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 to retailers, with our products available in approximately 72,000 retail doors in the United States, up from 71,000 a year ago. During the first quarter of 2009, this segment generated revenue of $18.7 million, down from $26.4 million during the first quarter of 2008. Excluding international revenues, which were effected by the transition from product sales to licensing arrangements and the disposition of our UK subsidiary, the business segment revenue decreased 20%. Domestic gross revenue, which is gross sales to retailers (and does not include deductions and allowances), was down 5%. During the quarter we expanded our store-within-store presentations, which include customer fixtures that we design, to over 10,500 locations, up from 7,100 at the end of March 2008.

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 first quarter of 2009, this segment generated revenues of $27.7 million, down from $32.2 million during the first quarter of 2008. This decrease reflects a planned reduction to our catalog circulation of 39% and the overall economic environment, partially offset by revenue growth with our direct response marketing programs.

Our solar segment offers residential and small commercial solar energy integration services. On May 13, 2008, our solar integration 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 first quarter of 2009, this segment generated revenues of $9.5 million, up from $6.6 million during the first quarter of 2008. Real Goods uses its IPO proceeds to fund their working capital needs and general corporate purposes, which may include future acquisitions of businesses.

We believe our growth will be driven by media content, products, and online community offerings delivered to the consumer via Internet, retailers, 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.

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 edutainment, 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
                                                         March 31,
                                                     2009         2008

Net revenue                                            100.0 %      100.0 %
Cost of goods sold                                      44.6 %       37.1 %
Gross profit                                            55.4 %       62.9 %

Expenses:
Selling and operating                                   60.7 %       53.6 %
Corporate, general and administration                    5.8 %        5.2 %
Total expenses                                          66.5 %       58.8 %

Income (loss) from operations                          -11.1 %        4.1 %

Interest and other income                                0.1 %        0.7 %
Income tax expense (benefit)                            -4.0 %        1.9 %
Net loss attributable to noncontrolling interest         1.5 %        0.5 %
Net income (loss) attributable to Gaiam, Inc.           -5.5 %        3.4 %

Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008

Net revenue. Net revenue decreased $9.3 million, or 14.2%, to $55.9 million during the first quarter of 2009 from $65.2 million during the first quarter of 2008. Net revenue in our direct to consumer segment decreased $4.5 million to $27.7 million during the first quarter of 2009 from $32.2 million during the first quarter of 2008. This decrease in the direct to consumer segment net revenue primarily reflects overall slower consumer spending and our decision to reduce catalog circulation by 39%, partially offset by revenue growth with our direct response marketing programs. Net revenue in our business segment decreased $7.7 million to $18.7 million during the first quarter of 2009 from $26.4 million during the first quarter of 2008, primarily reflecting conservative retail buying, higher deductions and allowances to retailers, and changes in our international reporting, which includes the shift to licensing arrangements and the disposition of our UK operations. Domestic gross revenue, which is domestic gross sales to retailers (and does not include deductions and allowances), was down 5.0%. Net revenue in our solar segment increased $2.9 million to $9.5 million during the first quarter of 2009 from $6.6 million during the first quarter of 2008, primarily due to the acquisitions during 2008.

Gross profit. Gross profit decreased $10.0 million, or 24.4%, to $31.0 million during the first quarter of 2009 from $41.0 million during the first quarter of 2008. As a percentage of net revenue, gross profit decreased to 55.4% during the first quarter of 2009 from 62.9% during the first quarter of 2008. Gross profit in our direct to consumer segment decreased $3.2 million, or 14.5%, to $19.3 million during the first quarter of 2009 from $22.6 million during the first quarter of 2008 and, as a percentage of net revenue, decreased to 69.8% during the first quarter of 2009 from 70.2% during the first quarter of 2008 reflecting lower revenues. Gross profit in our business segment decreased $7.2 million, or 43.4%, to $9.4 million during the first quarter of 2009 from $16.5 million during the first quarter of 2008 and, as a percentage of net revenue, decreased to 50.1% during the first quarter of 2009 from 62.6% during the first quarter of 2008, primarily reflecting the expansion of our category manager role in media at retailers (for which the setup requires higher deductions and allowances), expanding our distribution footprint by maintaining retail prices while absorbing cost increases from higher freight charges and the dollar decline, and greater participation in retailer discount programs and promotions. Gross profit in our solar segment increased $0.5 million, or 25.3%, to $2.3 million during the first quarter of 2009 from $1.8 million during the first quarter of 2008 and, as a percentage of net revenue, decreased to 24.2% during the first quarter of 2009 from 28.0% during the first quarter of 2008, primarily reflecting the acquisition of Independent Energy Systems and Regrid Power which have larger average installation sizes that traditionally produce lower gross profit margins.

Selling and operating expenses. Selling and operating expenses decreased $1.0 million, or 2.8%, to $33.9 million during the first quarter of 2009 from $34.9 million during the first quarter of 2008. This change is primarily a result of reduced catalog prospecting circulation, lower royalty payments, and less amortization due to the 2008 impairment of certain intangibles assets. As a percentage of net revenue, selling and operating expenses increased to 60.7% during the first quarter of 2009 from 53.6% during the first quarter of 2008 reflecting lower revenues.

Corporate, general and administration expenses. Corporate, general and administration expenses decreased $0.1 million, or 3.3%, to $3.3 million during the first quarter of 2009 from $3.4 million during the first quarter of 2008. As of percentage of net revenue, corporate, general and administration expenses increased to 5.8% during the first quarter of 2009 from 5.2% during the first quarter of 2008 as a result of lower revenue.

Interest and other income. Interest and other income decreased $0.4 million to $0.1 million during the first quarter of 2009 from $0.5 million during the first quarter of 2008. The lower interest earnings reflect the decrease in prevailing short-term interest rates and cash used to acquire our corporate facilities, acquire businesses and assets, and repurchase 1.3 million shares of our Class A common stock for $19.3 million. At March 31, 2009, the majority of our cash was in short-term treasuries.

Net loss attributable to noncontrolling interest. Net loss attributable to noncontrolling interest increased to $0.8 million during the first quarter of 2009 from $0.3 million during the first quarter of 2008 primarily as a result of the losses in our solar segment.

Net income (loss) attributable to Gaiam, Inc. As a result of the above factors, net income attributable to Gaiam, Inc. decreased $5.3 million to a net loss of $3.1 million during the first quarter of 2009 from net income of $2.2 million during the first quarter of 2008. Net income (loss) per share attributable to Gaiam, Inc. common shareholders decreased to a net loss of $0.13 per share during the first quarter of 2009 from net income of $0.09 per share during the first quarter of 2008.

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 and service 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 March 31, 2009, we had no amounts outstanding under this agreement; however, $0.5 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:



                                                           Three Months Ended
                                                               March 31,
(in thousands)                                             2009         2008
Net cash provided by (used in):
Operating activities                                     $   8,009    $  (1,362 )
Investing activities                                        (1,776 )    (15,400 )
Financing activities                                             -       (1,332 )
Effects of exchange rates on cash and cash equivalents           -          (13 )
Net change in cash and cash equivalents                  $   6,233    $ (18,107 )

Operating activities. Our operating activities provided net cash of $8.0 million during the first quarter of 2009 and used net cash of $1.4 million during the first quarter of 2008. Our net cash provided by operating activities during the first quarter of 2009 was primarily attributable to decreased accounts receivable and inventory of $18.9 million and refunded income taxes of $3.2 million, partially offset by decreased accounts payable and accrued liabilities of $9.4 million and net loss of $3.1 million. The reduction in accounts payable reflects payments for inventory purchases of holiday and fitness season shipments. Our net cash used by operating activities during the first quarter of 2008 was primarily attributable to decreased accounts payable and accrued liabilities of $11.6 million, partially offset by noncash adjustments to net income of $4.4 million, reductions in accounts receivable of $3.3 million, and net income of $2.2 million.

Investing activities. Our investing activities used net cash of $1.8 million and $15.4 million during the first quarters of 2009 and 2008, respectively. The net cash used in investing activities during the first quarter of 2009 was used primarily to acquire property and equipment for $1.3 million, of which $0.4 million was acquired to maintain normal operations, and purchase media for $0.5 million. Our net cash used in our investing activities during the first quarter of 2008 was used primarily to acquire businesses, property, equipment and other investments for $12.6 million and purchase media for $1.4 million.

Financing activities. Our financing activities used net cash of $1.3 million during the first quarter of 2008 primarily to repurchase 75,800 shares of our Class A common stock.

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 and Conscious Media markets. 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 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 $ 9,195 $ 2,734 $ 3,082 $ 2,364 $ 1,015

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, 2008. 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.