiated transactionas follows:

 
| **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** | ** ** |
|--------------------|------------|--------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| April 6, 2009 |       | 932,000                                                                        |       | $                                                                             | 3.00       |                                                                                                                                                           | —     |                                                                                                                                                                                                            | —     |   |
|                    |            |                                                                                |            |                                                                               |            |                                                                                                                                                                |            |                                                                                                                                                                                                                 |            |  |

 

**Dividend Policy**

 

In2010, for the first time, we declared out of additional paid-in capital anannual $0.15 per share cash dividend on our capital stock.

 

**Sales of Unregistered Securities**

 

None.

 

**EquityCompensation Plan Information**

 

Thefollowing table summaries equity compensation plan information for our Class Acommon stock:

 
| **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          |       | 1,224,760                                                                                                                                        |       | $                                                                                                                | 5.35       |                                                                                                                                    | 2,995,128  |   |
| Equity compensation plans not approved by  security holders |       | —                                                                                                                                           |       | —                                                                                                           |       | —                                                                                                                                  |       |
| Total                                                            |       | 1,224,760                                                                                                                                        |       | $                                                                                                                | 5.35       |                                                                                                                                    | 2,995,128  |   |

 

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**Stock Performance Graph**

 

TheGraph below shows, for the five years ended December 31, 2009, thecumulative total return on an investment of $100 in our Class A commonstock, assuming the investment was made on December 31, 2004 and therelative stock performances of our Class A common stock commencing withGaiam’s initial public offering on October 29, 1999 until December 31,2004.  The graph compares such returnwith that of comparable investments assumed to have been made on the same datein (a) the NASDAQ Stock Market (U.S. Companies) Index and (b) a mediapeer group, comprised of Martha Steward Living Omnimedia, Inc.; The WaltDisney Company; and Lions Gate Entertainment Corp.  Although total return for the assumedinvestment 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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* $100 invested on 12/31/04in stock or index, including reinvestment of dividends.

Fiscal year ending December31.

 

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### **Item 6.****          ****Selectedfinancial data**

###  

Wederived the selected consolidated statement of operations data for the yearsended December 31, 2009, 2008 and 2007 and consolidated balance sheet dataas of December 31, 2009 and 2008 set forth below from our auditedconsolidated financial statements which are included elsewhere in this Form 10-K.We derived the selected consolidated statement of operations data for the yearsended December 31, 2006 and 2005 and consolidated balance sheet data as ofDecember 31, 2007, 2006 and 2005 set forth below from our audited consolidatedfinancial statements which are not included in this Form 10-K. Thehistorical operating results are not necessarily indicative of the results tobe expected for any other period. You should read the data set forth below inconjunction with “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” and our consolidated financial statements andrelated notes, included elsewhere in this Form 10-K.

 
| ** **                                                                         | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **(in thousands, except per share data)**                 | ** ** | **2009**                                    | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                               |       |                                        |       |   |   |   |   |   |   |   |   |
| **Consolidated Statements of  Operations Data:**                                   |       |                                        |       |   |   |   |   |   |   |   |   |
| Net revenues                                                                       |       | $                                           | 278,473    |   | $ | 257,172 |   | $ | 262,943 |   | $ | 219,480 |   | $ | 142,492 |   |
| Cost of goods sold                                                                 |       | 134,370                                     |       | 107,927 |   | 94,565 |   | 79,150 |   | 61,977 |   |
| Gross profit                                                                       |       | 144,103                                     |       | 149,245 |   | 168,378 |   | 140,330 |   | 80,515 |   |
| Expenses:                                                                          |       |                                        |       |   |   |   |   |   |   |   |   |
| Selling and operating                                                              |       | 131,659                                     |       | 142,401 |   | 144,768 |   | 119,700 |   | 67,639 |   |
| Corporate, general and administration                                              |       | 13,225                                      |       | 13,059 |   | 13,157 |   | 14,989 |   | 9,790 |   |
| Other general income and expense                                                   |       | —                                      |       | 82,928 |   | — |   | — |   | — |   |
| Total expenses                                                                     |       | 144,884                                     |       | 238,388 |   | 157,925 |   | 134,689 |   | 77,429 |   |
|                                                                               |       |                                        |       |   |   |   |   |   |   |   |   |
| Income (loss) from operations                                                      |       | (781                                        | )          | (89,143 | ) | 10,453 |   | 5,641 |   | 3,086 |   |
|                                                                               |       |                                        |       |   |   |   |   |   |   |   |   |
| Gain from issuance of subsidiary stock                                             |       | —                                      |       | 32,800 |   | — |   | — |   | — |   |
| Interest and other income (expense)                                                |       | (1,524                                      | )          | 1,216 |   | 4,148 |   | 3,905 |   | (175 | ) |
|                                                                               |       |                                        |       |   |   |   |   |   |   |   |   |
| Income (loss) before income taxes and  noncontrolling interest                     |       | (2,305                                      | )          | (55,127 | ) | 14,601 |   | 9,546 |   | 2,911 |   |
|                                                                               |       |                                        |       |   |   |   |   |   |   |   |   |
| Income tax expense (benefit)                                                       |       | (2,088                                      | )          | (7,542 | ) | 5,767 |   | 3,774 |   | 974 |   |
|                                                                               |       |                                        |       |   |   |   |   |   |   |   |   |
| Net income (loss)                                                                  |       | (217                                        | )          | (47,585 | ) | 8,834 |   | 5,772 |   | 1,937 |   |
| Net (income) loss attributable to noncontrolling  interest                         |       | 513                                         |       | 11,962 |   | (310 | ) | (128 | ) | (601 | ) |
| Net income (loss) attributable to Gaiam, Inc.                                 |       | $                                           | 296        |   | $ | (35,623 | ) | $ | 8,524 |   | $ | 5,644 |   | $ | 1,336 |   |
|                                                                               |       |                                        |       |   |   |   |   |   |   |   |   |
| Net income (loss) per share attributable to  Gaiam, Inc. common shareholders: |       |                                        |       |   |   |   |   |   |   |   |   |
| Basic                                                                              |       | $                                           | 0.01       |   | $ | (1.46 | ) | $ | 0.34 |   | $ | 0.23 |   | $ | 0.08 |   |
| Diluted                                                                            |       | $                                           | 0.01       |   | $ | (1.46 | ) | $ | 0.34 |   | $ | 0.23 |   | $ | 0.08 |   |
| Weighted-average shares outstanding:                                               |       |                                        |       |   |   |   |   |   |   |   |   |
| Basic                                                                              |       | 23,306                                      |       | 24,452 |   | 24,962 |   | 24,349 |   | 17,140 |   |
| Diluted                                                                            |       | 23,378                                      |       | 24,452 |   | 25,214 |   | 24,617 |   | 17,354 |   |

 
| ** **                            | ** ** | **As of December 31,** | ** ** |
|---------------------------------------|------------|---------------------------------------|------------|
| **(in thousands)**               | ** ** | **2009**                              | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                  |       |                                  |       |   |   |   |   |   |   |   |   |
| **Consolidated Balance Sheet  Data:** |       |                                  |       |   |   |   |   |   |   |   |   |
| Cash                                  |       | $                                     | 48,325     |   | $ | 31,965 |   | $ | 66,258 |   | $ | 104,876 |   | $ | 15,028 |   |
| Working capital                       |       | 94,910                                |       | 95,780 |   | 106,815 |   | 140,147 |   | 37,216 |   |
| Total assets                          |       | 212,213                               |       | 202,098 |   | 240,712 |   | 250,968 |   | 156,101 |   |
| Total liabilities                     |       | 44,322                                |       | 33,452 |   | 34,251 |   | 26,700 |   | 40,716 |   |
| Total equity                          |       | 167,891                               |       | 168,646 |   | 206,461 |   | 224,268 |   | 115,385 |   |
|                                       |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Duringthe last three years, we used $53.9 million of cash to repurchase our commonstock.

 

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### **Item 7.****          ****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 as they relateto us to identify such forward-looking statements. Our actual results coulddiffer materially from the results anticipated in these forward-lookingstatements as a result of certain factors set forth under “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” “Quantitativeand Qualitative Disclosures About Market Risk” and elsewhere in this report.Risks and uncertainties that could cause actual results to differ include,without limitation, general economic conditions, competition, loss of keypersonnel, pricing, brand reputation, acquisitions, new initiatives weundertake, security and information systems, legal liability for websitecontent, merchandise supply problems, failure of third parties to provideadequate service, reliance on centralized customer service, overstocks andmerchandise 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.

 

Youshould read the following discussion and analysis of our financial conditionand results of operations in conjunction with the consolidated financialstatements and related notes included elsewhere in this document.**This section is designed to provide information thatwill assist readers in understanding our consolidated financial statements,changes in certain items in those statements from year to year, the primaryfactors that caused those changes and how certain accounting principles,policies and estimates affect the consolidated financial statements.

 

**Overviewand Outlook**

 

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

#  

# 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, 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 to customers.  We also utilize a third party replication andfulfillment center for media distribution in our business segment.

#  

# Our businesssegment sells directly to retailers, with our products available inapproximately 70,000 retail doors in the United States. During 2009, thissegment generated revenue of $98.2 million, up from $88.9 million during 2008,an increase of 10.5%. During 2009, we expanded our store within storepresentations, which include custom fixtures that we design, to over 11,000locations.  In 2008, we launched a mediacategory management role that is part of our long term strategy and a key stepin securing shelf space for media.  Wehave now expanded this strategy to approximately 4,000 doors, up from 3,200 atthe end of 2008.

#  

# Through itsdiverse media reach, the direct to consumer segment provides an opportunity tolaunch and support new media releases, a sounding board for new producttesting, promotional opportunities, a growing subscription base, and customerfeedback on us and the LOHAS industry’s focus and future. During 2009, thissegment generated revenues of $115.9 million, down from $129.8 million during2008.  This decrease reflects a plannedreduction to our catalog circulation of 38%, partially offset by revenue growthfrom our direct response marketing programs.

#  

Our solar segment offersresidential and small commercial solar energy integration services.  On May 13, 2008, our solar energyintegration business consummated an initial public offering and has since beenmanaged as a separate segment.  Thisbusiness has grown its sales and expanded its market territories. During 2009,this segment generated revenues of $64.3 million, up from $38.4 million during2008.  We have and will continue to usethe IPO proceeds to fund this segment’s working capital needs and general 

 

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corporatepurposes, which may include future acquisitions of businesses.

 

We believe our growthwill be driven by media content, products, and services delivered to theconsumer via Internet, retailers, licensing, electronic downloads andsubscriptions. We have increased our focus on fitness media content creationand distribution, and media category management at retailers. Our recentlicensing agreements will expand our distribution within the non-theatricalmedia category.

 

We believe a number offactors are important to our long-term success, including increasing our brandedstore within a store presence, expanding category management into new retailersand genres, increasing international growth by expanding into new marketsprimarily through license arrangements, extending our product lines andenhancing our multimedia platform community through new media opportunities,new membership programs, initiatives and acquisitions.

 

**Critical Accounting Policies**

 

Weprepare our consolidated financial statements in conformity with accountingprinciples generally accepted in the United States, which require us to makejudgments, estimates and assumptions that affect the amounts reported in theconsolidated financial statements and accompanying notes. Note 2 to theconsolidated financial statements in Item 8 of this Form 10-K summarizesthe significant accounting policies and methods used in the preparation of ourconsolidated financial statements.

 

Webelieve the following to be critical accounting policies whose application hasa material impact on our financial presentation, and involve a higher degree ofcomplexity, as they require us to make judgments and estimates about mattersthat are inherently uncertain.

 

*Allowances for Doubtful Accounts and Product Returns*

 

Wemaintain allowances for doubtful accounts for estimated losses resulting fromthe inability of our customers to make required payments. We make estimates ofthe collectibility of our accounts receivable by analyzing historical baddebts, specific customer creditworthiness, and current economic trends. If thefinancial condition of our customers were to deteriorate such that theirability to make payments to us was impaired, additional allowances could berequired.

 

Werecord allowances for product returns to be received in future periods at thetime we recognize the original sale. We base the amounts of the returnsallowances upon historical experience and future expectations.

 

*Inventory*

 

Inventoryconsists primarily of finished goods held for sale and is stated at the lowerof cost (first-in, first-out method) or market. We identify the inventory itemsto be written down for obsolescence based on the item’s current sales statusand condition. We write down discontinued or slow moving inventories based onan estimate of the markdown to retail price needed to sell through our currentstock level of the inventories.

 

*Goodwill and Other Intangibles*

 

Goodwillrepresents the excess of the purchase consideration over the estimated fairvalue of assets acquired less liabilities assumed in a business acquisition.Our other intangibles mainly consist of customer and marketing related assets.We review goodwill for impairment annually or more frequently if impairmentindicators arise on a reporting unit level. We compare the estimated fair valueof a reporting unit with its carrying amount, including goodwill. If theestimated fair value of a reporting unit exceeds its carrying amount, weconsider the goodwill of the reporting unit not impaired. If the carryingamount of a reporting unit exceeds its estimated fair value, we perform thegoodwill impairment test to measure the amount of impairment loss. We use atraditional present value method for the purposes of testing for potentialimpairment. The process of evaluating the potential impairment of goodwill ishighly subjective and requires significant judgment at many points during theanalysis. Application of alternative assumptions and definitions could yieldsignificantly different results.

 

*Investments*

 

Weaccount for investments in limited liability companies in which we have theability to exercise significant influence or control, or in which we hold afive percent or more membership interest, under the equity method. We accountfor investments 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 them only forother-than-temporary declines 

 

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infair value. Determining whether we have the ability to exercise significantinfluence or control over a company is highly subjective and requires a highdegree of judgment.

 

*Purchase Accounting*

 

Weaccount for the acquisition of a controlling interest in a business using theacquisition method. In determining the estimated fair value of certain acquiredassets and liabilities, we make assumptions based upon many different factors,such as historical and other relevant information and analyses performed byindependent parties. Assumptions may be incomplete, and unanticipated eventsand circumstances may occur that could affect the validity of such assumptions,estimates, or actual results.

 

*Media Library*

 

Ourmedia 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*

 

Wemeasure compensation cost at the grant date based on the fair value of theaward and recognize compensation cost upon the probable attainment of aspecified performance condition or over a service period. We use theBlack-Scholes option valuation model to estimate the grant date fair value. Inestimating this fair value, there are certain assumptions that we use, asdisclosed in Note 12, Share-Based Compensation, consisting of the expectedlife of the option, risk-free interest rate, dividend yield, and volatility.The use of a different estimate for any one of these components could have amaterial impact on the amount of calculated compensation expense.

 

**Resultsof Operations**

 

The following table sets forth certain financial data as a percentageof revenues for the periods indicated:

 
| ** **                                                     | ** ** | **Quarters ended December 31,** | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                     | ** ** | **2009**                             | ** ** | **2008**                                    | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net revenue                                                    |       | 100.0                                | %          | 100.0                                       | %          | 100.0 | % | 100.0 | % | 100.0 | % |
| Cost of goods sold                                             |       | 47.7                                 | %          | 48.6                                        | %          | 48.3 | % | 42.0 | % | 36.0 | % |
| Gross profit                                                   |       | 52.3                                 | %          | 51.4                                        | %          | 51.7 | % | 58.0 | % | 64.0 | % |
|                                                           |       |                                 |       |                                        |       |   |   |   |   |   |   |
| Expenses:                                                      |       |                                 |       |                                        |       |   |   |   |   |   |   |
| Selling and operating                                          |       | 40.4                                 | %          | 53.3                                        | %          | 47.3 | % | 55.4 | % | 55.0 | % |
| Corporate, general and administration                          |       | 4.3                                  | %          | 4.6                                         | %          | 4.7 | % | 5.1 | % | 5.0 | % |
| Other general income and expense                               |       | —                               | %          | 56.8                                        | %          | — | % | 32.2 | % | — | % |
| Total expenses                                                 |       | 44.7                                 | %          | 114.7                                       | %          | 52.0 | % | 92.7 | % | 60.0 | % |
|                                                           |       |                                 |       |                                        |       |   |   |   |   |   |   |
| Income (loss) from operations                                  |       | 7.6                                  | %          | -63.3                                       | %          | -0.3 | % | -34.7 | % | 4.0 | % |
|                                                           |       |                                 |       |                                        |       |   |   |   |   |   |   |
| Gain from issuance of subsidiary stock                         |       | —                               | %          | 1.9                                         | %          | — | % | 12.8 | % | — | % |
| Interest and other income (expense)                            |       | -2.0                                 | %          | 0.3                                         | %          | -0.5 | % | 0.5 | % | 1.5 | % |
| Income (loss) before income taxes and  noncontrolling interest |       | 5.6                                  | %          | -61.1                                       | %          | -0.8 | % | -21.4 | % | 5.5 | % |
| Income tax expense (benefit)                                   |       | 0.7                                  | %          | -4.7                                        | %          | -0.7 | % | -2.9 | % | 2.2 | % |
| Net (income) loss attributable to noncontrolling  interest     |       | -0.3                                 | %          | 15.7                                        | %          | 0.2 | % | 4.6 | % | -0.1 | % |
| Net income (loss) attributable to Gaiam, Inc.             |       | 4.6                                  | %          | -40.7                                       | %          | 0.1 | % | -13.9 | % | 3.2 | % |

 

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***Quarter Ended December 31, 2009 Compared to Quarter Ended December 31,2008***

 

*Net revenue*. Net revenue increased $13.1million, or 17.6%, to $87.6 million during the fourth quarter of 2009 from$74.5 million during the fourth quarter of 2008. The increase in net revenuewas primarily attributable to the business segment which grew 44.1% and stronggrowth in our solar segment, partially offset by a planned 38% reduction incatalog circulation.

 

*Gross profit*. Gross profit increased $7.6 million, or 19.8%, to$45.9 million during the fourth quarter of 2009 from $38.3 million during thefourth quarter of 2008. As a percentage of net revenue, gross profit increasedto 52.3% during the fourth quarter of 2009 from 51.4% during the fourth quarterof 2008.  This increase primarilyreflects higher sales of media.

 

*Selling and operating expenses*. Selling and operating expenses decreased$4.3 million, or 10.9%, to $35.4 million during the fourth quarter of 2009 from$39.7 million during the fourth quarter of 2008.  As a percentage of net revenue, selling andoperating expenses decreased to 40.4% during the fourth quarter of 2009 from53.3% during the fourth quarter of 2008. This decrease is a result of our significant cost savings measures,including reducing payroll costs, optimizing the direct business throughreduced catalog prospecting and closing unprofitable businesses.

 

*Corporate, general and administration expenses*. Corporate, general and administrationexpenses increased $0.3 million, or 9.7%, to $3.8 million during the fourthquarter of 2009 from $3.5 million during the fourth quarter of 2008.  As of percentage of net revenue, corporate,general and administration expenses decreased to 4.3% during the fourth quarterof 2009 from 4.6% during the fourth quarter of 2008 reflecting higher revenues.

 

*Net income(loss) attributable to Gaiam, Inc.*  Asa result of the above factors, net income attributable to Gaiam, Inc. was$4.0 million during the fourth quarter of 2009 compared to a net loss of $30.3million during the fourth quarter of 2008. Net income per share attributable to Gaiam, Inc. commonshareholders was $0.17 during the fourth quarter of 2009 compared to a net lossper share of $1.26 during the fourth quarter of 2008. Excluding assetimpairment charges and the gain from the issuance of Real Goods stock, our lossduring the fourth quarter of 2008 would have been $2.6 million or $0.11 pershare. Refer to the Non-GAAP Financial Measures table below.

 

***Year Ended December 31, 2009 Compared to Year Ended December 31,2008***

 

*Net revenue*. Net revenue increased $21.3million, or 8.3%, to $278.5 million during 2009 from $257.2 million during2008. Net revenue in our business segment increased $9.3 million to $98.2million during 2009 from $88.9 million during 2008, primarily reflectingimprovement in our domestic trade business, including increased store withinstore presentations and our success as media category manager, partially offsetby conservative buying by retailers in the first quarter of 2009, higherdeductions and allowances to retailers, and the disposition of our UKoperations at the end of the first quarter of 2008. Net revenue in our directto consumer segment decreased $13.9 million to $115.9 million during 2009 from$129.8 million during 2008. This decrease in the direct to consumer segment netrevenue primarily reflects our decision to reduce catalog circulation by 38%,partially offset by revenue growth with our direct response marketingprograms.   Net revenue to externalcustomers in our solar segment increased $25.9 million to $64.3 million during2009 from $38.4 million during 2008, primarily due to organic growth and ouracquisitions during 2008.

 

*Grossprofit*. Gross profit decreased $5.1 million, or 3.4%, to $144.1 millionduring 2009 from $149.2 million during 2008. As a percentage of net revenue,gross profit decreased to 51.7% during 2009 from 58.0% during 2008.  Gross profit in our business segment decreased$1.8 million, or 3.5%, to $50.0 million during 2009 from $51.8 million during2008 and, as a percentage of net revenue, decreased to 50.9% during 2009 from58.2% during 2008, primarily reflecting the expansion of our category managerrole in media at retailers and greater participation in retailer discountprograms and promotions. Gross profit in our direct to consumer segmentdecreased $9.1 million, or 10.4%, to $78.2 million during 2009 from $87.2million during 2008 and, as a percentage of net revenue, increased slightly to67.5% during 2009 from 67.2% during 2008, primarily reflecting our decision to focuson proprietary products, partially offset by our offering free shipping duringthe holiday season and reduced prices to accelerate sales and lower inventorylevels.    Gross profit in our solarsegment increased $5.7 million, or 55.7%, to $16.0 million during 2009 from$10.2 million during 2008 and, as a percentage of net revenue, decreased to24.8% during 2009 from 26.7% during 2008, primarily reflecting larger averageinstallation sizes that traditionally produce lower gross profit margins.

 

*Selling andoperating expenses*. Selling and operating expenses decreased $10.7 million, or7.5%, to $131.7 million during 2009 from $142.4 million during 2008.  This change is primarily a result of costcontrol measures implemented in late 2008 and early 2009 and reduced catalogcirculation. As a percentage of net revenue, selling and operating expensesdecreased to 47.3% during 2009 from 55.4% during 2008, reflecting our lowercost structure and increased revenues.

 

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*Corporate,general and administration expenses*. Corporate, general and administration expensesincreased $0.2 million, or 1.3%, to $13.2 million during 2009 from $13.1million during 2008.  As of percentage ofnet revenue, corporate, general and administration expenses decreased to 4.7%during 2009 from 5.1% during 2008.

 

*Interest andother income (expense)*. Interest and other income (expense) decreased $2.7 millionto expense of $1.5 million during 2009 from income of $1.2 million during2008.  The decrease reflects a loss onthe disposition of an insignificant, unprofitable subsidiary of $1.8 millionand lower interest income resulting from the decrease in prevailing short-terminterest rates and cash used to acquire our corporate facilities and repurchase0.9 million shares of our Class A common stock for $2.8 million since January 1,2009.

 

*Income taxbenefit*.  Income tax benefit during 2009 includes a$1.6 million tax benefit related to the disposition of an insignificant,unprofitable business in our direct to consumer segment.

 

*Net lossattributable to noncontrolling interest*. Net loss attributable to noncontrollinginterest decreased to $0.5 million during 2009 from $12.0 million during 2008primarily as a result of impairment of goodwill during 2008 and improvedearnings during 2009 in our solar segment.

 

*Net income(loss) attributable to Gaiam, Inc.*  Asa result of the above factors, net income attributable to Gaiam, Inc. was$0.3 million during 2009 compared to a loss of $35.6 million during 2008.  Net income per share attributable to Gaiam, Inc.common shareholders was $0.01 during 2009 compared to net loss per share of$1.46 during 2008.  Excluding theimpairment charges and the gain from the issuance of Real Goods stock, the netloss attributable to Gaiam, Inc. would have been $2.0 million, or $0.08per share, for 2008.  Refer to theNon-GAAP Financial Measures table below.

 

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

 

*Net revenue*. Net revenue decreased $5.8million, or 2.2%, to $257.2 million during 2008 from $262.9 million during2007. Net revenue in our direct to consumer segment decreased $2.7 million to$129.8 million during 2008 from $132.5 million during 2007. This decrease inthe direct to consumer segment net revenue primarily reflects overall slowerconsumer spending and our decision to reduce catalog circulation by 16%.  Net revenue in our business segment decreased$22.6 million to $88.9 million during 2008 from $111.5 million during 2007,primarily reflecting lower international product sales, which includes the shiftto licensing arrangements and the disposition of our UK operations. Excludinginternational revenues, our business segment net revenues increased $5.0million, or 6.4%, to $83.8 million during 2008 from $78.8 million during 2007,primarily reflecting the acquisition of SPRI Products.  Net revenue to external customers in oursolar segment increased $19.5 million to $38.4 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.

 

*Grossprofit*. Gross profit decreased $19.1 million, or 11.4%, to $149.2 millionduring 2008 from $168.4 million during 2007. As a percentage of net revenue,gross profit decreased to 58.0% 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, our success in expanding our category managerrole in media at retailers, and expanding our distribution footprint bymaintaining retail prices while absorbing cost increases from higher freightcharges and the dollar decline.  Grossprofit in our solar segment increased $3.8 million, or 57.8%, to $10.2 millionduring 2008 from $6.5 million during 2007 and, as a percentage of net revenue,decreased to 26.7% during 2008 from 34.3% during 2007, primarily reflecting theacquisition of Independent Energy Systems and Regrid Power which have largeraverage installation sizes that traditionally produce lower gross profitmargins.

 

*Selling andoperating expenses*. Selling and operating expenses decreased $2.4 million, or1.6%, to $142.4 million during 2008 from $144.8 million during 2007.  This change is primarily a result fromreduced catalog circulation, lower royalty payments, and lower compensationcosts, partially offset by investments made in our online community andincreased bad debt reserve, and lower amortization from the impairment of certainintangibles assets.    As a percentage ofnet revenue, selling and operating expenses increased to 55.4% during 2008 from55.0% during 2007.

 

*Corporate,general and administration expenses*. Corporate, general and administration expensesdecreased $0.1 million, or 0.7%, to $13.1 million during 2008 from $13.2million during 2007.  As of percentage ofnet revenue, corporate, general and administration expenses increased slightlyto 5.1% during 2008 from 5.0% during 2007.

 

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*Other generalincome and expense.* Other general income and expense was $82.9 million during2008 and was comprised of impairment charges of $44.4 million of goodwill,$27.1 million of media libraries (primarily from our GoodTimes and Limeacquisitions), $1.5 million of other intangibles, $2.2 million of property andequipment (primarily web site development), $1.5 million of deferredadvertising costs, and $3.3 million of other related assets,  and operatingexpenses related to the consummation of the Real Goods initial public offeringand guaranteed payments that we were obligated to make, but for which we willreceive no benefit, including reduction in force costs, totaling $2.9 million.

 

*Gain fromissuance of subsidiary stock*.  Gain from issuanceof subsidiary stock was $32.8 million during 2008 and represented the increasein carrying value of our investment in Real Goods as a result of its issuanceof new stock.

 

*Interest andother income*.Interest and other income decreased $2.9 million to $1.2 million during 2008from $4.1 million during 2007.  Thedecrease reflects lower interest earnings as we used cash to acquire ourcorporate facilities, acquire businesses and assets and repurchase 1.3 millionshares of our Class A common stock for $19.3 million, and the decline ofaverage interest rates received 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-termtreasuries.

 

*Net (income)loss attributable to noncontrolling interest*. Net loss attributable to noncontrollinginterest was $12.0 million during 2008 compared to net income attributable tononcontrolling interest of $0.3 million during 2007 primarily as a result ofimpairment of goodwill in our solar segment.

 

*Net income(loss) attributable to Gaiam, Inc.*  Asa result of the above factors, net loss attributable to Gaiam, Inc. was$35.6 million during 2009 compared to net income of $8.5 million during2008.  Net loss per share attributable toGaiam, Inc. common shareholders was $1.46 during 2008 compared to netincome per share of $0.34 during 2007. Excluding the impairment charges and the gain from the issuance of RealGoods stock, the net loss attributable to Gaiam, Inc. would have been $2.0million, or $0.08 per share, for 2008. Refer to the Non-GAAP Financial Measures table immediately below.

 

**Non-GAAPFinancial Measures**

 

We have utilized the non-GAAP informationset forth below as an additional device to aid in understanding and analyzingour financial results for the quarter and year ended December 31, 2008. Webelieve that these non-GAAP measures will allow for a better evaluation of theoperating performance of our business and facilitate meaningful comparison ofthe results in the current period to those in prior periods and future periods.Reference to these non-GAAP measures should not be considered a substitute forresults that are presented in a manner consistent with GAAP.

 

A reconciliation of ourquarter and year ended December 31, 2008 GAAP net loss to our non-GAAP netloss is set forth below (unaudited, in millions except share and per sharedata):

 
| ** **                                                                                                                          | ** ** | **For the Quarter  Ended  December 31, 2008** | ** ** | **For the Year  Ended  December 31, 2008** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|-------------------------------------------------|------------|
|                                                                                                                                |       |                                               |       |                                            |       |
| **Net loss**                                                                                                                        | ** ** | **$**                                              | **(30.3**  | **)**                                           | **$**      | **(35.6** | **)** |
|                                                                                                                                |       |                                               |       |                                            |       |
| Exclusion  of non-cash gain on issuance of Real Goods Solar stock (net of taxes of $0.5  million and $12.7 million, respectively)   |       | (0.9                                               | )          | (20.1                                           | )          |
|                                                                                                                                |       |                                               |       |                                            |       |
| Exclusion  of non-cash impairment of goodwill and intangible assets (net of taxes of  $2.3 million and $17.8 million, respectively) |       | 28.6                                               |       | 53.7                                            |       |
| ** **                                                                                                                          | ** ** | ** **                                         | ** ** | ** **                                      | ** ** |
| **Non-GAAP net loss**                                                                                                               | ** ** | **$**                                              | **(2.6**   | **)**                                           | **$**      | **(2.0** | **)** |
|                                                                                                                                |       |                                               |       |                                            |       |
| Non-GAAP  weighted average shares used in earnings per share calculation —diluted                                              |       | 23,980,000                                         |       | 24,452,000                                      |       |
| ** **                                                                                                                          | ** ** | ** **                                         | ** ** | ** **                                      | ** ** |
| **Non-GAAP loss per share —diluted**                                                                                           | ** ** | **$**                                              | **(0.11**  | **)**                                           | **$**      | **(0.08** | **)** |

 

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**Quarterly and SeasonalFluctuations**

 

The following table sets forth our unaudited resultsof operations for each of the quarters in 2009 and 2008. In our opinion, thisunaudited financial information includes all adjustments, consisting solely ofnormal recurring accruals and adjustments, necessary for a fair presentation ofthe results of operations for the quarters presented. You should read thisfinancial information in conjunction with our consolidated financial statementsand related notes included elsewhere in this Form 10-K. The results ofoperations for any quarter are not necessarily indicative of future results ofoperations.

 
| ** **                                                                                | ** ** | **Year 2009 Quarters Ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **(in thousands, except per share data)**                        | ** ** | **March  31**                               | ** ** | **June 30** | ** ** | **September  30** | ** ** | **December  31** | ** ** |
|                                                                                      |       |                                        |       |   |   |   |   |   |   |
| Net revenue                                                                               |       | $                                           | 55,923     |   | $ | 60,475 |   | $ | 74,439 |   | $ | 87,636 |   |
| Gross profit                                                                              |       | 30,986                                      |       | 31,446 |   | 35,811 |   | 45,860 |   |
| Income (loss) before income taxes and noncontrolling interests                            |       | (6,152                                      | )          | (2,115 | ) | 1,031 |   | 4,931 |   |
| Net income (loss)                                                                         |       | (3,903                                      | )          | (1,277 | ) | 643 |   | 4,320 |   |
| Net income (loss) attributable to Gaiam, Inc.                                        |       | (3,090                                      | )          | (1,009 | ) | 365 |   | 4,030 |   |
| Diluted net income (loss) per share attributable  to Gaiam, Inc. common shareholders |       | $                                           | (0.13      | ) | $ | (0.04 | ) | $ | 0.02 |   | $ | 0.17 |   |
| Weighted average shares outstanding-diluted                                               |       | 23,957                                      |       | 23,076 |   | 23,167 |   | 23,267 |   |

 
| ** **                                                                                | ** ** | **Year 2008 Quarters Ended (a)** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| **(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 noncontrolling interests                            |       | 3,135                                           |       | 4,184 |   | (16,922 | ) | (45,524 | ) |
| Net income (loss)                                                                         |       | 1,897                                           |       | 2,531 |   | (10,000 | ) | (42,013 | ) |
| Net income (loss) attributable to Gaiam, Inc.                                        |       | 2,213                                           |       | 2,581 |   | (10,115 | ) | (30,302 | ) |
| Diluted net income (loss) per share attributable  to Gaiam, Inc. common shareholders |       | $                                               | 0.09       |   | $ | 0.10 |   | $ | (0.42 | ) | $ | (1.26 | ) |
| Weighted average shares outstanding-diluted                                               |       | 25,352                                          |       | 24,895 |   | 24,020 |   | 23,980 |   |

 

----

(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 fitness purchases.

 

**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 ability toexpand 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 with a current expiration dateof June 19, 2010.  We are currentlyin negotiations to renew the line of credit agreement, which was recentlyextended pending the renewal negotiations. 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 

 

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ratios.At December 31, 2009, we had no amounts outstanding under this agreement;however, $0.5 million was reserved for outstanding letters of credit.  We believe we have complied with all of thefinancial covenants under this credit agreement.

 

***Cash Flows***

 

The following table summarizes our primarysources (uses) of cash during the periods presented:

 
| ** **                                              | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------|------------|
| **(in thousands)**                                 | ** ** | **2009**                                    | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net cash provided by (used in):                         |       |                                        |       |   |   |   |   |
| Operating activities                                    |       | $                                           | 28,134     |   | $ | (20,414 | ) | $ | 13,445 |   |
| Investing activities                                    |       | (9,036                                      | )          | (43,858 | ) | (22,787 | ) |
| Financing activities                                    |       | (2,735                                      | )          | 29,996 |   | (29,432 | ) |
| Effects of exchange rates on cash and cash  equivalents |       | (3                                          | )          | (17 | ) | 156 |   |
| Net increase (decrease) in cash and cash  equivalents   |       | $                                           | 16,360     |   | $ | (34,293 | ) | $ | (38,618 | ) |

 

*Operatingactivities*. Ouroperating activities provided net cash of $28.1 million during 2009 and usednet cash of $20.4 million during 2008. Our net cash provided by operatingactivities during 2009 was primarily attributable to decreased inventory of$13.9 million, noncash adjustments to net loss of $9.3 million, increasedaccounts payable and accrued liabilities of $10.9 million and refunded incometaxes of $8.3 million, partially offset by increased accounts receivable andother assets of $12.6 million and $1.3 million, respectively. Our net cash usedby operating activities during 2008 was primarily attributable to $8.4 millionof income tax benefits that we expect to be refunded in 2009 as a result of theimpairment of assets in 2008 and $10.6 million of liabilities assumed inbusiness acquisitions which are shown in operating activities in accordancewith GAAP.  The remaining purchase pricefor these acquisitions is shown in investing activities.  Also included in net cash used in operatingactivities are additional inventory purchases of $3.6 million, partially offsetby other net sources of cash of $2.1 million.

 

*Investingactivities*. Ourinvesting activities used net cash of $9.0 million and $43.9 million during2009 and 2008, respectively. The net cash used in investing activities during2009 was used primarily for property and equipment acquisitions of $4.4million, of which $2.2 million was required to maintain normal operations, formedia productions of $3.1 million, and for a business acquisition earn-out of$1.5 million. The net cash used in investing activities during 2008 was usedprimarily to acquire our new corporate headquarters and related property andequipment for $19.4 million, purchase other property and equipment for $3.1million, acquire businesses and other investments for $13.9 million, andpurchase and produce media rights for $6.0 million.

 

*Financingactivities*. Ourfinancing activities used net cash of $2.7 million during 2009 and provided netcash of $30.0 million during 2008.  Ournet cash used in financing activities during 2009 was used primarily torepurchase 932,000 shares of our Class A common stock.  Our net cash provided by financing activitiesduring 2008 primarily reflected net proceeds from Real Goods’ IPO of $48.2million and issuances of our common stock and related tax benefits of $1.5million, partially offset by the use of funds to repurchase approximately 1.3million shares of our Class A common stock for $18.4 million and payoff of$1.3 million on a line of credit of an acquired solar business.

 

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 years ended December 31,2009 and 2008, we issued 50,000 and 221,152 of these shares, respectively,primarily to acquire business ownership interests.

 

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 using then-availableliquidity, issuing equity securities or incurring additional indebtedness.

 

**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 |       | $         | 8,933      |                      | $          | 2,314              |       | $                  | 3,871      |                     | $          | 2,494 |   | $ | 254 |   |
|                             |            |           |            |                           |            |                    |            |                    |            |                          |            |  |  |  |  |  |

 

**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.****                            ****Quantitativeand qualitative disclosures about market risk**

 

Weare exposed to market risks, which include changes in U.S. interest rates andforeign exchange rates. We do not engage in financial transactions for tradingor speculative purposes, but do have forward contracts for foreign currencytransactions, the gains and losses from which historically have beenimmaterial.

 

Anyborrowings we might make under our bank credit facility would bear interest atthe lower of prime rate less 75 basis points or LIBOR plus 275 basis points. Wedo not have any amounts outstanding under our credit line, so any unfavorablechange in interest rates would not have a material impact on our results fromoperations or cash flows unless we make borrowings in the future.

 

Wepurchase a significant amount of inventory from vendors outside of the U.S. intransactions that are primarily U.S. dollar denominated transactions. A declinein the relative value of the U.S. dollar to other foreign currencies has andmay continue to lead to increased purchasing costs.

 

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**Item 8.             Financial statements and supplementary 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 changes in equity                            | 31     |
|                                                                    |   |
| Consolidated  statements of cash flows                                  | 32     |
|                                                                    |   |
| Notes  to consolidated financial statements                             | 33     |
|                                                                    |   |
| **Financial  Statement Schedule:**                                      |   |
| Schedule II — Consolidated valuation and  qualifying accounts | 49     |

 

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**Report of independent registered publicaccounting firm**

 

Tothe Board of Directors and Shareholders of

Gaiam, Inc.

Louisville,Colorado

 

We have audited the accompanyingconsolidated balance sheets of Gaiam, Inc. and subsidiaries as of December 31,2009 and 2008, and the related consolidated statements of operations, equity,and cash flows for each of the three years in the period ended December 31,2009.  Our audits also included the financial statement schedule IIfor the years ended December 31, 2009, 2008 and 2007.  We also have audited the Company’s internalcontrol over financial reporting based on criteria established in*Internal Control-Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(the “COSO Criteria”).  The Company’s management is responsible for theseconsolidated financial statements, for maintaining effective internal controlover financial reporting, and for its assessment of the effectiveness ofinternal control over financial reporting included in the accompanyingmanagement’s report.  Our responsibility is to express an opinion on theseconsolidated financial statements and the effectiveness of the Company’sinternal control over financial reporting based on our audits.

 

We conducted our audits in accordance withthe standards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that we plan and perform the audits to obtainreasonable assurance about whether the consolidated financial statements arefree of material misstatement and whether effective internal control overfinancial reporting was maintained in all material respects.  Our audit 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 included obtaining anunderstanding of internal control over financial reporting, assessing the riskthat a material weakness exists, testing and evaluating the design andoperating effectiveness of internal control based on the assessed risk, andperforming such other procedures as we considered necessary in thecircumstances.  We believe that our audits provide a reasonable basis forour opinions.

 

A company’s internal control over financialreporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples. A company’s internal control over financial reporting includesthose policies and procedures that (1) pertain to the maintenance ofrecords that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations,internal control over financial reporting may not prevent or detectmisstatements.  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 2009, Gaiam, Inc. and subsidiaries changed their methodof accounting for noncontrolling interests.

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, thefinancial position of Gaiam, Inc. and subsidiaries as of December 31,2009 and 2008, and the results of their operations and their cash flows foreach of the three years in the period ended December 31, 2009 inconformity with accounting principles generally accepted in the United Statesof America.  Also, in our opinion, the related financial statementschedule II for the years ended December 31, 2009, 2008 and 2007,when considered in relation to the basic financial statements taken as a whole,presents fairly in all material respects the information set forththerein.  Also in our opinion, Gaiam, Inc. and subsidiariesmaintained, in all material respects, effective internal control over financialreporting as of December 31, 2009 based on the COSO Criteria.

 

 
|                 | /s/  Ehrhardt Keefe Steiner & Hottman PC |
|----------------------|---------------------------------------------------|
|                 |                                              |
| March 12,  2010 |                                              |
| Denver,  Colorado    |                                              |

 

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**GAIAM, INC.**

**Consolidated balance sheets**

 
| ** **                                                                                                                                                                        | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| **(in thousands, except share and per share data)**                                                                                            | ** ** | **2009**              | ** ** | **2008** | ** ** |
| ** **                                                                                                                                                                        | ** ** | ** **            | ** ** | ** ** | ** ** |
| **ASSETS**                                                                                                                                                                        |       |                  |       |   |   |
| Current assets:                                                                                                                                                                   |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                                         |       | $                     | 48,325     |   | $ | 31,965 |   |
| Accounts receivable, net                                                                                                                                                          |       | 46,266                |       | 33,664 |   |
| Inventory, less allowances                                                                                                                                                        |       | 26,872                |       | 40,782 |   |
| Deferred advertising costs                                                                                                                                                        |       | 1,909                 |       | 2,578 |   |
| Receivable and deferred tax  assets                                                                                                                                               |       | 10,179                |       | 15,448 |   |
| Other current assets                                                                                                                                                              |       | 5,681                 |       | 4,795 |   |
| Total current assets                                                                                                                                                              |       | 139,232               |       | 129,232 |   |
|                                                                                                                                                                              |       |                  |       |   |   |
| Property and equipment,  net                                                                                                                                                      |       | 28,217                |       | 27,381 |   |
| Media library, net                                                                                                                                                                |       | 12,354                |       | 12,102 |   |
| Deferred tax assets, net                                                                                                                                                          |       | 4,414                 |       | 6,076 |   |
| Goodwill                                                                                                                                                                          |       | 24,166                |       | 23,180 |   |
| Other intangibles, net                                                                                                                                                            |       | 652                   |       | 880 |   |
| Notes receivable and other  assets                                                                                                                                                |       | 3,178                 |       | 3,247 |   |
| Total assets                                                                                                                                                                      |       | $                     | 212,213    |   | $ | 202,098 |   |
|                                                                                                                                                                              |       |                  |       |   |   |
| **LIABILITIES AND EQUITY**                                                                                                                                                        |       |                  |       |   |   |
| Current liabilities:                                                                                                                                                              |       |                  |       |   |   |
| Accounts payable                                                                                                                                                                  |       | $                     | 33,261     |   | $ | 26,567 |   |
| Accrued liabilities                                                                                                                                                               |       | 11,061                |       | 6,885 |   |
| Total current liabilities                                                                                                                                                         |       | 44,322                |       | 33,452 |   |
|                                                                                                                                                                              |       |                  |       |   |   |
| Commitments and  contingencies                                                                                                                                                    |       |                  |       |   |   |
|                                                                                                                                                                              |       |                  |       |   |   |
| Equity:                                                                                                                                                                           |       |                  |       |   |   |
| Gaiam, Inc.  shareholders’ equity:                                                                                                                                      |       |                  |       |   |   |
| Class A common stock,  $.0001 par value, 150,000,000 shares authorized, 17,721,212 and 18,541,201 shares  issued and outstanding at December 31, 2009 and 2008, 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, 2009 and 2008                           |       | 1                     |       | 1 |   |
| Additional paid-in capital                                                                                                                                                        |       | 162,532               |       | 163,652 |   |
| Accumulated other  comprehensive income                                                                                                                                           |       | 85                    |       | 88 |   |
| Accumulated deficit                                                                                                                                                               |       | (9,979                | )          | (10,275 | ) |
| Total Gaiam, Inc.  shareholders’ equity                                                                                                                                 |       | 152,641               |       | 153,468 |   |
| Noncontrolling interest                                                                                                                                                           |       | 15,250                |       | 15,178 |   |
| Total equity                                                                                                                                                                      |       | 167,891               |       | 168,646 |   |
| Total liabilities and  equity                                                                                                                                                     |       | $                     | 212,213    |   | $ | 202,098 |   |

 

See accompanying notes toconsolidated financial statements.

 

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**GAIAM,INC.**

**Consolidated statements of operations**

 
| ** **                                                                         | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **(in thousands, except per share data)**                 | ** ** | **2009**                                    | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                         | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net revenue                                                                        |       | $                                           | 278,473    |   | $ | 257,172 |   | $ | 262,943 |   |
| Cost of goods sold                                                                 |       | 134,370                                     |       | 107,927 |   | 94,565 |   |
| Gross profit                                                                       |       | 144,103                                     |       | 149,245 |   | 168,378 |   |
|                                                                               |       |                                        |       |   |   |   |   |
| Expenses:                                                                          |       |                                        |       |   |   |   |   |
| Selling and operating                                                              |       | 131,659                                     |       | 142,401 |   | 144,768 |   |
| Corporate, general and administration                                              |       | 13,225                                      |       | 13,059 |   | 13,157 |   |
| Other general income and expense                                                   |       | —                                      |       | 82,928 |   | — |   |
| Total expenses                                                                     |       | 144,884                                     |       | 238,388 |   | 157,925 |   |
|                                                                               |       |                                        |       |   |   |   |   |
| Income (loss) from operations                                                      |       | (781                                        | )          | (89,143 | ) | 10,453 |   |
|                                                                               |       |                                        |       |   |   |   |   |
| Gain from issuance of subsidiary stock                                             |       | —                                      |       | 32,800 |   | — |   |
| Interest and other income (expense)                                                |       | (1,524                                      | )          | 1,216 |   | 4,148 |   |
|                                                                               |       |                                        |       |   |   |   |   |
| Income (loss) before income taxes and noncontrolling  interest                     |       | (2,305                                      | )          | (55,127 | ) | 14,601 |   |
|                                                                               |       |                                        |       |   |   |   |   |
| Income tax expense (benefit)                                                       |       | (2,088                                      | )          | (7,542 | ) | 5,767 |   |
|                                                                               |       |                                        |       |   |   |   |   |
| Net income (loss)                                                                  |       | (217                                        | )          | (47,585 | ) | 8,834 |   |
|                                                                               |       |                                        |       |   |   |   |   |
| Net (income) loss attributable to noncontrolling  interest                         |       | 513                                         |       | 11,962 |   | (310 | ) |
|                                                                               |       |                                        |       |   |   |   |   |
| Net income (loss) attributable to Gaiam, Inc.                                 |       | $                                           | 296        |   | $ | (35,623 | ) | $ | 8,524 |   |
|                                                                               |       |                                        |       |   |   |   |   |
| Net income (loss) per share attributable to  Gaiam, Inc. common shareholders: |       |                                        |       |   |   |   |   |
| Basic                                                                              |       | $                                           | 0.01       |   | $ | (1.46 | ) | $ | 0.34 |   |
| Diluted                                                                            |       | $                                           | 0.01       |   | $ | (1.46 | ) | $ | 0.34 |   |
|                                                                               |       |                                        |       |   |   |   |   |
| Weighted average shares outstanding:                                               |       |                                        |       |   |   |   |   |
| Basic                                                                              |       | 23,306                                      |       | 24,452 |   | 24,962 |   |
| Diluted                                                                            |       | 23,378                                      |       | 24,452 |   | 25,214 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

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**GAIAM,INC.**

**Consolidated statement of changes in equity**

 
| ** **                                                                                        | ** ** | ** ** | ** ** | ** **         | ** ** | **Gaiam, Inc. Shareholders** | ** ** | ** **        | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------|------------|--------------------|------------|----------------------------------------|------------|-------------------|------------|
|                                                                                              |       |       |       |               |       | **Retained**                           |       | **Accumulated**   |       | ** ** |   |   |   |   |   |   |   |
| ** **                                                                                        | ** ** | ** ** | ** ** | ** **         | ** ** | **Earnings**                           | ** ** | **Other**         | ** ** | **Common** | ** ** | **Common** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                        | ** ** | ** ** | ** ** | **Comprehensive**  | ** ** | **(Accumulated**                       | ** ** | **Comprehensive** | ** ** | **Stock** | ** ** | **Stock** | ** ** | **Paid-in** | ** ** | **Noncontrolling** | ** ** |
| **(in thousands, except shares)**                                                                 | ** ** | **Total**  | ** ** | **Income  (Loss)** | ** ** | **Deficit)**                           | ** ** | **Income**        | ** ** | **Amount** | ** ** | **Shares** | ** ** | **Capital** | ** ** | **Interest** | ** ** |
|                                                                                              |       |       |       |               |       |                                   |       |              |       |   |   | ** ** |   |   |   |   |   |
| Balance at December 31, 2006                                                                 |       | $          | 224,268    |               | $          | —                                 |       | $                 | 16,824     |   | $ | 873 |   | $ | 3 |   | 27,149,936 |   | $ | 200,906 |   | $ | 5,662 |   |
|                                                                                              |       |       |       |               |       |                                   |       |              |       |   |   |   |   |   |   |   |   |
| Issuance of Gaiam, Inc. common stock in  conjunction with acquisitions and compensation      |       | 6,047      |       | —             |       | —                                 |       | —            |       | — |   | 303,695 |   | 6,047 |   | — |   |
| Issuance of subsidiary common stock in conjunction  with acquisitions                             |       | 101        |       | —             |       | —                                 |       | —            |       | — |   | — |   | — |   | 101 |   |
| Repurchase of stock                                                                               |       | (32,907    | )          | —             |       | —                                 |       | —            |       | — |   | (2,500,000 | ) | (32,907 | ) | — |   |
| Comprehensive income:                                                                             |       |       |       |               |       |                                   |       |              |       |   |   |   |   |   |   |   |   |
| Net income                                                                                        |       | 8,834      |       | 8,834              |       | 8,524                                  |       | —            |       | — |   | — |   | — |   | 310 |   |
| Foreign currency translation adjustment, net of income  taxes of $77                              |       | 118        |       | 118                |       | —                                 |       | 118               |       | — |   | — |   | — |   | — |   |
| Comprehensive income                                                                              |       | 8,952      |       | 8,952              |       | —                                 |       | —            |       | — |   | — |   | — |   | — |   |
| Balance at December 31, 2007                                                                 |       | 206,461    |       |               |       | 25,348                                 |       | 991               |       | 3 |   | 24,953,631 |   | 174,046 |   | 6,073 |   |
|                                                                                              |       |       |       |               |       |                                   |       |              |       |   |   |   |   |   |   |   |   |
| Issuance of Gaiam, Inc. common stock in conjunction  with acquisitions and compensation      |       | 7,965      |       | —             |       | —                                 |       | —            |       | — |   | 359,855 |   | 7,965 |   | — |   |
| Issuance of subsidiary common stock in conjunction  with acquisitions and compensation            |       | 21,985     |       | —             |       | —                                 |       | —            |       | — |   | — |   | 918 |   | 21,067 |   |
| Repurchase of stock                                                                               |       | (19,277    | )          | —             |       | —                                 |       | —            |       | — |   | (1,372,285 | ) | (19,277 | ) | — |   |
| Comprehensive loss:                                                                               |       |       |       |               |       |                                   |       |              |       |   |   |   |   |   |   |   |   |
| Net loss                                                                                          |       | (47,585    | )          | (47,585            | )          | (35,623                                | )          | —            |       | — |   | — |   | — |   | (11,962 | ) |
| Foreign currency translation adjustment, net of  reclassification and related tax benefit of $590 |       | (903       | )          | (903               | )          | —                                 |       | (903              | )          | — |   | — |   | — |   | — |   |
| Comprehensive loss                                                                                |       | (48,488    | )          | (48,488            | )          | —                                 |       | —            |       | — |   | — |   | — |   | — |   |
| Balance at December 31, 2008                                                                 |       | 168,646    |       | —             |       | (10,275                                | )          | 88                |       | 3 |   | 23,941,201 |   | 163,652 |   | 15,178 |   |
|                                                                                              |       |       |       |               |       |                                   |       |              |       |   |   |   |   |   |   |   |   |
| Issuance of Gaiam, Inc. common stock in conjunction  with acquisitions and compensation           |       | 1,507      |       | —             |       | —                                 |       | —            |       | — |   | 112,011 |   | 1,507 |   | — |   |
| Issuance of subsidiary common stock in conjunction  with acquisitions and compensation            |       | 962        |       | —             |       | —                                 |       | —            |       | — |   | — |   | 183 |   | 779 |   |
| Repurchase of stock                                                                               |       | (2,810     | )          | —             |       | —                                 |       | —            |       | — |   | (932,000 | ) | (2,810 | ) | — |   |
| Subsidiary dividends to noncontrolling interests                                                  |       | (194       | )          | —             |       | —                                 |       | —            |       | — |   | — |   | — |   | (194 | ) |
| Comprehensive loss:                                                                               |       |       |       |               |       |                                   |       |              |       |   |   |   |   |   |   |   |   |
| Net income (loss)                                                                                 |       | (217       | )          | (217               | )          | 296                                    |       | —            |       | — |   | — |   | — |   | (513 | ) |
| Foreign currency translation                                                                      |       | (3         | )          | (3                 | )          | —                                 |       | (3                | )          | — |   | — |   | — |   | — |   |
| Comprehensive loss                                                                                |       | (220       | )          | $                  | (220       | )                                      | —     |              | —     |   | — |   | — |   | — |   | — |   |
| Balance at December 31, 2009                                                                 |       | $          | 167,891    |               |       |                                   | $          | (9,979            | )          | $ | 85 |   | $ | 3 |   | 23,121,212 |   | $ | 162,532 |   | $ | 15,250 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

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**GAIAM,INC.**

**Consolidated statements of cash flows**

 
| ** **                                                                                               | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **(in thousands)**                                                                                  | ** ** | **2009**                                    | ** ** | **2008** | ** ** | **2007** | ** ** |
| Operating activities:                                                                                    |       |                                        |       |   |   |   |   |
| Net income (loss)                                                                                        |       | $                                           | (217       | ) | $ | (47,585 | ) | $ | 8,834 |   |
| Adjustments to reconcile net income (loss) to net  cash provided by (used in) operating activities: |       |                                        |       |   |   |   |   |
| Depreciation                                                                                             |       | 3,255                                       |       | 3,110 |   | 2,120 |   |
| Amortization                                                                                             |       | 4,429                                       |       | 5,525 |   | 10,169 |   |
| Share-based compensation expense                                                                         |       | 1,879                                       |       | 1,506 |   | 1,024 |   |
| Net loss (gain) on investments and property                                                              |       | 190                                         |       | (579 | ) | 265 |   |
| Noncash gain from equity method investment                                                               |       | —                                      |       | — |   | (127 | ) |
| Deferred and stock option income tax benefit                                                             |       | (400                                        | )          | (15,358 | ) | (701 | ) |
| 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                                                                                 |       | (12,588                                     | )          | (922 | ) | (3,330 | ) |
| Inventory, net                                                                                           |       | 13,910                                      |       | (3,629 | ) | (5,546 | ) |
| Deferred advertising costs                                                                               |       | (178                                        | )          | (1,564 | ) | (1,230 | ) |
| Income tax receivable                                                                                    |       | 8,260                                       |       | (7,751 | ) | — |   |
| Other assets                                                                                             |       | (1,339                                      | )          | (5,240 | ) | (771 | ) |
| Accounts payable                                                                                         |       | 6,757                                       |       | (856 | ) | 345 |   |
| Accrued liabilities                                                                                      |       | 4,176                                       |       | (6,954 | ) | 2,393 |   |
| Net cash provided by (used in) operating activities                                                      |       | 28,134                                      |       | (20,414 | )(a) | 13,445 |   |
|                                                                                                     |       |                                        |       |   |   |   |   |
| Investing activities:                                                                                    |       |                                        |       |   |   |   |   |
| Purchase of property, equipment and media rights                                                         |       | (7,536                                      | )          | (28,585 | ) | (9,536 | ) |
| Purchase of acquisitions, investments, and note,  net of cash acquired                                   |       | (1,500                                      | )          | (13,892 | ) | (17,122 | ) |
| Disposition of investments, net                                                                          |       | —                                      |       | (1,381 | ) | 3,871 |   |
| Net cash used in investing activities                                                                    |       | (9,036                                      | )          | (43,858 | ) | (22,787 | ) |
|                                                                                                     |       |                                        |       |   |   |   |   |
| Financing activities:                                                                                    |       |                                        |       |   |   |   |   |
| Proceeds from Real Goods stock issuances, net                                                            |       | —                                      |       | 48,154 |   | — |   |
| Repurchase of Class A common stock, including  related costs                                        |       | (2,810                                      | )          | (18,411 | ) | (32,907 | ) |
| Subsidiary’s payment of dividends to noncontrolling  interest                                       |       | (194                                        | )          | — |   | — |   |
| Net proceeds from issuance of common stock and tax  benefits from option exercises                       |       | 269                                         |       | 1,556 |   | 3,475 |   |
| Net payments on acquired business’ line of credit                                                   |       | —                                      |       | (1,303 | ) | — |   |
| Net cash (used in) provided by financing activities                                                      |       | (2,735                                      | )          | 29,996 |   | (29,432 | ) |
|                                                                                                     |       |                                        |       |   |   |   |   |
| Effects of exchange rates on cash and cash  equivalents                                                  |       | (3                                          | )          | (17 | ) | 156 |   |
|                                                                                                     |       |                                        |       |   |   |   |   |
| Net increase (decrease) in cash and cash  equivalents                                                    |       | 16,360                                      |       | (34,293 | ) | (38,618 | ) |
| Cash and cash equivalents at beginning of year                                                           |       | 31,965                                      |       | 66,258 |   | 104,876 |   |
| Cash and cash equivalents at end of year                                                                 |       | $                                           | 48,325     |   | $ | 31,965 |   | $ | 66,258 |   |
|                                                                                                     |       |                                        |       |   |   |   |   |
| **Supplemental cash flow  information:**                                                                 |       |                                        |       |   |   |   |   |
| Interest paid                                                                                            |       | $                                           | 57         |   | $ | 41 |   | $ | 174 |   |
| Income taxes paid                                                                                        |       | 985                                         |       | 3,006 |   | 6,746 |   |
| Liabilities assumed from acquisitions                                                                    |       | —                                      |       | 10,624 |   | 4,683 |   |
| Common stock issued for acquisitions                                                                     |       | 796                                         |       | 16,187 |   | 1,504 |   |

 

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(a)         Cashused in 2008’s operating activities includes $19.0 million that is attributableto $8.4 million of income tax benefits that we were 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. The remaining purchase price for theseacquisitions is shown in investing activities.

 

See accompanying notes to consolidatedfinancial statements.

 

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**Notes to consolidated financial statements**

 

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

 

Referencesin this report to “we”, “us”, “our” or “Gaiam” refer to Gaiam, Inc. andits consolidated subsidiaries, unless we indicate otherwise. We are a lifestylemedia company providing a broad selection of information, media, products andservices to customers who value personal development, wellness, ecologicallifestyles, and responsible media. We were incorporated under the laws of theState of Colorado on July 7, 1988.

 

Wehave prepared the accompanying consolidated financial statements in accordancewith accounting principles generally accepted in the United States, or GAAP,and they include our accounts and those of our subsidiaries.  Intercompany transactions and balances havebeen eliminated.

 

**2. Significant Accounting Policies**

 

No changes were made toour significant accounting policies during the year ended December 31,2009, except for the adoption of the Financial Accounting Standards Board, orFASB, Accounting Standards Codification, which does not change any existingaccounting principles, and new pronouncements related to business combinations,fair value measurements, noncontrolling interests in consolidated financialstatements, and disclosures about derivatives and hedging activities.  The business combination changes requirean acquirer to recognize all assets acquired and liabilities assumed in atransaction at the acquisition-date fair value with limited exceptions, andchanges the accounting treatment for certain specific items.  The fair value measurement guidance definesfair value, establishes a framework for measuring fair value in GAAP, andexpands disclosures about fair value measurements.  The noncontrolling interests guidanceestablishes new accounting and reporting standards for a noncontrollinginterest in a subsidiary and for the deconsolidation of a subsidiary anddirects that gains from the issuance of subsidiary stock must be recognized in additionalpaid-in capital.  The derivativesguidance enhances required disclosures regarding derivatives and hedgingactivities.  We have applied thenoncontrolling interests guidance by reclassifying amounts formerly referred toas minority interests in our consolidated balance sheets and consolidatedstatements of operations.  Aside fromthis presentation change, the implementation of these pronouncements did nothave a material impact on our consolidated financial statements for the yearended December 31, 2009.

 

Additionally, in May 2009,the FASB issued subsequent eventsguidance, which defines further disclosure requirements for events which occurafter the balance sheet date but before financial statements are issued. This was effective for us beginning on April 1, 2009.  We haveevaluated events subsequent to December 31, 2009 and concluded that otherthan the event disclosed in Note 15. Subsequent Events, no material event hasoccurred which either would impact the results reflected in this report or ourresults going forward.

 

*Cash and Cash Equivalents*

 

Cashand cash equivalents include demand deposit accounts with financialinstitutions and highly liquid investments, which mature within three months ofdate of purchase. The fair value of the cash and cash equivalents approximatestheir carrying value due to their short maturities.

 

*Concentration of Risk and Allowances for Doubtful Accounts*

 

Wehave potential concentration of credit risk in our accounts receivable becausetwo of our top customers, Target and Walmart, accounted for 39.3% of accountsreceivable, net as of December 31, 2009. These customers are major retailers in the United States to which wemade significant sales during the year end holiday season.

 

Wemaintain allowances for doubtful accounts for estimated losses resulting fromthe inability of our customers to make required payments. We make estimates ofthe collectibility of our accounts receivable by analyzing historical baddebts, specific customer creditworthiness, and current economic trends. Theallowance for doubtful accounts was $1.6 million and $2.7 million as of December 31,2009 and 2008, respectively. If the financial condition of our customers wereto deteriorate such that their ability to make payments to us was impaired,additional allowances could be required.

 

*ProductReturns*

 

Werecord allowances for product returns to be received in future periods at thetime we recognize the original sale. We base the amounts of the returnsallowances upon historical experience and future expectations.

 

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*Inventory*

 

Inventoryconsists primarily of finished goods held for sale and is stated at the lowerof cost (first-in, first-out method) or market. We identify the inventory itemsto be written down for obsolescence based on the item’s current sales statusand condition. We write down discontinued or slow moving inventories based onan estimate of the markdown to retail price needed to sell through our currentstock level of the inventories. As of December 31, 2009 and 2008, weestimated obsolete or slow-moving inventory to be $2.0 million and $1.6million, respectively.

 

*Advertising Costs*

 

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, and then we amortizethese costs over succeeding periods on the basis of estimated directrelationship sales. We amortize our seasonal catalogs within six months.Forecasted sales are the principal factor we use in estimating the amortizationrate. We expense other advertising and promotional costs as incurred. Amountsrecorded as advertising expense were $40.8 million, $43.3 million, and $39.9million for the years ended December 31, 2009, 2008, and 2007,respectively, and we include these amounts in selling and operating expense.

 

Werecord sales discounts or other sales incentives as a reduction to revenues. Weidentify and record as part of selling and operating expense any cooperativeadvertising expenses we pay, which are for advertisements meeting the separablebenefit and fair value tests, as part of selling and operating expense.

 

*Property and Equipment*

 

Westate property and equipment at cost less accumulated depreciation andamortization. We include in property and equipment the cost of internal-usesoftware, including software used in connection with our websites. We expenseall costs related to the development of internal-use software other than thoseincurred during the application development stage. We capitalize the costs weincur during the application development stage and amortize them over theestimated useful life of the software, which is typically three years. Wecompute depreciation of property and equipment on the straight-line method overestimated useful lives, generally three to forty-five years. We amortizeleasehold and building improvements over the shorter of the estimated usefullives of the assets or the remaining term of the lease or remaining life of thebuilding, respectively.

 

*Investments*

 

Weaccount for investments in limited liability companies in which we have theability to exercise significant influence or control, or in which we hold afive percent or more membership interest, under the equity method. We accountfor investments in corporations in which we have the ability to exercise significantinfluence or control, or in which we hold a twenty percent or more ownership,under the equity method. Under the equity method, we record our share of theincome or losses of the investment by increasing or decreasing the carryingvalue of our investment and recording the income or expense through theconsolidated statement of operations. Under the cost method of accounting, wecarry 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*

 

Weaccount for the attainment of a controlling interest in a business using theacquisition method. In determining the estimated fair value of certain acquiredassets and liabilities, we make assumptions based upon many different factors,such as historical and other relevant information and analyses performed byindependent parties. Assumptions may be incomplete, and unanticipated eventsand circumstances may occur that could affect the validity of such assumptions,estimates, or actual results.

 

*Media Library*

 

Ourmedia library asset represents the estimated fair value of our library ofproduced videos acquired through business combinations, the purchase price ofmedia rights to both video and audio titles, and the capitalized cost toproduce media products, all of which we market to retailers and our directcustomers. We have presented the media library net of accumulated amortizationof approximately $22.0 million and $19.1 million at December 31, 2009 and2008, respectively, which is being amortized over the estimated useful life ofthe titles, which range from five to fifteen years. Additionally, during 2010we anticipate incurring approximately $11.1 million in participation expenses,primarily royalties, related to acquired and produced media content.

 

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Medialibrary production costs consist of costs incurred to produce the mediacontent, net of accumulated amortization. We recognize these costs, as well asparticipation costs, as expenses on an individual title basis equal to theratio that the current year’s gross revenues bear to our estimate of totalultimate gross revenues from all sources to be earned over a maximum seven-yearperiod. We state capitalized production costs at the lower of unamortized costor estimated fair value on an individual title basis. We continually reviewrevenue forecasts, based primarily on historical sales statistics, and revisethese forecasts when warranted by changing conditions. When estimates of totalrevenues and other events or changes in circumstances indicate that a title 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 title’s estimated fair value.

 

During2009, capitalized production cost for released titles was approximately $3.0million, and for those titles not yet released was approximately $1.4 million.Additionally, as of December 31, 2009, we estimate that approximately $2.3million or 28.6% of the unamortized costs for released titles will be amortizedduring 2010, and approximately 79.7% of the unamortized costs for released titleswill be amortized within the next three years. Accumulated amortization forproduced media content at December 31, 2009 and 2008 was approximately$12.0 million and $9.8 million, respectively. Amortization expense for producedmedia content for the years ended December 31, 2009, 2008 and 2007 was$2.2 million, $2.0 million and $2.9 million, respectively.

 

Ouracquired media rights have $4.3 million of remaining unamortized costs as of December 31,2009 that will be amortized on a straight-line basis over 12 to 84 months.Amortization expense for acquired and purchased media rights for the yearsended December 31, 2009, 2008, and 2007 was $0.9 million, $3.1 million,and $4.7 million, respectively. Based upon the acquired media titles and rightsat December 31, 2009, we expect the annual amortization expense for thenext five years to approximate $0.9 million per annum.

 

Basedon total media library costs at December 31, 2009 and assuming nosubsequent impairment of the underlying assets or a material increase in thevideo productions or media acquired, we expect the amortization expense for thenext five years to be approximately $2.5 million per annum.

 

*Goodwill and Other Intangibles*

 

Goodwillrepresents the excess of the purchase consideration over the estimated fairvalue of assets acquired less liabilities assumed in a business acquisition.Our other intangibles mainly consist of customer and marketing related assets.We review goodwill for impairment annually or more frequently if impairmentindicators arise on a reporting unit level. We compare the estimated fair valueof a reporting unit with its carrying amount, including goodwill. If theestimated fair value of a reporting unit exceeds its carrying amount, weconsider the goodwill of the reporting unit not impaired. If the carryingamount of a reporting unit exceeds its estimated fair value, we perform thegoodwill impairment test to measure the amount of impairment loss. We use atraditional present value method for the purposes of testing for potentialimpairment. The process of evaluating the potential impairment of goodwill ishighly subjective and requires significant judgment at many points during theanalysis. Application of alternative assumptions and definitions could yieldsignificantly different results.

 

Wehave allocated the entire goodwill balance of $24.2 million at December 31,2009 to our three segments: direct to consumer, business and solar.  The following table sets forth the changes ingoodwill for the period December 31, 2007 through December 31, 2009by segment.

 
| **(in thousands)**           | ** ** | **Direct to  Consumer  Segment** | ** ** | **Business  Segment** | ** ** | **Solar  Segment** | ** ** | **Total**  | ** ** |
|-----------------------------------|------------|---------------------------------------|------------|-----------------------|------------|--------------------|------------|------------|------------|
| ** **                        | ** ** | ** **                            | ** ** | ** **            | ** ** | ** **         | ** ** | ** ** | ** ** |
| 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     |       |
| Acquisitions                      |       | —                                |       | 254                   |       | 732                |       | 986        |       |
| Balance at December 31, 2009 |       | $                                     | 2,702      |                  | $          | 20,732             |       | $          | 732        |   | $ | 24,166 |   |

 

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Thefollowing table represents our other intangibles subject to amortization bymajor class as of December 31, 2009 and 2008.

 
| ** **               | ** ** | **As of December 31,** | ** ** |
|--------------------------|------------|---------------------------------------|------------|
| **(in thousands)**  | ** ** | **2009**                              | ** ** | **2008** | ** ** |
|                     |       |                                  |       |   |   |
| Customer related:        |       |                                  |       |   |   |
| Gross carrying amount    |       | $                                     | 515        |   | $ | 250 |   |
| Accumulated amortization |       | (139                                  | )          | (52 | ) |
|                     |       | $                                     | 376        |   | $ | 198 |   |
| Marketing related:       |       |                                  |       |   |   |
| Gross carrying amount    |       | $                                     | 552        |   | $ | 817 |   |
| Accumulated amortization |       | (276                                  | )          | (135 | ) |
|                     |       | $                                     | 276        |   | $ | 682 |   |

 

Theamortization periods range from 36 to 84 months. Amortization expense for theyears ended December 31, 2009 and 2008 was $0.2 million and $1.1 million,respectively. Based on the December 31, 2009 balance of other intangibles,we estimate amortization expense to be $0.2 million each year for 2010 and2011, $0.1 million for 2012, $45,000 for 2013 and $38,000 each year for 2014and 2015.

 

*Long-LivedAssets*

 

Weevaluate the carrying value of long-lived assets held and used, other thangoodwill, when events or changes in circumstances indicate the carrying valuemay not be recoverable. We consider the carrying value of a long-lived assetimpaired when the total projected undiscounted cash flows from such asset areseparately identifiable and are less than the carrying value. We recognize aloss based on the amount by which the carrying value exceeds the estimated fairvalue of the long-lived asset. We determine the estimated fair value primarilyusing the projected cash flows from the asset discounted at a rate commensuratewith the risk involved.

 

*IncomeTaxes*

 

We provide for income taxes pursuant to theliability method. The liability method requires recognition of deferred incometaxes based on temporary differences between financial reporting and income taxbases of assets and liabilities, using current enacted income tax rates andregulations. These differences will result in taxable income or deductions infuture years when the reported amount of the asset or liability is recovered orsettled, respectively. Considerable judgment is required in determining whenthese events may occur and whether recovery of an asset, including theutilization of a net operating loss or other carryforward prior to itsexpiration, is more likely than not.

 

*Revenues*

 

Revenueconsists of sales of products, media licensing, and solar energy integrationcontract fees. We recognize revenue from the sale of products and the licensingof media when the following four basic criteria are met: (1) persuasiveevidence of an arrangement exists; (2) delivery has occurred or servicesrendered; (3) the seller’s price to the buyer is fixed and determinable;and (4) collectibility is reasonably assured. We recognize revenue fromfixed price contracts using either the completed contract orpercentage-of-completion method, based on the energy size of the solar energyintegration project. We had six and two solar energy integration contractsaccounted for under the percentage-of-completion method as of December 31,2009 and 2008, respectively, and none for 2007. We present revenues net oftaxes collected from customers. We recognize amounts billed to customers forpostage and handling as revenue at the same time we recognize the revenuesarising from the product sale. We include postage and handling costs, whichwere approximately $12.9 million for 2009, $13.1 million for 2008, and $12.0million for 2007, in selling and operating expense along with other fulfillmentcosts.

 

*Share-Based Compensation*

 

Asof January 1, 2006, we adopted the FASB’s guidance for stock-basedcompensation, which requires companies to recognize compensation cost forshare-based awards based on the estimated fair value of the award on date ofgrant. We measure compensation cost at the grant date based on the estimatedfair value of the award and recognize compensation cost upon the probableattainment of a specified performance condition or over a service period.We use the Black-Scholes option valuation model to estimate the fairvalue of the award. In estimating this fair value, we use certainassumptions, as disclosed in Note 12, Share-Based Compensation, consistingof the expected life of the option, risk-free interest rate, dividend yield,and volatility. The use of a different estimate for any one of these componentscould have a material impact on the amount of calculated compensation expense.We elected the modified-prospective method, under which prior periods are notrevised for comparative purposes. The valuation provisions of the FASB’sguidance apply to new grants and to grants that were outstanding as of theeffective date and are subsequently modified. We

 

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willrecognize estimated compensation for grants that were outstanding as of theeffective date over the remaining service periods using the compensation costestimated for pro forma disclosures.

 

*Use ofEstimates and Reclassifications*

 

Thepreparation of financial statements in accordance with GAAP requires us to makeestimates and assumptions that affect the amounts reported in the accompanyingfinancial statements and disclosures. Although we base these estimates on ourbest knowledge of current events and actions that we may undertake in thefuture, actual results may be different from the estimates. We have madecertain reclassifications to prior period amounts to conform to the currentperiod presentations.

 

*Defined Contribution Plan*

 

Wehave adopted a defined contribution retirement plan under Section 401(k) ofthe Internal Revenue Code, which covers substantially all employees. Eligibleemployees may contribute amounts to the plan, via payroll withholding, subjectto certain limitations. The 401(k) plan permits, but does not require, usto make additional matching contributions to the 401(k) plan on behalf ofall participants in the 401(k) plan. Effective June 1, 2007, we beganmatching 50% of an employee’s contribution, up to an annual maximum matchingcontribution of $1,500, and during the year ended December 31, 2009, wemade matching contributions of $0.2 million to the 401(k) plan.

 

*Foreign Currency Translation*

 

Ourforeign subsidiaries use their local currency as their functional currency. Wetranslate assets and liabilities into U.S. dollars at exchange rates in effectat the balance sheet date. We translate income and expense accounts at theaverage monthly exchange rates during the year. We record resulting translationadjustments, net of income taxes, as a separate component of accumulated othercomprehensive income.

 

*Comprehensive Income (Loss)*

 

Our comprehensive income (loss) iscomprised of our net income (loss), noncontrolling interest net income (loss),and foreign currency translation adjustments, net of income taxes. Thedisposition of our investment in our UK operations during the year ended December 31,2008 resulted in a net loss which lowered our net income.  The foreign currency translation amountattributable to that entity and accumulated in the translation adjustmentcomponent of equity was removed from the other comprehensive income componentof equity and reported as part of the loss on the sale of the investment.

 

*Net Income (Loss) Per Share Attributable To Gaiam, Inc. CommonShareholders*

 

Basicnet income (loss) per share attributable to Gaiam, Inc. commonshareholders excludes any dilutive effects of options. We compute basic netincome (loss) per share attributable to Gaiam, Inc. common shareholdersusing the weighted average number of common shares outstanding during theperiod. We compute diluted net income (loss) per share attributable to Gaiam, Inc.common shareholders using the weighted average number of common and commonstock equivalent shares outstanding during the period. We excluded commonequivalent shares of 886,000, 717,000 and 186,000 from the computation ofdiluted net income (loss) per share attributable to Gaiam, Inc. commonshareholders for 2009, 2008 and 2007, respectively, because their effect wasantidilutive.

 

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Thefollowing table sets forth the computation of basic and diluted net income(loss) per share attributable to Gaiam, Inc. common shareholders:

 
| ** **                                                                                                          | ** ** | **For the Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| **(in thousands, except per share data)**                                                  | ** ** | **2009**                                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                                                          | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Numerator for basic and diluted net income (loss)  per share attributable to Gaiam, Inc. common shareholders   |       | $                                                             | 296        |   | $ | (35,623 | ) | $ | 8,524 |   |
|                                                                                                                |       |                                                          |       |   |   |   |   |
| Denominator:                                                                                                        |       |                                                          |       |   |   |   |   |
| Weighted average shares for basic net income  (loss) per share attributable to Gaiam, Inc. common shareholders |       | 23,306                                                        |       | 24,452 |   | 24,962 |   |
|                                                                                                                |       |                                                          |       |   |   |   |   |
| Effect of dilutive securities:                                                                                      |       |                                                          |       |   |   |   |   |
| Weighted average of common stock and stock options                                                                  |       | 72                                                            |       | — |   | 252 |   |
|                                                                                                                |       |                                                          |       |   |   |   |   |
| Denominators for diluted net income (loss) per  share attributable to Gaiam, Inc. common shareholders          |       | 23,378                                                        |       | 24,452 |   | 25,214 |   |
|                                                                                                                |       |                                                          |       |   |   |   |   |
| Net income (loss) per share attributable to  Gaiam, Inc. common shareholders - basic                           |       | $                                                             | 0.01       |   | $ | (1.46 | ) | $ | 0.34 |   |
| Net income (loss) per share attributable to  Gaiam, Inc. common shareholders - diluted                         |       | $                                                             | 0.01       |   | $ | (1.46 | ) | $ | 0.34 |   |

 

**3.****                  ****NotesReceivable and Other Assets**

 

Asof December 31, 2009 and 2008, our notes receivable and other assetsconsisted of $2.7 million in notes and $0.3 million in investments, and $0.2million in other long-term assets.

 

**4.      Mergersand Acquisitions**

 

During 2009, we issued25,000 shares of our Class A common stock worth $64,000 and paid $1.5million as contingent consideration for two of our 2007 business acquisitions.For purchase price true-up and contingent consideration related to one of its2008 business acquisitions, Real Goods issued 363,504 shares its Class Acommon stock with an estimated fair value of $0.7 million and allocated theadditional consideration to goodwill, which is not expected to be taxdeductible. Real Goods used a period beginning two days beforeand two days after the date that the consideration became payable indetermining the estimated fair value of the securities issued.

 

Duringthe fourth quarter 2009, we closed one of our insignificant, unprofitabledirect to consumer businesses, resulting in a pre-tax deconsolidation loss of$1.8 million, which is reported in our interest and other income (expense), an incometax benefit of $1.6 million, and a net loss of $0.2 million to our consolidatedstatement of operations for the year ended December 31, 2009.

 

During2008, we acquired businesses in all of our reporting segments.  The acquisition in our direct to consumersegment strengthened our online community and expanded our offline distributionthrough print media.  Our businesssegment acquisition 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.

 

Duringthe first quarter of 2008, Real Goods’ subsidiary, Real Goods Carlson, acquiredcertain assets of Carlson Solar, Inc., and we acquired 100% ownershipinterest of SPRI Products and the remaining 49.9% ownership interest ofConscious Enlightenment.  On May 23,2008, Real Goods exchanged 280,000 shares of its Class A common stock forReal Goods’ current Chief Financial Officer’s 11.6% ownership in Real GoodsCarlson, Inc.  Consideration paidfor the minority interest of Real Goods Carlson was the same relative fairvalue as the equity received.  The assetsacquired from Carlson Solar were determined to have all inputs and processesnecessary for the transferred assets to continue to conduct normal operationsafter acquisition; accordingly, the purchase was treated as a businesscombination.  Also during 2008, RealGoods 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 

 

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of$14.2 million in cash, $5.1 million in our Class A common stock, $11.1million in Real Goods Class A common stock, and $2.2 million in assumedliabilities. We used a period beginning two days before and two days after thedate that the terms of the acquisition were agreed and announced in determiningthe estimated fair value of the securities issued in connection with thesebusiness acquisitions.

 

Asadditional consideration for Carlson Solar, Real Goods granted to the sellerswarrants to purchase 30,000 shares of Real Goods’ Class A common stock atan exercise price of $3.20 per share. The warrants commenced vesting upon the initial public offering of RealGoods’ Class A common stock.  Inaddition, the Regrid Power acquisition had purchase price true-up andcontingent share consideration up to a maximum of 800,000 shares of Real Goods’Class A common stock, based on Regrid Power’s revenue and earningsperformance over its first 12 months following acquisition. Real Goods issuedshares related to this purchase price true-up and contingency during 2009.

 

Forthese acquisitions, we preliminarily recognized $20.3 million, $7.0 million,and $0.9 million of solar, business, and direct to consumer segment goodwill,respectively, of which $2.5 million is expected to be deductible for taxpurposes, and $1.6 million of intangibles subject to amortization (50 monthweighted-average useful life).  Themarketing related intangibles were $1.3 million (51 month weighted-averageuseful life) and the customer related intangibles were $0.3 million (45 monthweighted-average useful life).

 

Alsoduring 2008, we vested 50% of the contingent consideration warrants related toReal Goods’ Marin Solar and Carlson Solar acquisitions as a result of theconsummation of Real Goods’ initial public offering on May 13, 2008, for atotal additional cost of $0.2 million, which we allocated to the solar segmentgoodwill.

 

In2008, we sold our investment in the non-LOHAS business publications that wereacquired as part of a previous acquisition and sold our 51% ownership interestin Gaiam Limited, our UK subsidiary.  Wereceived 50,000 shares of Gaiam Class A common stock, valued at $0.9million, as part of the consideration for our UK subsidiary.  We also closed one of our unprofitable directto 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 (loss) before income taxes and  noncontrolling interest                     |       | $                                | (50,795    | ) | $ | 16,617 |   |
| Net income (loss) attributable to Gaiam, Inc.                                      |       | $                                | (33,675    | ) | $ | 9,663 |   |
|                                                                               |       |                             |       |   |   |
| Net income (loss) per share attributable to  Gaiam, Inc. common shareholders: |       |                             |       |   |   |
| Basic                                                                              |       | $                                | (1.38      | ) | $ | 0.38 |   |
| Diluted                                                                            |       | $                                | (1.38      | ) | $ | 0.38 |   |

 

----

(a)         Internationalrevenues, excluding our disposed UK operation, were $2.9 million during 2008and $25.3 million during 2007.  Thissupplemental pro forma information has not been adjusted for our change in thefirst quarter of 2008 from traditional product sales to licensing arrangementsfor our international operations.

 

Weinclude results from operations of acquired companies in our consolidatedfinancial statements from their respective effective acquisition dates.

 

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**5.             Property and Equipment**

 

Propertyand equipment, stated at lower of cost or estimated fair value, consists of thefollowing as of December 31:

 
| **(in thousands)**                      | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
| Land                                         |       | $        | 8,533      |     | $          | 8,533 |   |
| Buildings                                    |       | 16,055   |       | 13,875   |       |
| Furniture, fixtures and equipment            |       | 6,182    |       | 6,112    |       |
| Leasehold improvements                       |       | 1,690    |       | 1,668    |       |
| Website development costs and other software |       | 7,674    |       | 6,656    |       |
| Studio, computer and telephone equipment     |       | 8,007    |       | 7,655    |       |
| Vehicles                                     |       | 905      |       | 731      |       |
| Warehouse and distribution equipment         |       | 1,406    |       | 1,406    |       |
|                                         |       | 50,452   |       | 46,636   |       |
| Accumulated depreciation and amortization    |       | (22,235  | )          | (19,255  | )          |
|                                         |       | $        | 28,217     |     | $          | 27,381 |   |

 

**6.             Asset Impairment and Other GeneralExpense and Income**

 

During 2008, as aresult of changes in the retail business climate, we impaired $44.4 million of goodwill,$27.1 million of media libraries, $1.5 million of other intangibles, $2.2million of property and equipment (primarily web site development), $1.5million of deferred advertising costs, and $3.3 million of other relatedassets.  The impairment of goodwill,resulting from the application of GAAP, was primarily driven by adversefinancial market conditions that reduced our market capitalization below thenet carrying value of our assets on our consolidated balance sheet as of December 31,2008.  The impairment took 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 solarsegments by $33.7 million, $19.1 million, and $27.2 million, respectively.  We estimated the fair value of eachimpaired asset category using a traditional present value technique, relyingupon various sources of information forour assumptions, such as estimated future sales, internal budgets andprojections, and judgment about existing brand potential.  Other general expense and income on ourconsolidated statement of operations for the year ended December 31, 2008included these asset impairment losses of $80.0 million, and operatingexpenses related to the consummation of Real Goods’ initial public offering andguaranteed payments that we were obligated to make, but for which we willreceive no benefit, including reduction of force costs, totaling $2.9 million.

 

**7.             Commitmentsand Contingencies**

 

Welease office and warehouse space through operating leases.  Some of the leases have renewal clauses,which range from 1 to 10 years.

 

Thefollowing schedule represents the annual future minimum payments under thesecommitments, as of December 31, 2009:

 
| **(in thousands)**      | ** ** | **Operating** | ** ** |
|------------------------------|------------|---------------|------------|
| 2010                         |       | $             | 2,314      |   |
| 2011                         |       | 1,999         |       |
| 2012                         |       | 1,872         |       |
| 2013                         |       | 1,452         |       |
| 2014                         |       | 1,042         |       |
| 2015                         |       | 254           |       |
| Total minimum lease payments |       | $             | 8,933      |   |

 

Weincurred rent expense of $3.3 million, $3.8 million and $4.2 million for theyears ended December 31, 2009, 2008 and 2007, respectively.

 

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**8.             AccruedLiabilities**

 

Accruedliabilities consist of the following as of December 31:

 
| **(in thousands)**   | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|
| Accrued compensation      |       | $        | 4,823      |     | $          | 3,815 |   |
| Accrued royalties         |       | 3,488    |       | 1,573    |       |
| Accrued distribution fees |       | 1,627    |       | —   |       |
| Other accrued liabilities |       | 1,123    |       | 1,497    |       |
|                      |       | $        | 11,061     |     | $          | 6,885 |   |

 

**9.             Line of Credit**

 

We have a revolving lineof credit agreement with a financial institution with a expiration date of June 19,2010.  We are currently in negotiationsto renew the line of credit agreement, which was recently extended pending therenewal negotiations. The credit agreement permits borrowings up to thelesser of $15 million or our borrowing base which is calculated based upon thecollateral value of our accounts receivable, inventory, and certain propertyand equipment. Borrowings under this agreement bear interest at the lower ofprime rate less 75 basis points or LIBOR plus 275 basis points. Borrowings aresecured by a pledge of certain of our assets, and the agreement containsvarious financial covenants, including those requiring compliance with certainfinancial ratios. At December 31, 2009, we had no amounts outstandingunder this agreement; however, $0.5 million was reserved for outstandingletters of credit.  We believe we havecomplied with all of the financial covenants.

 

**10.          IncomeTaxes**

 

Ourprovision for income tax expense (benefit) is comprised of the following:

 
| ** **              | ** ** | **For the Years Ended December 31,** | ** ** |
|-------------------------|------------|---------------------------------------------------------------|------------|
| **(in thousands)** | ** ** | **2009**                                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Current:                |       |                                                          |       |   |   |   |   |
| Federal                 |       | $                                                             | 308        |   | $ | (5,099 | ) | $ | 5,404 |   |
| State                   |       | 156                                                           |       | 122 |   | 1,196 |   |
| International           |       | —                                                        |       | — |   | (132 | ) |
|                    |       | 464                                                           |       | (4,977 | ) | 6,468 |   |
| Deferred:               |       |                                                          |       |   |   |   |   |
| Federal                 |       | (2,308                                                        | )          | (1,321 | ) | (624 | ) |
| State                   |       | (244                                                          | )          | (1,048 | ) | (138 | ) |
| International           |       | —                                                        |       | (196 | ) | 61 |   |
|                    |       | (2,552                                                        | )          | (2,565 | ) | (701 | ) |
|                    |       | $                                                             | (2,088     | ) | $ | (7,542 | ) | $ | 5,767 |   |

 

Variationsfrom the federal statutory rate are as follows:

 
| **(in thousands)**                                                 | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                    |       |     |       |     |       |     |       |
| Expected federal income tax expense (benefit) at  statutory rate of 34% |       | $        | (871       | )        | $          | (18,743  | )          | $ | 4,944 |   |
| Effect of permanent worthless stock and impairment  differences         |       | (967     | )          | 13,766   |       | —   |       |
| Effect of permanent other differences                                   |       | 177      |       | (139     | )          | 92       |       |
| Effect of changes in tax positions                                      |       | (259     | )          | —   |       | —   |       |
| State income tax expense (benefit), net of federal  benefit             |       | (139     | )          | (2,165   | )          | 721      |       |
| Federal tax credits                                                     |       | —   |       | (315     | )          | —   |       |
| Other                                                                   |       | (29      | )          | (26      | )          | —   |       |
| Effect of differences between U.S. taxation and  foreign taxation       |       | —   |       | 80       |       | 10       |       |
| Income tax expense (benefit)                                            |       | $        | (2,088     | )        | $          | (7,542   | )          | $ | 5,767 |   |

 

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Deferredincome taxes reflect net tax effects of temporary differences between thecarrying amounts of assets and liabilities for financial reporting purposes andthe amounts used for income tax purposes. The components of the net accumulateddeferred income tax assets as of December 31, 2009 and 2008 are asfollows:

 
| ** **                                                         | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------|------------|
| **(in thousands)**                                            | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Deferred tax assets (liabilities):                                 |       |                  |       |   |   |
| Current:                                                           |       |                  |       |   |   |
| Provision for doubtful accounts                                    |       | $                     | 589        |   | $ | 1,049 |   |
| Inventory-related expense                                          |       | 1,150                 |       | 781 |   |
| Accrued liabilities                                                |       | 4,433                 |       | 3,866 |   |
| Worthless investment                                               |       | 2,610                 |       | 1,598 |   |
| Impairment of assets                                               |       | 1,517                 |       | — |   |
| Prepaid and deferred catalog costs                                 |       | (270                  | )          | (256 | ) |
| Total current deferred tax assets                                  |       | $                     | 10,029     |   | $ | 7,038 |   |
| Non-current:                                                       |       |                  |       |   |   |
| Depreciation and amortization                                      |       | $                     | (814       | ) | $ | (764 | ) |
| Section 181 qualified production expense                      |       | (3,219                | )          | (3,071 | ) |
| Net operating loss carryforward                                    |       | 12,562                |       | 11,871 |   |
| Charitable carryforward                                            |       | 807                   |       | 592 |   |
| Gain from issuance of subsidiary stock                             |       | (11,755               | )          | (12,662 | ) |
| Impairment of assets                                               |       | 7,450                 |       | 10,291 |   |
| Tax credits                                                        |       | 716                   |       | 863 |   |
| Foreign exchange rate gain                                         |       | —                |       | (590 | ) |
| Other                                                              |       | (283                  | )          | (454 | ) |
| Total non-current deferred tax assets                              |       | 5,464                 |       | 6,076 |   |
| Valuation allowance                                                |       | (1,050                | )          | — |   |
| Total non-current deferred tax assets, net of  valuation allowance |       | 4,414                 |       | 6,076 |   |
| Total net deferred tax assets                                      |       | $                     | 14,443     |   | $ | 13,114 |   |

 

Thesources of income (loss) before income taxes and noncontrolling interests areas follows:

 
| **(in thousands)** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|----------|------------|
| Domestic                |       | $        | (2,563     | )        | $          | (53,999  | )          | $ | 14,841 |   |
| International           |       | 258      |       | (1,128   | )          | (240     | )          |
|                    |       | $        | (2,305     | )        | $          | (55,127  | )          | $ | 14,601 |   |

 

AtDecember 31, 2009, we had made no provision for U.S. federal and stateincome taxes on approximately $170,000 of undistributed foreign earnings, whichare expected to remain outside of the U.S. indefinitely. Upon any futuredistribution of foreign earnings in the form of dividends or otherwise, wewould be subject to U.S. income taxes (subject to an adjustment for foreign taxcredits), state income taxes, and withholding taxes payable to the variousforeign countries. Determination of the amount of unrecognized deferred U.S.income tax liability is not practicable because of the complexities associated withits hypothetical calculation.

 

AtDecember 31, 2009, we had $1.3 million in tax effected state net operatingloss carryforwards.  These operating losscarryforwards, if unused, will begin to expire in 2010.  Additionally, we had $10.2 million in tax effectedfederal net operating loss carryforwards. These operating loss carryforwards, if unused, begin to expire in 2018.The Internal Revenue Code contains provisions that limit the net operating lossavailable for use in any given year upon the occurrence of certain events,including significant changes in ownership interest. A change in ownership of acompany of greater than 50% within a three-year period results in an annuallimitation on the utilization of net operating loss carryforwards from tax periodsprior to the ownership changes. Our net operating loss carryforwards as of December 31,2009 are subject to annual limitations due to changes in****ownership.

 

Wehave an alternative minimum tax credit carryforward of approximately $480,000that is available to offset future regular tax liabilities and has noexpiration date.  We also have generalbusiness tax credit carryforwards for federal income tax purposes at December 31,2009 of approximately $238,000 that are available to reduce future federalincome taxes, if any, and expire through 2028.

 

Weperform assessments of the realization of our net deferred tax assetsconsidering all available evidence, both positive and negative.  As a result of this assessment, we concludedit was more likely than not that a portion of our net operating loss deferredtax asset would not be realized and, therefore, we established a valuationallowance against a portion of our net operating loss deferred tax asset 

 

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forthe year ended December 31, 2009. The valuation allowance was recorded asa result of our analysis of the facts and circumstances, including anevaluation of our net operating loss realizability and an evaluation of ourpre-tax income and losses for historical and future periods.  We expect all other deferred tax assets at December 31,2009 to be fully recoverable through the reversal of taxable temporary differencesin future years as a result of normal business activities.

 

Werealized $0.03 million and $0.2 million in tax benefits recorded to additionalpaid-in capital as a result of the exercise of stock options for the yearsended December 31, 2009 and 2008, respectively.

 

Werecognize the tax benefit from an uncertain tax position only if it is morelikely than not that the tax position will be sustained on examination by thetaxing authorities, based on the technical merits of the position. We measurethe tax benefits recognized in the consolidated financial statements from sucha position based on the largest benefit that has a greater than 50% likelihoodof being realized upon ultimate resolution. The application of income tax lawis inherently complex. Laws and regulations in this area are voluminous and areoften ambiguous. As such, we are required to make many subjective assumptionsand judgments regarding our income tax exposures. Interpretations of andguidance surrounding income tax law and regulations change over time and mayresult in changes to our subjective assumptions and judgments which canmaterially affect amounts recognized in our consolidated balance sheets andconsolidated statements of operations. The result of our assessment of ouruncertain tax positions did not have a material impact on our consolidatedfinancial statements.  Our federal andstate tax returns for all years after 2004 are subject to future examination bytax authorities for all our tax jurisdictions. We recognize interest and penalties related to income tax matters ininterest and other income (expense) and corporate, general and administrationexpenses, respectively.

 

**11.          Equity**

 

During 2009, we issued atotal of 13,561 of our Class A common shares to our independent directors,in lieu of cash compensation, for services rendered in 2009; issued 25,000 ofour Class A common shares as contingent consideration for a businessacquired in 2007 (see Note 4. Mergers and Acquisitions); issued 25,000 of our Class Acommon shares for consulting services; and issued 48,450 of our Class Acommon shares upon exercise of options under our 1999 Long-Term Incentive Planand our 2009 Long-Term Incentive Plan.

 

Additionally, during2009, we repurchased 932,000 of our Class A common shares for a total costof $2.8 million.  We recorded thisrepurchase of our shares in accordance with the cost method of accounting fortreasury stock.  Since we have not yetdecided the ultimate disposition of the re-acquired shares, their cost isreflected in our consolidated balance sheet at December 31, 2009 as a $2.8million reduction to additional paid-in capital.

 

Our Real Goods subsidiaryissued 36,112 shares valued at $0.1 million to compensate independent boardmembers for services rendered during 2009 under their 2008 Long-Term IncentivePlan and issued 363,504 shares valued at $0.7 million as contingentconsideration for a business acquired in 2008 (see Note 4.  Mergers and Acquisitions).  Following these transactions, we owned 54.7%of Real Goods.  The portion of our gainresulting from Real Goods issuing new shares, $0.1 million net of tax, isreflected in additional paid-in capital on our consolidated balance sheet at December 31,2009.

 

Anothersubsidiary, which is 51.4% owned by us, paid its shareholders dividends fromearnings totaling $0.4 million and, as a result, the noncontrolling interestson our consolidated balance sheet at December 31, 2009 was decreased by$0.2 million.

 

Thefollowing schedule reflects the effect of changes in Gaiam, Inc.’s ownershipinterest in Real Goods on Gaiam, Inc.’s equity:

 
| ** **                                                                                                                                                        | ** ** | **For the Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| **(in thousands,  except share data)**                                                                                                                       | ** ** | **2009**                                 | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                                                                                                              |       |                                     |       |   |   |   |   |
| Net income (loss)  attributable to Gaiam, Inc.                                                                                                               |       | $                                        | 296        |   | $ | (35,623 | ) | $ | 8,524 |   |
| Transfers from the noncontrolling  interest:                                                                                                                      |       |                                     |       |   |   |   |   |
| Increase in  Gaiam, Inc.’s paid-in capital for the issuance of 399,616 Real Goods  common shares in conjunction with acquisitions and compensation |       | 183                                      |       | — |   | — |   |
| Increase in  Gaiam, Inc.’s paid-in capital in conjunction with Real Goods’ IPO and  compensation                                                   |       | —                                   |       | 918 |   | — |   |
| Change from the net income  (loss) attributable to Gaiam, Inc. and transfers from the noncontrolling  interest                                               |       | $                                        | 479        |   | $ | (34,705 | ) | $ | 8,524 |   |

 

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Asof December 31, 2009, we had the following Class A common sharesreserved for future issuance:

 
| Conversion of Class B common shares        |   | 5,400,000 |   |
|-------------------------------------------------|--------|-----------|--------|
| Awards under the 1999 Long-Term Incentive Plan: |   |      |   |
| Stock options outstanding                       |   | 1,224,760 |   |
| Total shares reserved for future issuance       |   | 6,624,760 |   |

 

Each holder of our Class A common sharesis entitled to one vote for each share held on all matters submitted to a voteof shareholders. Each of our Class B common shares is entitled to tenvotes on all matters submitted to a vote of shareholders. There are nocumulative voting rights. All holders of our Class A common shares and ourClass B common shares vote as a single class on all matters that are submittedto the shareholders for a vote. Accordingly, our Chairman, who holds 100% ofour Class B common shares entitled to vote in any election of directors,may elect all directors who stand for election. Shareholders may consent to anaction in writing and without a meeting under certain circumstances.

 

Our Class A common shares and our Class Bcommon shares are entitled to receive dividends, if any, as may be declared bythe board of directors out of legally available funds. In the event of aliquidation, dissolution or winding up of our Company, our Class A commonshares and our Class B common shares are entitled to share ratably in ourassets remaining after the payment of all of our debts and other liabilities.Holders of our Class A common shares and our Class B common shareshave no preemptive, subscription or redemption rights, and there are noredemption or sinking fund provisions applicable to our Class A commonshares and our Class B common shares.

 

OurClass B common shares may not be transferred unless converted into our Class Acommon shares, other than certain transfers to affiliates, family members, andcharitable organizations. Our Class B common shares are convertibleone-for-one into our Class A common shares, at the option of the holder ofthe Class B common shares.

 

During2008, we issued a total of 2,810 Class A common shares to our independentdirectors, in lieu of cash compensation, for services rendered in 2007 and2008; issued 221,152 of our Class A common shares as part of the considerationto acquire the remaining and controlling ownership interests in two businesses(see Note 4, Mergers and Acquisitions); and issued 133,360 Class A commonshares upon exercise of options under our 1999 Long-Term Incentive Plan,including 110,000 shares exercised and held by our Chief Executive Officer.

 

Additionally,during 2008, we repurchased 1,372,285 of our Class A common shares for atotal cost of $19.3 million.  See alsoNote 4, Mergers and Acquisitions.  Werecorded these repurchases in accordance with the cost method of accounting fortreasury stock.  Since we have not yetdecided the ultimate disposition of the re-acquired shares, their combined costis reflected in the consolidated balance sheet at December 31, 2008 as a$19.3 million reduction to additional paid-in capital.

 

During2008, Real Goods completed an initial public offering of 5.5 million sharesresulting in net proceeds of $48.2 million to Real Goods, issued 280,000 sharesvalued at $1.9 million to acquire a minority interest in one of itssubsidiaries and issued 2,094,679 shares valued at $9.2 million as partialconsideration to acquire 100% ownership of two businesses (see Note 4, Mergersand Acquisitions), issued an additional 15,297 shares valued at $94,000 tocompensate nonemployee board members for services rendered, and made othernon-stock related equity transactions, for a net gain of $33.7 million tous.  Real Goods uses a period beginningtwo days before and two days after the date that the terms of the acquisitionare agreed to and announced in determining the estimated fair value of thesecurities issued.  Following thesetransactions we owned 55.9% of Real Goods. The Real Goods shares were generally valued based upon the closing priceof Real Goods’ Class A common stock, which ranged from $3.65 to $7.50 pershare during the period from 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 theassumption by Real Goods’ minority interest shareholders of their respectiveportion of Real Goods’ tax sharing agreement obligation to us, the recognitionof the Carlson Solar and Marin Solar contingent warrant consideration uponconsummation of Real Goods’ IPO (see Note 4, Mergers and Acquisitions), andstock option share-based compensation expense, none of which were tax effected,are recorded as increases to additional paid-in capital on our consolidatedbalance sheet at December 31, 2008.

 

As part of additional consideration foracquisitions, Real Goods issued, during 2008 and 2007, seven-year warrants topurchase 70,000 shares of Real Goods’ Class A common stock at an exerciseprice of $3.20 per share. See Note 4, Mergers and Acquisitions.

 

During2007, we issued a total of 4,955 Class A common shares to our independentdirectors, in lieu of cash compensation, for services rendered in 2006 and2007; issued 1,875 restricted Class A common shares to two of our namedexecutive officers as bonus compensation; issued 80,795 Class A commonshares as part of the consideration to acquire controlling ownership interestsin two 

 

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businesses;and issued 216,070 Class A common shares upon exercise of options underour 1999 Long-Term Incentive Plan.

 

OnFebruary 6, 2007, we entered into a stock repurchase agreement withRevolution Living and Alps, whereby we repurchased 2.5 million of our Class Acommon shares from Revolution Living for $13.14 per share or $32.8 million incash, Alps prepaid a promissory note plus accrued interest in the amount of$2.4 million, Alps acquired our investment in Lime for $1.5 million in cash,and David Golden, Chief Financial Officer of Revolution, resigned from theBoard of Directors of Gaiam. Also as part of the Agreement, Jirka Rysavy, ourChairman and largest shareholder, purchased for $7.2 million Revolution Living’soption to acquire approximately 2.3 million of his Gaiam shares at $10 pershare. The price to repurchase the option was calculated as the spread betweenthe negotiated $13.14 share price for our purchase of the shares fromRevolution Living and the $10 option exercise price. The $13.14 per share priceagreed to by the parties was the average share price over the 90 days prior tothe 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.

 

**12.          Share-BasedCompensation**

 

During 2009, weadopted a new plan, the Gaiam, Inc. 2009 Long-Term Incentive Plan (the “Plan”).  The purpose of the Plan is to advance ourinterests and those of our shareholders by providing incentives to certainpersons who contribute significantly to our strategic and long-term performanceobjectives and growth.  An aggregate ofnot more than 3 million of our Class A common shares, subject to certainadjustments, may be issued under the Plan, and the Plan terminates no laterthan April 23, 2019.  The authorityto grant new options under our 1999 Long-Term Incentive Plan expired on June 1,2009. We generally grant options under both of our incentive plans with anexercise price equal to the closing market price of our stock at the date ofthe grant and the options normally vest and become exercisable at 2% per monthfor the 50 months beginning in the eleventh month after date of grant. Werecognize the compensation expense related to share-based payment awards on astraight-line basis over the requisite service periods of the awards, which aregenerally five years for employee options and two years for Board members’options. Grants typically expire seven years from the date of grant.

 

Thedetermination of the estimated fair value of share-based payment awards on thedate of grant using the Black-Scholes option-pricing model is affected by ourstock price as well as assumptions regarding a number of complex and subjectivevariables. We derive the expected terms from the historical behavior ofparticipant groupings.  We base expectedvolatilities on the historically realized volatility of our stock over theexpected term. Our use of historically realized volatilities is based upon theexpectation that future volatility over the expected term is not likely todiffer from historical results. We base the risk-free interest rate used in theoption valuation 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 FASBshare-based compensation guidance, we are required to estimate forfeitures atthe time of grant and revise those estimates in subsequent periods if actualforfeitures differ from those estimates. We primarily use historical data byparticipant groupings to estimate option forfeitures and record share-basedcompensation expense only for those awards that are expected to vest.

 

Thefollowing are the variables we used in the Black-Scholes option pricing modelto determine the estimated grant date fair value for options granted under our1999 Long-Term Incentive Plan for each of the years presented:

 
| ** **                  | ** ** | **2009**       | ** ** | **2008**       | ** ** | **2007**       | ** ** |
|-----------------------------|------------|----------------|------------|----------------|------------|----------------|------------|
|                        |       |           |       |           |       |           |       |
| Expected volatility         |       | 60% - 64       | %          | 52% - 60       | %          | 49% - 59       | %          |
| Weighted-average volatility |       | 62             | %          | 56             | %          | 57             | %          |
| Expected dividends          |       | 0              | %          | 0              | %          | 0              | %          |
| Expected term (in years)    |       | 5.0 — 6.5 |       | 5.0 — 6.5 |       | 2.0 — 5.8 |       |
| Risk-free rate              |       | 1.25% - 2.38   | %          | 2.50% - 4.13   | %          | 4.13% - 4.88   | %          |

 

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Thetable below presents a summary of option activity under our 1999 Long-TermIncentive Plan as of December 31, 2009, and changes during the year thenended:

 
| ** **                            | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|---------------------------------------|------------|------------|------------|-----------------------------------------|------------|------------------------------------------------------|------------|---------------------------------|------------|
|                                  |       |       |       |                                    |       |                                                 |       |                            |       |
| Outstanding at January 1, 2009   |       | 1,219,310  |       | $                                       | 10.17      |                                                 |       |                            |       |   |
| Granted                               |       | 210,500    |       | 4.97                                    |       |                                                 |       |                            |       |
| Exercised                             |       | (48,450    | )          | 5.03                                    |       |                                                 |       |                            |       |
| Forfeited or expired                  |       | (156,600   | )          | 6.15                                    |       |                                                 |       |                            |       |
| Outstanding at December 31, 2009 |       | 1,224,760  |       | $                                       | 5.35       |                                                 | 4.1        |                            | $          | 3,107,865 |   |
| Exercisable at December 31, 2009 |       | 424,700    |       | $                                       | 5.63       |                                                 | 2.1        |                            | $          | 1,239,246 |   |

 

During 2009, for optionspreviously granted under our 1999 Long-Term Incentive Plan to 49 employees, wereset the exercise price to $5.00 per share. The options shall continue to vest over their remaining original vestingperiods.  These modifications will resultin total incremental share-based compensation cost of approximately $212,000over the next 5 years.

 

Weissue new shares upon the exercise of options. We received $0.2 million and$1.3 million in cash from stock options exercised during 2009 and 2008,respectively. The weighted-average grant-date fair value of options grantedduring the years 2009, 2008, and 2007 was $2.50, $4.67, and $8.28,respectively.  The total intrinsic valueof options exercised during the years ended December 31, 2009, 2008, and2007, was $0.1 million, $0.6 million, $2.1 million, respectively. The totalfair value of shares vested during the years ended December 31, 2009,2008, and 2007 was and $1.3 million, $0.9 million, and $0.7 million,respectively.

 

Ourshare-based compensation cost charged against income was $1.9 million, $1.5million, and $1.0 million during 2009, 2008, and 2007, respectively, and isshown in corporate, general and administration expenses. The total income taxbenefit recognized for share-based compensation was $0.7 million, $0.6 million,and $0.4 million for 2009, 2008, and 2007, respectively.  As of December 31, 2009, there was $2.0million of unrecognized cost related to nonvested shared-based compensationarrangements granted under our 1999 Long-Term Incentive Plan.  We expect that cost to be recognized over aweighted-average period of 2.95 years.

 

During 2009, Real Goodsgranted 499,500 and cancelled 617,500 new stock options stock options under theReal Goods 2008 Long-Term Incentive Plan. The cancelled options primarilyresulted from the nonattainment of the performance conditions for 2009.  The 2009 stock option grants were to commencevesting 2% over 50 months only upon the attainment of certain amount of pre-taxincome for the year ended December 31, 2009. For these performance basedstock options, the attainment of the performance condition was never met and,therefore, no compensation expense for these grants was recorded.

 

In 2007, Real Goods’ predecessor grantedstock options Real Goods assumed on January 31, 2008 at an exercise priceof $3.20 per share. The options assumed are for Real Goods Class A commonstock and have a total cost of $0.5 million. These options vested 50% on May 13,2008 when Real Goods’ initial public offering was consummated (see Note 11.Equity) and this vested portion was recorded as an offering cost. The remainingoptions vest 2% each month after May 2008.

 

**13.          Segment andGeographic Information**

 

Segment Information

 

Wemanage our business and aggregate our operational and financial information inaccordance with three reportable segments. The direct to consumer segmentcontains direct response marketing programs, catalogs, Internet, andsubscription community sales channels, the business segment comprisesretailers, media and corporate account channels, and the solar segment reflectssolar energy integration businesses.

 

Althoughwe are able to track revenues by sales channel, the management, allocation ofresources and analysis and reporting of expenses is presented on a combinedbasis, at the reportable segment level. Prior period amounts have been recastto reflect the addition of our solar reporting segment.  Contribution margin is defined as net revenueless cost of goods sold and total operating expenses.

 

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Financialinformation for our segments is as follows:

 
| ** **                                                                                      | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **(in thousands)**                                                                         | ** ** | **2009**                                   | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net revenue:                                                                                    |       |                                       |       |   |   |   |   |
| Direct to consumer                                                                              |       | $                                          | 115,904    |   | $ | 129,832 |   | $ | 132,540 |   |
| Business                                                                                        |       | 98,241                                     |       | 88,912 |   | 111,481 |   |
| Solar                                                                                           |       | 64,328                                     |       | 38,428 |   | 18,922 |   |
| Consolidated net revenue                                                                        |       | 278,473                                    |       | 257,172 |   | 262,943 |   |
| Contribution margin (loss):                                                                     |       |                                       |       |   |   |   |   |
| Direct to consumer                                                                              |       | (6,242                                     | )          | (29,871 | )(a) | (3,091 | ) |
| Business                                                                                        |       | 8,057                                      |       | (28,277 | )(a) | 13,358 |   |
| Solar                                                                                           |       | (2,596                                     | )          | (30,995 | )(a) | 186 |   |
| Consolidated contribution margin (loss)                                                         |       | (781                                       | )          | (89,143 | ) | 10,453 |   |
| Reconciliation of contribution margin (loss) to  net income (loss) attributable to Gaiam, Inc.: |       |                                       |       |   |   |   |   |
| Gain from issuance of subsidiary stock                                                          |       | —                                     |       | 32,800 |   | — |   |
| Interest and other income (expense)                                                             |       | (1,524                                     | )          | 1,216 |   | 4,148 |   |
| Income tax expense (benefit)                                                                    |       | (2,088                                     | )          | (7,542 | ) | 5,767 |   |
| Net (income) loss attributable to noncontrolling  interest                                      |       | 513                                        |       | 11,962 |   | (310 | ) |
| Net income (loss) attributable to Gaiam, Inc.                                              |       | $                                          | 296        |   | $ | (35,623 | ) | $ | 8,524 |   |

 

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(a)                    Forthe year ended December 31, 2008, the contribution margins for the directto consumer, business and solar segments include asset impairment and relatedcharges of $20.4 million, $35.3 million and $27.2 million, respectively. SeeNote 6, Asset Impairment and Other General Expenses and Income.

 

Thefollowing is a reconciliation of reportable segments’ assets to ourconsolidated total assets.  The amountsas of December 31, 2007 have been recast for our solar segment andunallocated corporate amounts.  Otherunallocated corporate amounts are comprised of cash, current and deferred taxesand property and equipment.

 
| ** **                          | ** ** | **As of December 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|
| **(in thousands)**             | ** ** | **2009**                              | ** ** | **2008** | ** ** | **2007** | ** ** |
| Total assets:                       |       |                                  |       |   |   |   |   |
| Direct to consumer                  |       | $                                     | 31,087     |   | $ | 30,857 |   | $ | 61,235 |   |
| Business                            |       | 89,268                                |       | 90,133 |   | 115,940 |   |
| Solar                               |       | 41,658                                |       | 38,954 |   | 4,701 |   |
| Other unallocated corporate amounts |       | 50,200                                |       | 42,154 |   | 58,836 |   |
|                                |       | $                                     | 212,213    |   | $ | 202,098 |   | $ | 240,712 |   |

 

MajorCustomer

 

Salesto our largest customer for 2009, 2008 and 2007 accounted for less than 11.7%,8.9% and 10.0% of total revenue, respectively, during these periods and arereported in our business segment.

 

Geographic Information

 

Wesell and distribute essentially the same products in the United States andseveral foreign countries. The major geographic territories are the U.S.,Canada, Mexico, Japan, and the U.K., and are based on the location of thecustomer. The following represents geographical data for our operations as ofand for the years ended December 31, 2009, 2008 and 2007:

 
| **(in thousands)** | ** ** | **2009**   | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|-------------------------|------------|------------|------------|------------|------------|------------|------------|
| Revenue:                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| United States           |       | $          | 274,951    |       | $          | 250,062    |       | $ | 229,279 |   |
| International           |       | 3,522      |       | 7,110      |       | 33,664     |       |
|                    |       | $          | 278,473    |       | $          | 257,172    |       | $ | 262,943 |   |
| Long-Lived Assets:      |       |       |       |       |       |       |       |
| United States           |       | $          | 40,749     |       | $          | 39,855     |       | $ | 47,794 |   |
| International           |       | 493        |       | 555        |       | 1,521      |       |
|                    |       | $          | 41,242     |       | $          | 40,410     |       | $ | 49,315 |   |

 

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| ** **                           | ** ** | **As of December 31,** | ** ** |
|--------------------------------------|------------|---------------------------------------|------------|
| **(in thousands)**              | ** ** | **2009**                              | ** ** | **2008** | ** ** | **2007** | ** ** |
| Components of Long-Lived Assets (a): | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Property and equipment, net          |       | $                                     | 28,217     |   | $ | 27,381 |   | $ | 9,509 |   |
| Media Library, net                   |       | 12,354                                |       | 12,102 |   | 37,566 |   |
| Other Intangibles, net               |       | 652                                   |       | 880 |   | 1,554 |   |
| Notes receivable and other assets    |       | 19                                    |       | 47 |   | 686 |   |
|                                 |       | $                                     | 41,242     |   | $ | 40,410 |   | $ | 49,315 |   |

 

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(a)                   Excludesother non-current assets (non-current deferred tax assets, net, goodwill,investments, notes receivable, and security deposits) of $31,739, $32,456, and$50,331 for 2009, 2008, and 2007, respectively.

 

**14.          QuarterlyResults of Operations (Unaudited)**

 

Thefollowing is a summary of the quarterly results of operations for the yearsended December 31, 2009 and 2008:

 
| ** **                                                                                | ** ** | **Year 2009 Quarters Ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **(in thousands, except per share data)**                        | ** ** | **March 31**                           | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|                                                                                      |       |                                        |       |   |   |   |   |   |   |
| Net revenue                                                                               |       | $                                           | 55,923     |   | $ | 60,475 |   | $ | 74,439 |   | $ | 87,636 |   |
| Gross profit                                                                              |       | 30,986                                      |       | 31,446 |   | 35,811 |   | 45,860 |   |
| Income (loss) before income taxes and  noncontrolling interests                           |       | (6,152                                      | )          | (2,115 | ) | 1,031 |   | 4,931 |   |
| Net income (loss)                                                                         |       | (3,903                                      | )          | (1,277 | ) | 643 |   | 4,320 |   |
| Net income (loss) attributable to Gaiam, Inc.                                        |       | (3,090                                      | )          | (1,009 | ) | 365 |   | 4,030 |   |
| Diluted net income (loss) per share attributable  to Gaiam, Inc. common shareholders |       | $                                           | (0.13      | ) | $ | (0.04 | ) | $ | 0.02 |   | $ | 0.17 |   |
| Weighted average shares outstanding-diluted                                               |       | 23,957                                      |       | 23,076 |   | 23,167 |   | 23,267 |   |

 
| ** **                                                                                | ** ** | **Year 2008 Quarters Ended (a)** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| **(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  noncontrolling interests                           |       | 3,135                                           |       | 4,184 |   | (16,922 | ) | (45,524 | ) |
| Net income (loss)                                                                         |       | 1,897                                           |       | 2,531 |   | (10,000 | ) | (42,013 | ) |
| Net income (loss) attributable to Gaiam, Inc.                                        |       | 2,213                                           |       | 2,581 |   | (10,115 | ) | (30,302 | ) |
| Diluted net income (loss) per share attributable  to Gaiam, Inc. common shareholders |       | $                                               | 0.09       |   | $ | 0.10 |   | $ | (0.42 | ) | $ | (1.26 | ) |
| Weighted average shares outstanding-diluted                                               |       | 25,352                                          |       | 24,895 |   | 24,020 |   | 23,980 |   |

 

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(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, Asset Impairment and Other General Expenses andIncome.

 

**15.          SubsequentEvents**

 

OnMarch 8, 2010, our board of directors declared an annual cash dividend of$0.15 per share for our common shareholders. For 2010, the dividend will be paid in late April 2010 to ourcommon shareholders of record on April 1, 2010.  The 2010 dividend will be charged to ouradditional paid-in capital.

 

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**GAIAM, INC.**

 

**Financial Statement Schedule II**

 

**Consolidated valuation andqualifying 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: |       |                                         |       |                                                              |       |           |       |                                            |       |
| 2009                              |       | $                                            | 2,704      |                                                              | $          | 1,362          |       | $                                               | 2,473      |   | $ | 1,593 |   |
| 2008                              |       | $                                            | 1,279      |                                                              | $          | 2,592          |       | $                                               | 1,167      |   | $ | 2,704 |   |
| 2007                              |       | $                                            | 1,443      |                                                              | $          | 312            |       | $                                               | 476        |   | $ | 1,279 |   |
|                              |       |                                         |       |                                                              |       |           |       |                                            |       |
| Allowance for Product  Returns:   |       |                                         |       |                                                              |       |           |       |                                            |       |
| 2009                              |       | $                                            | 4,400      |                                                              | $          | 23,550         |       | $                                               | 21,741     |   | $ | 6,209 |   |
| 2008                              |       | $                                            | 6,759      |                                                              | $          | 22,245         |       | $                                               | 24,604     |   | $ | 4,400 |   |
| 2007                              |       | $                                            | 6,891      |                                                              | $          | 30,216         |       | $                                               | 30,348     |   | $ | 6,759 |   |

 

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(a)              Includesreserves associated with acquired assets/companies.

 

**Item 9.        Changes in and Disagreements withAccountants on Accounting and Financial Disclosure**

 

None.

 

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

 

**Evaluation of Disclosure Controls and Procedures**

 

Ourprincipal executive officer and principal accounting officer conducted anevaluation of the effectiveness of the design and operation of our disclosurecontrols and procedures, as defined in Rules 13a-15(e) and Rule 15d-15(e) underthe Exchange Act. Based upon their evaluation as of December 31, 2009,they have concluded that those disclosure controls and procedures areeffective.

 

**Changes in Internal Control over Financial Reporting**

 

Therehave been no changes in our internal control over financial reporting duringthe quarter ended December 31, 2009 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

**Management’s Report on Internal Control over FinancialReporting**

 

Weare responsible for establishing and maintaining adequate internal control overfinancial reporting as defined in Rule 13a-15(f) under the ExchangeAct. Our internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith accounting principles generally accepted in the United States of America.Because of its inherent limitations, internal control over financial reportingmay not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

Weassessed the effectiveness of our internal control over financial reporting asof December 31, 2009. In making the assessment, we used the criteria setforth by the Committee of Sponsoring Organizations of the Treadway Commissionin “*Internal Control-Integrated Framework*.”  Based on that assessment, we concluded that,as of December 31, 2009, our internal control over financial reporting iseffective based on those criteria.

 

Theoperating effectiveness of our internal control over financial reporting as of December 31,2009 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**

 

Notapplicable.

 

**PART III**

 

**Item 10.      Directors, Executive Officers andCorporate Governance**

 

We incorporate herein the information required by this Item byreference to our Proxy Statement for our Annual Meeting of Shareholders, to beheld on May 12, 2010, to be filed with the Commission pursuant toRegulation 14A.

 

On March 12, 2010, Stephen J. Thomasbecame Gaiam’s principal financial officer.  Mr. Thomas, 46, has beenVice President and Chief Accounting Officer of Gaiam since November 2009and became Controller of Gaiam in 2006.  From 2005 until 2006 he was ChiefFinancial Officer of Digitally Unique Corporation, an online retailer ofconsumer electronics, and from 2003 until 2005 he was Controllerof American Coin Merchandising, Inc., a public company acquiredby Coinstar in 2004 for approximately $235 million.  Mr. Thomas hasheld numerous financial and accounting positions throughout his career thatbegan with Arthur Andersen LLP in 1986.

 

*Code of Ethics*

 

Wehave adopted a Code of Ethics applicable to our employees, including ourprincipal executive officer, principal financial officer, principal accountingofficer and persons performing similar functions. We have posted a copy of ourCode of Ethics on the corporate section of our Internet website atwww.gaiam.com/corporate. Our full Board of Directors must approve in advanceany waivers of the Code of Ethics. We will post any amendments or waivers fromour Code of Ethics that apply to our executive officers and directors on the “Codeof Ethics” section of our Internet website located at www.gaiam.com/corporate.

 

**Item 11.      Executive Compensation**

 

Weincorporate herein the information required by this Item by reference to ourProxy Statement for our Annual Meeting of Shareholders, to be held on May 12,2010, to be filed with the Commission pursuant to Regulation 14A.

 

**Item 12.      Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters**

 

Weincorporate herein the information required by this Item by reference to ourProxy Statement for our Annual Meeting of Shareholders, to be held on May 12,2010, to be filed with the Commission pursuant to Regulation 14A.

 

**Item 13.      Certain Relationships and RelatedTransactions, and Director Independence**

 

Weincorporate herein the information required by this Item by reference to ourProxy Statement for our Annual Meeting of Shareholders, to be held on May 12,2010, to be filed with the Commission pursuant to Regulation 14A.

 

**Item 14.      Principal Accountant Fees and Services**

 

Weincorporate herein the information required by this Item by reference to ourProxy Statement for our Annual Meeting of Shareholders, to be held on May 12,2010, to be filed with the Commission pursuant to Regulation 14A.

 

**PART IV**

 

**Item 15.      Exhibits and Financial Statement Schedules**

 

Documents filed as part of this report are asfollows:

 

1.        Consolidated Financial Statements.

 

See listing of Consolidated Financial Statementsincluded as part of this Form 10-K in Item 8 of Part II.

 

2.        Financial Statement Schedules.

 

Schedule II Consolidated Valuation and QualifyingAccounts.

 

3.      Exhibits:

 

The following exhibits areincorporated by reference or are filed or furnished with this report asindicated below:

 

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| **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             |       | Modification Agreement executed January 21, 2010 between  Gaiam, Inc. (and other Gaiam subsidiaries identified therein) and Wells  Fargo Bank, N.A. (filed herewith).                                                                                                                                                              |
|             |       |                                                                                                                                                                                                                                                                                                                                         |
| 10.4             |       | Gaiam, Inc. Amended and Restated 1999 Long-Term Incentive Plan  (incorporated by reference to Exhibit B of Gaiam’s proxy statement dated  March 13, 2009).*                                                                                                                                                              |
|             |       |                                                                                                                                                                                                                                                                                                                                         |
| 10.5             |       | Gaiam, Inc. 2009 Long-Term Incentive Plan (incorporated by  reference to Exhibit A of Gaiam’s proxy statement dated March 13,  2009).*                                                                                                                                                                                   |
|             |       |                                                                                                                                                                                                                                                                                                                                         |
| 10.6             |       | 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).                                                                                                     |
|             |       |                                                                                                                                                                                                                                                                                                                                         |
| 10.7             |       | 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).                                         |
|             |       |                                                                                                                                                                                                                                                                                                                                         |
| 10.8             |       | 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). |
|             |       |                                                                                                                                                                                                                                                                                                                                         |
| 10.9             |       | Third Lease Amendment dated November 8, 2007 between Gaiam, Inc.  and Dugan Financing LLC (filed herewith).                                                                                                                                                                                                                             |
|             |       |                                                                                                                                                                                                                                                                                                                                         |
| 10.10            |       | Fourth Lease Amendment dated October 7, 2009 between  Gaiam, Inc. and Dugan Financing LLC (filed herewith).                                                                                                                                                                                                                        |
|             |       |                                                                                                                                                                                                                                                                                                                                         |
| 10.11            |       | 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).                                                                                                 |
|             |       |                                                                                                                                                                                                                                                                                                                                         |
| 10.12            |       | First Lease Amendment dated January 25, 2008 between Gaiam, Inc.  and Dugan Realty L.L.C (filed herewith).                                                                                                                                                                                                                              |
|             |       |                                                                                                                                                                                                                                                                                                                                         |
| 10.13            |       | 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).                                                                                            |
|             |       |                                                                                                                                                                                                                                                                                                                                         |
| 10.14            |       | 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).*                                                                                                       |

 

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| **Exhibit  No.** | ** ** | **Description**                                                                                                                                          |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.15            |       | Form of Stock Option Agreement under Gaiam’s 2009 Long-Term  Incentive Plan (filed herewith).*                                                 |
|             |       |                                                                                                                                                     |
| 21.1             |       | List of Gaiam Subsidiaries (filed herewith).                                                                                                             |
|             |       |                                                                                                                                                     |
| 23.1             |       | Consent letter from Ehrhardt Keefe Steiner & Hottman PC  (filed herewith).                                                                      |
|             |       |                                                                                                                                                     |
| 31.1             |       | Certification of the Chief Executive Officer pursuant to Rule  13a-14(a) under the Securities Exchange Act of 1934 (filed herewith).                     |
|             |       |                                                                                                                                                     |
| 31.2             |       | Certification of the Principal 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 management contract or compensatory plan or arrangement.

 

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**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities andExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 

 
|   | GAIAM, INC. |
|--------|-------------|
|   |        |   |
|   |        |   |
|   | By:         | /s/ Jirka Rysavy |
|   |        | Jirka Rysavy |
|   |        | Chairman  March 12, 2010 |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.

 
| **Signature**          | ** ** | **Title**                                             | ** ** | **Date**            |
|------------------------|------------|-------------------------------------------------------|------------|---------------------|
|                   |       |                                                  |       |                |
| /s/ Jirka Rysavy       |       | Chairman of the Board and Chairman                    |       | March 12, 2010 |
| Jirka Rysavy           |       |                                                  |       |                |
|                   |       |                                                  |       |                |
| /s/ Lynn Powers        |       | Chief Executive Officer,                              |       | March 12, 2010 |
| Lynn Powers            |       | President and Director

(Principal Executive Officer) |       |                |
|                   |       |                                                  |       |                |
| /s/ James Argyropoulos |       | Director                                              |       | March 12, 2010 |
| James Argyropoulos     |       |                                                  |       |                |
|                   |       |                                                  |       |                |
| /s/ Barnet M. Feinblum |       | Director                                              |       | March 12, 2010 |
| Barnet M. Feinblum     |       |                                                  |       |                |
|                   |       |                                                  |       |                |
| /s/ Barbara Mowry      |       | Director                                              |       | March 12, 2010 |
| Barbara Mowry          |       |                                                  |       |                |
|                   |       |                                                  |       |                |
| /s/ Paul H. Ray        |       | Director                                              |       | March 12, 2010 |
| Paul H. Ray            |       |                                                  |       |                |
|                   |       |                                                  |       |                |
| /s/ Stephen J. Thomas  |       | Chief Accounting Officer                              |       | March 12, 2010 |
| Stephen J. Thomas      |       | (Principal Financial and Accounting Officer)          |       |                |

 

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