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 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 creation, 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 distribute the majority of our products in our business and direct to consumer segments from our fulfillment center or drop-ship products directly to customers. We also utilize a third party replication and fulfillment center for media distribution in our business segment.

Our business segment sells directly to retailers, with our products available in approximately 73,000 retail doors in the United States. During the third quarter of 2008, this segment generated revenues of $16.5 million, down from $30.1 million during the third quarter of 2007. Excluding international revenues, which were affected by the transition from product sales to licensing arrangements, the business segment revenue decrease for the quarter was approximately 4.3%. During the quarter we expanded our store-within-store presence to over 9,000 lifestyle presentations, up from 6,500 at the end of September 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 third quarter of 2008, this segment generated revenues of $34.2 million, down from $36.0 million during the third quarter of 2007. This decrease reflects planned lower catalog circulation and direct response marketing, and the overall economic environment.

During May 2008, our solar energy business consummated an initial public offering and has since been managed as a separate segment. Through recent acquisitions, this business has grown its sales and expanded its market territories. During the third quarter of 2008, this segment generated revenues of $10.3 million, up from $4.3 million during the third quarter of 2007. We have and will continue to 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 nine months ended September 30, 2008, we completed acquisitions targeted towards expanding and enhancing our solar market, community reach, and media content. The solar acquisitions were Carlson Solar, Inc. and Independent Energy Systems, Inc., solar energy integrators located in southern and northern California, respectively. We also purchased 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 the current and projected economic and market conditions, we 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 $37.8 million of the acquired media libraries, LIME goodwill and other intangibles, tangible assets primarily related to web site development, certain deferred advertising costs, and related assets during the second and third quarters of 2008.

We believe our growth will be driven by information, media content, products, and community delivered to the consumer via 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, higher operating contribution and greater mainstream penetration.

Results of Operations



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



                                           Three Months Ended        Nine Months Ended
                                              September 30,            September 30,
                                            2008         2007        2008         2007

Net revenue                                  100.0 %      100.0 %     100.0 %      100.0 %
Cost of goods sold                            43.9 %       34.4 %      39.2 %       35.3 %
Gross profit                                  56.1 %       65.6 %      60.8 %       64.7 %

Expenses:
Selling and operating                         56.5 %       55.0 %      56.2 %       57.2 %
Corporate, general and administration          5.2 %        4.7 %       5.3 %        5.4 %
Other general income and expense              23.1 %          - %      22.2 %          - %
Total expenses                                84.8 %       59.7 %      83.7 %       62.6 %

Income (loss) from operations                (28.7 )%       5.9 %     (22.9 )%       2.1 %

Gain from issuance of subsidiary stock         0.2 %          - %      17.2 %          - %
Interest and other income                      0.4 %        1.5 %       0.5 %        1.9 %
Income tax expense (benefit)                 (11.5 )%       2.9 %      (2.2 )%       1.6 %
Minority interest in net (income) loss
of consolidated subsidiaries, net of
tax                                           (0.2 )%      (0.4 )%      0.1 %        0.0 %
Net income (loss)                            (16.8 )%       4.1 %      (2.9 )%       2.4 %

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

Net revenue. Net revenue decreased $10.0 million, or 14.3%, to $60.3 million during the third quarter of 2008 from $70.3 million during the third quarter of 2007. Excluding international revenues, which were affected by the transition from product sales to licensing arrangements, the revenue growth for the quarter was approximately 2%. Net revenue in our direct to consumer segment decreased $1.7 million to $34.2 million during the third quarter of 2008 from $36.0 million during the third quarter of 2007. This decrease in the direct to consumer segment net revenue primarily reflects decreased catalog prospecting, lower response rates from our first holiday catalog drop which coincided with weather related impacts of hurricane Ike, and overall slower consumer spending. Net revenue in our business segment decreased $13.6 million to $16.5 million during the third quarter of 2008 from $30.1 million during the third 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 and precautionary holiday buying trends from our retailers. Net revenue in our solar segment increased $6.1 million to $10.3 million during the third quarter of 2008 from $4.3 million during the third quarter of 2007, primarily reflecting the acquisitions of Marin Solar in the fourth quarter of 2007, Carlson Solar in the first quarter of 2008, and Independent Energy Systems in the third quarter of 2008.

Gross profit. Gross profit decreased $12.3 million, or 26.7%, to $33.8 million during the third quarter of 2008 from $46.1 million during the third quarter of 2007. As a percentage of net revenue, gross profit decreased to 56.1% during the third quarter of 2008 from 65.6% during the third quarter of 2007. The change in gross margin reflects our investment in the lower margin solar business and additional store within store presentations. The margin was also impacted by the decision to expand our distribution footprint by maintaining retail prices while absorbing cost increases from higher freight charges and the dollar decline. Our strategy to aggressively pursue store-within-store and media category management expansion will continue to impact the margin through fourth quarter.

Selling and operating expenses. Selling and operating expenses decreased $4.6 million, or 11.9%, to $34.0 million during the third quarter of 2008 from $38.6 million during the third quarter of 2007, primarily from reduced catalog circulation, payroll and incentive reductions, and synergies realized from business acquisition integrations. As a percentage of net revenue, selling and operating expenses increased to 56.5% during the third quarter of 2008 from 55.0% during the third quarter of 2007.

Corporate, general and administration expenses. Corporate, general and administration expenses decreased $0.2 million, or 5.7%, to $3.1 million during the third quarter of 2008 from $3.3 million during the third quarter of 2007. As of percentage of net revenue, corporate, general and administration expenses increased to 5.2% during the third quarter of 2008 from 4.7% during the third quarter of 2007, primarily reflecting lower revenues.

Other general income and expense. Other general income and expense was $13.9 million during the third quarter of 2008 and was comprised of impairments of our acquired media libraries, tangible assets primarily related to web site development, and related assets, as well as expected losses on future contractual commitments and reduction in force costs.

Interest and other income. Interest and other income decreased $0.8 million to $0.3 million during the third quarter of 2008 from $1.0 million during the third quarter of 2007. The decrease reflects lower interest earnings as we used cash to fund our operations, acquire businesses and assets, and repurchase 1.3 million shares of our Class A common stock for $19.0 million, and the decline of average interest rates received on our cash investments from 5.24% as of September 30, 2007 to 2.65% at September 30, 2008.

Minority interest in net income of consolidated subsidiaries, net of income taxes. Minority interest in net income of consolidated subsidiaries, net of income taxes, decreased to $0.1 million during the third quarter of 2008 from $0.2 million during the third quarter of 2007.

Net income. As a result of the above factors, net income decreased $13.0 million to a net loss of $10.1 million during the third quarter of 2008 from net income of $2.9 million during the third quarter of 2007. Net income per share decreased to a loss of $0.42 per share during the third quarter of 2008 from net income of $0.12 per share during the third quarter of 2007.

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

Net revenue. Net revenue increased $1.5 million, or 0.8%, to $182.7 million during the nine months ended September 30, 2008 from $181.1 million during the nine months ended September 30, 2007. Net revenue in our direct to consumer segment increased $3.9 million to $95.4 million during the nine months ended September 30, 2008 from $91.5 million during the nine months ended September 30, 2007. This increase in the direct to consumer segment net revenue primarily reflects the success of our ecommerce and increased revenues from businesses acquired, partially offset by declining revenue from catalog prospecting and overall slower consumer spending. Net revenue in our business segment decreased $14.1 million to $62.3 million during the nine months ended September 30, 2008 from $76.5 million during the nine months ended September 30, 2007, primarily reflecting lower international product sales, which includes the shift to licensing arrangements and the disposition of our UK operations. Net revenue in our solar segment increased $12.6 million to $25.7 million during the nine months ended September 30, 2008 from $13.2 million during the nine months ended September 30, 2007, primarily due to the acquisition of Marin Solar in the fourth quarter of 2007, Carlson Solar in the first quarter of 2008, and Independent Energy Systems in the third quarter of 2008.

Gross profit. Gross profit decreased $6.3 million, or 5.4%, to $111.0 million during the nine months ended September 30, 2008 from $117.3 million during the nine months ended September 30, 2007. As a percentage of net revenue, gross profit decreased to 60.8% during the nine months ended September 30, 2008 from 64.7% during the nine months ended September 30, 2007. The change in gross margin primarily reflects our investment in the lower margin solar business and additional store within store presentations. The margin was also impacted by the decision to expand our distribution footprint by maintaining retail prices while absorbing cost increases from higher freight charges and the dollar decline.

Selling and operating expenses. Selling and operating expenses decreased $0.8 million, or 0.8%, to $102.7 million during the nine months ended September 30, 2008 from $103.5 million during the nine months ended September 30, 2007, resulting primarily from reduced catalog circulation, lower payroll incentives, and business dispositions in the first quarter of 2008, partially offset by investments made in community, advertising, and marketing programs. As a percentage of net revenue, selling and operating expenses decreased to 56.2% during the nine months ended September 30, 2008 from 57.2% during the nine months ended September 30, 2007.

Corporate, general and administration expenses. Corporate, general and administration expenses decreased $0.2 million, or 2.3%, to $9.6 million during the nine months ended September 30, 2008 from $9.8 million during the nine months ended September 30, 2007. As of percentage of net revenue, corporate, general and administration expenses decreased to 5.3% during the nine months ended September 30, 2008 from 5.4% during the nine months ended September 30, 2007, primarily reflecting the continued focus on leveraging corporate resources across all segments.

Other general income and expense. Other general income and expense was $40.7 million during the nine months ended September 30, 2008 and was comprised of impairments of our media library, LIME goodwill and other intangibles, tangible assets primarily related to web site development, certain deferred advertising costs, and related assets, as well as incremental operating expenses related to the consummation of the Real Goods initial public offering, expected losses on future contractual commitments, and reduction in force costs, partially offset by the recovery in value of a loan receivable.

Gain from issuance of subsidiary stock. Gain from issuance of subsidiary stock was $31.4 million during the nine months ended September 30, 2008 and represented the increase in carrying value of our investment in Real Goods as a result of their issuance of new stock.

Interest and other income. Interest and other income decreased $2.4 million to $1.0 million during the nine months ended September 30, 2008 from $3.4 million during the nine months ended September 30, 2007. The decrease reflects lower interest earnings as we used cash to fund our operations, acquire businesses and assets and repurchase 1.3 million shares of our Class A common stock for $19.0 million, and the decline of average interest rates received on our cash investments from 5.24% as of September 30, 2007 to 2.65% at September 30, 2008.

Minority interest in net (income) loss of consolidated subsidiaries, net of income taxes. Minority interest in net loss of consolidated subsidiaries, net of income taxes, increased to $0.3 million during the nine months ended September 30, 2008 from minority interest net income of $0.1 million during the nine months ended September 30, 2007.

Net income. As a result of the above factors, net income decreased $9.6 million to a net loss of $5.3 million during the nine months ended September 30, 2008 from net income of $4.3 million during the nine months ended September 30, 2007. Net income per share decreased to a net loss of $0.22 per share during the nine months ended September 30, 2008 from net income of $0.17 per share during the nine months ended September 30, 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 September 30, 2008, we had no amounts outstanding under this agreement; however, $1.2 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:



                                                           Nine Months Ended
                                                             September 30,
(in thousands)                                             2008        2007
Net cash (used in) provided by:
Operating activities                                     $  (9,857 ) $  20,571
Investing activities                                       (37,695 )   (12,063 )
Financing activities                                        31,624     (32,154 )
Effects of exchange rates on cash and cash equivalents         (13 )       335
Net decrease in cash and cash equivalents                $ (15,941 ) $ (23,311 )

Operating activities. Our operating activities used net cash of $9.9 million during the nine months ended September 30, 2008 and provided net cash of $20.6 million during the nine months ended September 30, 2007. Our net cash used in operating activities during the nine months ended September 30, 2008 was primarily attributable to decreased accounts payable and accrued liabilities of $11.8 million, a net loss of $5.3 million, increased current tax receivable of $12.1 million, and increased deferred advertising costs and inventory of $2.4 million and $2.0 million, respectively, partially offset by the noncash adjustments to the net loss of $17.6 million and reductions in accounts receivable of $4.6 million. 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 nine months ended September 30, 2007 was primarily attributable to cash provided from net income of $4.3 million, noncash adjustments to net income of $10.3 million, and improved accounts receivable collections of $13.2 million, partially offset by the use of funds from increased inventory in preparation for the 2007 holiday season of $3.1 million, reduced accounts payable of $3.0 million, and increased deferred advertising of $2.2 million.

Investing activities. Our investing activities used net cash of $37.7 million and $12.1 million during the nine months ended September 30, 2008 and 2007, respectively. The net cash used in investing activities during the nine months ended September 30, 2008 was used primarily to acquire our new corporate headquarters property, businesses, equipment and other investments for $30.9 million and purchase and produce media rights for $5.4 million. Our net cash provided by our investing activities during the nine months ended September 30, 2007 primarily reflected the acquisition of businesses for $10.8 million, net of acquired funds, and the purchase of property, equipment and media rights for $5.1 million, partially offset by proceeds from the sale of an investment for $1.4 million and prepayment of a promissory note principal and interest for $2.4 million.

Financing activities. Our financing activities provided net cash of $31.6 million during the nine months ended September 30, 2008 and used net cash of $32.2 million during the nine months ended September 30, 2007. Our net cash provided by financing activities during the nine months ended September 30, 2008 primarily reflected 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 funds to repurchase approximately 1.3 million shares of our Class A common stock for $18.1 million. We used net cash in our financing activities during the nine months ended September 30, 2007 primarily to repurchase 2.5 million shares of our Class A common stock for $32.9 million, partially offset by net proceeds from the exercise of stock options of $0.8 million.

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 nine months ended September 30, 2008, we issued 221,152 of these shares 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 $ 9,155 $ 2,503 $ 3,095 $ 2,034 $ 1,523

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.