You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this document. This section is designed to provide information that will assist readers in understanding our condensed consolidated financial statements, changes in certain items in those statements from period to period, the primary factors that caused those changes and how certain accounting principles, policies and estimates affect the condensed consolidated financial statements.

Overview and Outlook

We are a lifestyle 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 built around our ability to develop and offer media content, products, lifestyle solutions and community to consumers in the LOHAS market.

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

Our content forms the basis of our proprietary offerings, which then drive demand for parallel product and service offerings. Our operations are vertically integrated from content creations, through product development and sourcing, to customer service and distribution. We market our products and services across three segments, business, direct to consumer, and solar. We primarily distribute products in each of these sales segments from a single fulfillment center or drop-ship products directly to customers.

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

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

During May 2008, our solar energy business consummated an initial public offering and is now managed as a separate segment. Through recent acquisitions, this business has grown its sales and expanded its market territories. During the second quarter, this segment generated revenues of $8.8 million, up from $4.5 million during the second quarter of 2007, reflecting a 95.9% increase. We will use the IPO proceeds to fund this segment's working capital needs and general corporate purposes, which may include future acquisitions of businesses.

During the first half of 2008, we completed acquisitions targeted towards expanding and enhancing our solar market, community reach, and media content. These acquisitions were Carlson Solar, Inc., a solar energy integrator located in

southern California; the remaining 49.9% ownership interest in Conscious Enlightenment, an on-line and off-line community; and SPRI Products, Inc., a leading marketer of resistance exercise products for the professional health and fitness industry.

Given unsatisfactory results from certain GoodTimes Media brands and the current and projected economic and market conditions, Gaiam evaluated the recoverability of certain assets assuming that additional media and marketing investments would be limited. As a result of this evaluation, we revised our business plans for these assets and impaired $25.9 million of the GoodTimes media library, LIME goodwill and other intangibles, and related assets at the end of the second quarter of 2008.

We believe our growth will be driven by information, media content, products, and community delivered to the consumer via broadcast, catalog, Internet, retailers, international licensing, electronic downloads and subscription systems. We have increased our focus on our media content creation and distribution, 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 two years to better capitalize on strong relationships with our loyal consumer audience and growing broadband. This will allow us to focus on better leveraging our content.

We believe a number of factors are important to our long-term success, including building our brands, increasing international growth by expanding into new markets primarily through license arrangements, extending our product lines into wellness and children's programs, and enhancing our multimedia platform community through new media opportunities, new membership programs, initiatives and acquisitions.

Results of Operations



The following table sets forth certain financial data as a percentage of revenue
for the periods indicated:



                                            Three Months Ended       Six Months Ended
                                                 June 30,                June 30,
                                             2008         2007       2008        2007

Net revenue                                   100.0 %      100.0 %    100.0 %     100.0 %
Cost of goods sold                             36.8 %       35.8 %     37.0 %      35.8 %
Gross profit                                   63.2 %       64.2 %     63.0 %      64.2 %

Expenses:
Selling and operating                          58.9 %       61.7 %     56.1 %      58.5 %
Corporate, general and administration           5.4 %        6.2 %      5.3 %       5.9 %
Other general income and expense               46.7 %          - %     21.8 %         - %
Total expenses                                111.0 %       67.9 %     83.2 %      64.4 %

Income (loss) from operations                 (47.8 )%      (3.7 )%   (20.2 )%     (0.2 )%

Gain from issuance of subsidiary stock         54.6 %          - %     25.6 %         - %
Interest and other income                       0.5 %        2.2 %      0.6 %       2.1 %
Income tax expense (benefit)                    2.9 %       (0.6 )%     2.4 %       0.7 %
Minority interest in net loss of
consolidated subsidiaries, net of tax           0.1 %        0.2 %      0.3 %       0.1 %
Net income (loss) (1)                           4.5 %       (0.7 )%     3.9 %       1.3 %

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

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

quarter of 2008 from $4.5 million during the second quarter of 2007, primarily reflecting the acquisition of Marin Solar in the fourth quarter of 2007 and Carlson Solar in the first quarter of 2008.

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

Selling and operating expenses. Selling and operating expenses increased $1.4 million, or 4.4%, to $33.7 million during the second quarter of 2008 from $32.3 million during the second quarter of 2007, resulting primarily from increased sales and investments made in community, branding, personnel, advertising, and marketing programs. As a percentage of net revenue, selling and operating expenses decreased to 58.9% during the second quarter of 2008 from 61.7% during the second quarter of 2007, primarily reflecting the leveraging of our infrastructure against higher revenues.

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

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

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

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

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

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

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

Net revenue. Net revenue increased $11.6 million, or 10.4%, to $122.4 million during the first half of 2008 from $110.8 million during the first half of 2007. Net revenue in our direct to consumer segment increased $5.6 million, or 10.1%, to $61.2 million during the first half of 2008 from $55.5 million during the first half of 2007. This increase in the direct to consumer segment net revenue primarily reflects the success our ecommerce and increased revenues from businesses acquired over the last year, partially offset by declining revenue from catalog prospecting. Our direct response marketing revenues had only modest growth as a result of increasing media costs per order. Net revenue in our business segment decreased $0.6 million, or 1.2%, to $45.8 million during the first half of 2008 from $46.4 million during the first half of 2007, primarily reflecting our lower recognized international revenue due to our strategy change to operate our international markets as licensing arrangements rather than product sales, partially offset by our continued success in distributing our products to approximately 72,000 retail doors in the U.S. and increased revenue from our acquisition of SPRI in the first quarter. Net revenue in our solar segment increased $6.5 million, or 73.6%, to $15.4 million during the first half of 2008 from $8.9

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

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

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

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

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

Gain from issuance of subsidiary stock. Gain from issuance of subsidiary stock was $31.3 million during the first half of 2008 and represented the increase in carrying value of our investment in Real Goods as a resulting of Real Goods' issuance of new stock.

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

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

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

Seasonality

Our sales are affected by seasonal influences. On an aggregate basis, we generate our strongest revenues and net income in the fourth quarter due to increased holiday spending and retailer fitness purchases.

Liquidity and Capital Resources

Our capital needs arise from working capital required to fund operations, capital expenditures related to acquisition and development of media content, development of our Internet and community platforms and new products, acquisitions of new businesses, 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 ability to expand our customer base, the cost of ongoing upgrades to our product offerings, the level of expenditures for sales and marketing, the level of investment in distribution systems and facilities and other factors. The timing and amount of these capital requirements are variable and we cannot accurately predict them. Additionally, we will continue to pursue opportunities to expand our media libraries, evaluate possible investments in businesses, products and technologies, and increase our sales

and marketing programs and brand promotions as needed.

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

Cash Flows



The following table summarizes our primary sources (uses) of cash during the
periods presented:



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

Operating activities. Our operating activities used net cash of $3.4 million during the first half of 2008 and provided net cash of $16.4 million during the first half of 2007. Our net cash used in operating activities during the first half of 2008 was primarily attributable to noncash gain from the issuance of Real Goods stock of $31.3 million, decreased accounts payable and accrued liabilities of $12.9 million, prepaid income taxes and other current assets of $3.4 million, and deferred advertising costs of $1.2 million, partially offset by the noncash impairment loss of $25.9 million, other noncash adjustments to net income of $8.1 million, net income of $4.8 million, and reductions in accounts receivable and inventory of $4.1 million and $2.5 million, respectively. The reduction in accounts payable reflects payments for inventory purchases of holiday and fitness season shipments and our decision to lower accounts payable as interest rates declined. Our net cash provided by operating activities during the first half of 2007 was primarily attributable to improved accounts receivable collections of $16.8 million, noncash adjustments to net income of $7.6 million, and net income of $1.4 million, partially offset by the use of funds to reduce accounts payable by $8.1 million and other net uses of $1.3 million.

Investing activities. Our investing activities used net cash of $31.5 million during the first half of 2008 and provided net cash of $0.6 million during the first half of 2007. The net cash used in investing activities during the first half of 2008 was used primarily to acquire our new corporate headquarters property, businesses, equipment and other investments for $27.3 million and purchase media for $4.2 million. Our net cash provided by our investing activities during the first half of 2007 primarily resulted from the sale of our LIME investment for $1.4 million and prepayment of the Alps promissory note principle and interest for $2.4 million, partially offset by cash used for the purchase of property, equipment, investments, and media rights for $3.2 million.

Financing activities. Our financing activities provided net cash of $31.6 million during the first half of 2008 and used net cash of $32.9 million during the first half of 2007. Our net cash provided by financing activities during the first half of 2008 primarily reflects net proceeds from Real Goods IPO of $48.2 million and issuances of our common stock and related tax benefits of $1.5 million, partially offset by the use of fund to repurchase approximately 1.2 million shares of our Class A common stock for $18.1 million. We used net cash in our financing activities during the first half of 2007 primarily to repurchase 2.5 million shares of our Class A common stock.

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

We believe our available cash, cash expected to be generated from operations, cash generated by the sale of our stock, and borrowing capabilities should 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, product development, 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 market. For any future investment, acquisition or joint venture opportunities, we may consider using then-available liquidity, issuing equity securities or incurring additional 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 make future payments under operating leases:

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

Risk Factors

We wish to caution you that there are risks and uncertainties that could cause our actual results to be materially different from those indicated by forward looking statements that we make from time to time in filings with the Securities and Exchange Commission, news releases, reports, proxy statements, registration statements and other written communications as well as oral forward looking statements made from time to time by our representatives. These risks and uncertainties include, but are not limited to, those risks listed in our Annual Report on Form 10-K for the year ended December 31, 2007. Additional risks and uncertainties that we currently deem immaterial may also impair our business operations, and historical results are not necessarily an indication of the future results. Except for the historical information contained herein, the matters discussed in this analysis are forward-looking statements that involve risk and uncertainties, including, but not limited to, general economic and business conditions, competition, pricing, brand reputation, consumer trends, and other factors which are often beyond our control. We do not undertake any obligation to update forward-looking statements except as required by law.