**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, 2007** |
| ** **                                       |
| **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 registrantas specified in its charter)

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

 

**360 INTERLOCKEN BLVD.**

**BROOMFIELD, COLORADO 80021**

(Address of principalexecutive offices)

**(303) 222-3600**

(Registrant’s telephonenumber, including area code)

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

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer or a non-accelerated filer. Seedefinition of “accelerated filer” and “large accelerated filer” in Rule 12b-2of the Exchange Act.
| Large Accelerated  Filer  o |   | Accelerated Filer  x |   | Non-Accelerated Filer  o |
|---------------------------------------|--------|--------------------------------|--------|------------------------------------|

 

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

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of the latest practicable date:
| Class                                    | ** ** | **Outstanding at August 6, 2007** |
|------------------------------------------|------------|-----------------------------------|
| Class A Common  Stock ($.0001 par value) |       | 19,266,101                        |
| Class B Common  Stock ($.0001 par value) |       | 5,400,000                         |

 

 

 

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**GAIAM,INC.**

**FORM10-Q**

**INDEX**
| **PART  I. FINANCIAL INFORMATION** |                                                                                                        |
|------------------------------------|-------------------------------------------------------------------------------------------------------------|
| ** **                         | ** **** **                                                                                        |
| **Item 1.**                        | **Financial  Statements (Unaudited):**                                                                      |    |
| ** **                         | Condensed  Consolidated Balance Sheets at June 30, 2007 and December 31, 2006                               |    |
| ** **                         | Condensed  Consolidated Statements of Operations for the Three and Six Months Ended  June 30, 2007 and 2006 |    |
| ** **                         | Condensed Consolidated  Statements of Cash Flows for the Six Months Ended June 30,  2007and 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 REGARDING FORWARD-LOOKINGSTATEMENTS**

This report may contain forward-looking statementsthat involve risks and uncertainties. When used in discussion, the words “anticipate,”“believe,” “plan,” “estimate,” “expect,” “strive,” “future,” “intend” andsimilar expressions as they relate to Gaiam or its management are intended toidentify such forward-looking statements. Gaiam’s actual results could differmaterially from the results anticipated in these forward-looking statements asa result of certain factors set forth under “Management’s Discussion andAnalysis of Financial Condition and Results of Operations,” “Quantitative andQualitative Disclosures about Market Risk” and elsewhere in this report. Risksand uncertainties 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.

**PARTI.  FINANCIAL INFORMATION**

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

**Unaudited Interim Condensed Consolidated FinancialStatements**

The unaudited interim condensed consolidated financialstatements included herein have been prepared by the management of Gaiampursuant to the rules and regulations of the United States Securities andExchange Commission. Certain information and note disclosures normally includedin annual financial statements prepared in accordance with accountingprinciples generally accepted in the United States have been condensed oromitted pursuant to these rules and regulations, although the Company believesthat the disclosures made are adequate to make the information not misleading.In the opinion of management, the unaudited interim condensed financialstatements contain all adjustments (consisting of only normal recurringadjustments) necessary to present fairly, in all material respects, Gaiam’sconsolidated financial position as of June 30, 2007, the interim results ofoperations for the three and six months ended June 30, 2007 and 2006, and cashflows for the six months ended June 30, 2007 and 2006. These interim statementshave not been audited. The balance sheet as of December 31, 2006 was derivedfrom Gaiam’s audited consolidated financial statements included in Gaiam’sannual report on Form 10-K. The interim condensed consolidated financialstatements contained herein should be read in conjunction with Gaiam’s auditedfinancial statements, including the notes thereto, for the year ended December31, 2006.

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**GAIAM,INC.CONDENSED CONSOLIDATED BALANCE SHEETS**(In thousands, except share information)
| ** **                                                                                                                                                                            | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                            | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| ** **                                                                                                                                                                            | ** ** | **(Unaudited)**   | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                                                                            |       |              |       |                  |       |
| Current assets:                                                                                                                                                                       |       |              |       |                  |       |
| Cash and cash equivalents                                                                                                                                                             |       | $                 | 89,152     |                  | $          | 104,876 |   |
| Accounts receivable, net                                                                                                                                                              |       | 8,475             |       | 25,324                |       |
| Inventory, less allowances                                                                                                                                                            |       | 25,180            |       | 24,313                |       |
| Deferred advertising costs                                                                                                                                                            |       | 3,315             |       | 3,965                 |       |
| Deferred tax assets                                                                                                                                                                   |       | 3,424             |       | 3,404                 |       |
| Other current assets                                                                                                                                                                  |       | 4,851             |       | 4,965                 |       |
| Total current assets                                                                                                                                                                  |       | 134,397           |       | 166,847               |       |
|                                                                                                                                                                                  |       |              |       |                  |       |
| Property and equipment, net                                                                                                                                                           |       | 7,290             |       | 7,784                 |       |
| Media library, net                                                                                                                                                                    |       | 36,246            |       | 37,201                |       |
| Goodwill and other intangibles                                                                                                                                                        |       | 29,013            |       | 28,879                |       |
| Deferred tax assets                                                                                                                                                                   |       | 4,231             |       | 5,958                 |       |
| Notes receivable and other assets                                                                                                                                                     |       | 697               |       | 4,299                 |       |
| Total assets                                                                                                                                                                          |       | $                 | 211,874    |                  | $          | 250,968 |   |
|                                                                                                                                                                                  |       |              |       |                  |       |
| **Liabilities and stockholders’ equity**                                                                                                                                         |       |              |       |                  |       |
| Current liabilities:                                                                                                                                                                  |       |              |       |                  |       |
| Accounts payable                                                                                                                                                                      |       | $                 | 10,645     |                  | $          | 18,848 |   |
| Accrued liabilities                                                                                                                                                                   |       | 7,259             |       | 7,437                 |       |
| Income taxes payable                                                                                                                                                                  |       | 646               |       | 415                   |       |
| Total current liabilities                                                                                                                                                             |       | 18,550            |       | 26,700                |       |
|                                                                                                                                                                                  |       |              |       |                  |       |
| Minority interest                                                                                                                                                                     |       | 5,572             |       | 5,662                 |       |
|                                                                                                                                                                                  |       |              |       |                  |       |
| Commitments and contingencies                                                                                                                                                         |       |              |       |                  |       |
|                                                                                                                                                                                  |       |              |       |                  |       |
| Stockholders’ equity:                                                                                                                                                            |       |              |       |                  |       |
| Class A common stock, $.0001 par value, 150,000,000  shares authorized, 19,257,611 and 21,749,936 shares issued and outstanding at  June 30, 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 June 30, 2007 and  December 31, 2006                                       |       | 1                 |       | 1                     |       |
| Additional paid-in capital                                                                                                                                                            |       | 168,562           |       | 200,906               |       |
| Accumulated other comprehensive income                                                                                                                                                |       | 957               |       | 873                   |       |
| Retained earnings                                                                                                                                                                     |       | 18,230            |       | 16,824                |       |
| Total stockholders’ equity                                                                                                                                                       |       | 187,752           |       | 218,606               |       |
| Total liabilities and stockholders’ equity                                                                                                                                       |       | $                 | 211,874    |                  | $          | 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  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                              | ** ** | **2007**                                                          | ** ** | **2006**                                                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                    |       |                                                              |       |                                                            |       |   |   |   |   |
| Net revenue                                                             |       | $                                                                 | 52,361     |                                                            | $          | 43,161 |   | $ | 110,819 |   | $ | 94,913 |   |
| Cost of goods sold                                                      |       | 18,730                                                            |       | 16,270                                                          |       | 39,712 |   | 34,860 |   |
| Gross profit                                                            |       | 33,631                                                            |       | 26,891                                                          |       | 71,107 |   | 60,053 |   |
|                                                                    |       |                                                              |       |                                                            |       |   |   |   |   |
| Expenses:                                                               |       |                                                              |       |                                                            |       |   |   |   |   |
| Selling and operating                                                   |       | 31,490                                                            |       | 26,016                                                          |       | 63,502 |   | 54,922 |   |
| Corporate, general and administration                                   |       | 4,068                                                             |       | 3,551                                                           |       | 7,907 |   | 6,797 |   |
| Total expenses                                                          |       | 35,558                                                            |       | 29,567                                                          |       | 71,409 |   | 61,719 |   |
|                                                                    |       |                                                              |       |                                                            |       |   |   |   |   |
| Loss from operations                                                    |       | (1,927                                                            | )          | (2,676                                                          | )          | (302 | ) | (1,666 | ) |
|                                                                    |       |                                                              |       |                                                            |       |   |   |   |   |
| Other income                                                            |       | 1,144                                                             |       | 551                                                             |       | 2,347 |   | 1,128 |   |
|                                                                    |       |                                                              |       |                                                            |       |   |   |   |   |
| Earnings (loss) before income taxes and minority  interest              |       | (783                                                              | )          | (2,125                                                          | )          | 2,045 |   | (538 | ) |
|                                                                    |       |                                                              |       |                                                            |       |   |   |   |   |
| Income tax expense (benefit)                                            |       | (309                                                              | )          | (804                                                            | )          | 808 |   | (192 | ) |
| Minority interest in net loss of consolidated  subsidiaries, net of tax |       | 128                                                               |       | 155                                                             |       | 169 |   | 70 |   |
| Net income (loss)                                                       |       | $                                                                 | (346       | )                                                               | $          | (1,166 | ) | $ | 1,406 |   | $ | (276 | ) |
|                                                                    |       |                                                              |       |                                                            |       |   |   |   |   |
| Net earnings (loss) per share:                                          |       |                                                              |       |                                                            |       |   |   |   |   |
| Basic                                                                   |       | $                                                                 | (0.01      | )                                                               | $          | (0.05 | ) | $ | 0.06 |   | $ | (0.01 | ) |
| Diluted                                                                 |       | $                                                                 | (0.01      | )                                                               | $          | (0.05 | ) | $ | 0.06 |   | $ | (0.01 | ) |
| Shares used in computing net earnings (loss) per  share:                |       |                                                              |       |                                                            |       |   |   |   |   |
| Basic                                                                   |       | 24,655                                                            |       | 23,140                                                          |       | 25,159 |   | 21,795 |   |
| Diluted                                                                 |       | 24,655                                                            |       | 23,140                                                          |       | 25,338 |   | 21,795 |   |

 

*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 Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2007**                                                        | ** ** | **2006** | ** ** |
| **Operating activities**                                                                  | ** ** | ** **                                                      | ** ** | ** ** | ** ** |
| Net income (loss)                                                                         |       | $                                                               | 1,406      |   | $ | (276 | ) |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities: |       |                                                            |       |   |   |
| Depreciation                                                                              |       | 886                                                             |       | 1,064 |   |
| Amortization                                                                              |       | 4,474                                                           |       | 2,074 |   |
| Minority interest in consolidated subsidiaries                                            |       | (169                                                            | )          | (70 | ) |
| Noncash gain from equity investment                                                       |       | (127                                                            | )          | (519 | ) |
| Noncash loss on disposal of property                                                      |       | 265                                                             |       | — |   |
| Noncash stock-based compensation                                                          |       | 531                                                             |       | 194 |   |
| Deferred income tax expense (benefit)                                                     |       | 1,677                                                           |       | (211 | ) |
| Changes in operating assets and liabilities, net of  effects from acquisitions:           |       |                                                            |       |   |   |
| Accounts receivable                                                                       |       | 16,824                                                          |       | 13,496 |   |
| Inventory                                                                                 |       | (922                                                            | )          | (3,026 | ) |
| Deferred advertising costs                                                                |       | (285                                                            | )          | 325 |   |
| Prepaid and other assets                                                                  |       | (82                                                             | )          | (1,929 | ) |
| Accounts payable                                                                          |       | (8,106                                                          | )          | (10,034 | ) |
| Accrued liabilities                                                                       |       | (181                                                            | )          | (3,611 | ) |
| Income tax and other current liabilities                                                  |       | 232                                                             |       | (460 | ) |
| Net cash provided by (used in) operating activities                                       |       | 16,423                                                          |       | (2,983 | ) |
|                                                                                      |       |                                                            |       |   |   |
| **Investing activities**                                                                  | ** ** | ** **                                                      | ** ** | ** ** | ** ** |
| Purchase of property, equipment and media rights                                          |       | (3,088                                                          | )          | (379 | ) |
| Proceeds from sale of property and equipment                                              |       | —                                                          |       | 297 |   |
| Purchase of acquisitions and investments                                                  |       | (150                                                            | )          | (3,548 | ) |
| Proceeds from sale of investments                                                         |       | 3,871                                                           |       | — |   |
| Net cash provided by (used in) investing activities                                       |       | 633                                                             |       | (3,630 | ) |
|                                                                                      |       |                                                            |       |   |   |
| **Financing activities**                                                                  | ** ** | ** **                                                      | ** ** | ** ** | ** ** |
| Repurchase of Class A common stock, net of related  costs                                 |       | (32,907                                                         | )          | — |   |
| Proceeds from issuance of common stock, net of  related costs                             |       | 18                                                              |       | 96,496 |   |
| Net cash provided by (used in) financing activities                                       |       | (32,889                                                         | )          | 96,496 |   |
|                                                                                      |       |                                                            |       |   |   |
| Effects of exchange rates on cash and cash  equivalents                                   |       | 109                                                             |       | 424 |   |
|                                                                                      |       |                                                            |       |   |   |
| Net change in cash and cash equivalents                                                   |       | (15,724                                                         | )          | 90,307 |   |
| Cash and cash equivalents at beginning of period                                          |       | 104,876                                                         |       | 15,028 |   |
| Cash and cash equivalents at end of period                                                |       | $                                                               | 89,152     |   | $ | 105,335 |   |
|                                                                                      |       |                                                            |       |   |   |
| **Supplemental cash flow information**                                                    | ** ** | ** **                                                      | ** ** | ** ** | ** ** |
| Interest paid                                                                             |       | $                                                               | —     |   | $ | — |   |
| Income taxes paid                                                                         |       | $                                                               | 166        |   | $ | 92 |   |

 

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

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**Gaiam,Inc.Notes to Interim Condensed Consolidated Financial Statements(Unaudited)June 30, 2007**

**1.    ****Summary of SignificantAccounting Policies**

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 and six months ended June 30, 2007, except for theadoption of the Financial Accounting Standards Board’s (“FASB”)Interpretation  No. 48, *Accounting  forUncertainty in Income Taxes – An Interpretation of FASB Statement No. 109*(“FIN 48”). See Gaiam’s significantaccounting policy for *Income Taxes*discussed below.

*Organization and Nature ofOperations*

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 andReturns*

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 the latter half of 2006and the first six months of 2007 are preliminary as of June 30, 2007.  We expect to obtain information necessary tofinalize the estimated values during the remainder of 2007.

*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 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 significantlydifferent results.

*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. Determining whether a decline invalue is other-than-temporary requires a high degree of managementjudgment.  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 estimated fair valueof Gaiam’s library of produced videos acquired through business combinations,the purchase 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 estimated fair value and amortized on the basis of their estimateduseful lives. Capitalized costs to produce media products are recognized ascosts of goods sold 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 estimated fairvalue.

*Contractual Obligations*

Gaiam hascommitments pursuant to lease agreements, but does not have any outstandingcommitments pursuant to long-term debt, capital lease, or purchase obligations.The following 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 |       | $         | 3,095      |                      | $          | 1,424              |       | $                  | 1,123      |                       | $          | 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 June 30, 2007, Gaiam is not involved in any unconsolidated SPEsor VIEs.

*Income Taxes*

Gaiam provides forincome taxes 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 January1, 2007, Gaiam adopted the provisions of FIN 48. FIN 48 clarifies theaccounting for uncertainty in income taxes recognized in an enterprise’sfinancial statements 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 Company’s reassessmentof its tax positions in accordance with FIN 48 did not have a material impacton Gaiam’s condensed consolidated financial statements. Gaiam’s tax returns forall years after 2002 are subject to future examination by tax authorities.

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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 defines fair value, establishes a framework for measuring fairvalue in generally accepted accounting principles, and expands disclosuresabout fair value measurements. SFAS 157 applies under other accountingpronouncements that require or permit fair value measurements, the FASB havingpreviously concluded in those accounting pronouncements that fair value is therelevant measurement attribute. Accordingly, this Statement does not requireany new fair value measurements. The Statement is effective for financialstatements issued for fiscal years beginning after November 15, 2007, andinterim periods within those fiscal years. Earlier application is encouraged,provided that the reporting entity has not yet issued financial statements forthat fiscal year, including financial statements for an interim period withinthat fiscal year. Gaiam will adopt the provisions of SFAS 157 in its fiscalyear commencing January 1, 2008. Management currently believes that adoption ofthe provisions of SFAS 157 will not have a material impact on Gaiam’sconsolidated financial statements.

**2.****              Notes Receivableand Other Assets**

Notes receivableand other assets as of June 30, 2007 consisted of $0.7 million of otherlong-term assets 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 intoan agreement with Alps Communications LLC (“Alps”) and Life Balance MediaHoldings LLC (“LIME”) on January 5, 2006, to sell 19,968 Series A PreferredUnits of LIME, an investment previously accounted for using the equity method.The purchase price per unit was equal to the amount Gaiam paid for itsinvestment during 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 the sixmonths ended June 30, 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.

On July 17, 2007, Gaiam acquired 100% ownership interest in LIME.  See Subsequent Events Note 8.

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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 purchased 2.5million shares of its Class A common stock from Revolution Living for $13.14per share or $32.8 million in cash. The $13.14 per share price agreed to by theparties was the average price over the last 90 days of Gaiam’s shares prior tothe Agreement’s closing. In accordance with the cost method of accounting fortreasury stock, Gaiam recorded the treasury stock at $32.9 million includingacquisition legal fees. Since Gaiam has not yet decided the ultimatedisposition of the re-acquired stock, its cost is reflected in the CondensedConsolidated Balance Sheet at June 30, 2007 as a $32.9 million reduction toAdditional paid-in capital. Following this repurchase, Gaiam had approximately24.7 million Class A and Class B common shares outstanding.

During the sixmonths ended June 30, 2007, Gaiam issued a total of 3,735 shares of Class Acommon stock to Gaiam’s independent directors, in lieu of cash compensation,for services rendered in 2006 and 2007. In addition, for the six months endedJune 30, 2007, Gaiam issued 3,940 shares of Class A common stock upon exerciseof options granted under 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 andterminates no later than June 1, 2009. Options under the Plan are generallygranted with an exercise price equal to the closing market price of Gaiam’sstock at the date of the grant and normally vest and become exercisable at 2%per month for the 50 months beginning in the eleventh month after date ofgrant. Grants typically expire seven years from the date of grant. Gaiam usesthe Black-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 firsthalf of 2007, Gaiam granted 190,000 stock options to employees and directorsand 113,500 stock options were cancelled or expired. Total share-basedcompensation recognized was $0.3 million and $0.1 million for the three monthsended June 30, 2007 and 2006, respectively, and $0.5 million and $0.2 millionfor the six months ended June 30, 2007 and 2006, respectively, and is shown inCorporate, general, and administration expenses on Gaiam’s CondensedConsolidated Statements of Operations.

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**5.     ComprehensiveIncome (Loss)**

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): 
|                                               | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                          |       |                                            |       |                                          |       |   |   |   |   |
| Net income  (loss)                            |       | $                                               | (346       | )                                             | $          | (1,166 | ) | $ | 1,406 |   | $ | (276 | ) |
| Foreign currency  translation adjustment, net |       | 72                                              |       | 314                                           |       | 84 |   | 399 |   |
| Comprehensive income  (loss), net of taxes    |       | $                                               | (274       | )                                             | $          | (852 | ) | $ | 1,490 |   | $ | 123 |   |

 

**6.****     Earnings (Loss) Per Share**

Basic earnings (loss) per share excludes any dilutiveeffects of options, warrants and dilutive securities. Basic earnings (loss) pershare is computed using the weighted average number of common sharesoutstanding during the period. Diluted earnings (loss) per share is computedusing the weighted average number of common and common stock equivalent sharesoutstanding during the period. Common equivalent shares of 590 thousand and 221thousand are excluded from the computation of diluted earnings per share forthe three months ended June 30, 2007 and 2006, respectively, and 549 thousandand 290 thousand common equivalent shares are excluded from the computation ofthe six months ended June 30, 2007 and 2006, respectively, because their effectis antidilutive. The following table sets forth the computation of basic anddiluted earnings (loss) per share (in thousands, except per share data): 
|                                                               | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                    | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Numerator for  basic and diluted earnings (loss) per share    |       | $                                               | (346       | )                                             | $          | (1,166 | ) | $ | 1,406 |   | $ | (276 | ) |
| Denominator:                                                  |       |                                            |       |                                          |       |   |   |   |   |
| Weighted average share for basic earnings (loss) per  share   |       | 24,655                                          |       | 23,140                                        |       | 25,159 |   | 21,795 |   |
| Effect of  dilutive securities:                               |       |                                            |       |                                          |       |   |   |   |   |
| Weighted average of common stock, stock options and  warrants |       | —                                          |       | —                                        |       | 179 |   | — |   |
| Denominators for  diluted earnings (loss) per share           |       | 24,655                                          |       | 23,140                                        |       | 25,338 |   | 21,795 |   |
|                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Net earnings (loss) per share – basic                    |       | $                                               | (0.01      | )                                             | $          | (0.05 | ) | $ | 0.06 |   | $ | (0.01 | ) |
| Net earnings (loss) per  share – diluted                 |       | $                                               | (0.01      | )                                             | $          | (0.05 | ) | $ | 0.06 |   | $ | (0.01 | ) |

 

**7.****     Segment Information**

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.

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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 segments was as follows (in thousands): 
| ** **                                                              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                              | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net revenue:                                                            |       |                                            |       |                                          |       |   |   |   |   |
| Direct to consumer                                                      |       | $                                               | 30,352     |                                          | $          | 27,008 |   | $ | 64,417 |   | $ | 53,118 |   |
| Business                                                                |       | 22,009                                          |       | 16,153                                        |       | 46,402 |   | 41,795 |   |
| Consolidated net revenue                                                |       | 52,361                                          |       | 43,161                                        |       | 110,819 |   | 94,913 |   |
| Contribution  loss:                                                     |       |                                            |       |                                          |       |   |   |   |   |
| Direct to consumer                                                      |       | (2,029                                          | )          | (693                                          | )          | (2,629 | ) | (1,312 | ) |
| Business                                                                |       | 102                                             |       | (1,983                                        | )          | 2,327 |   | (354 | ) |
| Consolidated contribution loss                                          |       | (1,927                                          | )          | (2,676                                        | )          | (302 | ) | (1,666 | ) |
| Reconciliation  of contribution margin loss to net income (loss):       |       |                                            |       |                                          |       |   |   |   |   |
| Other income                                                            |       | 1,144                                           |       | 551                                           |       | 2,347 |   | 1,128 |   |
| Income tax expense (benefit)                                            |       | (309                                            | )          | (804                                          | )          | 808 |   | (192 | ) |
| Minority interest in net loss of consolidated  subsidiaries, net of tax |       | 128                                             |       | 155                                           |       | 169 |   | 70 |   |
| Net income (loss)                                                       |       | $                                               | (346       | )                                             | $          | (1,166 | ) | $ | 1,406 |   | $ | (276 | ) |

 

**8.****              Subsequent Events**

Subsequent to June 30, 2007, Gaiam acquired varyingamounts of controlling ownership interest in four entities for a total cost ofapproximately $10.2 million, excluding direct acquisition costs, of which $9.7million was paid in cash and $0.5 million in Gaiam Class A common stock.  The four companies are:  (1) Zaadz, Inc., a leading social networkingsite in the LOHAS space, (2) Life Balance Media Holdings LLC, a multimedialifestyle company with multiple platforms focused on leading a healthier,greener, and more balanced lifestyle, (3) Conscious Enlightenment, Inc., anon-line and off-line based community that owns and operates the EnlightenmentCard, a socially conscious credit card, and Conscious Choice and Whole Lifemagazines, and (4) Explorers Corner LLC, an eco adventure travel company.  Gaiam is in the process of assessing theestimated fair value of the net assets acquired and, thus, the amount ofgoodwill and other intangibles is not yet known.

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

The following discussion and analysis of Gaiam’sfinancial condition and results of operations should be read in conjunctionwith the unaudited condensed consolidated financial statements and relatednotes included elsewhere in this document.

Adopted New Accounting Policies

In July 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 Company’s reassessment of its tax positions in accordance withFIN 48 did not have a material impact on the results of operations, financialcondition or liquidity. For additional information regarding the adoption ofFIN 48, see Note 1 – Summary of Significant Accounting Policies - *Income Taxes* to the Interim Condensed Consolidated FinancialStatements.

Overview and 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.

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 a multi-channelapproach including traditional media channels, direct to consumers via theInternet, catalog, direct response marketing, and subscription clubs, andthrough 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 or drop-shipped directlyto customers.

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.  Subsequent to June 30, 2007 Gaiam acquiredvarying ownership interests in four lifestyle companies to further develop its community.

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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.

Results of Operations

The following table sets forth certain financial dataas a percentage of revenue for the periods indicated:
| ** **                                                              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                              | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                    |       |                                            |       |                                          |       |   |   |   |   |
| Net revenue                                                             |       | 100.0                                           | %          | 100.0                                         | %          | 100.0 | % | 100.0 | % |
| Cost of goods  sold                                                     |       | 35.8                                            | %          | 37.7                                          | %          | 35.8 | % | 36.7 | % |
| Gross profit                                                            |       | 64.2                                            | %          | 62.3                                          | %          | 64.2 | % | 63.3 | % |
|                                                                    |       |                                            |       |                                          |       |   |   |   |   |
| Expenses:                                                               |       |                                            |       |                                          |       |   |   |   |   |
| Selling and operating                                                   |       | 60.1                                            | %          | 60.3                                          | %          | 57.3 | % | 57.9 | % |
| Corporate, general and administration                                   |       | 7.8                                             | %          | 8.2                                           | %          | 7.1 | % | 7.2 | % |
| Total expenses                                                          |       | 67.9                                            | %          | 68.5                                          | %          | 64.4 | % | 65.1 | % |
|                                                                    |       |                                            |       |                                          |       |   |   |   |   |
| (Loss) from  operations                                                 |       | (3.7                                            | )%         | (6.2                                          | )%         | (0.2 | )% | (1.8 | )% |
| Other income                                                            |       | 2.2                                             | %          | 1.3                                           | %          | 2.1 | % | 1.2 | % |
| Income tax  expense (benefit)                                           |       | (0.6                                            | )%         | (1.9                                          | )%         | 0.7 | % | (0.2 | )% |
| Minority  interest in net loss of consolidated subsidiaries, net of tax |       | 0.2                                             | %          | 0.3                                           | %          | 0.1 | % | 0.1 | % |
| Net income  (loss)                                                      |       | (0.7                                            | )%         | (2.7                                          | )%         | 1.3 | % | (0.3 | )% |

 

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#### Three Months Ended June 30, 2007 and 2006

Revenue of $52.4 million during the three months endedJune 30, 2007 was 21.3% higher than the $43.2 million in revenue generated inthe second quarter of 2006. The increase in revenue includes Gaiam’s successfulentrance into the international market, increased internet sales, and revenuesfrom the Spiritual Cinema Inc. acquisition. Revenue in Gaiam’s direct toconsumer segment was $30.4 million for the three months ended June 30, 2007, anincrease of $3.4 million or 12.6% over 2006 second quarter revenue of $27.0million. Total revenue generated by Gaiam’s business segment was $22.0 millionfor the quarter ended June 30, 2007 compared to $16.2 million for the threemonths ended June 30, 2006. The above mentioned international market launchesare included in the business segment.

Gross profit, which consists of revenue less cost ofgoods sold (primarily merchandise cost plus inbound freight and duties),increased to $33.6 million in the second quarter of 2007 from $26.9 million forthe three months ended June 30, 2006. As a percentage of revenue, gross profitremained consistent with the first quarter of 2007 at 64.2% and improved overthe 62.3% for the same quarter last year.

Selling and operating expenses increased to $31.5million for the three months ended June 30, 2007 compared to $26.0 million inthe same period of 2006, primarily resulting from increased sales andinvestments made in personnel, advertising, community and marketing programs.As a percentage of revenue, selling and operating expenses decreased slightlyto 60.1% in the second quarter of 2007 from 60.3% during the quarter ended June30, 2006 reflecting increased leverage on the higher revenue base partiallyoffset by planned investments in our on-line communities.

Corporate, general and administration expensesincreased to $4.1 million for the second quarter of 2007 from $3.6 million forthe three months ended June 30, 2006 primarily due to Gaiam’s plannedinvestments to support the increased revenue base and online communities.  As a percent of revenue, corporate generaland administration expenses decreased to 7.8% of revenue during the secondquarter of 2007 compared to 8.2% of revenue for the same period in 2006.

Loss from operations was $1.9 million for the quarterended June 30, 2007, an improvement from the $2.7 million loss for the secondquarter of 2006, reflecting higher sales, lowered cost of goods sold, and improvedselling and operating and corporate, general and administration expenses.  As a percent of revenue, loss from operationsimproved to 3.7% of revenue during the three months ended June 30, 2007, ascompared to a 6.2% of revenue loss for the second quarter of 2006.

Gaiam recorded other income of $1.1 million during thesecond quarter of 2007 compared to $0.6 million during the same period in 2006.The increase in 2007 to other income primarily consisted of interest on cashinvestments. In the second quarter of 2006, Gaiam’s other income was alsomainly comprised of interest earned on cash investments.

Gaiam recorded an income tax benefit of $0.3 millionin the second quarter of 2007 compared to a $0.8 million tax benefit in thesame period of 2006. Gaiam’s consolidated effective tax rate fluctuates basedupon the distribution of earnings/losses between its domestic and foreignoperations.

As a result of the factors described above, Gaiamimproved its 2007 second quarter financial performance over that of the threemonths ended June 30, 2006. For the quarter ended June 30, 2007, Gaiam produceda net loss of $0.3 million, or $0.01 per share, as compared to a net loss inthe same period of 2006 of $1.2 million, or $0.05 per share.

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#### Six Months Ended June 30, 2007 and 2006

Revenue of $110.8 million during the six months endedJune 30, 2007 was 16.8% higher than the $94.9 million in revenue generated inthe same period of 2006. The increase in revenue includes Gaiam’s successful entranceinto the international market and the continued success of its web and directresponse marketing. Revenue in Gaiam’s direct to consumer segment was $64.4million for the six months ended June 30, 2007, an increase of $11.3 million or21.3% over the first half of 2006 revenue of $53.1 million. Total revenuegenerated by Gaiam’s business segment was $46.4 million for the half year endedJune 30, 2007 compared to $41.8 million for the six months ended June 30, 2006.The above mentioned international market launches are included in the businesssegment.

Gross profit increased to $71.1 million in the firsthalf of 2007 from $60.1 million for the six months ended June 30, 2006. As apercentage of revenue, gross profit improved over the 63.3% for the same periodlast year.

Selling and operating expenses increased to $63.5million for the six months ended June 30, 2007 compared to $54.9 million in thesame period of 2006, primarily resulting from increased sales and investmentsmade in branding, personnel, advertising, community and marketing programs. Asa percentage of revenue, selling and operating expenses decreased to 57.3% inthe first half of 2007 from 57.9% for the six months ended June 30, 2006reflecting increased leverage on the higher revenue base.

Corporate, general and administration expensesincreased to $7.9 million for the first half of 2007 from $6.8 million for thesix months ended June 30, 2006 primarily due to Gaiam’s planned investments tosupport the increased revenue base. As a percent of revenue, corporate generaland administration expenses decreased slightly to 7.1% of revenue during thefirst half of 2007 compared to 7.2% of revenue for the same period in 2006.

Loss from operations was $0.3 million for the sixmonths ended June 30, 2007, an improvement over the $1.7 million loss for thesame period of 2006, reflecting higher sales, lower cost of goods sold, andimproved operating expenses.  As apercent of revenue, loss from operations improved to 0.2% of revenue during thefirst half of 2007, as compared to 1.8% of revenue for the six months endedJune 30, 2006.

Gaiam recorded other income of $2.3 million during thefirst half of 2007 compared to $1.1 million during the same period in 2006. Theincrease in 2007 to other income primarily consisted of interest on cashinvestments. In the first half of 2006, Gaiam’s other income was mainlycomprised of a $0.5 million gain on sale of an investment and interest earnedon cash investments.

Gaiam recorded income tax expense of $0.8 million forthe six months ended June 30, 2007 compared to a $0.2 million tax benefit inthe same period of 2006. Gaiam’s consolidated effective tax rate fluctuatesbased upon the distribution of earnings/losses between its domestic and foreignoperations.

As a result of the factors described above, Gaiamimproved its first half of 2007 financial performance over that of the sixmonths ended June 30, 2006. For the first half of 2007, Gaiam produced netincome of $1.4 million, or $0.06 per share, as compared to a net loss in thesame period of 2006 of $0.3 million or $0.01 per share.

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Seasonality

Gaiam’s sales areaffected by seasonal influences. On an aggregate basis, Gaiam generates itsstrongest revenues and net income in the latter half of the year due toincreased holiday spending.

Liquidity and CapitalResources

Gaiam’s capitalneeds arise 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 June 30, 2007, Gaiam had no amounts outstandingunder this agreement; however, $2.3 million was reserved for outstandingletters of credit. Gaiam has complied with all of the financial covenants. Thecredit agreement originally expired on July 31, 2007 and Gaiam obtained a 61day extension of the agreement while negotiating a new, long-term agreementwith Wells Fargo. Gaiam anticipates that the terms and conditions of the newagreement will be at least as favorable as the current agreement.  Under the current agreement, if 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.

Gaiam’s operatingactivities provided net cash of $16.4 million for the six months ended June 30,2007, primarily reflecting cash provided from net income of $1.4 million,noncash adjustments to net income of $7.6 million, and improved accountsreceivable collections of $16.8 million, partially offset by the use of fundsto reduce accounts payable by $8.1 million and other net uses of $1.3 million.During the six months ended June 30, 2006, Gaiam’s operating activities usednet cash of $3.0 million, primarily reflecting the use of funds to reduceaccounts payable and accrued liabilities by $13.6 million, increase inventoryand prepaid and other current assets by $4.9 million, and fund other net usesof $0.5 million, partially offset by cash provided from the decrease inaccounts receivable of $13.5 million and non-cash adjustments to the net lossof $2.5 million.

Gaiam’s investingactivities for the six months ended June 30, 2007 provided net cash of $0.6million from the sale of the LIME investment for $1.4 million and prepayment ofthe Alps promissory note principal and interest for $2.4 million, partiallyoffset by cash used for the purchase of property, equipment, and media rightsfor $3.1 million and the purchase of an acquisition for $0.1 million. Gaiam’sinvesting activities for the six months ended June 30, 2006 used net cash of$3.6 million primarily to purchase an approximate 34% interest in Cinema CircleInc. for $3.5 million.

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Gaiam’s financingactivities used net cash of $32.9 million for the six months ended June 30,2007 primarily to repurchase 2.5 million shares of Gaiam Class A common stock.For the six months ended June 30, 2006, Gaiam’s financing activities providednet cash of $96.5 million reflecting net cash provided by the common stockoffering of $93.0 million and the exercise of stock options during the firsthalf of the year for $3.5 million.

On April 7, 2006, Gaiam filed a shelf registrationstatement on Form S-3 with the Securities and Exchange Commission for Class ACommon Stock, par value $.0001, with a total offering price not to exceed$100,000,000.  During May 2006, Gaiamfiled an amended Form S-3 to register 5,000,000 shares of Class A Common Stock,plus additional shares to cover over-allotments, if any.  On May 24,2006, Gaiam sold 5,000,000 shares of ClassA Common Stock and on June 13, 2006 sold 690,000 shares of Class A Common Stockin underwritten offerings under the registration statement.  The combined stock sales generated grossproceeds of $99.6 million.

Gaiam believes itsavailable cash, cash expected to be generated from operations, and borrowingcapabilities should be sufficient to fund its operations on both a short-termand long-term basis. However, Gaiam’s projected cash needs may change as aresult of acquisitions, product development, unforeseen operationaldifficulties or other factors.

In the normalcourse of our business, Gaiam investigates, evaluates and discussesacquisition, joint venture, minority investment, strategic relationship andother business combination opportunities in the LOHAS and MTM markets. For anyfuture investment, acquisition or joint venture opportunities, Gaiam mayconsider using then-available liquidity, issuing equity securities or incurringadditional indebtedness.

Risk Factors

There are risksand uncertainties 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.

**Item 3.    Quantitativeand 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.

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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 June 30, 2007.

**Item 4.    Controls and Procedures**

**Evaluation of Disclosure Controls andProcedures**

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 June 30, 2007, Gaiam’s chief executive officer and chieffinancial officer have concluded that those disclosure controls and proceduresare effective.

**Changes in Internal Control overFinancial Reporting**

No changes in Gaiam’s internal control over financialreporting occurred during the quarter or first six months ended June 30, 2007that have materially affected, or are reasonably likely to materially affect,Gaiam’s internal control 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.

**Item 2.    Sales of Unregistered Securities and Use ofProceeds**

None.

**Item 3.    Defaults Upon Senior Securities**

None.

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**Item 4.    Submission of Matters to a Vote of SecurityHolders**

On June 19, 2007, Gaiam held an annual meeting ofshareholders. The shareholders elected seven directors to serve until the nextannual meeting of shareholders to be held in 2008 or until their successors areduly elected and qualified. The results of this vote follow:

| Jirka Rysavy       |   | For:   65,942,158 |   | Withheld: |   | 2,341,412 |
|--------------------|--------|------------------------|--------|-----------|--------|-----------|
| Lynn Powers        |   | For:   65,928,345 |   | Withheld: |   | 2,355,225 |
| James Argyropoulos |   | For:   67,954,811 |   | Withheld: |   | 328,759   |
| Barnet M. Feinblum |   | For:   67,295,445 |   | Withheld: |   | 988,125   |
| Barbara Mowry      |   | For:   67,969,237 |   | Withheld: |   | 314,333   |
| Ted Nark           |   | For:   68,214,554 |   | Withheld: |   | 69,016    |
| Paul H. Ray        |   | For:   68,214,671 |   | Withheld: |   | 68,899    |

 

**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**

In accordance with the requirements of the Securitiesand Exchange Act, the registrant caused this report to be signed on its behalf,by the undersigned, thereunto duly authorized.
|        |   | Gaiam, Inc.                                             |                |   |
|--------|--------|---------------------------------------------------------|---------------------|--------|
|   |   | (Registrant)                                            |                |   |
|   |   | August 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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