Tableof Contents

 

 

 

**United StatesSecurities and Exchange Commission**

**Washington,D.C. 20549**

 

#### **Form 10-Q**

#### ** **

| **x**                                                  | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15 (d)  OF THE SECURITIES AND EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
|                                                   |
| **For the  quarterly period ended June 30, 2008** |
|                                                   |
| **OR**                                                 |
|                                                   |                                                                                                     |
| **o**                                                  | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d)  OF THE SECURITIES AND EXCHANGE ACT OF 1934** |

 

**CommissionFile Number 0-27517**

 

**GAIAM, INC.**

(Exact name of registrant as specified in itscharter)

 

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

 

**833 W. SOUTH BOULDER ROAD**

**LOUISVILLE, COLORADO 80027-2452**

(Address of principalexecutive offices)

 

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

 

Indicateby check mark whether the registrant:  (1) has filed all reportsrequired to be filed by Section 13 or 15 (d) of the Securities andExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports) and (2) has beensubject to such filing requirements for the past 90days.  YES  x    NO  o

 

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

 

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

 

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

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date:

 

| **Class**                                     | ** ** | **Outstanding at August 8, 2008** |
|-----------------------------------------------|------------|-------------------------------------------------------|
| Class A Common Stock  ($.0001 par value) |       | 18,619,321                                            |
| Class B Common Stock  ($.0001 par value) |       | 5,400,000                                             |

 

 

 

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**GAIAM, INC.**

 

**FORM 10-Q**

 

**INDEX**

 
| **PART I.  FINANCIAL INFORMATION** | 3                                                                                                                               |
|-----------------------------------------|---------------------------------------------------------------------------------------------------------------------------------|
| ** **                              | ** **                                                                                                                      |   |
| **Item 1.**                             | **Financial  Statements (Unaudited):**                                                                                          | 3 |
|                                    | Condensed consolidated  balance sheets at June 30, 2008 and December 31, 2007                                         | 4 |
|                                    | Condensed consolidated  statements of operations for the Three and Six Months Ended  June 30, 2008 and 2007 | 5 |
|                                    | Condensed  consolidated statements of cash flows for the Six Months Ended June 30,  2008 and 2007                     | 6 |
|                                    | Notes to  interim condensed consolidated financial statements                                                                   | 7 |
| ** **                              | ** **                                                                                                                      | ** ** |
| **Item 2.**                             | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                     | 11 |
| ** **                              | ** **                                                                                                                      | ** ** |
| **Item 3.**                             | Quantitative  and Qualitative Disclosures About Market Risk                                                                     | 16 |
| ** **                              | ** **                                                                                                                      | ** ** |
| **Item 4.**                             | Controls and Procedures                                                                                                         | 16 |
| ** **                              | ** **                                                                                                                      | ** ** |
| **PART II. OTHER INFORMATION**     | 17                                                                                                                              |
| ** **                              | ** **                                                                                                                      | ** ** |
| **Item  1.**                            | Legal Proceedings                                                                                                               | 17 |
| ** **                              | ** **                                                                                                                      | ** ** |
| **Item  1A.**                           | Risk Factors                                                                                                                    | 17 |
| ** **                              | ** **                                                                                                                      | ** ** |
| **Item 2.**                             | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                    | 17 |
| ** **                              | ** **                                                                                                                      | ** ** |
| **Item 3**                              | Defaults  Upon Senior Securities                                                                                                | 17 |
| ** **                              | ** **                                                                                                                      | ** ** |
| **Item 4.**                             | Submission  of Matters to a Vote of Security Holders                                                                            | 18 |
| ** **                              | ** **                                                                                                                      | ** ** |
| **Item  5.**                            | Other Information                                                                                                               | 18 |
| ** **                              | ** **                                                                                                                      | ** ** |
| **Item 6.**                             | Exhibits                                                                                                                        | 18 |
| ** **                              | ** **                                                                                                                      | ** ** |
|                                    | SIGNATURES                                                                                                                      | 19 |

 

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**CAUTIONARY STATEMENT REGARDING FORWARD-LOOKINGSTATEMENTS**

 

# **Thisreport may contain forward-looking statements that involve risks anduncertainties. When used in discussion, the words “anticipate,” “believe,” “plan,”“estimate,” “expect,” “strive,” “future,” “intend” and similar expressions asthey relate to us are intended to identify such forward-looking statements. Ouractual results could differ materially from the results anticipated in theseforward-looking statements 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, consumer trends, acquisitions, newinitiatives undertaken by us, security and information systems, legal liabilityfor website content, merchandise supply problems, failure of third parties toprovide adequate service, our reliance on centralized customer service,overstocks and merchandise returns, our reliance on a centralized fulfillmentcenter, increases in postage and shipping costs, E-commerce trends, futureInternet related taxes, our founder’s control of us, fluctuations in quarterlyoperating results, customer interest in our products, the effect of governmentregulation and other risks and uncertainties included in our filings with theSecurities and Exchange Commission. We caution you that no forward-lookingstatement is a guarantee of future performance, and you should not place unduereliance on these forward-looking statements which reflect our view only as ofthe date of this report. We undertake no obligation to update anyforward-looking information.**

# ** **

# **PART I.  FINANCIAL INFORMATION**

# ** **

**Item 1.     Financial Statements (Unaudited)**

 

# **Unaudited Interim CondensedConsolidated Financial Statements**

# ** **

Wehave prepared our unaudited interim condensed consolidated financial statementsincluded herein pursuant to the rules and regulations of the United StatesSecurities and Exchange Commission. Certain information and note disclosuresnormally included in annual financial statements prepared in accordance withaccounting principles generally accepted in the United States have beencondensed or omitted pursuant to these rules and regulations, although webelieve that the disclosures made are adequate to make the information notmisleading. In our opinion, the unaudited interim condensed financialstatements contain all adjustments (consisting of only normal recurringadjustments) necessary to present fairly, in all material respects, ourconsolidated financial position as of June 30, 2008, the interim resultsof operations for the three and six months ended June 30, 2008 and 2007,and cash flows for the six months ended June 30, 2008 and 2007. Theseinterim statements have not been audited. The balance sheet as of December 31,2007 was derived from our audited consolidated financial statements included inour annual report on Form 10-K. The interim condensed consolidatedfinancial statements contained herein should be read in conjunction with ouraudited financial statements, including the notes thereto, for the year ended December 31,2007.

 

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**GAIAM, INC.Condensed consolidated balance sheets**

 
| ** **                                                                                                                                                                                                                     | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(in thousands, except share and per share data)**                                                                                                                                         | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| ** **                                                                                                                                                                                                                     | ** ** | **(Unaudited)**   | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                                                                     |       |              |       |                  |       |
| Current assets:                                                                                                                                                                                                                |       |              |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                                                      |       | $                 | 62,924     |                  | $          | 66,258 |   |
| Accounts receivable, net                                                                                                                                                                                                       |       | 26,901            |       | 30,157                |       |
| Inventory, less allowances                                                                                                                                                                                                     |       | 28,469            |       | 29,839                |       |
| Deferred advertising costs                                                                                                                                                                                                     |       | 3,620             |       | 3,602                 |       |
| Deferred tax assets                                                                                                                                                                                                            |       | 6,472             |       | 6,005                 |       |
| Other current assets                                                                                                                                                                                                           |       | 6,569             |       | 5,205                 |       |
| Total current assets                                                                                                                                                                                                           |       | 134,955           |       | 141,066               |       |
|                                                                                                                                                                                                                           |       |              |       |                  |       |
| Property and equipment, net                                                                                                                                                                                                    |       | 26,325            |       | 9,509                 |       |
| Media library, net                                                                                                                                                                                                             |       | 19,557            |       | 37,566                |       |
| Deferred tax assets, net                                                                                                                                                                                                       |       | 98                |       | 4,057                 |       |
| Goodwill and other intangibles, net                                                                                                                                                                                            |       | 48,853            |       | 44,410                |       |
| Notes receivable and other assets                                                                                                                                                                                              |       | 4,005             |       | 4,104                 |       |
| Total assets                                                                                                                                                                                                                   |       | $                 | 233,793    |                  | $          | 240,712 |   |
|                                                                                                                                                                                                                           |       |              |       |                  |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                                 |       |              |       |                  |       |
| Current liabilities:                                                                                                                                                                                                           |       |              |       |                  |       |
| Accounts payable                                                                                                                                                                                                               |       | $                 | 16,015     |                  | $          | 23,620 |   |
| Accrued liabilities                                                                                                                                                                                                            |       | 5,308             |       | 10,631                |       |
| Total current liabilities                                                                                                                                                                                                      |       | 21,323            |       | 34,251                |       |
|                                                                                                                                                                                                                           |       |              |       |                  |       |
| Minority interest                                                                                                                                                                                                              |       | 19,088            |       | 6,073                 |       |
|                                                                                                                                                                                                                           |       |              |       |                  |       |
| Commitments and contingencies                                                                                                                                                                                                  |       |              |       |                  |       |
|                                                                                                                                                                                                                           |       |              |       |                  |       |
| Shareholders’ equity:                                                                                                                                                                                                     |       |              |       |                  |       |
| Class A common stock, $.0001 par  value, 150,000,000 shares authorized, 18,619,321 and 19,553,631  shares issued and outstanding at June 30, 2008  and December 31, 2007, respectively |       | 2                 |       | 2                     |       |
| Class B common stock, $.0001 par  value, 50,000,000 shares authorized, 5,400,000 issued and outstanding at  June 30, 2008 and December 31, 2007                                                            |       | 1                 |       | 1                     |       |
| Additional paid-in capital                                                                                                                                                                                                     |       | 163,144           |       | 174,046               |       |
| Accumulated other comprehensive income                                                                                                                                                                                         |       | 93                |       | 991                   |       |
| Retained earnings                                                                                                                                                                                                              |       | 30,142            |       | 25,348                |       |
| Total shareholders’ equity                                                                                                                                                                                                |       | 193,382           |       | 200,388               |       |
| Total liabilities and shareholders’ equity                                                                                                                                                                                |       | $                 | 233,793    |                  | $          | 240,712 |   |

 

See accompanyingnotes to the interim condensed consolidated financial statements.

 

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**GAIAM, INC.Condensed consolidated statements of operations**

 
| ** **                                                              | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| **(in thousands, except per share data)**      | ** ** | **2008**                                                          | ** ** | **2007**                                                        | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                    |       |                                                              |       |                                                            |       |   |   |   |   |
| Net revenue                                                             |       | $                                                                 | 57,217     |                                                            | $          | 52,361 |   | $ | 122,390 |   | $ | 110,819 |   |
| Cost of goods sold                                                      |       | 21,064                                                            |       | 18,730                                                          |       | 45,259 |   | 39,712 |   |
| Gross profit                                                            |       | 36,153                                                            |       | 33,631                                                          |       | 77,131 |   | 71,107 |   |
|                                                                    |       |                                                              |       |                                                            |       |   |   |   |   |
| Expenses:                                                               |       |                                                              |       |                                                            |       |   |   |   |   |
| Selling and operating                                                   |       | 33,704                                                            |       | 32,294                                                          |       | 68,637 |   | 64,900 |   |
| Corporate, general and administration                                   |       | 3,096                                                             |       | 3,264                                                           |       | 6,475 |   | 6,509 |   |
| Other general income and expense                                        |       | 26,708                                                            |       | —                                                          |       | 26,708 |   | — |   |
| Total expenses                                                          |       | 63,508                                                            |       | 35,558                                                          |       | 101,820 |   | 71,409 |   |
|                                                                    |       |                                                              |       |                                                            |       |   |   |   |   |
| Income (loss) from operations                                           |       | (27,355                                                           | )          | (1,927                                                          | )          | (24,689 | ) | (302 | ) |
|                                                                    |       |                                                              |       |                                                            |       |   |   |   |   |
| Gain from issuance of subsidiary stock                                  |       | 31,270                                                            |       | —                                                          |       | 31,270 |   | — |   |
| Interest and other income                                               |       | 269                                                               |       | 1,144                                                           |       | 738 |   | 2,347 |   |
|                                                                    |       |                                                              |       |                                                            |       |   |   |   |   |
| Income (loss) before income taxes and  minority interest                |       | 4,184                                                             |       | (783                                                            | )          | 7,319 |   | 2,045 |   |
|                                                                    |       |                                                              |       |                                                            |       |   |   |   |   |
| Income tax expense (benefit)                                            |       | 1,653                                                             |       | (309                                                            | )          | 2,891 |   | 808 |   |
| Minority interest in net loss of consolidated  subsidiaries, net of tax |       | 50                                                                |       | 128                                                             |       | 366 |   | 169 |   |
| Net income (loss)                                                       |       | $                                                                 | 2,581      |                                                            | $          | (346 | ) | $ | 4,794 |   | $ | 1,406 |   |
|                                                                    |       |                                                              |       |                                                            |       |   |   |   |   |
| Net income (loss) per share:                                            |       |                                                              |       |                                                            |       |   |   |   |   |
| Basic                                                                   |       | $                                                                 | 0.10       |                                                            | $          | (0.01 | ) | $ | 0.19 |   | $ | 0.06 |   |
| Diluted                                                                 |       | $                                                                 | 0.10       |                                                            | $          | (0.01 | ) | $ | 0.19 |   | $ | 0.06 |   |
| Shares used in computing net income (loss)  per share:                  |       |                                                              |       |                                                            |       |   |   |   |   |
| Basic                                                                   |       | 24,707                                                            |       | 24,655                                                          |       | 24,895 |   | 25,159 |   |
| Diluted                                                                 |       | 24,895                                                            |       | 24,655                                                          |       | 25,120 |   | 25,338 |   |

 

See accompanyingnotes to the interim condensed consolidated financial statements.

 

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**GAIAM, INC.Condensed consolidated statements of cash flows**

 
| ** **                                                                                             | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| **(in thousands)**                                                                                | ** ** | **2008**                                                        | ** ** | **2007** | ** ** |
| ** **                                                                                             | ** ** | **(unaudited)**                                                 | ** ** |
| **Operating activities**                                                                          | ** ** | ** **                                                      | ** ** | ** ** | ** ** |
| Net income                                                                                             |       | $                                                               | 4,794      |   | $ | 1,406 |   |
| Adjustments to reconcile net income to net  cash (used in) provided by operating activities: |       |                                                            |       |   |   |
| Depreciation                                                                                           |       | 1,552                                                           |       | 886 |   |
| Amortization                                                                                           |       | 3,284                                                           |       | 4,474 |   |
| Minority interest in consolidated subsidiaries,  net of tax                                            |       | (366                                                            | )          | (169 | ) |
| Net (gain) loss on investments and property                                                            |       | (579                                                            | )          | 138 |   |
| Share-based compensation expense                                                                       |       | 671                                                             |       | 531 |   |
| Deferred and stock option income tax  expense                                                          |       | 3,525                                                           |       | 1,677 |   |
| Gain on issuance of subsidiary stock                                                                   |       | (31,270                                                         | )          | — |   |
| Impairment loss                                                                                        |       | 25,879                                                          |       | — |   |
| Changes in operating assets and  liabilities, net of effects from acquisitions and dispositions:       |       |                                                            |       |   |   |
| Accounts receivable, net                                                                               |       | 4,103                                                           |       | 16,824 |   |
| Inventory, net                                                                                         |       | 2,479                                                           |       | (922 | ) |
| Deferred advertising costs                                                                             |       | (1,161                                                          | )          | (285 | ) |
| Other current assets                                                                                   |       | (3,371                                                          | )          | (82 | ) |
| Accounts payable                                                                                       |       | (8,367                                                          | )          | (8,106 | ) |
| Accrued liabilities                                                                                    |       | (4,602                                                          | )          | 51 |   |
| Net cash (used in) provided by operating  activities                                                   |       | (3,429                                                          | )          | 16,423 |   |
|                                                                                                   |       |                                                            |       |   |   |
| **Investing activities**                                                                               |       |                                                            |       |   |   |
| Purchase of property, equipment and media  rights                                                      |       | (22,813                                                         | )          | (3,088 | ) |
| Purchase of acquisitions, net of cash  acquired                                                        |       | (7,274                                                          | )          | (150 | ) |
| Disposition of investments, net                                                                        |       | (1,381                                                          | )          | 3,871 |   |
| Net cash (used in) provided by investing  activities                                                   |       | (31,468                                                         | )          | 633 |   |
|                                                                                                   |       |                                                            |       |   |   |
| **Financing activities**                                                                               |       |                                                            |       |   |   |
| Proceeds from Real Goods IPO, net                                                                      |       | 48,154                                                          |       | — |   |
| Repurchase of Class A common stock,  including related costs                                      |       | (18,086                                                         | )          | (32,907 | ) |
| Proceeds from issuance of common stock and  tax benefits from option exercises                         |       | 1,508                                                           |       | 18 |   |
| Net cash provided by (used in) financing  activities                                                   |       | 31,576                                                          |       | (32,889 | ) |
|                                                                                                   |       |                                                            |       |   |   |
| Effects of exchange rates on cash and cash  equivalents                                                |       | (13                                                             | )          | 109 |   |
|                                                                                                   |       |                                                            |       |   |   |
| Net change in cash and cash equivalents                                                                |       | (3,334                                                          | )          | (15,724 | ) |
| Cash and cash equivalents at beginning of  period                                                      |       | 66,258                                                          |       | 104,876 |   |
| Cash and cash equivalents at end of period                                                             |       | $                                                               | 62,924     |   | $ | 89,152 |   |
|                                                                                                   |       |                                                            |       |   |   |
| **Supplemental cash flow information**                                                                 |       |                                                            |       |   |   |
| Interest paid                                                                                          |       | $                                                               | 39         |   | $ | — |   |
| Income taxes paid                                                                                      |       | $                                                               | 2,708      |   | $ | 166 |   |
| Common stock issued for acquisitions                                                                   |       | $                                                               | 5,105      |   | $ | — |   |

 

See accompanyingnotes to the interim condensed consolidated financial statements

 

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**Notes to interim condensedconsolidated financial statements**

 

**1.  Organization,Nature of Operations, and Principles of 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, responsible media and conscious community. We were incorporatedunder the laws of the State of Colorado on July 7, 1988.

 

Wehave prepared the accompanying unaudited interim condensed consolidatedfinancial statements in accordance with accounting principles generallyaccepted in the United States, or GAAP, and they include our accounts and thoseof our subsidiaries.  Intercompanytransactions and balances have been eliminated.

 

Theunaudited condensed consolidated financial position, results of operations andcash flows for the interim periods disclosed in this report are not necessarilyindicative of future financial results.

 

**2. Significant Accounting Policies**

 

Nochanges were made to our significant accounting policies during the three andsix months ended June 30, 2008, except for the adoption of Financial AccountingStandards Board, or FASB, Statement No. 157, *Fair ValueMeasurement* and the adoption of Staff Accounting Bulletin No. 51,*Accounting for Sales of Stock by a*Subsidiary,whereby we elected the income statement approach for the recognition of gainsand losses resulting from the issuance of subsidiary stock.  SFAS 157 defines fair value, establishes aframework for measuring fair value in GAAP, and expands disclosures about fairvalue measurements. The implementation of SFAS 157 did not have a material impacton our unaudited interim condensed consolidated financial statements for thethree and six months ended June 30, 2008.

 

*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.

 

*RecentlyIssued Accounting Pronouncements*

 

On March 19, 2008, the FASB issued FASBStatement No. 161, *Disclosures aboutDerivative Instruments and Hedging Activities – an Amendment of FASB Statement133*.  SFAS 161 enhancesrequired disclosures regarding derivatives and hedging activities, includingenhanced disclosures regarding how: (a) an entity uses derivative instruments;(b) derivative instruments and related hedge items are accounted for underFASB Statement No. 133, *Accounting for DerivativeInstruments and Hedging Activities*; and (c) derivativeinstruments and related hedged items affect an entity’s financial position,financial performance, and cash flows. Specifically, SFAS 161 requires:

 

·                  disclosureof the objectives for using derivative instruments be disclosed in terms ofunderlying risk and accounting designation;

·                  disclosureof the fair values of derivative instruments and their gains and losses in atabular format;

·                  disclosureof information about credit-risk-related contingent features; and

·                  cross-referencefrom the derivative footnote to other footnotes in which derivative-relatedinformation is disclosed.

 

SFAS161 is effective for fiscal years and interim periods beginning after November 15,2008.  Early adoption is encouraged.  We will adopt the provisions of SFAS 161 inour fiscal year commencing January 1, 2009. We currently believe thatadoption of the provisions of SFAS 161 will not have a material impact on ourconsolidated financial statements.

 

**3.****             ****Property and Equipment**

 

On April 3, 2008, we purchased land, an officebuilding, and improvements located in Colorado for a total cost of approximately$15.7 million in cash. We consolidated our Colorado operations to this newlyacquired property during the second quarter of 2008 upon expiration of ourexisting facility lease.

 

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**4.****             ****Impairment of Assets**

 

As a result of changes in the retail businessclimate, we impaired a portion of the GoodTimes media library, LIME goodwilland other intangibles, certain deferred advertising costs, and related assetsat the end of the second quarter of 2008. These noncash, tax deductible impairments reduced the business anddirect to consumer total assets by $25.0 million and $0.9 million,respectively.  We determined theestimated fair value of these asset groups using various valuation techniques,such as estimated future sales, internal budgets and projections, and judgmentabout existing brand potential.  Theresulting impairment loss of $25.9 million is reported in other general incomeand expense on our condensed consolidated statements of operations for thethree and six months ended June 30, 2008.

 

**5.****             ****Shareholders’ Equity**

 

During the six months ended June 30,2008, we issued a total of 2,446 shares of our Class A common stock to ourindependent directors, in lieu of cash compensation, for services rendered in2007 and 2008; issued 221,152 shares of our Class A common stock as partof the consideration to acquire the remaining and controlling ownership interestsin two businesses (see Note 10, Mergers and Acquisitions); and issued 127,180shares of our Class A common stock upon exercise of options under our 1999Long-Term Incentive Plan, including 110,000 shares exercised and held by ourPresident.

 

Additionally,during the first half of 2008, we repurchased 1,285,088 shares of our Class Acommon stock for a total cost of $19.0 million. See also Note 10, Mergers and Acquisitions.  We recorded these repurchases of our sharesin accordance with the cost method of accounting for treasury stock.  Since we have not yet decided the ultimatedisposition of the re-acquired shares, their combined cost is reflected in thecondensed consolidated balance sheet at June 30, 2008 as a $19.0 millionreduction to additional paid-in capital.

 

Duringthe second quarter of 2008, our subsidiary, Real Goods Solar, Inc. (“RealGoods”), completed an initial public offering (“IPO”) 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 (see Note 10, Mergers and Acquisitions), issued 11,032 othershares valued at $77,000, and made other non-stock related equity transactions,for a net gain of $32.1 million to us. Following these transactions we owned 63.3% of Real Goods.  The portion of our gain resulting from RealGoods selling new shares, $31.3 million, is reflected in gain from issuance ofsubsidiary stock on our condensed consolidated statements of operations for thethree and six months ended June 30, 2008 and has been tax affected.  The remaining net gain resulting from otherReal Goods non-stock related equity transactions, which was not tax affected,is recorded as a reduction to additional paid-in capital on our condensedconsolidated balance sheet at June 30, 2008.

 

During2007, we issued a total of 4,955 shares of our Class A common stock to ourindependent directors, in lieu of cash compensation, for services rendered in2006 and 2007; issued 1,875 restricted shares of our Class A common stockto two of our named executive officers as bonus compensation; issued 80,795shares of our Class A common stock as part of the consideration to acquirecontrolling ownership interests in two businesses; issued 216,070 shares of ourClass A common stock upon exercise of options under our 1999 Long-TermIncentive Plan; and repurchased 2.5 million shares of our Class A commonstock.

 

**6.****              ****Comprehensive Income (Loss)**

 

Ourcomprehensive income (loss) is comprised of net income (loss) and foreigncurrency translation adjustments, net of income taxes. Comprehensive income(loss), net of related tax effects, was as follows:

 
| ** **                                                                        | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                              |       |                                            |       |                                          |       |   |   |   |   |
| Net income (loss)                                                                 |       | $                                               | 2,581      |                                          | $          | (346 | ) | $ | 4,794 |   | $ | 1,406 |   |
| Foreign currency translation adjustment,  net of reclassification and related tax |       | —                                          |       | 72                                            |       | (898 | ) | 84 |   |
| Comprehensive income (loss), net of taxes                                         |       | $                                               | 2,581      |                                          | $          | (274 | ) | $ | 3,896 |   | $ | 1,490 |   |

 

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The disposition of our investment in our UKoperations during the quarter ended March 31, 2008 resulted in a net losswhich lowered our net income.  Theforeign currency translation amount attributable to that entity and accumulatedin the translation adjustment component of equity was removed from the othercomprehensive income component of equity and reported as part of the loss onthe sale of the investment.

 

**7.****              ****Share-Based****Payments**

 

During the six months ended June 30,2008, we granted 170,500 stock options to employees and cancelled 4,960 stockoptions. Total share-based compensation recognized was $0.3 million for each ofthe three months ended June 30, 2008 and 2007, and $0.7 million and $0.5million for the six months ended June 30, 2008 and 2007, respectively, andis shown in corporate, general and administration expenses on our condensedconsolidated statements of operations.

 

**8.****              ****Net****Income****(Loss) Per Share**

 

Basicnet income per share excludes any dilutive effects of options. We compute basicnet income per share using the weighted average number of common sharesoutstanding during the period. We compute diluted net income per share usingthe weighted average number of common and common stock equivalent sharesoutstanding during the period. We excluded from the computation of diluted netincome (loss) per share common equivalent shares of 319,000 and 590,000 for thethree months ended June 30, 2008 and 2007, respectively, and 205,000 and549,000 for the six months ended June 30, 2008, respectively, becausetheir effect was antidilutive.

 

Thefollowing table sets forth the computation of basic and diluted net income(loss) per share:

 
| ** **                                                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in thousands, except per share data)** | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                               |       |                                            |       |                                          |       |   |   |   |   |
| Numerator for basic and diluted net income  (loss) per share       |       | $                                               | 2,581      |                                          | $          | (346 | ) | $ | 4,794 |   | $ | 1,406 |   |
| Denominator:                                                       |       |                                            |       |                                          |       |   |   |   |   |
| Weighted average shares for basic net  income (loss) per share     |       | 24,707                                          |       | 24,655                                        |       | 24,895 |   | 25,159 |   |
| Effect of dilutive securities:                                     |       |                                            |       |                                          |       |   |   |   |   |
| Weighted average of common stock and stock  options                |       | 188                                             |       | —                                        |       | 225 |   | 179 |   |
| Denominators for diluted net income (loss)  per share              |       | 24,895                                          |       | 24,655                                        |       | 25,120 |   | 25,338 |   |
|                                                               |       |                                            |       |                                          |       |   |   |   |   |
| Net income (loss) per share – basic                           |       | $                                               | 0.10       |                                          | $          | (0.01 | ) | $ | 0.19 |   | $ | 0.06 |   |
| Net income (loss) per share – diluted                         |       | $                                               | 0.10       |                                          | $          | (0.01 | ) | $ | 0.19 |   | $ | 0.06 |   |

 

**9.****              ****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 business.

 

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. Contribution margin is defined as netsales, less cost of goods sold and direct expenses.  Prior period amounts have been restated toreflect the addition of our solar reporting segment.

 

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Financialinformation for our segments is as follows:

 
| ** **                                                              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in thousands)**                                                 | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net revenue:                                                            |       |                                            |       |                                          |       |   |   |   |   |
| Direct to consumer                                                      |       | $                                               | 28,947     |                                          | $          | 25,838 |   | $ | 61,152 |   | $ | 55,539 |   |
| Business                                                                |       | 19,429                                          |       | 22,009                                        |       | 45,829 |   | 46,402 |   |
| Solar                                                                   |       | 8,841                                           |       | 4,514                                         |       | 15,409 |   | 8,878 |   |
| Consolidated net revenue                                                |       | 57,217                                          |       | 52,361                                        |       | 122,390 |   | 110,819 |   |
| Contribution margin (loss):                                             |       |                                            |       |                                          |       |   |   |   |   |
| Direct to consumer                                                      |       | (3,478                                          | )          | (2,304                                        | )          | (4,644 | ) | (2,976 | ) |
| Business                                                                |       | (23,745                                         | )          | 102                                           |       | (19,424 | ) | 2,327 |   |
| Solar                                                                   |       | (132                                            | )          | 275                                           |       | (621 | ) | 347 |   |
| Consolidated contribution margin (loss)                                 |       | (27,355                                         | )          | (1,927                                        | )          | (24,689 | ) | (302 | ) |
| Reconciliation of contribution margin  (loss) to net income (loss):     |       |                                            |       |                                          |       |   |   |   |   |
| Gain from issuance of subsidiary stock                                  |       | 31,270                                          |       | —                                        |       | 31,270 |   | — |   |
| Interest and other income                                               |       | 269                                             |       | 1,144                                         |       | 738 |   | 2,347 |   |
| Income tax expense (benefit)                                            |       | 1,653                                           |       | (309                                          | )          | 2,891 |   | 808 |   |
| Minority interest in net loss of  consolidated subsidiaries, net of tax |       | 50                                              |       | 128                                           |       | 366 |   | 169 |   |
| Net income (loss)                                                       |       | $                                               | 2,581      |                                          | $          | (346 | ) | $ | 4,794 |   | $ | 1,406 |   |

 

# **Ourgoodwill balance of $47.0 million at June 30, 2008 was allocated $17.2million, $19.7 million, and $10.1 million to the direct to consumer, business,and solar segments, respectively.  Ourbalance of $42.9 million at December 31, 2007 was allocated $16.0 million,$21.0 million, and $5.9 million to the direct to consumer, business, and solarsegments, respectively.**

 

# **10.**            Mergers and Acquisitions

# ** **

Duringthe first quarter of 2008, Real Goods Carlson, Inc. acquired certainassets of Carlson Solar, Inc., and we acquired 100% ownership interest ofSPRI Products, Inc. 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 President’s 11.6% ownership in one of its subsidiaries,Real Goods Carlson, Inc. Consideration paid for the minority interest of Real Goods Carlson Solarwas the same relative fair value as the equity received.  The assets acquired from Carlson Solar weredetermined to have all inputs and processes necessary for the transferredassets to continue to conduct normal operations after acquisition; accordingly,the purchase was treated as a business combination.  The total cost of these business acquisitionswas $15.0 million, including direct acquisition costs, of which $7.5 millionwas paid in cash, $5.1 million in our Class A common stock, $1.9 millionin Real Goods Class A common stock, and $0.5 million in assumedliabilities. For these acquisitions, we have preliminarily recognized $4.0million, $6.3 million, and $0.9 million of solar, business, and direct toconsumer segment goodwill, respectively, of which $2.4 million is expected tobe deductible for tax purposes, and $0.8 million of intangibles subject toamortization (48 month weighted-average useful life).  The marketing related intangibles are $0.6million (43 month weighted-average useful life) and the customer relatedintangibles are $0.2 million (60 month weighted-average useful life).

 

During the quarter ended March 31, 2008, wesold our investment in the non-LOHAS business newspapers that were acquired aspart of a previous acquisition and sold our 51% ownership interest in GaiamLimited, our UK subsidiary.  We received50,000 shares of Gaiam Class A common stock, valued at $0.9 million, aspart of the consideration for our UK subsidiary.

 

In2007, we acquired varying amounts of controlling ownership interest in severalentities. Three of the acquisitions call for additional consideration, payablein cash or shares of our Class A common stock (up to a maximum of 50,000shares), contingent upon the achievement of a certain membership thresholdwithin the next two years or our sale of the acquired business or its assets,the amount of revenue generated from certain potential customers and thecollection of certain rebates, or the attaining of a certain level of pre-taxprofits in our community business over its first twelve months ofoperations.  At the time any of thiscontingent consideration becomes probable and can be estimated, we willrecognize it as additional purchase price and allocate it to goodwill and otherintangibles, as appropriate.

 

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Weare still in the process of finalizing our assessment of the estimated fairvalue of the net assets acquired during 2007 and 2008 and, thus, the amount ofgoodwill and other intangibles previously recorded is subject to refinement. Wehave included results from operations of these acquired companies in ourcondensed consolidated financial statements from their respective effectiveacquisition dates.

 

# **11.**            Income Taxes

# ** **

Duringthe first half of 2008, we recognized a deferred tax liability of approximately$12.1 million reflecting a financial gain from the new issuance of Real Goodsstock (see Note 5, Shareholders’ Equity), partially offset by changes in ourdeferred tax assets of $8.6 million, primarily reflecting the financialimpairment of certain intangibles (see Note 4, Impairment of Assets).

 

# **Item 2.**                                   Management’s discussion and analysis offinancial condition and results of operations

# ** **

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

 

# **Overview andOutlook**

# ** **

# **We are alifestyle media company providing a broad selection of information, media,products and services to customers who value personal development, wellness,ecological lifestyles, responsible media and conscious community.**Our media brand isbuilt around our ability to develop and offer media content, products,lifestyle solutions and community to consumers in the LOHAS market.

# ** **

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

# ** **

# **Ourcontent forms the basis of our proprietary offerings, which then drive demandfor parallel product and service offerings. Our operations are verticallyintegrated from content creations, through product development and sourcing, tocustomer service and distribution. We market our products and services acrossthree segments, business, direct to consumer, and solar. We primarilydistribute products in each of these sales segments from a single fulfillmentcenter or drop-ship products directly to customers.**

# ** **

# **Ourbusiness segment sells directly to retailers, with our products available inapproximately 72,000 retail doors in the United States. During the secondquarter of 2008, this segment generated revenues of $19.4 million, down from$22.0 million during the second quarter of 2007, reflecting an 11.7% decrease.This decrease reflects our lower recognized international revenue due to ourstrategy change to operate our international markets as licensing arrangementsrather than product sales, partially offset by our store-within-storeexpansion, wellness launch, and recent business acquisitions. Domestically,revenues for our business segment improved nearly 54%.  During the quarter we expanded our store-within-storepresence to over 7,500 lifestyle presentations, up from 6,500 at the end of June 2007,which are custom fixtures that we design.**

# ** **

Throughits diverse media reach, the direct to consumer segment provides an opportunityto launch and support new media releases, a sounding board for new producttesting, promotional opportunities, a growing online and off-line community,and customer feedback on us and the LOHAS industry’s focus and future. Duringthe second quarter of 2008, this segment generated revenues of $28.9 million,up from $25.8 million during the second quarter of 2007, reflecting a 12.0%increase.  This increase reflects ourgrowth in Internet sales, memberships and our continued investment in communityand branded direct response marketing, partially offset by the sale of ournon-LOHAS newspapers.

 

DuringMay 2008, our solar energy business consummated an initial public offeringand is now managed as a separate segment. Through recent acquisitions, this business has grown its sales andexpanded its market territories.  Duringthe second quarter, this segment generated revenues of $8.8 million, up from$4.5 million during the second quarter of 2007, reflecting a 95.9%increase.  We will use the IPO proceeds tofund this segment’s working capital needs and general corporate purposes, whichmay include future acquisitions of businesses.

 

Duringthe first half of 2008, we completed acquisitions targeted towards expandingand enhancing our solar market, community reach, and media content. Theseacquisitions were Carlson Solar, Inc., a solar energy integrator locatedin 

 

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southernCalifornia; the remaining 49.9% ownership interest in Conscious Enlightenment,an on-line and off-line community; and SPRI Products, Inc., a leadingmarketer of resistance exercise products for the professional health andfitness industry.

 

Given unsatisfactory results from certain GoodTimes Media brands andthe current and projected economic and market conditions, Gaiam evaluated therecoverability of certain assets assuming that additional media and marketinginvestments would be limited.  As aresult of this evaluation, we revised our business plans for these assets andimpaired $25.9 million of the GoodTimes media library, LIME goodwill and otherintangibles, and related assets at the end of the second quarter of 2008.

 

Webelieve our growth will be driven by information, media content, products, andcommunity delivered to the consumer via broadcast, catalog, Internet,retailers, international licensing, electronic downloads and subscriptionsystems. We have increased our focus on our media content creation anddistribution, which strategically provides increased branding opportunities,significantly higher operating contribution and greater mainstream penetration.We plan to invest in our community and membership businesses over the next twoyears to better capitalize on strong relationships with our loyal consumeraudience and growing broadband. This will allow us to focus on betterleveraging our content.

 

Webelieve a number of factors are important to our long-term success, includingbuilding our brands, increasing international growth by expanding into newmarkets primarily through license arrangements, extending our product linesinto wellness and children’s programs, and enhancing our multimedia platformcommunity through new media opportunities, new membership programs, initiativesand acquisitions.

 

**Results of Operations**

 

Thefollowing table sets forth certain financial data as a percentage of revenuefor the periods indicated:

 
| ** **                                                              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                              | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                    |       |                                            |       |                                          |       |   |   |   |   |
| Net revenue                                                             |       | 100.0                                           | %          | 100.0                                         | %          | 100.0 | % | 100.0 | % |
| Cost of goods sold                                                      |       | 36.8                                            | %          | 35.8                                          | %          | 37.0 | % | 35.8 | % |
| Gross profit                                                            |       | 63.2                                            | %          | 64.2                                          | %          | 63.0 | % | 64.2 | % |
|                                                                    |       |                                            |       |                                          |       |   |   |   |   |
| Expenses:                                                               |       |                                            |       |                                          |       |   |   |   |   |
| Selling and operating                                                   |       | 58.9                                            | %          | 61.7                                          | %          | 56.1 | % | 58.5 | % |
| Corporate, general and administration                                   |       | 5.4                                             | %          | 6.2                                           | %          | 5.3 | % | 5.9 | % |
| Other general income and expense                                        |       | 46.7                                            | %          | —                                        | %          | 21.8 | % | — | % |
| Total expenses                                                          |       | 111.0                                           | %          | 67.9                                          | %          | 83.2 | % | 64.4 | % |
|                                                                    |       |                                            |       |                                          |       |   |   |   |   |
| Income (loss) from operations                                           |       | (47.8                                           | )%         | (3.7                                          | )%         | (20.2 | )% | (0.2 | )% |
|                                                                    |       |                                            |       |                                          |       |   |   |   |   |
| Gain from issuance of subsidiary stock                                  |       | 54.6                                            | %          | —                                        | %          | 25.6 | % | — | % |
| Interest and other income                                               |       | 0.5                                             | %          | 2.2                                           | %          | 0.6 | % | 2.1 | % |
| Income tax expense (benefit)                                            |       | 2.9                                             | %          | (0.6                                          | )%         | 2.4 | % | 0.7 | % |
| Minority interest in net loss of  consolidated subsidiaries, net of tax |       | 0.1                                             | %          | 0.2                                           | %          | 0.3 | % | 0.1 | % |
| Net income (loss) (1)                                                   |       | 4.5                                             | %          | (0.7                                          | )%         | 3.9 | % | 1.3 | % |

 

----

# **(1)  Excluding the effect of the gain on issuance of subsidiarystock, partially offset by the asset impairment loss and other expenses, netincome (loss) was (0.7%) and 1.3% of net revenue for the three and six monthsended June 30, 2008, respectively.**

# ** **

*Three Months Ended June 30, 2008 Compared to Three Months Ended June 30,2007*

 

*Net revenue*.Net revenue increased $4.9 million, or 9.3%, to $57.2 million during the secondquarter of 2008 from $52.4 million during the second quarter of 2007. Netrevenue in our direct to consumer segment increased $3.1 million, or 12.0%, to$28.9 million during the second quarter of 2008 from $25.8 million during thefirst quarter of 2007. This increase in the direct to consumer segment net revenueprimarily reflects the success our ecommerce and increased revenues frombusinesses acquired over the last year, partially offset by declining revenuefrom catalog prospecting.  Our directresponse marketing revenues had only modest growth as a result of increasingmedia costs per order.    Net revenue inour business segment decreased $2.6 million, or 11.7%, to $19.4 million duringthe second quarter of 2008 from $22.0 million during the second quarter of2007.  This decrease primarily reflectsthe decision in the first quarter of 2008 to shift our international businessto licensing arrangements rather than traditional product sales; partiallyoffset by strong sell-through of Gaiam products at retail, and increasedrevenue from our acquisition of SPRI in the first quarter.  Domestically, revenues for our businesssegment improved nearly 54%.  Net revenuein our solar segment increased $4.3 million, or 95.9%, to $8.8 million duringthe second 

 

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quarterof 2008 from $4.5 million during the second quarter of 2007, primarilyreflecting the acquisition of Marin Solar in the fourth quarter of 2007 andCarlson Solar in the first quarter of 2008.

 

*Gross profit*.Gross profit increased $2.5 million, or 7.5%, to $36.2 million during thesecond quarter of 2008 from $33.6 million during the second quarter of 2007. Asa percentage of net revenue, gross profit decreased to 63.2% during the secondquarter of 2008 from 64.2% during the second quarter of 2007. The decrease ingross margin primarily reflects increased revenues in our solar business whichproduces lower margins, higher transportation costs, the devaluation of theU.S. dollar, and the successful launch of our category management program inretail. Excluding the solar business, even after the absorption of thetransportation and U.S. dollar impacts mentioned above, our gross marginincreased to 69.3% from 66.6% a year ago.

 

*Selling and operating expenses*. Selling and operating expenses increased $1.4 million, or 4.4%, to$33.7 million during the second quarter of 2008 from $32.3 million during thesecond quarter of 2007, resulting primarily from increased sales andinvestments made in community, branding, personnel, advertising, and marketingprograms.  As a percentage of netrevenue, selling and operating expenses decreased to 58.9% during the secondquarter of 2008 from 61.7% during the second quarter of 2007, primarilyreflecting the leveraging of our infrastructure against higher revenues.

 

*Corporate, general and administration expenses*. Corporate, general and administrationexpenses decreased $0.2 million, or 5.1%, to $3.1 million during the second quarterof 2008 from $3.3 million during the second quarter of 2007.  As of percentage of net revenue, corporate,general and administration expenses decreased to 5.4% during the second quarterof 2008 from 6.2% during the second quarter of 2007, primarily reflecting thecontinued focus on leveraging corporate resources.

 

*Other general income and expense.* Other general income and expense was $26.7million during the second quarter of 2008 and primarily was comprised of animpairment loss, incremental operating expenses related to the consummation ofthe Real Goods initial public offering, and costs associated with relocating andconsolidating our Colorado and New York offices, partially offset by therecovery in value of a loan receivable.

 

*Gain from issuance of subsidiary stock*.  Gainfrom issuance of subsidiary stock was $31.3 million during the second quarterof 2008 and represented the increase in carrying value of our investment inReal Goods as a resulting of Real Goods’ issuance of new stock.

 

*Interest and other income*. Interest and other income decreased $0.9 million to $0.3 millionduring the second quarter of 2008 from $1.1 million during the second quarterof 2007.  As a percentage of net revenue,other income deceased to 0.5% during the second quarter of 2008 from 2.2%during the second quarter of 2007. The decrease reflects lower interestearnings as we used cash to acquire assets and repurchase 1.3 million shares ofour Class A common stock at an average price of $14.75 per share, and thedecline of average interest rates received on our cash investments from 5.16%as of June 30, 2007 to 2.37% at June 30, 2008.

 

*Minority interest in net loss of consolidated subsidiaries, net ofincome taxes*.Minority interest in net loss of consolidated subsidiaries, net of incometaxes, decreased by $78,000 to $50,000 during the second quarter of 2008 from$128,000 during the second quarter of 2007.

 

*Net income*.  As a result of the above factors, net incomeincreased $2.9 million to $2.6 million during the second quarter of 2008 from aloss of $346,000 during the second quarter of 2007. Net income per shareincreased to $0.10 per share during the second quarter of 2008 from a loss of$0.01 per share during the second quarter of 2007.

 

*Six Months Ended June 30, 2008 Compared to Six Months Ended June 30,2007*

 

*Net revenue*.Net revenue increased $11.6 million, or 10.4%, to $122.4 million during thefirst half of 2008 from $110.8 million during the first half of 2007. Netrevenue in our direct to consumer segment increased $5.6 million, or 10.1%, to$61.2 million during the first half of 2008 from $55.5 million during the firsthalf of 2007. This increase in the direct to consumer segment net revenueprimarily reflects the success our ecommerce and increased revenues from businessesacquired over the last year, partially offset by declining revenue from catalogprospecting.  Our direct responsemarketing revenues had only modest growth as a result of increasing media costsper order.  Net revenue in our businesssegment decreased $0.6 million, or 1.2%, to $45.8 million during the first halfof 2008 from $46.4 million during the first half of 2007, primarily reflectingour lower recognized international revenue due to our strategy change tooperate our international markets as licensing arrangements rather than productsales, partially offset by our continued success in distributing our productsto approximately 72,000 retail doors in the U.S. and increased revenue from ouracquisition of SPRI in the first quarter. Net revenue in our solar segment increased $6.5 million, or 73.6%, to$15.4 million during the first half of 2008 from $8.9 

 

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millionduring the first half of 2007, primarily due to the acquisition of Marin Solarin the fourth quarter of 2007 and Carlson Solar in the first quarter of 2008.

 

*Gross profit*.Gross profit increased $6.0 million, or 8.5%, to $77.1 million during the firsthalf of 2008 from $71.1 million during the first half of 2007. As a percentageof net revenue, gross profit decreased to 63.0% during the first half of 2008from 64.2% during the first half of 2007. The decrease in gross margin primarilyreflects increased revenues in our solar operations which produce lowermargins, higher transportation costs, the devaluation of the U.S. dollar, andthe successful launch of our category management program in retail. Excludingthe solar business, even after the absorption of the transportation and U.S.dollar impacts mentioned above, our gross margin increased to 67.9%.

 

*Selling and operating expenses*. Selling and operating expenses increased $3.7 million, or 5.8%, to$68.6 million during the first half of 2008 from $64.9 million during the firsthalf of 2007, resulting primarily from increased sales and investments made incommunity, branding, personnel, advertising, and marketing programs.  As a percentage of net revenue, selling andoperating expenses decreased to 56.1% during the first half of 2008 from 58.5%during the first half of 2007, primarily reflecting the leveraging of ourinfrastructure against higher revenues and acquired businesses.

 

*Corporate, general and administration expenses*. Corporate, general and administrationexpenses remained consistent at $6.5 million during the first half of 2008 and2007.  As of percentage of net revenue,corporate, general and administration expenses decreased to 5.3% during thefirst half of 2008 from 5.9% during the first half of 2007, primarilyreflecting the continued focus on leveraging corporate resources.

 

*Other general income and expense.* Other general income and expense was $26.7million during the first half of 2008 and primarily was comprised of animpairment loss, incremental operating expenses related to the consummation ofthe Real Goods initial public offering, and costs associated with relocating andconsolidating our Colorado and New York offices, partially offset by therecovery in value of a loan receivable.

 

*Gain from issuance of subsidiary stock*.  Gainfrom issuance of subsidiary stock was $31.3 million during the first half of2008 and represented the increase in carrying value of our investment in RealGoods as a resulting of Real Goods’ issuance of new stock.

 

*Interest and other income*. Interest and other income decreased $1.6 million to $0.7 millionduring the first half of 2008 from $2.3 million during the first half of2007.  As a percentage of net revenue,other income deceased to 0.6% during the first half of 2008 from 2.1% duringthe first half of 2007. The decrease reflects lower interest earnings as weused cash to acquire businesses and assets and repurchase 1.3 million shares ofour Class A common stock at an average price of $14.75 per share, and thedecline of average interest rates received on our cash investments from 5.16%as of June 30, 2007 to 2.37% at June 30, 2008.

 

*Minority interest in net loss of consolidated subsidiaries, net ofincome taxes*.Minority interest in net loss of consolidated subsidiaries, net of incometaxes, increased by $0.2 million to $0.4 million during the first half of 2008from $0.2 million during the first half of 2007.

 

*Net income*.  As a result of the above factors, net incomeincreased $3.4 million to $4.8 million during the first half of 2008 from $1.4million during the first half of 2007. Net income per share increased to $0.19per share during the first half of 2008 from $0.06 per share during the firsthalf of 2007.

 

**Seasonality**

 

Our sales areaffected by seasonal influences. On an aggregate basis, we generate ourstrongest revenues and net income in the fourth quarter due to increasedholiday spending and retailer fitness purchases.

 

**Liquidityand Capital Resources**

 

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

 

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and marketingprograms and brand promotions as needed.

 

Wehave a revolving line of credit agreement with a financial institution thatexpires on October 22, 2009.  Thecredit agreement permits borrowings up to the lesser of $15 million or ourborrowing base which is calculated based upon the collateral value of ouraccounts receivable, inventory, and certain property and equipment. Borrowingsunder this agreement bear interest at the lower of prime rate less 75 basispoints or LIBOR plus 275 basis points. Borrowings are secured by a pledge ofcertain of our assets, and the agreement contains various financial covenants,including those requiring compliance with certain financial ratios. At June 30,2008, we had no amounts outstanding under this agreement; however, $1.6 millionwas reserved for outstanding letters of credit. We believe we have complied with all of the financial covenants underthis credit agreement.

 

***Cash Flows***

 

Thefollowing table summarizes our primary sources (uses) of cash during theperiods presented:

 
| ** **                                              | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in thousands)**                                 | ** ** | **2008**                                      | ** ** | **2007** | ** ** |
| Net cash (used in) provided by:                         |       |                                          |       |   |   |
| Operating activities                                    |       | $                                             | (3,429     | ) | $ | 16,423 |   |
| Investing activities                                    |       | (31,468                                       | )          | 633 |   |
| Financing activities                                    |       | 31,576                                        |       | (32,889 | ) |
| Effects of exchange rates on cash and cash  equivalents |       | (13                                           | )          | 109 |   |
| Net decrease in cash and cash equivalents               |       | $                                             | (3,334     | ) | $ | (15,724 | ) |

 

*Operatingactivities*. Our operating activities used net cash of $3.4million during the first half of 2008 and provided net cash of $16.4 millionduring the first half of 2007. Our net cash used in operating activities duringthe first half of 2008 was primarily attributable to noncash gain from theissuance of Real Goods stock of $31.3 million, decreased accounts payable andaccrued liabilities of $12.9 million, prepaid income taxes and other currentassets of $3.4 million, and deferred advertising costs of $1.2 million,partially offset by the noncash impairment loss of $25.9 million, other noncashadjustments to net income of $8.1 million, net income of $4.8 million, andreductions in accounts receivable and inventory of $4.1 million and $2.5million, respectively. The reduction in accounts payable reflects payments forinventory purchases of holiday and fitness season shipments and our decision tolower accounts payable as interest rates declined.  Our net cash provided by operating activitiesduring the first half of 2007 was primarily attributable to improved accountsreceivable collections of $16.8 million, noncash adjustments to net income of$7.6 million, and net income of $1.4 million, partially offset by the use offunds to reduce accounts payable by $8.1 million and other net uses of $1.3 million.

 

*Investingactivities*. Our investing activities used net cash of $31.5million during the first half of 2008 and provided net cash of $0.6 millionduring the first half of 2007. The net cash used in investing activities duringthe first half of 2008 was used primarily to acquire our new corporateheadquarters property, businesses, equipment and other investments for $27.3million and purchase media for $4.2 million. Our net cash provided by ourinvesting activities during the first half of 2007 primarily resulted from thesale of our LIME investment for $1.4 million and prepayment of the Alpspromissory note principle and interest for $2.4 million, partially offset bycash used for the purchase of property, equipment, investments, and mediarights for $3.2 million.

 

*Financingactivities*. Our financing activities provided net cash of$31.6 million during the first half of 2008 and used net cash of $32.9 millionduring the first half of 2007. Our net cash provided by financing activitiesduring the first half of 2008 primarily reflects net proceeds from Real GoodsIPO of $48.2 million and issuances of our common stock and related tax benefitsof $1.5 million, partially offset by the use of fund to repurchaseapproximately 1.2 million shares of our Class A common stock for $18.1million. We used net cash in our financing activities during the first half of2007 primarily to repurchase 2.5 million shares of our Class A commonstock.

 

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 first half of2008, 221,152 of these shares had been issued to acquire business ownershipinterests.

 

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

 

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

 

**Contractual Obligations**

 

We have commitments pursuant to leaseagreements, but have no outstanding commitments pursuant to long-term debt,capital lease, or purchase obligations. The following table shows ourcommitments to make future payments under operating leases:

 
| **(in thousands)**     | ** ** | **Total** | ** ** | **< 1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **> 5 years** | ** ** |
|-----------------------------|------------|-----------|------------|---------------------------|------------|--------------------|------------|--------------------|------------|----------------------------|------------|
| Operating lease obligations |       | $         | 9,716      |                      | $          | 2,621              |       | $                  | 3,273      |                       | $          | 2,045 |   | $ | 1,777 |   |
|                             |            |           |            |                           |            |                    |            |                    |            |                            |            |  |  |  |  |  |

 

**Risk Factors**

 

We wish to caution you that there are risksand uncertainties that could cause our actual results to be materiallydifferent from those indicated by forward looking statements that we make fromtime to time in filings with the Securities and Exchange Commission, newsreleases, reports, proxy statements, registration statements and other writtencommunications as well as oral forward looking statements made from time totime by our representatives. These risks and uncertainties include, but are notlimited to, those risks listed in our Annual Report on Form 10-K for theyear ended December 31, 2007. Additional risks and uncertainties that wecurrently deem immaterial may also impair our business operations, and historicalresults are not necessarily an indication of the future results. Except for thehistorical information contained herein, the matters discussed in this analysisare forward-looking statements that involve risk and uncertainties, including,but not limited to, general economic and business conditions, competition,pricing, brand reputation, consumer trends, and other factors which are oftenbeyond our control. We do not undertake any obligation to updateforward-looking statements except as required by law.

 

**Item 3.   Quantitative and 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.

 

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. Since thepercentage of our international purchases denominated in currencies other thanthe U.S. dollar is small, any currency risks related to these transactions areimmaterial to us. However, a decline in the relative value of the U.S. dollarto other foreign currencies could lead to increased purchasing costs.  In order to mitigate this exposure, we makevirtually all of our purchase commitments in U.S. dollars.

 

**Item 4.    Controls and Procedures**

 

**Evaluation of Disclosure Controls and Procedures**

 

Ourchief executive officer and chief financial officer conducted an evaluation ofthe effectiveness of the design and operation of our disclosure controls andprocedures, as defined in Rule 13a-15(e) and Rule 15d-15(e) underthe Exchange Act. Based upon their evaluation as of June 30, 2008, ourchief executive officer and chief financial officer have concluded that thosedisclosure controls and procedures are effective.

 

**Changes in Internal Control over Financial Reporting**

 

Nochanges in our internal control over financial reporting occurred during thethree and six months ended June 30, 2008 that have materially affected, orare reasonably likely to materially affect, our internal control over financialreporting.

 

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## **PART II.   OTHER INFORMATION**

## ** **

**Item 1.    LegalProceedings**

 

From time to time, we are involved in legal proceedingsthat we consider to be in the normal course of business. We do not believe thatany of these proceedings will have a material adverse effect on our business.

 

**Item 1A. Risk Factors**

 

No material changes.

 

**Item 2.    Sales ofUnregistered Securities and Use of Proceeds**

 

We had no sales of unregistered securities duringthe quarter ended June 30, 2008.

 

We purchased shares of our Class A common stockas follows:

 

ISSUER PURCHASES OF EQUITY SECURITIES

 
| **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** | ** ** |
|---------------|------------|--------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 5/15/2008 (1) |       | 6,400                                                                          |       | $                                                                             | 15.6840    |                                                                                                                                                           | —     |                                                                                                                                                                                                            | —     |   |
| 5/16/2008 (1) |       | 29,200                                                                         |       | $                                                                             | 15.3609    |                                                                                                                                                           | —     |                                                                                                                                                                                                            | —     |   |
| 5/19/2008 (1) |       | 15,300                                                                         |       | $                                                                             | 15.4075    |                                                                                                                                                           | —     |                                                                                                                                                                                                            | —     |   |
| 5/20/2008 (1) |       | 59,000                                                                         |       | $                                                                             | 14.8289    |                                                                                                                                                           | —     |                                                                                                                                                                                                            | —     |   |
| 5/21/2008 (1) |       | 65,300                                                                         |       | $                                                                             | 14.4340    |                                                                                                                                                           | —     |                                                                                                                                                                                                            | —     |   |
| 5/22/2008 (1) |       | 250,000                                                                        |       | $                                                                             | 15.3500    |                                                                                                                                                           | —     |                                                                                                                                                                                                            | —     |   |
| 5/23/2008 (1) |       | 65,000                                                                         |       | $                                                                             | 15.1257    |                                                                                                                                                           | —     |                                                                                                                                                                                                            | —     |   |
| 5/27/2008 (1) |       | 22,443                                                                         |       | $                                                                             | 15.4513    |                                                                                                                                                           | —     |                                                                                                                                                                                                            | —     |   |
| 5/28/2008 (1) |       | 45,139                                                                         |       | $                                                                             | 15.3757    |                                                                                                                                                           | —     |                                                                                                                                                                                                            | —     |   |
| 6/2/2008 (1)  |       | 50,000                                                                         |       | $                                                                             | 14.7460    |                                                                                                                                                           | —     |                                                                                                                                                                                                            | —     |   |
| 6/6/2008 (1)  |       | 69,565                                                                         |       | $                                                                             | 14.0171    |                                                                                                                                                           | —     |                                                                                                                                                                                                            | —     |   |
| 6/9/2008 (1)  |       | 275,000                                                                        |       | $                                                                             | 14.0000    |                                                                                                                                                           | —     |                                                                                                                                                                                                            | —     |   |
| 6/10/2008 (1) |       | 74,500                                                                         |       | $                                                                             | 12.9410    |                                                                                                                                                           | —     |                                                                                                                                                                                                            | —     |   |
| 6/11/2008 (1) |       | 74,441                                                                         |       | $                                                                             | 12.4259    |                                                                                                                                                           | —     |                                                                                                                                                                                                            | —     |   |
| 6/26/2008 (1) |       | 41,700                                                                         |       | $                                                                             | 13.9542    |                                                                                                                                                           | —     |                                                                                                                                                                                                            | —     |   |
| 6/30/2008 (1) |       | 16,300                                                                         |       | $                                                                             | 13.6022    |                                                                                                                                                           | —     |                                                                                                                                                                                                            | —     |   |

 

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(1)   We repurchased these sharesof our Class A common stock in the open market.

 

**Item 3.    DefaultsUpon Senior Securities**

 

None.

 

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**Item 4.   Submission of Matters to a Vote of Security Holders**

 

On June 3, 2008, Gaiam held an annual meeting of shareholders. Theshareholders elected seven directors to serve until the next annual meeting ofshareholders to be held in 2009 or until their successors are duly elected andqualified. The results of this vote follow:

 
| Jirka  Rysavy       |   | For: | 67,860,598 |   | Withheld: | 1,992,014 |   |
|---------------------|--------|------|------------|--------|-----------|-----------|--------|
| Lynn  Powers        |   | For: | 67,865,916 |   | Withheld: | 1,986,696 |   |
| James  Argyropoulos |   | For: | 67,652,840 |   | Withheld: | 2,199,772 |   |
| Barnet  M. Feinblum |   | For: | 66,340,648 |   | Withheld: | 3,511,964 |   |
| Barbara  Mowry      |   | For: | 67,652,318 |   | Withheld: | 2,200,294 |   |
| Paul  H. Ray        |   | For: | 69,735,198 |   | Withheld: | 117,414   |   |

 

**Item 5.    OtherInformation**

 

None.

 

**Item 6.    Exhibits**

 

a)     Exhibits.

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                          |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                     |
| 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 Chief Financial Officer pursuant to Rule 13a-14(a) under the  Securities Exchange Act of 1934 (filed herewith).                                          |
| 32.1                 |       | Certification  of the Chief Executive Officer 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  of the Chief Financial Officer 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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### **Signatures**

### ** **

Inaccordance with the requirements of the Securities and Exchange Act, theregistrant caused this report to be signed on its behalf, by the undersigned,thereunto duly authorized.

 
|   | Gaiam, Inc.      |
|--------|-----------------------|
|   | (Registrant)          |
|   | August 11,  2008 |
|   |                  |
|   | By:                   | /s/  Jirka Rysavy |
|   |                  | Jirka  Rysavy |
|   |                  | Chief  Executive Officer |
|   |                  |   |
|   | By:                   | /s/  Vilia Valentine |
|   |                  | Vilia  Valentine |
|   |                  | Chief  Financial Officer |
|   |                  | (principal  accounting officer) |

 

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