**United StatesSecurities and Exchange Commission**

**Washington,D.C. 20549**

**Form 10-Q**

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

**For the quarterly period ended March31, 2007**

**OR**

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

**CommissionFile Number 0-27517**

**GAIAM, INC.**

**(Exact name of registrant asspecified in its charter)**

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

 

**360INTERLOCKEN BLVD.**

**BROOMFIELD,COLORADO 80021**

(Address of principal executive offices)

**(303)222-3600**

(Registrant’s telephone number, including area code)

Indicateby check mark whether the registrant:  (1) has filed all reports requiredto be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports) and (2) has been subject to such filingrequirements for the past 90 days.  YES  x    NO  o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer or a non-accelerated filer. See definition of “acceleratedfiler” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

| Large Accelerated  Filer  o |   | Accelerated  Filer  x |   | Non-Accelerated  Filer  o |
|---------------------------------------|--------|---------------------------------|--------|-------------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of 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 May 7, 2007 |
|------------------------------------------|--------|----------------------------|
| Class A Common  Stock ($.0001 par value) |   | 19,252,636                 |
| Class B Common  Stock ($.0001 par value) |   | 5,400,000                  |

 

 

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**GAIAM, INC.**

**FORM 10-Q**

**INDEX**
| **PART I.  FINANCIAL INFORMATION** |
|------------------------------------|
|                               |   |   |
| **Item 1.**                        | ** ** | **Financial  Statements (Unaudited):** |
| ** **                         |   | Condensed  Consolidated Balance Sheets at March 31, 2007 and December 31, 2006 |
| ** **                         |   | Condensed  Consolidated Statements of Operations for the Three Months Ended March 31,  2007 and 2006 |
| ** **                         |   | Condensed  Consolidated Statements of Cash Flows for the Three Months Ended March 31,  2007 and 2006 |
| ** **                         |   | Notes to  Interim Condensed Consolidated Financial Statements |
| ** **                         | ** ** | ** ** |
| **Item 2.**                        |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
| ** **                         | ** ** | ** ** |
| **Item 3.**                        |   | Quantitative  and Qualitative Disclosures About Market Risk |
| ** **                         | ** ** | ** ** |
| **Item 4.**                        |   | Controls and  Procedures |
| ** **                         | ** ** | ** ** |
| **PART II. OTHER  INFORMATION**    |
| ** **                         | ** ** | ** ** |
| **Item 1.**                        |   | Legal Proceedings |
| ** **                         | ** ** | ** ** |
| **Item 1A.**                       |   | Risk  Factors |
| ** **                         | ** ** | ** ** |
| **Item 2.**                        |   | Sales of  Unregistered Securities and Use of Proceeds |
| ** **                         | ** ** | ** ** |
| **Item 3**                         |   | Defaults Upon  Senior Securities |
| ** **                         | ** ** | ** ** |
| **Item 4.**                        |   | Submission of  Matters to a Vote of Security Holders |
| ** **                         | ** ** | ** ** |
| **Item 5.**                        |   | Other Information |
| ** **                         | ** ** | ** ** |
| **Item  6.**                       |   | Exhibits |
| ** **                         | ** ** | ** ** |
| ** **                         |   | SIGNATURES |

 

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**CAUTIONARY STATEMENT REGARDINGFORWARD-LOOKING STATEMENTS**

# 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 Gaiam or its management are intended to identify suchforward-looking statements. Gaiam’s actual results could differ materially fromthe results anticipated in these forward-looking statements as a result ofcertain factors set forth under “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations,” “Quantitative and QualitativeDisclosures about Market Risk” and elsewhere in this report. Risks anduncertainties that could cause actual results to differ include, withoutlimitation, general economic conditions, competition, loss of key personnel,pricing, brand reputation, consumer trends, acquisitions, new initiativesundertaken by Gaiam, security and information systems, legal liability forwebsite 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, control of Gaiam by its founder, fluctuations inquarterly operating results, customer interest in our products, the effect ofgovernment regulation and other risks and uncertainties included in Gaiam’sfilings with the Securities and Exchange Commission. We caution you that noforward-looking statement is a guarantee of future performance, and you shouldnot place undue reliance on these forward-looking statements which reflect ourmanagement’s view only as of the date of this report. We undertake noobligation to update any forward-looking information.

# **PART I   FINANCIAL INFORMATION**

**Item 1.   FinancialStatements (Unaudited)**

# **Unaudited Interim CondensedConsolidated Financial Statements**

The unaudited interimcondensed consolidated financial statements included herein have been preparedby the management of Gaiam pursuant to the rules and regulations of the UnitedStates Securities and Exchange Commission. Certain information and notedisclosures normally included in annual financial statements prepared inaccordance with accounting principles generally accepted in the United Stateshave been condensed or omitted pursuant to these rules and regulations,although the Company believes that the disclosures made are adequate to makethe information not misleading. In the opinion of management, the unauditedinterim condensed financial statements contain all adjustments (consisting ofonly normal recurring adjustments) necessary to present fairly, in all materialrespects, Gaiam’s consolidated financial position as of March 31, 2007, theinterim results of operations for the three months ended March 31, 2007 and2006, and cash flows for the three months ended March 31, 2007 and 2006. Theseinterim statements have not been audited. The balance sheet as of December 31,2006 was derived from Gaiam’s audited consolidated financial statementsincluded in Gaiam’s annual report on Form 10-K. The interim condensedconsolidated financial statements contained herein should be read inconjunction with Gaiam’s audited financial statements, including the notesthereto, for the year ended December 31, 2006.

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**GAIAM, INC.CONDENSED CONSOLIDATED BALANCE SHEETS**(In thousands, except share information)
| ** **                                                                                                                                                                              | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                              | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| ** **                                                                                                                                                                              | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                                                                              |       |               |       |                  |       |
| Current assets:                                                                                                                                                                         |       |               |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                              |       | $                  | 83,165     |                  | $          | 104,876 |   |
| Accounts  receivable, net                                                                                                                                                               |       | 16,855             |       | 25,324                |       |
| Inventory, less  allowances                                                                                                                                                             |       | 25,478             |       | 24,313                |       |
| Deferred  advertising costs                                                                                                                                                             |       | 3,891              |       | 3,965                 |       |
| Deferred tax  assets                                                                                                                                                                    |       | 3,524              |       | 3,404                 |       |
| Other current  assets                                                                                                                                                                   |       | 5,862              |       | 4,965                 |       |
| Total current  assets                                                                                                                                                                   |       | 138,775            |       | 166,847               |       |
|                                                                                                                                                                                    |       |               |       |                  |       |
| Property and equipment,  net                                                                                                                                                            |       | 7,710              |       | 7,784                 |       |
| Media library, net                                                                                                                                                                      |       | 36,422             |       | 37,201                |       |
| Goodwill and other  intangibles, net                                                                                                                                                    |       | 28,893             |       | 28,879                |       |
| Deferred tax assets,  net                                                                                                                                                               |       | 4,226              |       | 5,958                 |       |
| Notes receivable and  other assets                                                                                                                                                      |       | 585                |       | 4,299                 |       |
| Total assets                                                                                                                                                                            |       | $                  | 216,611    |                  | $          | 250,968 |   |
|                                                                                                                                                                                    |       |               |       |                  |       |
| **Liabilities and stockholders’  equity**                                                                                                                                          |       |               |       |                  |       |
| Current liabilities:                                                                                                                                                                    |       |               |       |                  |       |
| Accounts payable                                                                                                                                                                        |       | $                  | 13,630     |                  | $          | 18,848 |   |
| Accrued  liabilities                                                                                                                                                                    |       | 9,630              |       | 7,437                 |       |
| Income taxes  payable                                                                                                                                                                   |       | —             |       | 415                   |       |
| Total current  liabilities                                                                                                                                                              |       | 23,260             |       | 26,700                |       |
|                                                                                                                                                                                    |       |               |       |                  |       |
| Minority interest                                                                                                                                                                       |       | 5,640              |       | 5,662                 |       |
|                                                                                                                                                                                    |       |               |       |                  |       |
| Commitments and  contingencies                                                                                                                                                          |       |               |       |                  |       |
|                                                                                                                                                                                    |       |               |       |                  |       |
| Stockholders’ equity:                                                                                                                                                              |       |               |       |                  |       |
| Class A common  stock, $.0001 par value, 150,000,000 shares authorized, 19,252,346 and  21,749,936 shares issued and outstanding at March 31, 2007 and December 31,  2006, respectively |       | 2                  |       | 2                     |       |
| Class B common  stock, $.0001 par value, 50,000,000 shares authorized, 5,400,000 issued and  outstanding at March 31, 2007 and December 31, 2006                                        |       | 1                  |       | 1                     |       |
| Additional  paid-in capital                                                                                                                                                             |       | 168,247            |       | 200,906               |       |
| Accumulated  other comprehensive income                                                                                                                                                 |       | 885                |       | 873                   |       |
| Retained  earnings                                                                                                                                                                      |       | 18,576             |       | 16,824                |       |
| Total  stockholders’ equity                                                                                                                                                        |       | 187,711            |       | 218,606               |       |
| Total liabilities and  stockholders’ equity                                                                                                                                        |       | $                  | 216,611    |                  | $          | 250,968 |   |

 

*Seeaccompanying notes to the interim condensed consolidated financial statements.*

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**GAIAM, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**(Unaudited)(In thousands, except per share amounts)
| ** **                                                                       | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2007**                                                           | ** ** | **2006** | ** ** |
|                                                                             |       |                                                               |       |   |   |
| Net revenue                                                                      |       | $                                                                  | 58,458     |   | $ | 51,752 |   |
| Cost of goods  sold                                                              |       | 20,982                                                             |       | 18,590 |   |
| Gross profit                                                                     |       | 37,476                                                             |       | 33,162 |   |
|                                                                             |       |                                                               |       |   |   |
| Expenses:                                                                        |       |                                                               |       |   |   |
| Selling and operating                                                            |       | 32,012                                                             |       | 28,906 |   |
| Corporate, general and administration                                            |       | 3,839                                                              |       | 3,246 |   |
| Total expenses                                                                   |       | 35,851                                                             |       | 32,152 |   |
|                                                                             |       |                                                               |       |   |   |
| Earnings from  operations                                                        |       | 1,625                                                              |       | 1,010 |   |
|                                                                             |       |                                                               |       |   |   |
| Other income                                                                     |       | 1,203                                                              |       | 577 |   |
|                                                                             |       |                                                               |       |   |   |
| Earnings before  income taxes and minority interest                              |       | 2,828                                                              |       | 1,587 |   |
|                                                                             |       |                                                               |       |   |   |
| Income tax  expense                                                              |       | 1,117                                                              |       | 612 |   |
| Minority  interest in net (income) loss of consolidated subsidiaries, net of tax |       | 41                                                                 |       | (85 | ) |
| Net income                                                                       |       | $                                                                  | 1,752      |   | $ | 890 |   |
|                                                                             |       |                                                               |       |   |   |
| Net earnings per  share:                                                         |       |                                                               |       |   |   |
| Basic                                                                            |       | $                                                                  | 0.07       |   | $ | 0.04 |   |
| Diluted                                                                          |       | $                                                                  | 0.07       |   | $ | 0.04 |   |
| Shares used in  computing net earnings per share:                                |       |                                                               |       |   |   |
| Basic                                                                            |       | 25,651                                                             |       | 20,435 |   |
| Diluted                                                                          |       | 25,813                                                             |       | 20,795 |   |

 

*Seeaccompanying notes to the interim condensed consolidated financial statements.*

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**GAIAM, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**(Unaudited)(In thousands)
| ** **                                                                         | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                                                           | ** ** | **2006** | ** ** |
| **Operating  activities**                                                          |       |                                                               |       |   |   |
| Net income                                                                         |       | $                                                                  | 1,752      |   | $ | 890 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                                               |       |   |   |
| Depreciation                                                                       |       | 455                                                                |       | 518 |   |
| Amortization                                                                       |       | 1,850                                                              |       | 1,164 |   |
| Minority interest in consolidated subsidiaries                                     |       | (41                                                                | )          | 85 |   |
| Gain from sale of investment                                                       |       | (127                                                               | )          | (519 | ) |
| Noncash stock-based compensation                                                   |       | 239                                                                |       | 84 |   |
| Deferred income tax expense                                                        |       | 1,610                                                              |       | 457 |   |
| Changes in operating assets and liabilities, net of  effects from acquisitions:    |       |                                                               |       |   |   |
| Accounts receivable                                                                |       | 8,435                                                              |       | 5,364 |   |
| Inventory                                                                          |       | (1,246                                                             | )          | (1,269 | ) |
| Deferred advertising costs                                                         |       | (223                                                               | )          | 618 |   |
| Other current assets                                                               |       | (912                                                               | )          | (1,350 | ) |
| Note receivable and other assets                                                   |       | (53                                                                | )          | (113 | ) |
| Accounts payable                                                                   |       | (5,207                                                             | )          | (6,188 | ) |
| Accrued liabilities                                                                |       | 2,281                                                              |       | (716 | ) |
| Income taxes payable                                                               |       | (475                                                               | )          | (68 | ) |
| Net cash provided by (used in) operating activities                                |       | 8,338                                                              |       | (1,043 | ) |
|                                                                               |       |                                                               |       |   |   |
| **Investing  activities**                                                          |       |                                                               |       |   |   |
| Purchase of  property, equipment and media rights                                  |       | (1,032                                                             | )          | (191 | ) |
| Proceeds from  sale of investments                                                 |       | 3,871                                                              |       | — |   |
| Net cash provided by (used in) investing activities                                |       | 2,839                                                              |       | (191 | ) |
|                                                                               |       |                                                               |       |   |   |
| **Financing  activities**                                                          |       |                                                               |       |   |   |
| Repurchase of  Class A common stock, net                                           |       | (32,907                                                            | )          | — |   |
| Proceeds from  issuance of common stock, net                                       |       | 6                                                                  |       | 1,889 |   |
| Net cash provided by (used in) financing activities                                |       | (32,901                                                            | )          | 1,889 |   |
|                                                                               |       |                                                               |       |   |   |
| Effects of  exchange rates on cash and cash equivalents                            |       | 13                                                                 |       | 80 |   |
| Net change in  cash and cash equivalents                                           |       | (21,711                                                            | )          | 735 |   |
| Cash and cash  equivalents at beginning of period                                  |       | 104,876                                                            |       | 15,028 |   |
| Cash and cash  equivalents at end of period                                        |       | $                                                                  | 83,165     |   | $ | 15,763 |   |
|                                                                               |       |                                                               |       |   |   |
| **Supplemental  cash flow information**                                            |       |                                                               |       |   |   |
| Interest paid                                                                      |       | $                                                                  | —     |   | $ | — |   |
| Income taxes  paid                                                                 |       | $                                                                  | 112        |   | $ | 126 |   |
| Common stock issued for  acquisitions                                              |       | $                                                                  | —     |   | $ | — |   |

 

*Seeaccompanying notes to the interim condensed consolidated financial statements*

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**Gaiam,Inc.Notes to Interim Condensed Consolidated Financial Statements(Unaudited)March 31, 2007**

###### **1.****             ****Summary of Significant AccountingPolicies**

Management believes the following to be criticalaccounting policies whose application has a material impact on Gaiam Inc.’s (“Gaiam”or the “Company”) financial presentation, and involve a higher degree ofcomplexity, as they require management to make judgments and estimates aboutmatters that are inherently uncertain.

No changes were made to our significant accountingpolicies during the three months ended March 31, 2007, except for the adoptionof the Financial Accounting Standards Board’s (“FASB”) Interpretation  No. 48, *Accounting  for Uncertainty in Income Taxes — AnInterpretation of FASB Statement No. 109*(“FIN 48”). See Gaiam’s significant accounting policy for *Income Taxes* discussed below.

###### *Organizationand Nature of Operations*

Gaiam is a branded lifestyle media company providing abroad selection of information, media, products and services to customers whovalue personal development, wellness, ecological lifestyles, responsible mediaand conscious community. Gaiam was incorporated under the laws of the State ofColorado on July 7, 1988.

The accompanying unaudited interim condensedconsolidated financial statements include the accounts of Gaiam and itssubsidiaries in which Gaiam’s ownership is greater than 50% and the subsidiaryis considered to be under Gaiam’s control. All material intercompany accountsand transaction balances have been eliminated in consolidation.

The unaudited condensed consolidated financialposition, results of operations and cash flows for the interim periodsdisclosed in this report are not necessarily indicative of future financialresults.

*Cash and Cash Equivalents*

Cash and cash equivalents include demand depositaccounts and highly liquid instruments, with maturities of three months or lessat the date of purchase. The fair value of the cash and cash equivalentsapproximates their carrying value due to their short maturities.

*Provisions for Doubtful Accounts and Returns*

Gaiam records a provision for doubtful accounts forall receivables not expected to be collected. Gaiam generally does not requirecollateral. Gaiam evaluates the collectibility of accounts receivable based ona combination of factors. In circumstances in which Gaiam is aware of aspecific customer’s inability to meet its financial obligations (e.g.,bankruptcy filings), Gaiam records a specific reserve for bad debts againstamounts due. For all other instances, Gaiam recognizes reserves based onhistorical experience and review of individual accounts outstanding.

Gaiam records a provision for product returns to bereceived in future periods at the time the original sale is recognized. Theamount of the returns provision is based upon historical experience and futureexpectations.

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*Inventory*

Inventory consists primarily of finished goods heldfor sale and is stated at the lower of cost (first-in, first-out method) ormarket. Gaiam identifies the inventory items to be written down forobsolescence based on the item’s current sales status and condition. If theitem is discontinued or slow moving, it is written down based on an estimate ofthe markdown to retail price needed to sell through its current stock level ofthe item.

*Purchase Accounting*

Gaiam accounts for theacquisition of a controlling interest in a company using the purchase methodprescribed by FASB Statement No. 141, *BusinessCombinations* (“SFAS 141”). In determining the estimated fair valueof certain acquired assets and liabilities, management makes assumptions basedupon historical and other relevant information and, in some cases, independentexpert appraisers. Assumptions may be incomplete, and unanticipated events andcircumstances may occur that could affect the validity of such assumptions,estimates, or actual results. The estimated fair value of assets andliabilities acquired in accordance with SFAS 141 during 2006 are preliminary asof March 31, 2007.  We expect to obtaininformation necessary to finalize the estimated values during the remainder of2007.

*Goodwill and Other Intangibles*

Goodwill represents the excess of the purchaseconsideration over the fair value of assets acquired less liabilities assumedin a business acquisition. Gaiam’s other intangibles mainly consist of customerlists. In accordance with SFAS No. 142, *Goodwilland Other Intangible Assets*, goodwill is no longer amortized but isreviewed for impairment annually or more frequently if impairment indicatorsarise, on a reporting unit level. The estimated fair value of a reporting unitis compared with its carrying amount, including goodwill. If the estimated fairvalue of a reporting unit exceeds its carrying amount, goodwill of thereporting unit is considered not impaired.

If the carrying amount of a reporting unit exceeds itsestimated fair value, the goodwill impairment test is performed to measure theamount of impairment loss. Gaiam has allocated goodwill to two reporting units,and uses a market value method for the purposes of testing for potentialimpairment. The annual review requires extensive use of financial judgment andestimates. Application of alternative assumptions and definitions, such as achange in the composition of a reporting unit, could yield significantly differentresults.

*Investments*

Investments in limited liability companies in whichGaiam does have the ability to exercise significant influence or control, or inwhich it holds a five percent or more membership interest, are accounted forunder the equity method. Investments in corporations in which Gaiam does havethe ability to exercise significant influence or control, or in which it holdsa twenty percent or more ownership, are also accounted for under the equitymethod. Under the equity method, Gaiam records its share of the income orlosses of the investment by increasing or decreasing the carrying value of itsinvestment and recording the income or expense through the consolidatedstatement of operations. Under the cost method of accounting, investments inprivate companies are carried at cost and are adjusted only forother-than-temporary declines in fair value. Investments under the cost andequity methods are included on the accompanying unaudited CondensedConsolidated Balance Sheets in Notes receivable and other assets.

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*Media Library*

The media library asset represents the fair value ofGaiam’s library of produced videos acquired through business combinations, thepurchase price of media rights to both video and audio titles, and thecapitalized cost to produce media products marketed by Gaiam to retailers anddirect-mail and online customers. The acquired and purchased media rights arerecorded at fair market value and amortized on the basis of their estimateduseful lives. Capitalized costs to produce media products are recognized asoperating expenses on an individual film basis in the ratio that the currentyear’s gross revenues bear to management’s estimate of total ultimate remaininggross revenues. Ultimate remaining revenue forecasts, based primarily onhistorical sales statistics, are continually reviewed by management and revisedwhen warranted by changing conditions. When estimates of total revenues and other events or changes incircumstances indicate that a film has a fair value that is less than itsunamortized cost, an impairment loss is recognized in the current period forthe amount by which the unamortized cost exceeds the film’s fair value.

*Contractual Obligations*

Gaiam has commitmentspursuant to lease agreements, but does not have any outstanding commitmentspursuant to long-term debt, capital lease, or purchase obligations. Thefollowing table shows Gaiam’s commitments to make future payments underoperating leases (in thousands):
| ** **                   | ** ** | **Total** | ** ** | **< 1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **> 5 years** | ** ** |
|------------------------------|------------|-----------|------------|---------------------------|------------|--------------------|------------|--------------------|------------|----------------------------|------------|
| Operating lease  obligations |       | $         | 3,791      |                      | $          | 2,235              |       | $                  | 1,008      |                       | $          | 304 |   | $ | 244 |   |
|                              |            |           |            |                           |            |                    |            |                    |            |                            |            |  |  |  |  |  |

 

*Off-Balance Sheet Arrangements*

Gaiam does notparticipate in transactions that generate relationships with unconsolidatedentities or financial partnerships, such as special purpose entities (“SPEs”)or variable interest entities (“VIEs”), which have been established for thepurpose of facilitating off-balance sheet arrangements or other limitedpurposes. As of March 31, 2007, Gaiam is not involved in any unconsolidatedSPEs or VIEs.

*Income Taxes*

Gaiam provides for incometaxes pursuant to the liability method as prescribed in SFAS No. 109, *Accounting for Income Taxes*. The liability method requiresrecognition of deferred income taxes based on temporary differences betweenfinancial reporting and income tax bases of assets and liabilities, usingcurrent enacted income tax rates and regulations.

Effective January 1,2007, Gaiam adopted the provisions of FIN 48. FIN 48 clarifies the accountingfor uncertainty in income taxes recognized in an enterprise’s financialstatements in accordance with FASB Statement No. 109, *Accounting for Income Taxes.* Under FIN 48,Gaiam must recognize the tax benefit from an uncertain tax position only if itis more likely than not that the tax position will be sustained on examinationby the taxing authorities, based on the technical merits of the position. Thetax benefits recognized in the condensed consolidated financial statements fromsuch a position are measured based on the largest benefit that has a greaterthan fifty percent likelihood of being realized upon ultimate resolution. Theapplication of income tax law is inherently complex. Laws and regulations inthis area are voluminous and are often ambiguous. As such, Gaiam is required tomake many subjective assumptions and judgments regarding its income taxexposures. Interpretations of and guidance surrounding income tax law andregulations change over time and may result in changes to the Company’ssubjective assumptions and judgments which can materially affect amountsrecognized in Gaiam’s Condensed Consolidated Balance Sheets and Statements ofOperations.  The result of the Company’sreassessment of its tax positions in accordance with FIN 48 did not have amaterial impact on Gaiam’s condensed consolidated financial statements. Gaiam’stax returns for all years after 2002 are subject to future examination by taxauthorities.

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*Use of Estimates*

The unaudited interim condensed consolidated financialstatements are prepared in conformity with accounting principles generallyaccepted in the United States, which require management to make judgments,estimates and assumptions that affect the reported amounts of assets,liabilities, revenue and expenses and disclosure of contingent assets andliabilities in Gaiam’s interim condensed consolidated financial statements andaccompanying notes. Actual results could differ from those estimates.

*New Accounting Pronouncements*

In September 2006, the FASB issued Statement No. 157,Fair Value Measurements (“SFAS 157” or the “Statement”). This Statement definesfair value, establishes a framework for measuring fair value in generallyaccepted accounting principles, and expands disclosures about fair valuemeasurements. SFAS 157 applies under other accounting pronouncements thatrequire or permit fair value measurements, the FASB having previously concludedin those accounting pronouncements that fair value is the relevant measurementattribute. Accordingly, this Statement does not require any new fair valuemeasurements. The Statement is effective for financial statements issued forfiscal years beginning after November 15, 2007, and interim periods withinthose fiscal years. Earlier application is encouraged, provided that thereporting entity has not yet issued financial statements for that fiscal year,including financial statements for an interim period within that fiscal year.Gaiam will adopt the provisions of SFAS 157 in its fiscal year commencingJanuary 1, 2008. Management currently believes that adoption of the provisionsof SFAS 157 will not have a material impact on Gaiam’s consolidated financialstatements.

**2.****              NotesReceivable and Other Assets**

Notes receivable andother assets as of March 31, 2007 consisted of $0.6 million of other long-termassets and as of December 31, 2006 was comprised of $1.3 million ofinvestments, $2.4 million in notes and related interest receivable, and $0.6million of other long-term assets.

Gaiam entered into anagreement with Alps Communications LLC (“Alps”) and Life Balance Media HoldingsLLC (“LIME”) on January 5, 2006, to sell 19,968 Series A Preferred Units ofLIME, an investment previously accounted for using the equity method. Thepurchase price per unit was equal to the amount Gaiam paid for its investmentduring 2005. Alps Communications assumed all unpaid Series A CapitalContribution commitments from Gaiam and executed an interest bearing promissorynote due February 28, 2009 in the principal amount of $2,250,000. Afterthe closing of this transaction, Gaiam owned 4,876 units, or less than 4%, ofLIME. This transaction resulted in a gain of $0.5 million which is included inOther income on the Condensed Consolidated Statements of Operations for thethree months ended March 31, 2006. On February 6, 2007, Gaiam entered into a stockrepurchase agreement with Revolution Living LLC (“Revolution Living”) and Alps.As part of the stock repurchase agreement Alps prepaid its promissory noteprincipal plus accrued interest in the amount of $2.4 million and acquiredGaiam’s investment in LIME for $1.4 million in cash.

10

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**3.****      Stockholders’ Equity**

On February 6, 2007,Gaiam entered into a stock repurchase agreement (the “Agreement”) withRevolution Living and Alps, whereby as part of the Agreement Gaiam purchased2.5 million shares of its Class A common stock from Revolution Living for$13.14 per share or $32.8 million in cash. The $13.14 per share price agreed toby the parties was the average price over the last 90 days of Gaiam’s sharesprior to the Agreement’s closing. In accordance with the cost method ofaccounting for treasury stock, Gaiam recorded the treasury stock at $32.9million including acquisition legal fees. Since Gaiam has not yet decided theultimate disposition of the re-acquired stock, its cost is reflected in theCondensed Consolidated Balance Sheet at March 31, 2007 as a $32.9 millionreduction to Additional paid-in capital. Following this repurchase, Gaiam hadapproximately 24.7 million Class A and Class B common shares outstanding.

During the first threemonths of 2007, Gaiam issued a total of 1,370 shares of Class A common stock toGaiam’s independent directors, in lieu of cash compensation, for servicesrendered in 2006. In addition, for the quarter ended March 31, 2007, Gaiamissued 1,040 shares of Class A common stock upon exercise of options grantedunder Gaiam’s 1999 Long-Term Incentive Plan.

**4.****      Share-Based Payments**

Gaiam’s share-based compensation program is along-term retention program that is intended to attract, retain and provideincentives for talented employees, officers, and directors, and to alignstockholder and employee interests. Gaiam grants options under its 1999Long-Term Incentive Plan (“the Plan”), which provides for the granting ofoptions to purchase up to 3 million shares of Gaiam’s common stock and terminatesno later than June 1, 2009. Options under the Plan are generally granted withan exercise price equal to the closing market price of Gaiam’s stock at thedate of the grant and normally vest and become exercisable at 2% per month forthe 50 months beginning in the eleventh month after date of grant. Grantstypically expire seven years from the date of grant. Gaiam uses theBlack-Scholes option pricing model to determine the estimated fair value ofstock options and shares issued under the Plan. The determination of fair valuestock-based payment awards on the date of grant using the Black-Scholesoption-pricing model is affected by Gaiam’s stock price as well as assumptionsregarding a number of complex and subjective variables. All stock-based paymentawards are amortized on a straight-line basis over the requisite serviceperiods of the awards, which are generally five years for employees and twoyears for Board members.

During the first quarterof 2007, Gaiam granted 65,000 stock options to employees and directors. Totalshare-based compensation recognized was $0.2 million and $0.1 million for thethree months ended March 31, 2007 and 2006, respectively, and is shown inCorporate, general, and administration expenses on Gaiam’s Condensed ConsolidatedStatements of Operations.

**5.****      ComprehensiveIncome**

Gaiam’s comprehensive income is comprised of netincome and foreign currency translation adjustment, net of income taxes.Comprehensive income, net of related tax effects, was as follows (inthousands):

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| ** **                                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
|                                          |       |                                             |       |   |   |
| Net income                                    |       | $                                                | 1,752      |   | $ | 890 |   |
| Foreign currency  translation adjustment, net |       | 12                                               |       | 85 |   |
| Comprehensive income,  net of taxes           |       | $                                                | 1,764      |   | $ | 975 |   |

 

**6.****              EarningsPer Share**

Basic earnings per share excludes any dilutive effectsof options, warrants and dilutive securities. Basic earnings per share iscomputed using the weighted average number of common shares outstanding duringthe period. Diluted earnings per share is computed using the weighted averagenumber of common and common stock equivalent shares outstanding during theperiod. Common equivalent shares of 326 thousand are excluded from thecomputation of diluted earnings per share for the three months ended March 31,2007 because their effect is antidilutive. The following table sets forth thecomputation of basic and diluted earnings per share (in thousands, except pershare data):
| ** **                                                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                    | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
|                                                          |       |                                             |       |   |   |
| Numerator for  basic and diluted earnings per share           |       | $                                                | 1,752      |   | $ | 890 |   |
| Denominator:                                                  |       |                                             |       |   |   |
| Weighted average share for basic earnings per share           |       | 25,651                                           |       | 20,435 |   |
| Effect of  dilutive securities:                               |       |                                             |       |   |   |
| Weighted average of common stock, stock options and  warrants |       | 162                                              |       | 360 |   |
| Denominators for  diluted earnings per share                  |       | 25,813                                           |       | 20,795 |   |
|                                                          |       |                                             |       |   |   |
| Net earnings per  share—basic                            |       | $                                                | 0.07       |   | $ | 0.04 |   |
| Net earnings per share—diluted                           |       | $                                                | 0.07       |   | $ | 0.04 |   |

 

**7.****              SegmentInformation**

Gaiam manages its business and aggregates itsoperational and financial information in accordance with two reportablesegments. The direct to consumer segment contains the Internet, catalog, directresponse marketing, and subscription community sales channels, while thebusiness segment comprises the retailers, media, and corporate accountchannels.

Although Gaiam is able to track revenue by saleschannel, the management, allocation of resources and analysis and reporting ofexpenses is solely on a combined basis, at the reportable segment level.

Contribution margin is defined as net sales, less costof goods sold and direct and allocated expenses. Financial information forGaiam’s business segments was as follows (in thousands):

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| ** **                                                                       | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Net revenue:                                                                     |       |                                             |       |   |   |
| Direct to consumer                                                               |       | $                                                | 34,065     |   | $ | 26,110 |   |
| Business                                                                         |       | 24,393                                           |       | 25,642 |   |
| Consolidated net revenue                                                         |       | 58,458                                           |       | 51,752 |   |
| Contribution  margin (loss):                                                     |       |                                             |       |   |   |
| Direct to consumer                                                               |       | (600                                             | )          | (619 | ) |
| Business                                                                         |       | 2,225                                            |       | 1,629 |   |
| Consolidated contribution margin                                                 |       | 1,625                                            |       | 1,010 |   |
| Reconciliation  of contribution margin to net income:                            |       |                                             |       |   |   |
| Other income                                                                     |       | 1,203                                            |       | 577 |   |
| Income tax expense                                                               |       | 1,117                                            |       | 612 |   |
| Minority interest in net (income) loss of  consolidated subsidiaries, net of tax |       | 41                                               |       | (85 | ) |
| Net income                                                                       |       | $                                                | 1,752      |   | $ | 890 |   |

 

# **Item 2.****   Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

# Thefollowing discussion and analysis of Gaiam’s financial condition and results ofoperations should be read in conjunction with the unaudited condensedconsolidated financial statements and related notes included elsewhere in thisdocument.

# Adopted New Accounting Policies

# InJuly 2006, the FASB issued Interpretation No. 48, *Accounting for Uncertainty in Income Taxes* (“FIN 48”), whichbecame effective for Gaiam January 1, 2007. FIN 48 addressed the determination of how tax benefits claimed orexpected to be claimed on a tax return should be recorded in the financialstatements. Under FIN 48, the Company must recognize the tax benefit from anuncertain tax position only if it is more likely than not that the tax positionwill be sustained on examination by the taxing authorities, based on thetechnical merits of the position. The benefits recognized in the financialstatements from such a position are measured based on the largest benefit thathas a greater than fifty percent likelihood of being realized upon ultimateresolution. The impact of the Company’s reassessment of its tax positions inaccordance with FIN 48 did not have a material impact on the results ofoperations, financial condition or liquidity. For additional informationregarding the adoption of FIN 48, see Note 1 — Summary of SignificantAccounting Policies - *Income Taxes*to the Interim Condensed Consolidated Financial Statements.

#### Overviewand Outlook

Gaiam is a lifestyle media company providing a broadselection of information, media, products and services to customers who valuepersonal development, wellness, ecological lifestyles, responsible media andconscious community. Gaiam’s mediabrand is built around its ability to develop and offer media content, products,lifestyle solutions and community to consumers in the Lifestyle of Health andSustainability (“LOHAS”) and the emerging Media that Matters (“MTM”) markets.

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Gaiam offers its customersthe ability to make purchasing decisions and find responsible content based onthese values while providing quality offerings at a price comparable tomainstream alternatives. Gaiam markets its media and products through amulti-channel approach including traditional media channels, direct toconsumers via the Internet, catalog, direct response marketing, and subscriptionclubs, and through national retailers and corporate accounts.

Gaiam’s content forms thebasis of its proprietary offerings, which then drive demand for parallelproduct and service offerings. Gaiam’s operations are vertically integratedfrom content creations, through product development and sourcing, to customerservice and distribution. Gaiam markets its products and services across twosegments, business and direct-to-consumer. Products are distributed in each ofthese sales segments from a single fulfillment center.

Through its diverse media reach, the direct toconsumer segment provides an opportunity to launch and support new mediareleases. This direct link to the consumer provides a sounding board for newproduct testing, promotional opportunities, a growing loyal community, andcustomer feedback concerning the focus and future of Gaiam and the LOHASindustry as a whole. During 2006, Gaiam completed several acquisitions targetedtoward expanding and enhancing its media content and reach. These acquisitionsincluded acquiring the remaining minority interests in Conscious Media, Inc., amultimedia company, and Newmark Media, Ltd., a retail distributor in thenatural grocery and drug channel. Gaiam also acquired an 85% interest in a DVDsubscription club that provides inspirational and spiritual family films.

We believe our growth will be driven by information,media content, products, and community delivered to the consumer via broadcast,catalog, Internet, retailers, international licensing and electronic downloadsand subscription systems. Gaiam has increased its focus on media contentcreation and distribution, which strategically provides increased brandingopportunities, significantly higher operating contribution and greatermainstream penetration. Gaiam plans to invest in its community and membershipbusinesses over the next two years to better capitalize on strong relationshipswith its loyal consumer audience and growing broadband subscription trends.This will allow Gaiam to focus on better leveraging its content throughsubscription clubs and community.

Factors that Gaiam believes are important to itslong-term success include building brand equity, increasing internationalgrowth by expanding into new markets primarily through license arrangements,extending product lines into wellness and children’s programs, and enhancingthe multimedia platform community through new media opportunities, new club andmembership programs, initiatives and acquisitions.

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Resultsof Operations

The following table sets forth certain financial dataas a percentage of revenue for the periods indicated:
| ** **                                                                       | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
|                                                                             |       |                                             |       |   |   |
| Net revenue                                                                      |       | 100.0                                            | %          | 100.0 | % |
| Cost of goods sold                                                               |       | 35.9                                             | %          | 35.9 | % |
| Gross profit                                                                     |       | 64.1                                             | %          | 64.1 | % |
|                                                                             |       |                                             |       |   |   |
| Expenses:                                                                        |       |                                             |       |   |   |
| Selling and  operating                                                           |       | 54.7                                             | %          | 55.8 | % |
| Corporate,  general and administration                                           |       | 6.6                                              | %          | 6.3 | % |
| Total expenses                                                                   |       | 61.3                                             | %          | 62.1 | % |
|                                                                             |       |                                             |       |   |   |
| Income from operations                                                           |       | 2.8                                              | %          | 2.0 | % |
| Other income, net                                                                |       | 2.0                                              | %          | 1.1 | % |
| Income tax expense                                                               |       | 1.9                                              | %          | 1.2 | % |
| Minority interest in  net (income) loss of consolidated subsidiaries, net of tax |       | 0.1                                              | %          | (0.2 | )% |
| Net income                                                                       |       | 3.0                                              | %          | 1.7 | % |

 

#### ThreeMonths Ended March 31, 2007 and 2006

Revenue of $58.5 million during the three months endedMarch 31, 2007 was 13.0% higher than the $51.8 million in revenue generated inthe first quarter of 2006. The increase in revenue primarily reflects Gaiam’s successfuldirect marketing programs, particularly in web and direct response marketing,and an expansion of its community and subscription clubs. Revenue in Gaiam’sdirect to consumer segment was $34.1 million for the three months ended March31, 2007, an increase of $8.0 million or 30.5% over 2006 first quarter revenueof $26.1 million. Total revenue generated by Gaiam’s business segment was $24.4million for the quarter ended March 31, 2007 compared to $25.6 million for thethree months ended March 31, 2006 reflecting the liquidation of GoodTimestitles and formats sold during the first quarter of 2006 that are no longercarried by Gaiam. Also impacting the business segment was the discontinuationof certain products in the United Kingdom as the Company moves towards a Gaiambranded model versus a distributor model.

Gross profit, which consists of revenue less cost ofsales (primarily merchandise cost plus inbound freight and duties), increasedto $37.5 million in the first quarter of 2007 from $33.2 million for the threemonths ended March 31, 2006. As a percentage of revenue, gross profit remainedconsistent at 64.1%.

Selling and operating expenses increased to $32.0million for the three months ended March 31, 2007 compared to $28.9 million inthe same period of 2006, primarily resulting from increased sales andinvestments made in branding, advertising, and other marketing programs. As apercentage of revenue, selling and operating expenses decreased to 54.7% in thefirst quarter of 2007 from 55.8% during the quarter ended March 31, 2006reflecting increased leverage on the higher revenue base.

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Corporate, general and administration expensesincreased to $3.8 million for the first quarter of 2007 from $3.2 million forthe three months ended March 31, 2006 primarily due to Gaiam’s plannedinvestments to support the increased revenue base. As a percent of revenue,corporate general and administration expenses increased slightly to 6.6% ofrevenue during the first quarter of 2007 compared to 6.3% of revenue for thesame period in 2006.

Income from operations was $1.6 million for thequarter ended March 31, 2007, up from $1.0 million for the first quarter of2006, reflecting higher sales and improved selling and operating expenses,partially offset by higher corporate, general and administration expenses.  As a percent of revenue, income from operationsimproved to 2.8% of revenue during the three months ended March 31, 2007, ascompared to 2.0% of revenue for the first quarter of 2006.

Gaiam recorded other income of $1.2 million during thefirst quarter of 2007 compared to $0.6 million during the same period in 2006.The increase in 2007 other income primarily consisted of interest on cashinvestments. In the first quarter of 2006, Gaiam recorded in other income a$0.5 million gain on the sale of 19,968,968 Series A Preferred Units of LIME.

Gaiam recorded income tax expense of $1.1 million inthe first quarter of 2007 compared to $0.6 million in the same period of 2006.Gaiam’s consolidated effective tax rate fluctuates based upon the distributionof earnings/losses between its domestic and foreign operations.

As a result of the factors described above, Gaiamimproved its 2007 first quarter financial performance over that of the firstthree months of 2006. For the quarter ended March 31, 2007, Gaiam produced netincome of $1.8 million, or $0.07 per share, as compared to net income in thesame period of 2006 of $0.9 million or $0.04 per share.

Seasonality

Gaiam’s sales areaffected by seasonal influences. On an aggregate basis, Gaiam generates itsstrongest revenues and net income in the fourth quarter due to increasedholiday spending.

Liquidity and Capital Resources

Gaiam’s capital needsarise from working capital required to fund our operations, capitalexpenditures related to acquisition and development of media content,development of our Internet platform and new products, acquisitions of newbusinesses, replacements, expansions and improvements to Gaiam’sinfrastructure, and future growth. These capital requirements depend onnumerous factors, including the rate of market acceptance of Gaiam’s productofferings, the ability to expand Gaiam’s customer base, the cost of ongoingupgrades to Gaiam’s product offerings, the level of expenditures for sales andmarketing, the level of investment in distribution systems and facilities andother factors. The timing and amount of these capital requirements are variableand cannot accurately be predicted. Additionally, Gaiam will continue to pursueopportunities to expand its media libraries, evaluate possible investments inbusinesses, products and technologies, and increase its sales and marketingprograms and brand promotions as needed.

Gaiam has a creditagreement with Wells Fargo, which permits borrowings of up to $15 million basedupon the collateral value of Gaiam’s accounts receivable, inventory, andcertain property and equipment. At March 31, 2007, Gaiam had no amountsoutstanding under this agreement; however, $3.5 million was reserved foroutstanding letters of credit. Gaiam has complied with all of the financialcovenants. The credit agreement expires on July 31, 2007. Should Gaiam chooseto borrow under the credit agreement, outstanding advances would bear interestat the lower of prime rate less 50 basis points or LIBOR plus 275 basis points.Borrowings are secured by a pledge of Gaiam’s assets, and the agreementcontains various financial covenants, including covenants prohibiting thepayment of cash dividends to Gaiam shareholders and requiring compliance withcertain financial ratios.

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Gaiam’s operatingactivities provided net cash of $8.3 million for the three months ended March31, 2007, reflecting cash provided from net income of $1.8 million, noncashdepreciation and amortization adjustment to net income of $2.3 million,improved accounts receivable collections of $8.4 million, increased accruedliabilities of $2.3 million, and other noncash charges to net income of $1.6million. The sources of funds were partially offset by the use of funds toreduce accounts payable by $5.2 million, increase inventory by $1.2 million andincome taxes payable by $0.5 million, and advanced media production andacquired media programming and increase other current assets by $1.2 million.The reduction in accounts payable reflects payments for inventory purchases ofholiday and fitness season shipments. During the three months ended March 31,2006, Gaiam’s operating activities used net cash of $1.0 million, primarilyreflecting the use of funds to reduce accounts payable of $6.2 million and anincrease in other current assets of $1.4 million including advances in mediaproduction and acquired media programming. This use of funds was partiallyoffset by net income of $0.9 million, a decrease in accounts receivable of $5.4million, a reduction in media production and programming of $0.6 million, andnon-cash charges to net income of $1.7 million.

Gaiam’s investingactivities for the three months ended March 31, 2007 provided net cash of $2.8million from the sale of the LIME investment for $1.4 million and prepayment ofthe Alps promissory note principle and interest for $2.4 million, partiallyoffset by cash used for the purchase of property, equipment, and media rightsfor $1.0 million. During the three months ended March 31, 2006, Gaiam’sinvesting and acquisition activities used cash of $0.2 million for the purchaseof property, equipment, and media rights.

Gaiam’s financingactivities used net cash of $32.9 million for the three months ended March 31,2007 primarily to repurchase 2.5 million shares of Gaiam Class A common stock.For three months ended March 31, 2006, Gaiam’s financing activities providednet cash of $1.9 million reflecting the exercise of stock options during thequarter.

Gaiam believes itsavailable cash, cash expected to be generated from operations, cash generatedby the sale of Class A common stock, and borrowing capabilities should besufficient to fund its operations on both a short-term and long-term basis.However, Gaiam’s projected cash needs may change as a result of acquisitions,product development, unforeseen operational difficulties or other factors.

In the normal course of ourbusiness, Gaiam investigates, evaluates and discusses acquisition, jointventure, minority investment, strategic relationship and other businesscombination opportunities in the LOHAS and MTM markets. For any futureinvestment, acquisition or joint venture opportunities, Gaiam may considerusing then-available liquidity, issuing equity securities or incurringadditional indebtedness.

RiskFactors

There are risks anduncertainties that could cause Gaiam’s actual results to be materiallydifferent from those indicated by forward-looking statements that it makes fromtime to time in filings with the Securities and Exchange Commission, newsreleases, proxy statements, annual reports, registration statements and otherwritten communications, as well as oral forward-looking statements made fromtime to time by representatives of Gaiam. These risks and uncertaintiesinclude, but are not limited to, those listed in Gaiam’s Annual Report on Form10-K for the year ended December 31, 2006. These risks and uncertainties andadditional risks and uncertainties not presently known to Gaiam or that arecurrently deemed immaterial may cause its business, financial condition,operating results and cash flows to be materially adversely affected. Except for the historical information contained herein, the matters discussedin this analysis are forward-looking statements that involve risk anduncertainties, including, but not limited to, general economic and businessconditions, competition, pricing, brand reputation, consumer trends, and otherfactors which are often beyond Gaiam’s control. Gaiam does not undertake anyobligation to update forward-looking statements except as required by law.

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##### **Item3.   Quantitative and Qualitative Disclosures About Market Risk**

Gaiam is exposed to market risks, which includechanges in U.S. interest rates and foreign exchange rates. Gaiam does notengage in financial transactions for trading or speculative purposes.

Any borrowings Gaiam might make under its bank creditfacility would bear interest at the lower of prime rate less 50 basis points orLIBOR plus 275 basis points. Gaiam does not have any amounts outstanding underits credit facility, so any change in interest rates would not have a materialimpact on Gaiam’s results from operations or cash flows unless Gaiam makesborrowings in the future.

Gaiam purchases a significant amount of inventory fromvendors outside of the U.S. in transactions that are primarily U.S. dollardenominated transactions. Because the percentage of Gaiam’s internationalpurchases denominated in currencies other than the U.S. dollar is small, anycurrency risks related to these transactions are immaterial to Gaiam. A declinein the relative value of the U.S. dollar to other foreign currencies could,however, lead to increased purchasing costs. In order to mitigate thisexposure, Gaiam makes virtually all of its purchase commitments in U.S.dollars.

In 2003, Gaiam purchased a 50.1% interest in GaiamLimited (also known as Leisure Systems International Limited), a U.K. baseddistributor. Because Gaiam Limited’s revenue is primarily denominated inforeign currencies, this investment exposes Gaiam to accounting risk associatedwith foreign currency exchange rate fluctuations. However, Gaiam has determinedthat no material market risk exposure to its consolidated financial position,results of operations or cash flows existed as of March 31, 2007.

**Item 4.   Controls and Procedures**

**Evaluation of Disclosure Controls and Procedures**

Gaiam’s chief executive officer and chief financialofficer conducted an evaluation of the effectiveness of the design andoperation of Gaiam’s disclosure controls and procedures, as defined in Rule13a-15(e) and Rule 15d-15(e) under the Exchange Act. Based upon theirevaluation as of March 31, 2007, Gaiam’s chief executive officer and chieffinancial officer have concluded that those disclosure controls and proceduresare effective.

**Changes in Internal Control over Financial Reporting**

No changes in Gaiam’s internal control over financialreporting occurred during the quarter ended March 31, 2007 that have materiallyaffected, or are reasonably likely to materially affect, Gaiam’s internalcontrol over financial reporting.

## **PART II.   OTHERINFORMATION**

**Item 1.   Legal Proceedings**

From time to time, Gaiam is involved in legalproceedings that it considers to be in the normal course of business. Gaiamdoes not believe that any of these proceedings will have a material adverseeffect on its business.

**Item 1A.   Risk Factors**

No material changes.

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**Item 2.   Sales of UnregisteredSecurities and Use of Proceeds**

Gaiam had no sales of unregistered securities duringthe quarter ended March 31, 2007.

Gaiam purchased shares of its Class A common stock asfollows:

ISSUER PURCHASES OFEQUITY 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** | ** ** |
|------------|------------|------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 2/6/2007   |       | 2,500,000                                                                          | (1)        | $13.14                                                                        |       | —                                                                                                                                                         |       | —                                                                                                                                                                                                          |       |

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(1)    On February 6, 2007, Gaiam entered into astock repurchase agreement (the “Agreement”) with Revolution Living and Alps,whereby as part of the Agreement Gaiam purchased 2.5 million shares of itsClass A common stock from Revolution Living for $13.14 per share or $32.8million in cash. The $13.14 per share price agreed to by the parties was theaverage price of Gaiam’s shares over the last 90 days prior to the Agreement’sclosing.

**Item 3.   Defaults Upon SeniorSecurities**

None.

**Item 4.   Submission of Mattersto a Vote of Security Holders**

None.

**Item 5.   Other Information**

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) |
|   | May 9, 2007  |
|   |         |   |
|   | 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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