**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 March 31, 2008**                                                  |   |
|   |                                                                                                     |   |
|   | **OR**                                                                                                   |   |
|   |                                                                                                     |
| **o**  | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15  (d)  OF THE SECURITIES AND EXCHANGE ACT OF 1934** |

 

**CommissionFile Number 0-27517**

 

**GAIAM, INC.**

(Exact name of registrant as specified in itscharter)

 

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

 

**360INTERLOCKEN BLVD.BROOMFIELD, COLORADO 80021**(Address of principalexecutive offices)

 

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

 

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

 

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

 

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

 

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

 

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

 
| **Class**                                     | ** ** | **Outstanding at May 8, 2008** |
|-----------------------------------------------|------------|----------------------------------------------------|
| Class A Common Stock  ($.0001 par value) |       | 19,654,590                                         |
| Class B Common Stock  ($.0001 par value) |       |  5,400,000                                    |

 

 

----

 

**GAIAM, INC.**

 

**FORM 10-Q**

 

**INDEX**

 
| **PART I. FINANCIAL INFORMATION** |                                                                                                      |
|----------------------------------------|-----------------------------------------------------------------------------------------------------------|
| ** **                             | ** **                                                                                                | ** ** |
| **Item 1.**                            | **Financial  Statements (Unaudited):**                                                                    |   |
| ** **                             | Condensed consolidated  balance sheets at March 31, 2008 and December 31, 2007                  |   |
| ** **                             | Condensed consolidated  statements of operations for the Three Months Ended March 31, 2008 and  2007 |   |
| ** **                             | Condensed consolidated  statements of cash flows for the Three Months Ended March 31, 2008 and  2007 |   |
| ** **                             | 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.**                            | Unregistered  Sales of Equity 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                                                                                                |   |

 

1

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**CAUTIONARY STATEMENT REGARDING FORWARD-LOOKINGSTATEMENTS**

 

# **Thisreport may contain forward-looking statements that involve risks anduncertainties. When used in discussion, the words “anticipate,” “believe,” “plan,”“estimate,” “expect,” “strive,” “future,” “intend” and similar expressions asthey relate to us are intended to identify such forward-looking statements. Ouractual results could differ materially from the results anticipated in theseforward-looking statements as a result of certain factors set forth under “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” “Quantitativeand Qualitative Disclosures about Market Risk” and elsewhere in this report.Risks and uncertainties that could cause actual results to differ include,without limitation, general economic conditions, competition, loss of keypersonnel, pricing, brand reputation, consumer trends, acquisitions, newinitiatives undertaken by us, security and information systems, legal liabilityfor website content, merchandise supply problems, failure of third parties toprovide adequate service, our reliance on centralized customer service,overstocks and merchandise returns, our reliance on a centralized fulfillmentcenter, increases in postage and shipping costs, E-commerce trends, futureInternet related taxes, our founder’s control of us, fluctuations in quarterlyoperating results, customer interest in our products, the effect of governmentregulation and other risks and uncertainties included in our filings with theSecurities and Exchange Commission. We caution you that no forward-lookingstatement is a guarantee of future performance, and you should not place unduereliance on these forward-looking statements which reflect our view only as ofthe date of this report. We undertake no obligation to update anyforward-looking information.**

# ** **

# **PART I.  FINANCIAL INFORMATION**

# ** **

**Item 1.     FinancialStatements (Unaudited)**

 

# **Unaudited Interim CondensedConsolidated Financial Statements**

# ** **

Wehave prepared our unaudited interim condensed consolidated financial statementsincluded herein have been prepared by us pursuant to the rules andregulations of the United States Securities and Exchange Commission. Certaininformation and note disclosures normally included in annual financialstatements prepared in accordance with accounting principles generally acceptedin the United States have been condensed or omitted pursuant to these rules andregulations, although we believe that the disclosures made are adequate to makethe information not misleading. In our opinion, the unaudited interim condensedfinancial statements contain all adjustments (consisting of only normalrecurring adjustments) necessary to present fairly, in all material respects,our consolidated financial position as of March 31, 2008, the interimresults of operations for the three months ended March 31, 2008 and 2007,and cash flows for the three months ended March 31, 2008 and 2007. These interimstatements have not been audited. The balance sheet as of December 31,2007 was derived from our audited consolidated financial statements included inour annual report on Form 10-K. The interim condensed consolidatedfinancial statements contained herein should be read in conjunction with ouraudited financial statements, including the notes thereto, for the year ended December 31,2007.

 

2

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

 
| ** **                                                                                                                                                                                             | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(in thousands, except share and per share data)**                                                                                                                 | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| ** **                                                                                                                                                                                             | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                                             |       |               |       |                  |       |
| Current assets:                                                                                                                                                                                        |       |               |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                              |       | $                  | 48,151     |                  | $          | 66,258 |   |
| Accounts receivable, net                                                                                                                                                                               |       | 27,331             |       | 30,157                |       |
| Inventory, less allowances                                                                                                                                                                             |       | 30,415             |       | 29,839                |       |
| Deferred advertising costs                                                                                                                                                                             |       | 3,501              |       | 3,602                 |       |
| Deferred tax assets                                                                                                                                                                                    |       | 5,282              |       | 6,005                 |       |
| Other current assets                                                                                                                                                                                   |       | 5,963              |       | 5,205                 |       |
| Total current assets                                                                                                                                                                                   |       | 120,643            |       | 141,066               |       |
|                                                                                                                                                                                                   |       |               |       |                  |       |
| Property and equipment, net                                                                                                                                                                            |       | 9,572              |       | 9,509                 |       |
| Media library, net                                                                                                                                                                                     |       | 37,300             |       | 37,566                |       |
| Deferred tax assets, net                                                                                                                                                                               |       | 2,958              |       | 4,057                 |       |
| Goodwill and other intangibles, net                                                                                                                                                                    |       | 50,992             |       | 44,410                |       |
| Notes receivable and other assets                                                                                                                                                                      |       | 8,348              |       | 4,104                 |       |
| Total assets                                                                                                                                                                                           |       | $                  | 229,813    |                  | $          | 240,712 |   |
|                                                                                                                                                                                                   |       |               |       |                  |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                                         |       |               |       |                  |       |
| Current liabilities:                                                                                                                                                                                   |       |               |       |                  |       |
| Accounts payable                                                                                                                                                                                       |       | $                  | 14,959     |                  | $          | 23,620 |   |
| Accrued liabilities                                                                                                                                                                                    |       | 8,436              |       | 10,631                |       |
| Total current liabilities                                                                                                                                                                              |       | 23,395             |       | 34,251                |       |
|                                                                                                                                                                                                   |       |               |       |                  |       |
| Minority interest                                                                                                                                                                                      |       | 1,484              |       | 6,073                 |       |
|                                                                                                                                                                                                   |       |               |       |                  |       |
| Commitments and contingencies                                                                                                                                                                          |       |               |       |                  |       |
|                                                                                                                                                                                                   |       |               |       |                  |       |
| Shareholders’ equity:                                                                                                                                                                             |       |               |       |                  |       |
| Class A common stock, $.0001 par  value, 150,000,000 shares authorized, 19,651,010 and 19,553,631 shares issued  and outstanding at March 31, 2008 and December 31, 2007,  respectively |       | 2                  |       | 2                     |       |
| Class B common stock, $.0001 par  value, 50,000,000 shares authorized, 5,400,000 issued and outstanding at  March 31, 2008 and December 31, 2007                                        |       | 1                  |       | 1                     |       |
| Additional paid-in capital                                                                                                                                                                             |       | 177,277            |       | 174,046               |       |
| Accumulated other comprehensive income                                                                                                                                                                 |       | 93                 |       | 991                   |       |
| Retained earnings                                                                                                                                                                                      |       | 27,561             |       | 25,348                |       |
| Total shareholders’ equity                                                                                                                                                                        |       | 204,934            |       | 200,388               |       |
| Total liabilities and shareholders’ equity                                                                                                                                                        |       | $                  | 229,813    |                  | $          | 240,712 |   |

 

See accompanyingnotes to the interim condensed consolidated financial statements.

 

3

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

 
| ** **                                                              | ** ** | **For the Three Months Ended  March 31,** | ** **   |
|-------------------------------------------------------------------------|------------|--------------------------------------------------------------------|--------------|
| **(in thousands, except per share data)**      | ** ** | **2008**                                                           | ** **   | **2007** | ** ** |
| ** **                                                              | ** ** | **(unaudited)**                                                    | ** **   |
| Net revenue                                                        |       | $                                                                  |  65,173 |   | $ |  58,458 |   |
| Cost of goods sold                                                      |       | 24,195                                                             |         | 20,982 |   |
| Gross profit                                                            |       | 40,978                                                             |         | 37,476 |   |
|                                                                    |       |                                                               |         |   |   |
| Expenses:                                                               |       |                                                               |         |   |   |
| Selling and operating                                                   |       | 34,933                                                             |         | 32,606 |   |
| Corporate, general and administration                                   |       | 3,379                                                              |         | 3,245 |   |
| Total expenses                                                          |       | 38,312                                                             |         | 35,851 |   |
|                                                                    |       |                                                               |         |   |   |
| Income from operations                                                  |       | 2,666                                                              |         | 1,625 |   |
|                                                                    |       |                                                               |         |   |   |
| Other income                                                            |       | 469                                                                |         | 1,203 |   |
|                                                                    |       |                                                               |         |   |   |
| Income before income taxes and minority  interest                       |       | 3,135                                                              |         | 2,828 |   |
|                                                                    |       |                                                               |         |   |   |
| Income tax expense                                                      |       | 1,238                                                              |         | 1,117 |   |
| Minority interest in net loss of  consolidated subsidiaries, net of tax |       | 316                                                                |         | 41 |   |
| Net income                                                              |       | $                                                                  | 2,213        |   | $ | 1,752 |   |
|                                                                    |       |                                                               |         |   |   |
| Net income per share:                                                   |       |                                                               |         |   |   |
| Basic                                                                   |       | $                                                                  | 0.09         |   | $ | 0.07 |   |
| Diluted                                                                 |       | $                                                                  | 0.09         |   | $ | 0.07 |   |
| Shares used in computing net income per  share:                         |       |                                                               |         |   |   |
| Basic                                                                   |       | 25,084                                                             |         | 25,651 |   |
| Diluted                                                                 |       | 25,352                                                             |         | 25,813 |   |

 

See accompanyingnotes to the interim condensed consolidated financial statements*.*

 

4

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

 
| ** **                                                                                   | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **(in thousands)**                                                                      | ** ** | **2008**                                                           | ** ** | **2007** | ** ** |
| ** **                                                                                   | ** ** | **(unaudited)**                                                    | ** ** |
| **Operating activities**                                                                | ** ** | ** **                                                         | ** ** |
| Net income                                                                                   |       | $                                                                  | 2,213      |   | $ | 1,752 |   |
| Adjustments to reconcile net income to net  cash (used in) provided by operating activities: |       |                                                               |       |   |   |
| Depreciation                                                                                 |       | 812                                                                |       | 455 |   |
| Amortization                                                                                 |       | 1,682                                                              |       | 1,850 |   |
| Minority interest in consolidated  subsidiaries                                              |       | (316                                                               | )          | (41 | ) |
| Net gain on disposition of investments                                                       |       | (175                                                               | )          | (127 | ) |
| Share-based compensation expense                                                             |       | 323                                                                |       | 239 |   |
| Deferred and stock option income tax  expense                                                |       | 2,035                                                              |       | 1,610 |   |
| Changes in operating assets and  liabilities, net of effects from acquisitions:              |       |                                                               |       |   |   |
| Accounts receivable, net                                                                     |       | 3,269                                                              |       | 8,435 |   |
| Inventory, net                                                                               |       | 533                                                                |       | (1,246 | ) |
| Deferred advertising costs                                                                   |       | 56                                                                 |       | (223 | ) |
| Other current assets                                                                         |       | (145                                                               | )          | (965 | ) |
| Accounts payable                                                                             |       | (9,424                                                             | )          | (5,207 | ) |
| Accrued liabilities                                                                          |       | (2,225                                                             | )          | 1,806 |   |
| Net cash (used in) provided by operating  activities                                         |       | (1,362                                                             | )          | 8,338 |   |
|                                                                                         |       |                                                               |       |   |   |
| **Investing activities**                                                                     |       |                                                               |       |   |   |
| Purchase of property, equipment and media  rights                                            |       | (6,515                                                             | )          | (1,032 | ) |
| Purchase of acquisitions and note, net of  cash acquired                                     |       | (7,504                                                             | )          | — |   |
| Disposition of investments, net                                                              |       | (1,381                                                             | )          | 3,871 |   |
| Net cash (used in) provided by investing  activities                                         |       | (15,400                                                            | )          | 2,839 |   |
|                                                                                         |       |                                                               |       |   |   |
| **Financing activities**                                                                     |       |                                                               |       |   |   |
| Repurchase of Class A common stock,  including related costs                            |       | (1,332                                                             | )          | (32,907 | ) |
| Proceeds from issuance of common stock and  tax benefits from option exercises               |       | —                                                             |       | 6 |   |
| Net cash used in financing activities                                                        |       | (1,332                                                             | )          | (32,901 | ) |
|                                                                                         |       |                                                               |       |   |   |
| Effects of exchange rates on cash and cash  equivalents                                      |       | (13                                                                | )          | 13 |   |
|                                                                                         |       |                                                               |       |   |   |
| Net change in cash and cash equivalents                                                      |       | (18,107                                                            | )          | (21,711 | ) |
| Cash and cash equivalents at beginning of  period                                            |       | 66,258                                                             |       | 104,876 |   |
| Cash and cash equivalents at end of period                                                   |       | $                                                                  | 48,151     |   | $ | 83,165 |   |
|                                                                                         |       |                                                               |       |   |   |
| **Supplemental cash flow information**                                                       |       |                                                               |       |   |   |
| Interest paid                                                                                |       | $                                                                  | 29         |   | $ | — |   |
| Income taxes paid                                                                            |       | $                                                                  | 62         |   | $ | 112 |   |
| Common stock issued for acquisitions                                                         |       | $                                                                  | 5,105      |   | $ | — |   |

 

See accompanyingnotes to the interim condensed consolidated financial statements

 

5

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**Notes to interim condensedconsolidated financial statements**

 

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

 

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

 

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

 

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

 

**2.  Significant Accounting Policies**

 

Nochanges were made to our significant accounting policies during the threemonths ended March 31, 2008, except for the adoption of FinancialAccounting Standards Board, or FASB, Statement No. 157, *Fair Value Measurements*. SFAS 157 defines fair value,establishes a framework for measuring fair value in GAAP, and expandsdisclosures about fair value measurements. The implementation of SFAS 157 didnot have a material impact on our unaudited interim condensed consolidated financialstatements for the quarter ended March 31, 2008.

 

*Use ofEstimates and Reclassifications*

 

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

 

*RecentlyIssued Accounting Pronouncements*

 

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

 

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

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

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

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

 

6

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

 

**3.****             ****Notes Receivable and OtherAssets**

 

Our notes receivable and other assets as of March 31,2008 consisted of a $4.0 million property purchase option deposit (see Note 10,Subsequent Events), $3.4 million in notes and related interest receivable, $0.3million in investments, and $0.6 million in other long-term assets, and as of December 31,2007 consisted of $2.7 million in notes, $0.3 million in investments, and $1.1million in other long-term assets.

 

**4.****             ********Shareholders’ Equity**

 

Duringthe first three months of 2008, we issued a total of 1,927 shares of our Class Acommon stock to our independent directors, in lieu of cash compensation, forservices rendered in 2007 and 2008; issued 221,152 shares of our Class Acommon stock as part of the consideration to acquire the remaining andcontrolling ownership interests in two businesses; and issued 100 shares of ourClass A common stock upon exercise of options under our 1999 Long-TermIncentive Plan.

 

Additionally,on March 17, 2008, we repurchased 75,800 shares of our Class A commonstock in the open market for at an average price of $17.55 per share, for atotal of $1.3 million in cash, and on March 31, 2008, we received aspartial consideration for the sale of our controlling ownership in GaiamLimited 50,000 shares of our Class A common stock with a market value of$17.32 per share or $0.9 million in total (see Note 9, Mergers andAcquisitions).  We recorded these tworepurchases of our shares in accordance with the cost method of accounting fortreasury stock.  Since we have not yetdecided the ultimate disposition of the re-acquired shares, their combined costis reflected in the condensed consolidated balance sheet at March 31, 2008as a $2.2 million reduction to additional paid-in capital.

 

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

 

**5.****              ****Comprehensive Income**

 

Ourcomprehensive income is comprised of net income and foreign currencytranslation adjustments, net of income taxes. Comprehensive income, net ofrelated tax effects, was as follows:

 
| ** **                                                                        | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
|                                                                              |       |                                             |       |   |   |
| Net income                                                                        |       | $                                                | 2,213      |   | $ | 1,752 |   |
| Foreign currency translation adjustment,  net of reclassification and related tax |       | (898                                             | )          | 12 |   |
| Comprehensive income, net of tax                                                  |       | $                                                | 1,315      |   | $ | 1,764 |   |

 

7

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

 

**6.****              ****Share-Based****Payments**

 

During the first quarter of 2008, we granted56,000 stock options to employees and cancelled 3,400 stock options. Totalshare-based compensation recognized was $0.3 million and $0.2 million for thethree months ended March 31, 2008 and 2007, respectively, and is shown incorporate, general and administration expenses on our condensed consolidatedstatements of operations.

 

During2007, our subsidiary, Gaiam Energy Tech granted options under its 2007Long-Term Incentive Plan. Gaiam Energy Tech’s successor, Real Goods Solar, Inc.,or Real Goods Solar, assumed these options on January 31, 2008. Theoptions assumed are for 300,000 shares of Real Goods Solar’s Class Acommon stock.

 

**7.****              ****Net****Income****Per Share**

 

Basicnet income per share excludes any dilutive effects of options. We compute basicnet income per share using the weighted average number of common sharesoutstanding during the period. We compute diluted net income per share usingthe weighted average number of common and common stock equivalent sharesoutstanding during the period. We excluded common equivalent shares of 74,000and 326,000 from the computation of diluted net income per share for the threemonths ended March 31, 2008 and 2007, respectively, because their effectwas antidilutive.

 

Thefollowing table sets forth the computation of basic and diluted net income pershare:

 
| ** **                                                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in thousands, except per share data)** | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
|                                                               |       |                                             |       |   |   |
| Numerator for basic and diluted net income  per share              |       | $                                                | 2,213      |   | $ | 1,752 |   |
| Denominator:                                                       |       |                                             |       |   |   |
| Weighted average share for basic net income  per share             |       | 25,084                                           |       | 25,651 |   |
| Effect of dilutive securities:                                     |       |                                             |       |   |   |
| Weighted average of common stock and stock  options                |       | 268                                              |       | 162 |   |
| Denominator for diluted net income per  share                      |       | 25,352                                           |       | 25,813 |   |
|                                                               |       |                                             |       |   |   |
| Net income per share – basic                                  |       | $                                                | 0.09       |   | $ | 0.07 |   |
| Net income per share – diluted                                |       | $                                                | 0.09       |   | $ | 0.07 |   |

 

**8.****              ****Segment Information**

 

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

 

Althoughwe are able to track revenues by sales channel, the management, allocation ofresources and analysis and reporting of expenses is solely on a combined basis,at the reportable segment level. Contribution margin is defined as net sales,less cost of goods sold and direct expenses.

 

8

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Financialinformation for our segments is as follows:

 
| ** **                                                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in thousands)**                                                 | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Net revenue:                                                            |       |                                             |       |   |   |
| Direct to consumer                                                      |       | $38,773                                          |       | $34,065 |   |
| Business                                                                |       | 26,400                                           |       | 24,393 |   |
| Consolidated net revenue                                                |       | 65,173                                           |       | 58,458 |   |
| Contribution margin (loss):                                             |       |                                             |       |   |   |
| Direct to consumer                                                      |       | (1,655                                           | )          | (600 | ) |
| Business                                                                |       | 4,321                                            |       | 2,225 |   |
| Consolidated contribution margin                                        |       | 2,666                                            |       | 1,625 |   |
| Reconciliation of contribution margin to  net income:                   |       |                                             |       |   |   |
| Other income                                                            |       | 469                                              |       | 1,203 |   |
| Income tax expense                                                      |       | 1,238                                            |       | 1,117 |   |
| Minority interest in net loss of  consolidated subsidiaries, net of tax |       | 316                                              |       | 41 |   |
| Net income                                                              |       | $2,213                                           |       | $1,752 |   |

# ** **

# **9.**                                      Mergers and Acquisitions

# ** **

Duringthe first quarter of 2008, our subsidiary, Real Goods Carlson, Inc.,acquired certain assets of Carlson Solar, Inc., and we acquired 100%ownership interest of SPRI Products, Inc. and the remaining 49.9% ownershipinterest of Conscious Enlightenment.  Theassets acquired from Carlson Solar were determined to have all inputs andprocesses necessary for the transferred assets to continue to conduct normaloperations after acquisition; accordingly, the purchase was treated as abusiness combination.  The total cost ofthese business acquisitions was $13.1 million, including direct acquisitioncosts, of which $7.5 million was paid in cash, $5.1 million in our Class Acommon stock, and $0.5 million in assumed liabilities.  As additional contingent consideration forthe Carlson Solar acquisition, we granted warrants to purchase 30,000 shares ofReal Goods Solar’s Class A common stock at an exercise price of $3.20 per share.

 

Forthese acquisitions, we have preliminarily recognized $3.6 million and $6.2million of direct to consumer and business segment goodwill, respectively, ofwhich $2.4 is expected to be deductible for tax purposes, and $0.8 million ofintangibles subject to amortization (48 month weighted-average usefullife).  The marketing related intangiblesare $0.6 million (43 month weighted-average useful life) and the customerrelated intangibles are $0.2 million (60 month weighted-average useful life).

 

During the quarter ended March 31, 2008, wesold our investment in the non-LOHAS business newspapers that were acquired aspart of a previous acquisition and sold our 51% ownership interest in GaiamLimited, our UK subsidiary.

 

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

 

9

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Asadditional consideration for a solar energy integrator company acquired in2007, Real Goods Solar granted to the sellers warrants to purchase 40,000shares of Real Goods Solar’s Class A common stock at an exercise price of$3.20 per share.

 

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

 

# **10.**                               Subsequent Events

 

On April 3, 2008, we exercised our option topurchase land, an office building, and improvements located in Colorado for atotal purchase price of approximately $13.2 million in cash, of which $4.0million was paid as an option to purchase deposit during the first quarter of 2008(see Note 3, Notes Receivable and Other Assets).  We will consolidate our operations to thisnewly acquired property during the second quarter of 2008 upon expiration ofour existing lease.

 

In May 2008, Real Goods Solar priced its $55million initial public offering of Class A common stock.  Approximately $20 million of the net proceedswill be repaid to us for loans provided to the Real Goods Solar business.  In the offering, Real Goods Solar sold 5.5million shares at $10 per share.  Theshares began trading May 8, 2008 on the NASDAQ Global Market under theticker symbol “RSOL.”  Real Goods Solarhas granted the underwriters a 30-day option to purchase up to an additional825,000 shares. Post-offering we own 10 million shares or approximately 65% of RealGoods Solar, but have in excess of 80% of the voting power of Real Goods Solar.  On May 12, 2008, Ted Nark resigned hisposition as a director of Gaiam in order to serve on the board of directors ofGaiam’s subsidiary, Real Goods Solar, Inc.

 

10

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

 

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

 

# **CriticalAccounting Policies**

# ** **

# **Nosignificant changes were made to our critical accounting policies during thethree months ended March 31, 2008, except for the adoption of FASBStatement No. 157, *Fair Value Measurements*.SFAS 157 defines fair value, establishes a framework for measuring fair valuein GAAP, and expands disclosures about fair value measurements. Theimplementation of SFAS 157 did not have a material impact on our unauditedcondensed consolidated financial statements for the quarter ended March 31,2008.**

# ** **

# **Overview and Outlook**

# ** **

# **We are alifestyle media company providing a broad selection of information, media,products and services to customers who value personal development, wellness,ecological lifestyles, responsible media and conscious community.**Our media brand is builtaround our ability to develop and offer media content, products, lifestylesolutions and community to consumers in the LOHAS and the emerging ConsciousMedia markets.

# ** **

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

# ** **

# **Ourcontent forms the basis of our proprietary offerings, which then drive demandfor parallel product and service offerings. Our operations are verticallyintegrated from content creations, through product development and sourcing, tocustomer service and distribution. We market our products and services acrosstwo segments, business and direct to consumer. We primarily distribute productsin each of these sales segments from a single fulfillment center or drop-shipproducts directly to customers.**

# ** **

# **Ourbusiness segment sells directly to retailers, with our products available inapproximately 71,000 retail doors in the United States. During the firstquarter of 2008, this segment generated revenues of $26.4 million, up from$24.4 million during the first quarter of 2007, reflecting an 8.2% increase.This increase reflects our store-within-store expansion, wellness launch, andrecent business acquisitions, partially offset by lower recognizedinternational revenue due to our strategy change to operate our internationalmarkets as licensing arrangements rather than product sales. During the quarterwe expanded our store-within-store presence to over 7,100 lifestylepresentations, up from 6,000 at the end of March 2007, which are customfixtures that we design.**

# ** **

Throughits diverse media reach, the direct to consumer segment provides an opportunityto launch and support new media releases, a sounding board for new producttesting, promotional opportunities, a growing online and off-line community,and customer feedback on us and the LOHAS industry’s focus and future. Duringthe first quarter of 2008, this segment generated revenues of $38.8 million, upfrom $34.1 million during the first quarter of 2007, reflecting a 13.8%increase.  This increase reflects ourinvestment in solar energy integration companies, Internet sales, membershipsand our continued investment in community and branded direct responsemarketing, partially offset by the sale of our non-LOHAS newspapers.

 

11

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Duringthe first quarter of 2008, we completed three acquisitions targeted towardsexpanding and enhancing our solar market, community reach, and media content.These acquisitions were Carlson Solar, Inc., a solar energy integratorlocated in southern California; the remaining 49.9% ownership interest inConscious Enlightenment, an on-line and off-line community; and SPRI Products, Inc.,a leading marketer of resistance exercise products for the professional healthand fitness industry.

 

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

 

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

 

**Results of Operations**

 

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

 
| ** **                                                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                              | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
|                                                                    |       |                                             |       |   |   |
| Net revenue                                                             |       | 100.0                                            | %          | 100.0 | % |
| Cost of goods sold                                                      |       | 37.1                                             | %          | 35.9 | % |
| Gross profit                                                            |       | 62.9                                             | %          | 64.1 | % |
|                                                                    |       |                                             |       |   |   |
| Expenses:                                                               |       |                                             |       |   |   |
| Selling and operating                                                   |       | 53.6                                             | %          | 55.8 | % |
| Corporate, general and administration                                   |       | 5.2                                              | %          | 5.5 | % |
| Total expenses                                                          |       | 58.8                                             | %          | 61.3 | % |
|                                                                    |       |                                             |       |   |   |
| Income from operations                                                  |       | 4.1                                              | %          | 2.8 | % |
|                                                                    |       |                                             |       |   |   |
| Other income, net                                                       |       | 0.7                                              | %          | 2.0 | % |
| Income tax expense                                                      |       | 1.9                                              | %          | 1.9 | % |
| Minority interest in net loss of  consolidated subsidiaries, net of tax |       | 0.5                                              | %          | 0.1 | % |
| Net income                                                              |       | 3.4                                              | %          | 3.0 | % |

 

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*Three Months Ended March 31, 2008 Compared to Three Months Ended March 31,2007*

 

*Net revenue*.Net revenue increased $6.7 million, or 11.5%, to $65.2 million during the firstquarter of 2008 from $58.5 million during the first quarter of 2007. Netrevenue in our direct to consumer segment increased $4.7 million, or 13.8%, to$38.8 million during the first quarter of 2008 from $34.1 million during thefirst quarter of 2007. This increase in the direct to consumer segment netrevenue primarily reflects the continued success of our direct responsemarketing and community revenues and increased revenues from businesses acquiredover the last year.  Net revenue in ourbusiness segment increased $2.0 million, or 8.2%, to $26.4 million during thefirst quarter of 2008 from $24.4 million during the first quarter of 2007,primarily reflecting our continued success in distributing our products toapproximately 71,000 retail doors in the U.S. and increased revenue from ouracquisition of SPRI in the first quarter, partially offset by lower recognizedinternational revenue due to our strategy change to operate our internationalmarkets as licensing arrangements rather than product sales.

 

*Gross profit*.Gross profit increased $3.5 million, or 9.3%, to $41.0 million during the firstquarter of 2008 from $37.5 million during the first quarter of 2007. As apercentage of net revenue, gross profit decreased to 62.9% during the firstquarter of 2008 from 64.1% during the first quarter of 2007. The decrease ingross margin primarily reflects increased revenues in our solar operationswhich produce lower margins, higher transportation costs, the devaluation ofthe U.S. dollar, and the successful launch of our category management programin retail. Excluding the solar business, even after the absorption of thetransportation and U.S. dollar impacts mentioned above, our gross marginincreased to 66.8%.

 

*Selling and operating expenses*. Selling and operating expenses increased $2.3 million, or 7.1%, to$34.9 million during the first quarter of 2008 from $32.6 million during thefirst quarter of 2007, resulting primarily from increased sales and investmentsmade in community, branding, personnel, advertising, and marketingprograms.  As a percentage of netrevenue, selling and operating expenses decreased to 53.6% during the firstquarter of 2008 from 55.8% during the first quarter of 2007, primarily reflectingthe leveraging of our infrastructure against a higher revenue base.

 

*Corporate, general and administration expenses*. Corporate, general and administrationexpenses increased $0.1 million, or 4.1%, to $3.4 million during the firstquarter of 2008 from $3.3 million during the first quarter of 2007.  As of percentage of net revenue, corporate,general and administration expenses decreased to 5.2% during the first quarterof 2008 from 5.5% during the first quarter of 2007, primarily reflecting theleverage on the higher revenue base.

 

*Other income*.Other income decreased $0.7 million, or 61.0%, to $0.5 million during the firstquarter of 2008 from $1.2 million during the first quarter of 2007.  As a percentage of net revenue, other incomedeceased to 0.7% during the first quarter of 2008 from 2.0% during the firstquarter of 2007. The decrease reflects lower interest earnings as we use ourcash to acquire businesses, repurchase our Class A common stock, and the declineof average interest rates received on our cash investments from 5.18% as of March 1,2007 to 2.37% at March 31, 2008.

 

*Minority interest in net loss of consolidated subsidiaries, net ofincome taxes*.Minority interest in net loss of consolidated subsidiaries, net of incometaxes, increased by $275,000 to $316,000 during the first quarter of 2008 from$41,000 during the first quarter of 2007.

 

*Net income*.  Net income increased $0.5 million, or 26.3%,to $2.2 million during the first quarter of 2008 from $1.8 million during thefirst quarter of 2007. Net income per share increased 28.6% to $0.09 per shareduring the first quarter of 2008 from $0.07 per share during the first quarterof 2007.

 

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**Seasonality**

 

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

 

**Liquidityand Capital Resources**

 

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

 

Wehave a revolving line of credit agreement with a financial institution thatexpires on October 22, 2009.  Thecredit agreement permits borrowings up to the lesser of $15 million or ourborrowing base which is calculated based upon the collateral value of ouraccounts receivable, inventory, and certain property and equipment. Borrowingsunder this agreement bear interest at the lower of prime rate less 75 basispoints or LIBOR plus 275 basis points. Borrowings are secured by a pledge ofcertain of our assets, and the agreement contains various financial covenants,including those requiring compliance with certain financial ratios. At March 31,2008, we had no amounts outstanding under this agreement; however, $1.0 millionwas reserved for outstanding letters of credit. We believe we have complied with all of the financial covenants underthis credit agreement.

 

***Cash Flows***

 

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

 
| ** **                                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in thousands)**                                 | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Net cash (used in) provided by:                         |       |                                             |       |   |   |
| Operating activities                                    |       | $                                                | (1,362     | ) | $ | 8,338 |   |
| Investing activities                                    |       | (15,400                                          | )          | 2,839 |   |
| Financing activities                                    |       | (1,332                                           | )          | (32,901 | ) |
| Effects of exchange rates on cash and cash  equivalents |       | (13                                              | )          | 13 |   |
| Net decrease in cash and cash equivalents               |       | $                                                | (18,107    | ) | $ | (21,711 | ) |

 

*Operatingactivities*. Our operating activities used net cash of $1.4million during the first quarter of 2008 and provided net cash of $8.3 millionduring the first quarter of 2007. Our net cash used in operating activitiesduring the first quarter of 2008 was primarily attributable to decreasedaccounts payable and accrued liabilities of $11.6 million, partially offset bynoncash adjustments to net income of $4.4 million, reductions in accountsreceivable of $3.3 million, and net income of $2.2 million. The reduction inaccounts payable reflects payments for inventory purchases of holiday andfitness season shipments and our decision to lower accounts payable as interestrates declined.  Our net cash provided byoperating activities during the first quarter of 2007 was primarilyattributable to net income of $1.8 million, noncash adjustments to net incomeof $4.0 million, accounts receivable collections of $8.4 million, increasedaccrued liabilities of $1.8 million, partially offset by the use of funds toreduce accounts payable by $5.2 million and increase inventory, media, andother assets by $2.4 million.

 

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*Investingactivities*. Our investing activities used net cash of $15.4million during the first quarter of 2008 and provided net cash of $2.8 millionduring the first quarter of 2007. The net cash used in investing activitiesduring the first quarter of 2008 was used primarily to acquire businesses,property, equipment and other investments for $12.6 million and purchase mediafor $1.4 million. Our net cash provided by our investing activities during thefirst quarter of 2007 primarily resulted from the sale of our LIME investmentfor $1.4 million and prepayment of the Alps promissory note principle andinterest for $2.4 million, partially offset by cash we used to purchaseproperty, equipment, and media rights for $1.0 million.

 

*Financingactivities*. Our financing activities used net cash of $1.3million during the first quarter of 2008 and used net cash of $32.9 millionduring the first quarter of 2007. We used net cash in financing activitiesduring the first quarter of 2008 primarily to repurchase 75,800 shares of our Class Acommon stock for $1.3 million. We used net cash in our financing activitiesduring the first quarter of 2007 primarily to repurchase 2.5 million shares ofour Class A common stock.

 

On November 8,2007, we filed a shelf registration statement on Form S-3 with theSecurities and Exchange Commission for 5,000,000 shares of our Class Acommon stock.  During the first quarterof 2008, 221,152 of these shares had been issued to acquire business ownershipinterests.

 

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

 

In the normalcourse of our business, we investigate, evaluate and discuss acquisition, jointventure, minority investment, strategic relationship and other businesscombination opportunities in the LOHAS and Conscious Media markets. For anyfuture investment, acquisition or joint venture opportunities, we may considerusing then-available liquidity, issuing equity securities or incurringadditional indebtedness.

 

**Contractual Obligations**

 

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

 
| **(in thousands)**     | ** ** | **Total** | ** ** | **< 1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **> 5 years** | ** ** |
|-----------------------------|------------|-----------|------------|---------------------------|------------|--------------------|------------|--------------------|------------|----------------------------|------------|
| Operating lease obligations |       | $         | 11,413     |                      | $          | 3,051              |       | $                  | 3,932      |                       | $          | 2,308 |   | $ | 2,122 |   |
|                             |            |           |            |                           |            |                    |            |                    |            |                            |            |  |  |  |  |  |

 

**Risk Factors**

 

We wish to caution you that there are risksand uncertainties that could cause our actual results to be materiallydifferent from those indicated by forward looking statements that we make fromtime to time in filings with the Securities and Exchange Commission, newsreleases, reports, proxy statements, registration statements and other writtencommunications as well as oral forward looking statements made from time totime by our representatives. These risks and uncertainties include, but are notlimited to, those risks listed in our Annual Report on Form 10-K for theyear ended December 31, 2007. Additional risks and uncertainties that wecurrently deem immaterial may also impair our business operations, andhistorical results are not necessarily an indication of the future results.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 our control. We do not undertake any obligationto update forward-looking statements except as required by law.

 

15

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**Item 3.   Quantitative and Qualitative Disclosures About Market Risk**

 

Weare exposed to market risks, which include changes in U.S. interest rates andforeign exchange rates. We do not engage in financial transactions for tradingor speculative purposes.

 

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

 

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

 

**Item 4.    Controls and Procedures**

 

**Evaluation of Disclosure Controls and Procedures**

 

Ourchief executive officer and chief financial officer conducted an evaluation ofthe effectiveness of the design and operation of our disclosure controls andprocedures, as defined in Rule 13a-15(e) and Rule 15d-15(e) underthe Exchange Act. Based upon their evaluation as of March 31, 2008, ourchief executive officer and chief financial officer have concluded that thosedisclosure controls and procedures are effective.

 

**Changes in Internal Control over Financial Reporting**

 

Nochanges in our internal control over financial reporting occurred during thequarter ended March 31, 2008 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

## **PART II.   OTHER INFORMATION**

## ** **

**Item 1.    LegalProceedings**

 

From time to time, we areinvolved in legal proceedings that we consider to be in the normal course ofbusiness. We do not believe that any of these proceedings will have a materialadverse effect on our business.

 

**Item 1A. Risk Factors**

 

No material changes.

 

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

 

We had no sales of unregistered securities duringthe quarter ended March 31, 2008.

 

16

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We purchased shares of our Class A common stockas follows:

 

ISSUER PURCHASES OF EQUITY SECURITIES

 
| **Period**    | ** ** | **(a) Total Number of  Shares (or Units)  Purchased** | ** ** | **(b) Average Price Paid  per Share (or Unit)** | ** ** | **(c) Total Number of  Shares (or Units)  Purchased as Part of  Publicly Announced  Plans or Programs** | ** ** | **(d) Maximum Number  (or Approximate Dollar  Value) of Shares (or  Units) that May Yet Be  Purchased Under the  Plans or Programs** | ** ** |
|---------------|------------|--------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 3/17/2008 (1) |       | 75,800                                                                         |       | $                                                                             | 17.55      |                                                                                                                                                           | —     |                                                                                                                                                                                                            | —     |   |
| 3/31/2008 (2) |       | 50,000                                                                         |       | $                                                                             | 17.32      |                                                                                                                                                           | —     |                                                                                                                                                                                                            | —     |   |

 

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| (1) | On  March 17, 2008, we repurchased these shares of our Class A common  stock in the open market.                                                                                                                                                                                    |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | On  March 31, 2008, we repurchased these shares of our Class A common  stock as partial consideration for the sale of our 51% ownership interest in  Gaiam Limited. The price paid represents the closing market price of our Class  A common stock on the date of the transaction. |

 

**Item 3.    DefaultsUpon Senior Securities**

 

None.

 

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

 

None.

 

**Item 5.    OtherInformation**

 

None.

 

**Item 6.    Exhibits**

 

a)     Exhibits.

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                          |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                     |
| 31.1                 |       | Certification  of the Chief Executive Officer pursuant to Rule 13a-14(a) under the  Securities Exchange Act of 1934 (filed herewith).                                          |
| 31.2                 |       | Certification  of the Chief Financial Officer pursuant to Rule 13a-14(a) under the  Securities Exchange Act of 1934 (filed herewith).                                          |
| 32.1                 |       | Certification  of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (furnished herewith). |
| 32.2                 |       | Certification  of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (furnished herewith). |

 

17

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### **Signatures**

### ** **

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

 
|   | Gaiam, Inc.   |
|--------|--------------------|
|   | (Registrant)       |
|   | May 12,  2008 |
|   |               |
|   | By:                | /s/  Jirka Rysavy |
|   |               | Jirka  Rysavy |
|   |               | Chief  Executive Officer |
|   |               |   |
|   | By:                | /s/  Vilia Valentine |
|   |               | Vilia  Valentine |
|   |               | Chief  Financial Officer |
|   |               | (principal  accounting officer) |

 

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