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, and catalogs, as well as 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 and, as of September 30, 2009, our products were carried in over 72,000 retail doors in the United States. During the third quarter of 2009, this segment generated revenue of $20.5 million, up from $16.5 million during the third quarter of 2008. During 2009 we expanded our store-within-store presentations, which include custom fixtures that we design, to over 11,000 locations, up from 9,000 at the end of the third quarter of last year. In 2008, we launched a media category management role that is part of our long term strategy and a key step in securing shelf space for media. We have now expanded this strategy to over 4,000 doors, up from 2,000 at the end of the third quarter of 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, an online and off-line community, and customer feedback on us and the LOHAS industry's focus and future. During the third quarter of 2009, this segment generated revenues of $31.0 million, down from $34.2 million during the third quarter of 2008. This decrease reflects a planned reduction to our catalog circulation of 40%, partially offset by revenue growth from 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. This business has grown its sales and expanded its market territories. During the third quarter of 2009, this segment generated revenues to external customers of $23.0 million, up from $9.5 million during the third quarter of 2008. Real Goods uses its IPO proceeds to fund its 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 services. We have increased our focus on fitness media content creation and distribution, and media category management at retailers. Our recent licensing agreements will expand our distribution within the non-theatrical media category.

The Company is restructuring its finance department, generally dividing functional responsibilities between an accounting department (to be managed by the Company's controller, Steve Thomas, who will assume additional responsibilities in the newly-created position of Chief Accounting Officer) and a corporate finance department, to be headed by Carole Buyers. As a part of this departmental restructuring, the chief financial officer position will be eliminated as of November 9, 2009.

We believe a number of factors are important to our long-term success, including building our brands, expanding category management into new retailers and genres, increasing international growth by expanding into new markets primarily through license arrangements, extending our product lines 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        Nine Months Ended
                                          September 30,            September 30,
                                        2009         2008        2009         2008

Net revenue                              100.0 %      100.0 %     100.0 %      100.0 %
Cost of goods sold                        51.9 %       43.9 %      48.5 %       39.2 %
Gross profit                              48.1 %       56.1 %      51.5 %       60.8 %

Expenses:
Selling and operating                     42.5 %       56.5 %      50.5 %       56.2 %
Corporate, general and
administration                             4.3 %        5.2 %       4.9 %        5.3 %
Other general income and expense             - %       23.1 %         - %       22.2 %
Total expenses                            46.8 %       84.8 %      55.4 %       83.7 %

Income (loss) from operations              1.3 %      (28.7 )%     (3.9 )%     (22.9 )%

Gain from issuance of subsidiary
stock                                        - %        0.2 %         - %       17.2 %
Interest and other income                  0.1 %        0.4 %       0.1 %        0.5 %
Income tax expense (benefit)               0.5 %      (11.5 )%     (1.4 )%      (2.2 )%
Net (income) loss attributable to
noncontrolling interest                   (0.4 )%      (0.2 )%      0.4 %        0.1 %
Net income (loss) attributable to
Gaiam, Inc.                                0.5 %      (16.8 )%     (2.0 )%      (2.9 )%

Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008

Net revenue. Net revenue increased $14.2 million, or 23.5%, to $74.4 million during the third quarter of 2009 from $60.3 million during the third quarter of 2008. Net revenue in our business segment increased $4.0 million to $20.5 million during the third quarter of 2009 from $16.5 million during the third quarter of 2008, primarily reflecting improvement in our domestic trade business, including increased store-within-store presentations and our success as media category manager. Net revenue in our direct to consumer segment decreased $3.3 million to $31.0 million during the third quarter of 2009 from $34.2 million during the third quarter of 2008. This decrease in the direct to consumer segment net revenue primarily reflected our decision to reduce catalog circulation by 40%, partially offset by revenue growth with our direct response marketing programs. Net revenue to external customers in our solar segment increased $13.4 million to $23.0 million during the third quarter of 2009 from $9.5 million during the third quarter of 2008, primarily reflecting the acquisitions of solar companies in 2008 and organic growth.

Gross profit. Gross profit increased $2.0 million, or 5.8%, to $35.8 million during the third quarter of 2009 from $33.8 million during the third quarter of 2008. As a percentage of net revenue, gross profit decreased to 48.1% during the third quarter of 2009 from 56.1% during the third quarter of 2008. This decrease was due to increased sales in our lower margin solar business, the expansion of our category manager role in media at retailers, and reduced prices to accelerate sales and lower inventory levels.

Selling and operating expenses. Selling and operating expenses decreased $2.4 million, or 7.1%, to $31.6 million during the third quarter of 2009 from $34.0 million during the third quarter of 2008. As a percentage of net revenue, selling and operating expenses decreased to 42.5% during the third quarter of 2009 from 56.5% during the third quarter of 2008. This decrease is a result of our significant cost savings measures, including reducing payroll costs, optimizing the direct business through reduced catalog prospecting and closing non-profitable businesses.

Corporate, general and administration expenses. Corporate, general and administration expenses increased $0.1 million, or 3.2%, to $3.2 million during the third quarter of 2009 from $3.1 million during the third quarter of 2008. As of percentage of net revenue, corporate, general and administration expenses decreased to 4.3% during the third quarter of 2009 from 5.2% during the third quarter of 2008 reflecting higher revenues.

Net income attributable to noncontrolling interest. Net income attributable to noncontrolling interest increased to $0.3 million during the third quarter of 2009 from $0.1 million during the third quarter of 2008 reflecting profits in our travel business and solar segment.

Net income (loss) attributable to Gaiam, Inc. As a result of the above factors, net income attributable to Gaiam, Inc. was $0.4 million during the third quarter of 2009 compared to a net loss of $10.1 million during the third quarter of 2008. Net income per share attributable to Gaiam, Inc. common shareholders was $0.02 during the third quarter of 2009 compared to a net loss per share of $0.42 during the third quarter of 2008.

Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008

Net revenue. Net revenue increased $8.2 million, or 4.5%, to $190.8 million during the nine months ended September 30, 2009 from $182.7 million during the nine months ended September 30, 2008. Net revenue in our direct to consumer segment decreased $9.7 million to $85.7 million during the nine months ended September 30, 2009 from $95.4 million during the nine months ended September 30, 2008. This decrease in the direct to consumer segment net revenue primarily reflects our decision to reduce catalog circulation, partially offset by revenue growth with our direct response marketing programs. Net revenue in our business segment decreased $2.3 million to $60.0 million during the nine months ended September 30, 2009 from $62.3 million during the nine months ended September 30, 2008, primarily reflecting conservative buying by retailers in the first quarter of 2009, higher deductions and allowances to retailers, and the disposition of our UK operations at the end of the first quarter of 2008. Net revenue to external customers in our solar segment increased $20.3 million to $45.2 million during the nine months ended September 30, 2009 from $25.0 million during the nine months ended September 30, 2008, primarily due to the acquisitions during 2008 and organic growth.

Gross profit. Gross profit decreased $12.7 million, or 11.5%, to $98.2 million during the nine months ended September 30, 2009 from $111.0 million during the nine months ended September 30, 2008. As a percentage of net revenue, gross profit decreased to 51.5% during the nine months ended September 30, 2009 from 60.8% during the nine months ended September 30, 2008. This decrease is due to increased sales in our lower margin solar business, the expansion of our category manager role in media at retailers, reduced prices to accelerate sales and lower inventory levels, and greater participation in retailer discount programs and promotions.

Selling and operating expenses. Selling and operating expenses decreased $6.4 million, or 6.2%, to $96.3 million during the nine months ended September 30, 2009 from $102.7 million during the nine months ended September 30, 2008. This change is primarily a result of reduced catalog circulation and cost control measures implemented in late 2008 and early 2009. As a percentage of net revenue, selling and operating expenses decreased to 50.5% during the nine months ended September 30, 2009 from 56.2% during the nine months ended September 30, 2008 reflecting the lower cost structure and increased revenues.

Corporate, general and administration expenses. Corporate, general and administration expenses decreased $0.2 million, or 1.8%, to $9.4 million during the nine months ended September 30, 2009 from $9.6 million during the nine months ended September 30, 2008. As of percentage of net revenue, corporate, general and administration expenses decreased to 4.9% during the nine months ended September 30, 209 from 5.3% during the nine months ended September 30, 2008.

Interest and other income. Interest and other income decreased $0.8 million to $0.2 million during the nine months ended September 30, 2009 from $1.0 million during the nine months ended September 30, 2008. The lower interest earnings reflect the decrease in prevailing short-term interest rates and cash used to acquire our corporate facilities and repurchase 2.3 million shares of our Class A common stock for $21.2 million since January 1, 2008.

Net loss attributable to noncontrolling interest. Net loss attributable to noncontrolling interest increased to $0.8 million during the nine months ended September 30, 2009 from $0.3 million during the nine months ended September 30, 2008 primarily as a result of the losses in our solar segment during the first half of the year.

Net loss attributable to Gaiam, Inc. As a result of the above factors, net loss attributable to Gaiam, Inc. was $3.7 million during the nine months ended September 30, 2009 compared to $5.3 million during the nine months ended September 30, 2008. Net loss per share attributable to Gaiam, Inc. common shareholders was $0.16 during the nine months ended September 30, 2009 compared to $0.22 during the nine months ended September 30, 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.

At September 30, 2009, the majority of our cash was in short-term treasuries. We have a revolving line of credit agreement with a financial institution with extended current expiration date of December 21, 2009. We are currently in negotiations to renew the line of credit agreement, which was recently extended by two months pending the renewal negotiations. 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, 2009, we had no amounts outstanding under this agreement; however, $0.6 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:



                                                           Nine Months Ended
                                                             September 30,
(in thousands)                                             2009        2008
Net cash provided by (used in):
Operating activities                                     $  20,935   $  (9,857 )
Investing activities                                        (5,613 )   (37,695 )
Financing activities                                        (2,850 )    31,624
Effects of exchange rates on cash and cash equivalents           -         (13 )
Net change in cash and cash equivalents                  $  12,472   $ (15,941 )

Operating activities. Our operating activities provided net cash of $20.9 million during the nine months ended September 30, 2009 and used net cash of $9.9 million during the nine months ended September 30, 2008. Our net cash provided by operating activities during the nine months ended September 30, 2009 was primarily attributable to decreased accounts receivable and inventory of $17.1 million, noncash adjustments to the net loss of $3.4 million, and increased accounts payable and accrued liabilities of $3.2 million and refunded income taxes of $3.2 million, partially offset by the net loss of $3.7 million and increased deferred advertising costs of $1.7 million. 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 $5.1 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 $11.0 million and reductions in accounts receivable of $4.6 million.

Investing activities. Our investing activities used net cash of $5.6 million and $37.7 million during the nine months ended September 30, 2009 and 2008, respectively. The net cash used in investing activities during the nine months ended September 30, 2009 was used primarily to acquire property and equipment for $3.4 million, of which $1.5 million was acquired to maintain normal operations, and for media productions of $2.2 million. 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.

Financing activities. Our financing activities used net cash of $2.9 million during the nine months ended September 30, 2009 and provided net cash of $31.6 million during the nine months ended September 30, 2008. Our net cash used in financing activities during the nine months ended September 30, 2009 was used primarily to repurchase 932,000 shares of our Class A common stock. 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 1.2 million shares of our Class A common stock for $18.1 million.

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 $ 9,330 $ 2,392 $ 3,755 $ 2,675 $ 508

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.