Use these links to rapidly review the documentINDEX TO FORM 10-Q

United States
Securities and Exchange CommissionWashington, D.C. 20549

Form 10-Q

|ý                                               | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 
|----------------------------------------------- | ---------------------------------------------------------------------------------------------
|For the Fiscal Quarter Ended September 30, 2002
|OR                                             
|o                                               | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

Commission File Number 0-27517

GAIAM, INC.(Exact name of registrant as specified in its charter)

COLORADO

84-1113527(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)


360 INTERLOCKEN BLVD.,
BROOMFIELD, COLORADO 80021(Address of principal executive offices)

(303) 222-3600(Registrant's telephone number, 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 the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past
90 days. Yes ý    No o

Indicate
the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

Class

Shares outstanding as of November 7, 2002Class A Common Stock
($.0001 par value)

8,634,040Class B Common Stock
($.0001 par value)

5,400,000






INDEX TO FORM 10-Q



|         |  |                                                                                                     
|-------- |  | ----------------------------------------------------------------------------------------------------
|PART I.  |  | FINANCIAL INFORMATION                                                                               
|Item 1.  |  | Condensed Consolidated Financial Statements (Unaudited)                                             
|         |  | Condensed Consolidated Balance Sheets at September 30, 2002 and December 31, 2001                   
|         |  | Condensed Consolidated Statements of Income for the three months ended September 30, 2002 and 2001  
|         |  | Condensed Consolidated Statements of Income for the nine months ended September 30, 2002 and 2001   
|         |  | Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2002 and 2001
|         |  | 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 2.  |  | Changes in 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 and Reports on Form 8-K                                                                    

This
report may contain forward-looking statements that involve risks and uncertainties. When used in this discussion, the words "anticipate," "believe," "plan," "estimate," "expect," "strive,"
"future," "intend" and similar expressions as they relate to Gaiam or its management are intended to identify such forward-looking statements. Gaiam's actual results could differ materially from the
results anticipated in these forward-looking statements as a result of certain factors set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Market
Risk" and elsewhere in this report. Risks and uncertainties that could cause actual results to differ include, without limitation, competition, loss of key personnel, pricing, brand reputation, growth
of e-commerce, acquisitions, security and information systems, legal liability for website content, merchandise supply problems, failure of third parties to provide adequate service,
reliance on centralized customer service, overstocks and merchandise returns, future internet related taxes, control of Gaiam by its founder, fluctuations in quarterly operating results, limited
experience in operating retail stores, consumer trends, customer interest in our products, general economic conditions, the effect of government regulation and other risks and uncertainties included
in Gaiam's filings with the Securities and Exchange Commission. We caution you that no forward-looking statement is a guarantee of future performance, and you should not place undue reliance on these
forward-looking statements
which reflect our management's view only as of the date of this report. We undertake no obligation to update any forward-looking information.





GAIAM, INC.        CONDENSED CONSOLIDATED BALANCE SHEETS

|                                                 |                                                                                                                                                                                        | September 30,
2002 |            | December 31,
2001 |  
|------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------ | ---------- | ----------------- | -
|
|Assets                                           |                                                                                                                                                                                        |                    |            |                   |  
|Current assets:                                  |                                                                                                                                                                                        |                    |            |                   |  
|                                                 | Cash and cash equivalents                                                                                                                                                              |                    | $          | 17,136,706        |  
|                                                 | Accounts receivable, net                                                                                                                                                               |                    |            | 19,425,628        |  
|                                                 | Accounts and notes receivable, other                                                                                                                                                   |                    |            | 2,442,314         |  
|                                                 | Inventory, less allowances                                                                                                                                                             |                    |            | 14,835,296        |  
|                                                 | Deferred advertising costs                                                                                                                                                             |                    |            | 2,931,012         |  
|                                                 | Other current assets                                                                                                                                                                   |                    |            | 942,927           |  
|                                                 |                                                                                                                                                                                        |                    |            |                   |  
|Total current assets                             |                                                                                                                                                                                        |                    | 57,713,883 |                   |  
|Property and equipment, net                      |                                                                                                                                                                                        |                    | 11,317,412 |                   |  
|Capitalized production costs, net                |                                                                                                                                                                                        |                    | 4,782,863  |                   |  
|Video library, net                               |                                                                                                                                                                                        |                    | 4,073,884  |                   |  
|Goodwill, net                                    |                                                                                                                                                                                        |                    | 10,195,828 |                   |  
|Deferred tax assets                              |                                                                                                                                                                                        |                    | 1,390,545  |                   |  
|Other assets                                     |                                                                                                                                                                                        |                    | 651,668    |                   |  
|                                                 |                                                                                                                                                                                        |                    |            |                   |  
|Total assets                                     |                                                                                                                                                                                        | $                  | 90,126,083 |                   | $
|                                                 |                                                                                                                                                                                        |                    |            |                   |  
|Liabilities and stockholders' equity             |                                                                                                                                                                                        |                    |            |                   |  
|Current liabilities:                             |                                                                                                                                                                                        |                    |            |                   |  
|                                                 | Accounts payable                                                                                                                                                                       |                    | $          | 8,847,892         |  
|                                                 | Accrued liabilities                                                                                                                                                                    |                    |            | 3,507,869         |  
|                                                 | Accrued royalties                                                                                                                                                                      |                    |            | 514,776           |  
|                                                 | Income taxes payable                                                                                                                                                                   |                    |            | 1,194,934         |  
|                                                 | Capital lease obligations, current                                                                                                                                                     |                    |            | 901,869           |  
|                                                 |                                                                                                                                                                                        |                    |            |                   |  
|Total current liabilities                        |                                                                                                                                                                                        |                    | 14,967,340 |                   |  
|                                                 | Capital lease obligations, long-term                                                                                                                                                   |                    |            | 95,749            |  
|                                                 | Deferred tax liability                                                                                                                                                                 |                    |            | 537,408           |  
|                                                 |                                                                                                                                                                                        |                    |            |                   |  
|Total long-term liabilities                      |                                                                                                                                                                                        |                    | 633,157    |                   |  
|Minority interest                                |                                                                                                                                                                                        |                    | 6,411,416  |                   |  
|Redeemable Class A preferred stock in subsidiary |                                                                                                                                                                                        |                    | 6,000,000  |                   |  
|Stockholders' equity:                            |                                                                                                                                                                                        |                    |            |                   |  
|                                                 | Class A common stock, $.0001 par value, 150,000,000 shares authorized, 8,633,858 and 8,581,806 shares issued and outstanding at September 30, 2002 and December 31, 2001, respectively |                    |            | 863               |  
|                                                 | Class B common stock, $.0001 par value, 50,000,000 shares authorized, 5,400,000 issued and outstanding at June 30, 2002 and December 31, 2001, respectively                            |                    |            | 540               |  
|                                                 | Additional paid-in capital                                                                                                                                                             |                    |            | 48,554,892        |  
|                                                 | Deferred compensation                                                                                                                                                                  |                    |            | (298,326          | )
|                                                 | Retained earnings                                                                                                                                                                      |                    |            | 13,856,201        |  
|                                                 |                                                                                                                                                                                        |                    |            |                   |  
|Total stockholders' equity                       |                                                                                                                                                                                        |                    | 62,114,170 |                   |  
|                                                 |                                                                                                                                                                                        |                    |            |                   |  
|Total liabilities and stockholders' equity       |                                                                                                                                                                                        | $                  | 90,126,083 |                   | $
|                                                 |                                                                                                                                                                                        |                    |            |                   |  

See
accompanying notes.



GAIAM, INC.        CONDENSED CONSOLIDATED STATEMENTS OF INCOME        (Unaudited)

|                                                                              |                                       | For the Three Months Ended
September 30, |           
|----------------------------------------------------------------------------- | ------------------------------------- | ---------------------------------------- | ----------
|
|Net revenue                                                                   |                                       | $                                        | 25,793,600
|Cost of goods sold                                                            |                                       |                                          | 10,763,823
|                                                                              |                                       |                                          |           
|Gross profit                                                                  |                                       |                                          | 15,029,777
|Expenses:                                                                     |                                       |                                          |           
|                                                                              | Selling and operating                 |                                          |           
|                                                                              | Corporate, general and administration |                                          |           
|                                                                              |                                       |                                          |           
|Total expenses                                                                |                                       |                                          | 12,784,099
|                                                                              |                                       |                                          |           
|Income from operations                                                        |                                       |                                          | 2,245,678 
|Other income (expense)                                                        |                                       |                                          | (161,677  
|Interest income                                                               |                                       |                                          | 41,654    
|                                                                              |                                       |                                          |           
|Total other income (expense)                                                  |                                       |                                          | (120,023  
|                                                                              |                                       |                                          |           
|Income before income taxes and minority interest                              |                                       |                                          | 2,125,655 
|Provision for income taxes                                                    |                                       |                                          | 754,607   
|Minority interest in net (income) loss of consolidated subsidiary, net of tax |                                       |                                          | 23,744    
|                                                                              |                                       |                                          |           
|Net income                                                                    |                                       | $                                        | 1,394,792 
|                                                                              |                                       |                                          |           
|Net income per share:                                                         |                                       |                                          |           
|                                                                              | Basic                                 |                                          | $         
|                                                                              | Diluted                               |                                          | $         
|Shares used in computing net income per share:                                |                                       |                                          |           
|                                                                              | Basic                                 |                                          |           
|                                                                              | Diluted                               |                                          |           

See
accompanying notes.





GAIAM, INC.        CONDENSED CONSOLIDATED STATEMENTS OF INCOME        (Unaudited)

|                                                                              |                                       | For the Nine Months Ended
September 30, |           
|----------------------------------------------------------------------------- | ------------------------------------- | --------------------------------------- | ----------
|
|Net revenue                                                                   |                                       | $                                       | 74,144,566
|Cost of goods sold                                                            |                                       |                                         | 30,663,662
|                                                                              |                                       |                                         |           
|Gross profit                                                                  |                                       |                                         | 43,480,904
|Expenses:                                                                     |                                       |                                         |           
|                                                                              | Selling and operating                 |                                         |           
|                                                                              | Corporate, general and administration |                                         |           
|                                                                              | Non-recurring restructuring charges   |                                         |           
|                                                                              |                                       |                                         |           
|Total expenses                                                                |                                       |                                         | 38,382,824
|                                                                              |                                       |                                         |           
|Income from operations                                                        |                                       |                                         | 5,098,080 
|Other income (expense)                                                        |                                       |                                         | (414,618  
|Interest income (expense)                                                     |                                       |                                         | 155,134   
|                                                                              |                                       |                                         |           
|Total other income (expense)                                                  |                                       |                                         | (259,484  
|                                                                              |                                       |                                         |           
|Income before income taxes and minority interest                              |                                       |                                         | 4,838,596 
|Provision for income taxes                                                    |                                       |                                         | 1,717,701 
|Minority interest in net (income) loss of consolidated subsidiary, net of tax |                                       |                                         | 12,947    
|                                                                              |                                       |                                         |           
|Net income                                                                    |                                       | $                                       | 3,133,842 
|                                                                              |                                       |                                         |           
|Net income per share:                                                         |                                       |                                         |           
|                                                                              | Basic                                 |                                         | $         
|                                                                              | Diluted                               |                                         | $         
|Shares used in computing net income per share:                                |                                       |                                         |           
|                                                                              | Basic                                 |                                         |           
|                                                                              | Diluted                               |                                         |           

See
accompanying notes.



GAIAM, INC.        CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS        (Unaudited)

|                                                                                            |                                                                                | For the Nine Months
Ended September 30, |           
|------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | --------------------------------------- | ----------
|
|Operating activities                                                                        |                                                                                |                                         |           
|Net income                                                                                  |                                                                                | $                                       | 3,133,843 
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |                                                                                |                                         |           
|                                                                                            | Depreciation                                                                   |                                         |           
|                                                                                            | Amortization                                                                   |                                         |           
|                                                                                            | Stock compensation                                                             |                                         |           
|                                                                                            | Minority interest in consolidated subsidiary                                   |                                         |           
|                                                                                            | Changes in operating assets and liabilities, net of effects from acquisitions: |                                         |           
|                                                                                            |                                                                                | Accounts receivable                     |           
|                                                                                            |                                                                                | Inventory                               |           
|                                                                                            |                                                                                | Deferred advertising costs              |           
|                                                                                            |                                                                                | Capitalized production costs            |           
|                                                                                            |                                                                                | Other current assets                    |           
|                                                                                            |                                                                                | Other assets                            |           
|                                                                                            |                                                                                | Accounts payable                        |           
|                                                                                            |                                                                                | Accrued liabilities                     |           
|                                                                                            |                                                                                | Income taxes payable                    |           
|                                                                                            |                                                                                |                                         |           
|Net cash (used in) provided by operating activities                                         |                                                                                |                                         | (5,988,484
|                                                                                            |                                                                                |                                         |           
|Investing activities                                                                        |                                                                                |                                         |           
|Purchase of property and equipment                                                          |                                                                                |                                         | (2,142,644
|Proceeds from the sale of property and equipment                                            |                                                                                |                                         | 2,748,292 
|Payments for acquisitions, net of cash acquired                                             |                                                                                |                                         | 255,230   
|                                                                                            |                                                                                |                                         |           
|Net cash (used in) provided by investing activities                                         |                                                                                |                                         | 860,878   
|                                                                                            |                                                                                |                                         |           
|Financing activities                                                                        |                                                                                |                                         |           
|Principal payments on capital leases                                                        |                                                                                |                                         | (156,176  
|Proceeds from issuance of common stock                                                      |                                                                                |                                         | 176,841   
|Net proceeds from borrowings                                                                |                                                                                |                                         |          
|                                                                                            |                                                                                |                                         |           
|Net cash provided by financing activities                                                   |                                                                                |                                         | 20,666    
|                                                                                            |                                                                                |                                         |           
|Net change in cash and cash equivalents                                                     |                                                                                |                                         | (5,106,941
|Cash and cash equivalents at beginning of period                                            |                                                                                |                                         | 22,243,647
|                                                                                            |                                                                                |                                         |           
|Cash and cash equivalents at end of period                                                  |                                                                                | $                                       | 17,136,706
|                                                                                            |                                                                                |                                         |           
|Supplemental cash flow information                                                          |                                                                                |                                         |           
|Interest paid                                                                               |                                                                                | $                                       | 45,115    
|Income taxes paid                                                                           |                                                                                |                                         | 2,367,737 

See
accompanying notes.





Gaiam, Inc.        Notes to Interim Condensed Consolidated Financial Statements        (Unaudited)        September 30, 2002

1. Interim Condensed Consolidated Financial Statements



Gaiam, Inc. was incorporated under the laws of the State of Colorado on July 7, 1988. Gaiam is a multi-channel lifestyle company providing a broad
selection of information, products and services to customers who value natural health, personal development, and renewable energy.

The
accompanying consolidated financial statements include the accounts of Gaiam, its subsidiaries and partnerships in which ownership is greater than 50% and considered to be under the
control of Gaiam. All material intercompany accounts and transaction balances have been eliminated in consolidation.



The interim condensed consolidated financial statements included herein have been prepared by the management of Gaiam pursuant to the rules and regulations of the
United States Securities and Exchange Commission, and, in the opinion of management, contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly Gaiam's
consolidated financial position as of September 30, 2002, the interim results of operations for the three and nine months ended September 30, 2002 and 2001, and cash flows for the
nine months ended September 30, 2002 and 2001. These interim statements have not been audited. The balance sheet as of December 31, 2001 was derived from Gaiam's audited
consolidated financial statements included in Gaiam's annual report on Form 10-K.

Certain
information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principals have been
condensed or omitted pursuant to such rules and regulations. Accounting policies followed by Gaiam are described in Note 1 to the audited financial statements for the fiscal year ended
December 31, 2001 included in Gaiam's annual report on Form 10-K. The consolidated financial statements contained herein should be read in conjunction with the audited
financial statements, including the notes thereto, for the year ended December 31, 2001.

The
consolidated financial position, results of operations and cash flows for the interim periods disclosed within this report are not necessarily indicative of future financial results.



The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities at the date of the consolidated financial statements.
Actual results could differ from those estimates.



In June 2001, the FASB issued SFAS No. 142,Goodwill and Other Intangible Assets(SFAS
No. 142"), which revises the accounting for purchased goodwill and other intangible assets. Under SFAS No. 142, goodwill and other intangible assets with indefinite lives will no longer
be systematically amortized into operating results. Instead, each of these assets will be tested for impairment, in the absence of an indicator of possible impairment, at least annually, and upon an indicator of
possible impairment, immediately. As required under SFAS No. 142, any goodwill resulting from a business combination occurring subsequent to June 30, 2001, will not be systematically
amortized. The provisions of SFAS No. 142 are required to be applied starting with fiscal years beginning after December 15, 2001 and must be applied as of the beginning of a
fiscal year. Gaiam has adopted SFAS No. 142 as of January 1, 2002.

2. Stockholders' Equity

During the first quarter of 2002, Gaiam issued 24,000 shares of Class A common stock upon exercise of warrants. In addition, for the nine months
ended September 30, 2002, Gaiam issued 28,052 shares of Class A common stock upon exercise of options granted under the 1999 Long-Term Incentive Plan.

3. Earnings per Share

Basic earnings per share exclude any dilutive effects of options and dilutive securities. Basic earnings per share is computed using the weighted average number
of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common and common stock equivalent shares outstanding during the period.
Common equivalent shares are excluded from the computation if their effect is antidilutive. All earnings per share amounts for all period have been presented and conform to the Statement
No. 128 requirements.

The
following table sets forth the computation of basic and diluted earnings per share:

|                                                             |  | Three Months Ended
September 30, |            | Nine Months Ended
September 30,
|------------------------------------------------------------ |  | -------------------------------- | ---------- | -------------------------------
|
|Net income                                                   |  | $                                | 1,394,792  |                                
|                                                             |  |                                  |            |                                
|Denominator:                                                 |  |                                  |            |                                
|Weighted average shares for basic earnings per share         |  |                                  | 14,033,066 |                                
|Effect of Dilutive Securities:                               |  |                                  |            |                                
|Weighted average of common stock, stock options and warrants |  |                                  | 343,008    |                                
|                                                             |  |                                  |            |                                
|Denominator for diluted earnings per share                   |  |                                  | 14,376,074 |                                
|                                                             |  |                                  |            |                                
|Net income per sharebasic                                   |  | $                                | 0.10       |                                
|Net income per sharediluted                                 |  | $                                | 0.10       |                                



4. Segment Information

Gaiam has two business segments: Direct to Consumer and Business; both of which sell products, services and information produced or purchased from other
suppliers. Although the customer bases do not overlap to any significant extent, the production, purchase and delivery processes overlap in some areas. Gaiam does not accumulate the balance sheet by
segment for purposes of management review.

Each
of the two segments qualifies as such because each accounts for more than 10% of combined revenue. Contribution margin is defined as net sales, less cost of goods sold and direct
expenses. Financial information for Gaiam's business segments was as follows:

|                                                     |                                      | For the Three Months
Ended September 30, |           | For the Nine Months
Ended September 30, |           
|---------------------------------------------------- | ------------------------------------ | ---------------------------------------- | --------- | --------------------------------------- | ----------
|
|Net revenue:                                         |                                      |                                          |           |                                         |           
|                                                     | Direct to consumer                   |                                          | $         | 12,772,864                              |           
|                                                     | Business                             |                                          |           | 13,020,736                              |           
|                                                     |                                      |                                          |           |                                         |           
|                                                     |                                      | Consolidated net revenue                 |           |                                         | 25,793,600
|Contribution margin:                                 |                                      |                                          |           |                                         |           
|                                                     | Direct to consumer                   |                                          |           | 452,020                                 |           
|                                                     | Business                             |                                          |           | 1,793,658                               |           
|                                                     | Non-Recurring restructuring charge * |                                          |           |                                        |           
|                                                     |                                      |                                          |           |                                         |           
|                                                     |                                      | Consolidated contribution margin         |           |                                         | 2,245,678 
|Reconciliation of contribution margin to net income: |                                      |                                          |           |                                         |           
|                                                     | Other income (expense)               |                                          |           | (120,023                                | )         
|                                                     | Income tax expense                   |                                          |           | 754,607                                 |           
|                                                     | Minority interest expense            |                                          |           | 23,744                                  |           
|                                                     |                                      |                                          |           |                                         |           
|Net income                                           |                                      | $                                        | 1,394,792 |                                         | $         
|                                                     |                                      |                                          |           |                                         |           

---

5. Restructuring Charge

During the first quarter of 2002, Gaiam accrued $375,953 for severance and relocation costs associated with the consolidation of our finance and creative staff
from California into our Colorado headquarters. These charges include approximately $286,000 for severance/relocation and other costs associated with the workforce consolidation. The remainder of the
charge primarily relates to lease termination and other costs associated with office consolidation.





Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of Gaiam's financial condition and results of operations should be read in conjunction with the condensed consolidated
financial statements included elsewhere in this document.

Three months ended September 30, 2002 compared to three months ended September 30, 2001

Revenues increased to $25.8 million for the three months ended September 30, 2002 from $23.9 million during the three months
ended September 30, 2001. The closure of some catalog operations and the multi-store retail operation we acquired in connection with the Real Goods transaction lowers our year over year sales
growth comparison. Sales growth in the business segment coupled with increased sales of proprietary products contributed to the internal growth rate of 13%.

Gross
profit, which consists of revenues less cost of sales (primarily merchandise acquisition costs and in-bound freight) increased to $15.0 million for the third
quarter of 2002 from $14.2 million during the same period in 2001. As a percentage of revenue, gross profit declined to 58.3% in 2002 from 59.4% in 2001. This was primarily attributable to
increased sales contribution from the business segment, which carries lower gross margin but also lower operating expenses. Gaiam continues to pursue growth of its proprietary product offerings and
increase focus on media products, on which Gaiam has better margins.

Selling
and operating expenses, which consist primarily of sales and marketing costs, commission and fulfillment expenses, increased to $10.7 million for the three months
ended September 30, 2002 from $10.5 million for the same period in 2001. As a percentage of revenues, selling and operating expenses decreased to 41.5% in 2002 from 43.7% in 2001
primarily due to the increased percentage of sales from our business segment.

Corporate,
general and administrative expenses increased to $2.1 million during the third quarter of 2002, from $2.0 million during 2001. As a percentage of revenues,
general and administrative expenses decreased marginally to 8.1% in 2002 from 8.2% in 2001.

Operating
income, as a result of the factors described above, increased 25.3% to $2.2 million for the three months ended September 30, 2002, from $1.8 million
for the comparable period in 2001. As a percentage of revenues operating income increased 120 basis points to 8.7% in the third quarter ended September 30, 2002 up from 7.5% for the like period
in 2001.

Gaiam
recorded $120,023 in other expense for the three months ended September 30, 2002 compared to other income of $131,574 for the three month ended September 30,
2001. Minority interest was $23,744 during the third quarter of 2002, compared to ($282,979) during the third quarter of 2001. Minority interest changed year-over-year due to
Gaiam's purchase of the remaining minority interests in our organic clothing and two renewable energy businesses.

Income
tax provision was $754,607 for the three months ended September 30, 2002 compared to $671,434 for the prior year period.

Net
income, as a result of the factors described above, increased 43.9% to $1,394,792 for the three months ended September 30, 2002 from $969,464 for the
three months ended September 30, 2001.

Nine months ended September 30, 2002 compared to nine months ended September 30, 2001

Revenues increased to $74.1 million for the nine months ended September 30, 2002 from $63.6 million during the nine months
ended September 30, 2001. Sales growth in the business segment coupled with increased sales of proprietary products contributed to the internal growth rate of 24%.

Gross
profit increased to $43.5 million for the nine months ended September 30, 2002 from $38.3 million during the same period in 2001. As a percentage of
revenue, gross profit declined to 58.6% in 2002 from 60.2% in 2001. This was primarily attributable to increased sales contribution from the business segment, which carries lower gross margin but also
lower operating expenses.

Selling
and operating expenses increased to $31.7 million for the nine months ended September 30, 2002 from $28.9 million for the same period in 2001. As a
percentage of revenues, selling and operating expenses decreased to 42.8% in 2002 from 45.4% in 2001 primarily due to increases percentage of sales from our business segment.

Corporate,
general and administrative expenses increased to $6.3 million for the nine months ended September 30, 2002, compared to $5.3 million for the
corresponding period in 2001 primarily to support the Company's growth. As a percentage of revenues, general and administrative expenses increased to 8.5% in 2002 from 8.4% in 2001.

A
non-recurring one-time charge of $375,953 was taken in the first quarter of 2002. The charge was for severance and relocation costs associated with the
consolidation of our finance and creative staff from California into our Colorado headquarters.

Operating
income, as a result of the factors described above, increased 25.1% to $5.1 million for the nine months ended September 30, 2002 from $4.1 million
for the comparable period in 2001. Excluding the accrued one-time charge (described above) operating income increased 34.3% to $5.5 million or 7.4% of sales in 2002 compared to
$4.1 million or 6.4% of sales in 2001.

Gaiam
recorded $259,484 in other expense during the nine months ended September 30, 2002, compared to other income of $240,342 for the comparable period in 2001. This was
partly attributable to the loss of $181,708 associated with the sales commission and other expenses paid on the sale of the Gaiam Yoga Center. Minority interest was $12,947 for the nine months
ended September 30, 2002 compared to ($806,166) for the prior year period. Minority interest changed year-over-year due to Gaiam's purchase of the remaining minority
interests in our organic clothing and two renewable energy businesses.

Income
tax provision increased to $1,717,702 for the nine months ended September 30, 2002 from $1,569,353 for the comparable period in 2001.

Net
income, as a result of the factors described above, increased 61.5% to $3,133,842 for the nine months ended September 30, 2002 from $1,940,895 for the comparable period
in 2001.

Liquidity and Capital Resources

Gaiam's capital needs arise from working capital required to fund our operations, capital expenditures related to expansions and improvements to Gaiam's
infrastructure, development of e-commerce, and funds required in connection with the acquisitions of new businesses and Gaiam's anticipated future growth. These capital requirements depend
on numerous factors, including the rate of market acceptance of Gaiam's product offerings, the ability to expand Gaiam's customer base, the cost of ongoing upgrades to Gaiam's product offerings, the
level of expenditures for sales and marketing, the level of investment in distribution and other factors. The timing and amount of these capital requirements cannot accurately be predicted.
Additionally, Gaiam will continue to evaluate possible investments in businesses, products and technologies, and plans to expand sales and marketing programs and conduct more aggressive brand
promotions.

Gaiam's
operating activities used net cash of $6.0 million and $4.7 million for the nine months ended September 30, 2002 and 2001, respectively. Gaiam's net
cash used by operating activities for nine months ended September 30, 2002 arose primarily from an increase in accounts receivable associated with the growth in our business segment and
increased sales to major national retailers that typically require longer payment terms, and a decrease in accrued liabilities. Gaiam's net cash used by operating activities for 2001 arose primarily from an increase in inventories in order to
support additional revenue growth, including store-within-store rollouts.

Gaiam's
investing and acquisition activities provided net cash of $860,878 for the nine months ended September 30, 2002 and used cash of $4.8 million for the
comparable period in 2001. The cash provided by investing activities in 2002 primarily arose from the sale of the Gaiam Yoga Center for net proceeds of $2.7 million. During third quarter 2002,
Gaiam acquired a majority interest in a catalog company for $600,000. This acquisition was accounted for using the purchase method, and, since this company had negative net worth (liabilities exceeded
assets), Gaiam recorded $2.9 million of goodwill. The cash used in investing activities in 2001 primarily arose from Gaiam's merger with Real Goods Trading Corporation, and also the acquisition
of the stock and net assets of Earthlings, Inc. and Self Care, Inc. for a total combined purchase price for both companies of $3.8 million.

During
the nine months ended September 30, 2002, Gaiam's financing activities provided $20,666 in cash. During the nine months ended September 30, 2001,
Gaiam's financing activities provided $26.1 million in cash, primarily resulting from the completion of Gaiam's secondary offering, net of loan repayments.

We
believe our available cash, cash expected to be generated from operations, and borrowing capabilities of $15 million (unused line of credit) will be sufficient to fund our
operations on both a short-term and long-term basis. However, our projected cash needs may change as a result of acquisitions, unforeseen operational difficulties or other
factors.

In
the normal course of our business, we investigate, evaluate and discuss acquisition, joint venture, minority investment, strategic relationship and other business combination
opportunities in the LOHAS (Lifestyles of Health and Sustainability) market. In the event of any future investment, acquisition or joint venture opportunities, we may consider using
then-available liquidity, issuing equity securities or incurring additional indebtedness.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We do not believe that any of our financial instruments have significant risk associated with market sensitivity. We are not exposed to financial market risks
from changes in foreign exchange rates and are
only minimally impacted by changes in interest rates. In the future, we may enter into transactions denominated in non-U.S. currencies, which could increase our exposure to these market
risks. We have not used, and currently do not contemplate using, any derivative financial instruments.

Item 4. Controls and Procedures

Based on their evaluation of our disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of
1934) as of a date within 90 days of the filing date of this quarterly report, our Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and
procedures are effective. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.





PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Gaiam is not party to any material legal proceedings.

Item 2. Changes in Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

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

None.

Item 5. Other Information.

None.

Item 6. Exhibits and Reports on Form 8-K.



Exhibit No.

Description99.1

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200299.2

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002






Signatures

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

| |  | Gaiam, Inc.
(Registrant)
November 11, 2002
| |  | ------------------------------------------
| |  | By:                                       
| |  |                                           



CERTIFICATIONS

I,
Jirka Rysavy, certify that:





Date:
November 11, 2002

|/s/JIRKA RYSAVYJirka Rysavy
Chairman and Chief Executive Officer |  | 
|---------------------------------------------------------------- |  | 



CERTIFICATIONS

I,
Yudhister Bahl, certify that:





Date:
November 11, 2002

|/s/YUDHISTER BAHLYudhister Bahl
Chief Financial Officer |  | 
|------------------------------------------------------- |  |