Edgar Filing: GAIAM INC

As filed with the Securities and Exchange Commission on July 23, 2001

Registration No. 333-63488

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

AMENDMENT NO. 1

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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Gaiam, Inc.
(exact name of registrant as specified in its charter)
Colorado 5961, 7375 84-111-35-27
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
organization)

360 Interlocken Blvd., Suite 300
Broomfield, Colorado 80021
(303) 222-3600
(address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)

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Jirka Rysavy
Chief Executive Officer
Gaiam, Inc.
360 Interlocken Blvd, Suite 300
Broomfield, Colorado 80021
(303) 222-3600
(name, address, including zip code, and telephone number,
including area code, of agent for service)

Copies To:
Thomas R. Stephens, Esq. Richard R. Plumridge, Esq.
Polly S. Swartzfager, Esq. John E. Hayes III, Esq.
Bartlit Beck Herman Palenchar & Scott Brobeck, Phleger & Harrison LLP
1899 Wynkoop Street, 8th Floor 370 Interlocken Blvd. Suite 500
Denver, Colorado 80202 Broomfield, Colorado 80021

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Approximate Date of Commencement of Proposed Sale to the Public: As soon as
practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [_]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]

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The Registrant Hereby Amends This Registration Statement On Such Date Or
Dates As May Be Necessary To Delay Its Effective Date Until The Registrant
Shall File A Further Amendment Which Specifically States That This
Registration Statement Shall Thereafter Become Effective In Accordance With
Section 8(a) Of The Securities Act Of 1933 Or Until The Registration Statement
Shall Become Effective On Such Date As The Commission, Acting Pursuant To Said
Section 8(a), May Determine.

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

Subject To Completion, Dated July 23, 2001

2,200,000 Shares of Class A Common Stock

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We are offering 2,200,000 shares of our class A common stock. Our class A
common stock is listed on the Nasdaq National Market under the symbol "GAIA."
On July 20, 2001, the last reported sale price of our class A common stock on
the Nasdaq National Market was $14.80.

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Investing in our common stock involves risks. See "Risk Factors" on page 6.

Per Share Total

Public offering price........................................... $ $
Underwriting discounts and commissions.......................... $ $
Proceeds to Gaiam............................................... $ $

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We have granted the underwriters a 30-day option to purchase up to 330,000
shares of our class A common stock for resale to the public at the $ offering
price per share.

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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.

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TUCKER ANTHONY SUTRO ADAMS, HARKNESS & HILL, INC.
CAPITAL MARKETS

The date of this prospectus is , 2001.

[pictures of Gaiam products]

TABLE OF CONTENTS

Page
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Prospectus Summary....................................................... 1
Risk Factors............................................................. 6
Forward-Looking Statements............................................... 14
Use of Proceeds.......................................................... 14
Price Range of Common Stock.............................................. 15
Dividend Policy.......................................................... 15
Capitalization........................................................... 16
Selected Consolidated Financial Data..................................... 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 19
Our Business............................................................. 27
Management............................................................... 36
Certain Relationships and Related Transactions........................... 41
Principal Shareholders................................................... 43
Description of Capital Stock............................................. 45
Shares Eligible for Future Sale.......................................... 47
Underwriting............................................................. 49
Legal Matters............................................................ 51
Experts.................................................................. 52
Where You Can Find More Information...................................... 52
Index to Financial Statements............................................ F-1

You should rely only on the information contained in this prospectus. We have
not, and the underwriters have not, authorized any other person to provide you
with different information. This prospectus is not an offer to sell, nor is it
seeking an offer to buy, these securities in any state where the offer or sale
is not permitted.

(i)

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this
prospectus. Because this is only a summary, it does not contain all the
information that you should consider before buying shares in this offering. You
should read the entire prospectus carefully, including our consolidated
financial statements and the related notes included elsewhere in this
prospectus.

Gaiam is a lifestyle company providing a broad selection of information,
products and services to customers who value natural health, personal
development and renewable energy. We offer our customers the ability to make
purchasing decisions based on these values while striving to provide products
at prices comparable to conventional alternatives. Our direct customer base is
80% female and 70% college-educated, has a median age of 44 and has an average
annual household income of approximately $60,000.

The Gaiam lifestyle brand was built around our ability to continuously
develop content that establishes Gaiam as an authority in the Lifestyle Of
Health And Sustainability (LOHAS) market. Our content provides solutions that
improve quality of life, promote personal development and protect the
environment. It also forms the basis of our proprietary products, on which we
realize our highest margins, and drives demand for parallel product and service
offerings. We sell our content in the form of television broadcasts, on-demand
visual media programming, DVDs, videotapes, music CDs, books and other media.
We also provide content through our catalogs, on the internet, at point of
purchase and as part of the packaging for our products. Our content together
with the Gaiam brand creates barriers to entry for competitors.

We market our products and services direct-to-consumers and business-to-
business through five sales channels: our catalogs, the internet, retailers,
media and corporate accounts. Our products are sold by leading retailers
including lifestyle stores such as Discovery Channel Stores and The Walking
Company; women's beauty stores such as Ulta and Origins; sporting goods chains
such as Sports Authority and Big 5; home furnishing stores such as Bed, Bath
and Beyond; natural food stores such as Whole Foods Market; book stores such as
Borders and Barnes & Noble; music stores such as Musicland and Wherehouse
Music; sporting good stores such as Dick's; mass merchants such as Target,
Kohl's and Wal-Mart; and e-tailers such as Amazon.com. A number of our
retailers display our products in store-within-a-store Gaiam lifestyle shops.
We believe we have an opportunity to become the single source solution for
LOHAS products for our retail accounts. Our media channel includes television
broadcasts, on-demand visual media programming coverage to more than 600,000
hotel rooms in North America, video streaming, video tapes, DVDs and three
music labels. Our media partners include the Discovery Channel, Universal
Studios and On Command. Our corporate account customers include The White
House, NASA, Disney, Sony, AT&T, Mercedes Benz, the U.S. Departments of Energy
and Defense and the Government of Brazil. We distribute our products in each of
these sales channels from a single fulfillment center.

Gaiam has a highly centralized, scaleable business model. Gaiam's
operations are vertically integrated from content creation, through product
development and sourcing, to customer service and fulfillment.

The LOHAS market, which represented $227 billion in sales in 2000
according to Natural Business Communication, consists of five main sectors:

. Sustainable Economy. Renewable energy, energy conservation, recycled
goods, environmental management services, sustainable manufacturing
processes and related information and services.

. Healthy Living. Natural and organic foods, dietary supplements,
personal care products and related information and services.

. Alternative Healthcare. Health and wellness solutions and
alternative health practices.

. Personal Development. Solutions, information, products and
experiences relating to mind, body and spiritual development.

. Ecological Lifestyles. Environmentally friendly cleaning and
household products, organic cotton clothing and bedding, and eco-
tourism.

Gaiam provides lifestyle product solutions for all sectors of the LOHAS
market. We offer solutions for a sustainable economy such as renewable energy
systems, energy efficient lighting and products made from recycled materials;
healthy living solutions such as nutrition content, air and water filters and
personal care items; alternative healthcare solutions such as back and neck
care products, stress relief and wellness information; personal development
solutions such as mind-body fitness information, fitness accessories and
performance wear; ecological lifestyle solutions such as natural cleaners,
organic cotton bedding and bath products and organic cotton clothing.

We intend to pursue the following strategic initiatives in order to
continue to grow our business and serve the LOHAS market:

. Strengthen Our Lifestyle Brand

. Capitalize on Our Multi-Channel Approach

. Expand Our Proprietary Product Selection

. Broaden Our Content Through Growth of Gaiam Media

. Complement Our Existing Business with Selective Strategic
Acquisitions

From 1996 to 2000, our revenues increased from $14.8 million to $60.6
million. Our direct customer file has increased from 300,000 at the end of 1996
to approximately 1.7 million at the end of May 2001. Our retailer channel grew
from its inception in 1998 to 25,500 stores at the end of May 2001.

The name Gaiam is a fusion of the words "Gaia," the name for Mother Earth
in ancient Greece, and "I am." Gaiam was founded in Boulder, Colorado and
organized as a Colorado corporation on July 7, 1988. Gaiam's principal office
is located at 360 Interlocken Blvd., Broomfield, Colorado 80021, and its
telephone number is (303) 222-3600.

Recent Results

Gaiam's unaudited results of operations for the second quarter ended June
30, 2001 reflect a 93.4% increase in sales to $22.0 million from $11.4 million
for the second quarter ended June 30, 2000, a 425.9% increase in operating
income to $1.5 million from $294,441 for the second quarter of 2000 and a
175.6% increase in net income to $552,403 from $200,452 for the second quarter
of 2000. Earnings per share were 5 cents for the three months ended June 30,
2001, up from 2 cents for the three months ended June 30, 2000.

THE OFFERING

Class A common stock offered by
Gaiam............................ 2,200,000 shares
Class A common stock outstanding
after this offering.............. 8,165,557 shares (1)
Class B common stock outstanding
after this offering.............. 5,400,000 shares
Total common stock outstanding
after this offering.............. 13,565,557 shares (1)
Use of proceeds................... Working capital and other general corporate
purposes, including repayment of
indebtedness, expansion of sales channels,
new product launches and acquisitions. See
"Use of Proceeds" and "Our Business."
Nasdaq National Market symbol..... GAIA

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(1) Based on the number of shares outstanding on June 30, 2001. Excludes
1,568,290 shares issuable upon exercise of options and warrants outstanding
as of June 30, 2001, at an average exercise price of $7.93 per share. See
"Management." Also assumes no exercise of the underwriter's over-allotment
option.

Except where specified, references to Gaiam's shares refer to shares of
its class A common stock. The information on our website, including any online
discussion forums, and in our catalogs and other marketing materials is not
part of this prospectus. References in this prospectus to "Gaiam," "we," "our"
and "us" refer to Gaiam, Inc. and our wholly- and majority-owned subsidiaries
and not to the persons who manage Gaiam or sit on its Board of Directors.

SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)

The following table summarizes the consolidated financial data of our
business. You should read the summary consolidated financial data below in
conjunction with our consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

Three Months
Year Ended December 31, Ended March 31,
----------------------- ----------------
1998 1999 2000 2000 2001
------- ------- ------- ------- -------
(Unaudited)

Statement of Operations Data:
Net revenues........................ $30,739 $45,725 $60,588 $12,558 $17,672
Gross profit........................ 17,565 27,549 36,795 7,636 10,824
Other income (expense).............. 388 606 (283) (123) 68
Net income after minority interest
(1)................................ 860 1,718 2,649 203 419
Net income per share
Basic............................. $ 0.11 $ 0.20 $ 0.24 $ .02 $ .04
Diluted........................... $ 0.11 $ 0.19 $ 0.23 $ .02 $ .04
Shares outstanding (basic).......... 8,073 8,785 10,858 10,846 11,206
Shares outstanding (diluted)........ 8,119 9,119 11,525 11,505 11,563

March 31, 2001
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Actual As Adjusted (2)
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(Unaudited)

Balance Sheet Data:
Cash.................................................... $ 6,374 $26,005
Working capital......................................... 11,312 34,424
Total assets............................................ 59,118 78,749
Long-term debt.......................................... 6,780 261
Stockholders' equity.................................... 22,168 51,799

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(1) Net income after minority interest includes net income of consolidated
Gaiam operations, excluding that portion attributable to the minority
shareholders' interest in the net income or loss in the consolidated
subsidiary, net of tax.

(2) Gives effect to the sale by Gaiam of 2,200,000 shares at an assumed public
offering price of $14.80 per share, after deducting the estimated
underwriting discount and offering expenses payable by Gaiam and
application of the net proceeds for repayment of $6.5 million of long-term
debt (at March 31, 2001) from the proceeds of this offering. (Gaiam intends
to use an additional $3.5 million in proceeds from this offering to repay
debt incurred subsequent to March 31, 2001.) See "Use of Proceeds" and
"Capitalization."

RISK FACTORS

This offering involves a high degree of risk. You should carefully
consider the risks described below and the other information in this prospectus
before deciding to invest in our shares. If any of the following risks actually
occurs, our business could be harmed and the trading price of our shares could
decline. In that case, you might lose all or part of your investment.

We may not be able to compete successfully against our current and future
competitors.

Our goal is to establish ourselves as the leader in the LOHAS market. We
believe that the LOHAS market has thousands of small, local and regional
businesses. Some smaller businesses may be able to more effectively personalize
their relationships with customers, thereby gaining a competitive advantage.
Although we believe that we do not compete directly with any single company
with respect to our entire range of merchandise, within each merchandise
category we have competitors and may face competition from new entrants. Some
of our competitors or our potential competitors may have greater financial and
marketing resources. In addition, larger, well-established and well-financed
entities may acquire, invest in or form joint ventures with our competitors.
Increased competition from these or other competitors could negatively impact
our business.

Changing consumer preferences and general economic conditions may have an
adverse effect on our business.

Our business is targeted at consumers who assign high value to healthy
lifestyles, personal development, renewable energy and the environment. A
decrease of consumer interest in purchasing goods and services that promote the
values we espouse would materially and adversely affect the growth of our
customer base and sales revenues and, accordingly, our financial prospects.
Further, consumer preferences are difficult to predict. Our future success
depends in part on our ability to anticipate and respond to changes in consumer
preferences and we may not respond in a timely or commercially appropriate
manner to such changes. Failure to anticipate and respond to changing consumer
preferences could lead to, among other things, lower sales of our products,
increased merchandise returns and lower margins, which would have a material
adverse effect on our business.

We may face quarterly and seasonal fluctuations that could harm our business.

Our revenue and results of operations have fluctuated and can be expected
to continue to fluctuate on a quarterly basis as a result of a number of
factors, including the timing of catalog offerings, recognition of costs or net
sales contributed by new merchandise and catalog offerings, fluctuations in
response rates, fluctuations in paper, production and postage costs and
expenses, merchandise returns, adverse weather conditions that affect
distribution or shipping, shifts in the timing of holidays and changes in our
merchandise mix. In addition, our net sales and profits have historically been
higher during the fourth quarter holiday season. We believe that this
seasonality will continue in the future. If, for any

reason, our sales were to fall below expectations during the fourth quarter
holiday season, our financial condition and results of operations would be
adversely affected.

Some products and services we sell may put us at a competitive price
disadvantage.

Some environmentally friendly products are priced at a premium to
products that have similar uses but are not environmentally friendly. Our sales
growth assumes that consumers will sometimes be willing to pay higher prices in
order to enhance the environment, promote a sustainable economy and achieve
healthy lifestyles and personal development or that, over time, we will be able
to reduce prices through volume purchases from our suppliers. If we are unable
to sustain price levels of these products, or to increase sales volume to a
level that would allow us to reduce our costs, our business will be adversely
affected.

If the protection of our internet domain names is inadequate, our brand
recognition could be impaired and we could lose customers.

We currently hold various internet domain names relating to our brand,
including www.gaiam.com. The acquisition and maintenance of domain names is
regulated by governmental agencies and their designees. The regulation of
domain names in the U.S. and in foreign countries is changing and is expected
to continue to change in the future. As a result, we may not be able to acquire
or maintain the domain names we want in all countries in which we seek to
conduct business. Furthermore, we may be unable to prevent third parties from
acquiring domain names whose similarity decreases the value of our trademarks
and proprietary rights. Loss of our internet domain names could adversely
affect our ability to develop brand recognition.

Our success depends on the value of the Gaiam brand, and if the value of our
brand were to diminish, our revenues, results of operations and prospects would
be adversely affected.

Because we are increasing our sales of proprietary products, our success
increasingly depends on the Gaiam brand and its value in the LOHAS market.
Building and maintaining recognition of the Gaiam brand is important to
attracting and expanding our customer base. We cannot be certain that our
marketing efforts or brands will attract new customers, retain existing
customers or encourage repeat purchases.

Acquisitions may harm our financial results, cause our stock price to decline,
or dilute our shareholders' interests.

Acquisitions have been part of our growth and may continue to be part of
our growth in the future. In June 2000, Gaiam and Whole Foods Market, Inc., a
publicly-traded company, merged their internet properties into gaiam.com, Inc.
In January 2001, we acquired Real Goods Trading Corporation. We will continue
to evaluate acquisition opportunities as they arise. These acquisitions may be
of entire companies, controlling interests in companies or of minority
interests in companies where we intend to invest as part of a strategic

alliance. However, we may not succeed in identifying attractive acquisitions or
attractive acquisition candidates may not be available at reasonable prices. We
are also likely to face competition for attractive acquisition candidates,
which may increase the expense of completing acquisitions. Acquisitions may
harm our operating results or cause our stock price to decline because we may:

. issue equity or equity-related securities that dilute our current
shareholders' percentage ownership or incur substantial debt or
assume liabilities of an acquired business;

. experience reduced earnings or adverse tax consequences by failing
to efficiently integrate the operations, assets and personnel of the
acquired companies in a timely manner, being required to amortize a
significant amount of intangible assets acquired in an acquisition,
or otherwise; and

. divert management's attention from operating the business.

Moreover, we may have difficulties integrating the operations, products and
personnel of the companies we acquire. The presence of minority ownership
interests in any acquired company, and our strategy of allowing our
subsidiaries to retain some autonomy in their management and operation, could
make integration more difficult. The success of future acquisitions is
dependent on our ability to effectively integrate the acquired companies'
operations and brands, including our ability to recognize potentially available
marketing synergies and cost savings, some of which may involve operational
changes. If we are not successful in integrating companies that we may acquire,
our business could be materially and adversely affected.

The loss of the services of our key personnel could disrupt our business.

The services of our officers, Jirka Rysavy, Lynn Powers and Pavel Bouska,
are critical to our business. We do not carry any key-man life insurance. Our
strategy of allowing the management teams of acquired companies to continue to
exercise significant management responsibility for those companies makes it
especially important that we retain key employees, particularly the sales and
creative teams, of the companies we might acquire.

Government regulation and legal uncertainties could add additional costs to
doing business on the internet.

E-commerce is new and rapidly changing. Federal and state regulation
relating to the internet and e-commerce is evolving. Currently, there are few
laws or regulations directly applicable to the internet or e-commerce on the
internet. Laws and regulations may be enacted with respect to the internet,
covering issues such as user privacy, pricing, taxation, content, copyrights,
distribution, antitrust and quality of products and services.

Our business could also be affected by regulations adopted in the future.
For example, a number of different bills are under consideration by Congress
and various state legislatures that would restrict disclosure of consumers'
personal information. If legislation of this type were enacted, it would make
it more difficult for us to obtain additional names

for our distribution lists, and restrict our ability to send unsolicited
electronic mail or printed catalogs, both of which could slow the growth of our
customer base.

If we cannot maintain and continually update our information systems, our
business could suffer.

Information systems are critical to our business. These systems assist in
processing orders, managing inventory, purchasing and shipping merchandise on a
timely basis, responding to customer service inquiries, and gathering and
analyzing operating data by business segment, customer, and SKU (a specific
identifier for each different product). As our business grows we will need to
continually update these systems. Furthermore, if we acquire other companies,
we will need to integrate the acquired companies' systems with ours, a process
that could be time-consuming and costly. If our systems cannot accomodate our
growth or fail, we could incur substantial expenses.

Although we are a multi-channel company, the internet is an important
sales channel for us. The development of a website and other proprietary
technology entails significant technical, financial and business risks. We have
spent approximately $5.5 million in the development of our websites to date to
introduce several new website features. We intend to continue to invest
resources to enhance our websites and keep our systems up to date. In addition,
the adoption of new internet, networking or telecommunications technologies may
require us to devote substantial resources to modify and adapt our services.
Our success in e-commerce will depend upon our ability to continue to provide a
compelling and satisfying shopping experience. To remain competitive, we must
continue to enhance and improve the responsiveness, functionality and features
of our online technology.

A material security breach could cause us to lose sales, damage our reputation
or result in liability to us.

Our computer servers may be vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions. We may need to expend significant
additional capital and other resources to protect against a security breach or
to alleviate problems caused by any breaches. Our relationships with our
customers may be adversely affected if the security measures that we use to
protect personal information, such as credit card numbers, are ineffective. We
currently rely on security and authentication technology that we license from
third parties. We may not be able to prevent all security breaches.

Our systems may fail or limit user traffic, which would cause us to lose sales.

We maintain a single call center in Broomfield, Colorado. We are
dependent on our ability to maintain our computer and telecommunications
equipment in this center in effective working order and to protect against
damage from fire, natural disaster, power loss, telecommunications failure or
similar events. In addition, growth of our customer base may strain or exceed
the capacity of our computer and telecommunications systems and lead to
degradations in performance or systems failure. We have experienced capacity
constraints and failure of information systems in the past that have resulted
in decreased levels of

service delivery or interruptions in service to customers for limited periods
of time. Although we continually review and seek to upgrade our technical
infrastructure and provide for system redundancies and backup power to limit
the likelihood of systems overload or failure, substantial damage to our
systems or a systems failure that causes interruptions for a number of days
could adversely affect our business. Additionally, if we are unsuccessful in
updating and expanding our infrastructure, including our call center, our
ability to grow may be constrained.

We may face legal liability for the content contained on our website.

We could face legal liability for defamation, negligence, copyright,
patent or trademark infringement, personal injury or other claims based on the
nature and content of materials that we publish or distribute on our website.
If we are held liable for damages for the content on our website, our business
may suffer. Further, our business is based on establishing www.gaiam.com as a
trustworthy and dependable provider of information and services. Allegations of
impropriety, even if unfounded, could therefore have a material adverse effect
on our reputation and our business.

Our suppliers may not be able to supply us with merchandise in a timely manner,
which could cause us to lose sales.

To successfully operate our business, we must receive timely delivery of
merchandise from our vendors and suppliers, many of which are small private
companies. As we grow, some of these vendors may not have sufficient capital,
resources, or personnel to increase their sales to us or to satisfy their
commitments to us. Any significant delay in the delivery of products by vendors
could result in a loss of sales, increased fulfillment expenses and damage to
our customer service reputation. The failure of third parties to provide an
adequate level of service could decrease our revenues and increase our costs.

Given our emphasis on customer service, the efficient and uninterrupted
operation of order-processing and fulfillment functions is critical to our
business. To maintain a high level of customer service, we rely heavily on a
number of different outside service providers, such as printers,
telecommunications companies and delivery companies. Any interruption in
services from our principal outside service providers, including delays or
disruptions resulting from labor disputes, power outages, human error, adverse
weather conditions or natural disasters, could materially adversely affect our
business.

Relying on our centralized fulfillment center could expose us to losing
revenue.

Prompt and efficient fulfillment of our customers' orders is critical to
our business. Our facility in Cincinnati, Ohio handles our fulfillment
functions and some customer-service related operations, such as returns
processing. Approximately 90% of our orders are filled and shipped from the
Cincinnati facility. The balance is shipped directly from suppliers. Because we
rely on a centralized fulfillment center, our fulfillment functions could be
severely impaired in the event of fire, extended adverse weather conditions, or
natural disasters. Because we recognize revenue only when we ship orders,
interruption of our shipping would diminish our revenues.

Our costs could be increased by overstocks and merchandise returns, as well as
by our strategy of offering branded products.

An important part of our strategy is to feature branded products. These
products are sold under our brand names and are manufactured to our
specifications. We expect our reliance on branded merchandise to increase. To
be successful, we must periodically update and expand the product offerings for
our catalogs and websites. The use of branded merchandise requires us to incur
costs and risks relating to the design and purchase of products, including
submitting orders earlier and making longer initial purchase commitments.

In addition, the use of branded merchandise limits our ability to return
unsold products to vendors, which can result in higher markdowns in order to
sell excess inventory. Our commitment to customer service typically results in
more emphasis being placed on keeping a high level of merchandise in stock so
we can fill orders immediately. Consequently, we run the risk of having excess
inventory, which may also contribute to higher markdowns. Our failure to
successfully execute a branded merchandise strategy or to achieve anticipated
profit margins on these goods, or a higher than anticipated level of
overstocks, may materially adversely affect our revenues.

We offer our customers liberal merchandise return policies. Our financial
statements include a reserve for anticipated merchandise returns, which is
based on historical return rates. It is possible that actual returns may
increase as a result of factors such as the introduction of new merchandise,
new product offerings, changes in merchandise mix or other factors. Any
increase in our merchandise returns will correspondingly reduce our revenues.

Our sales could be negatively affected if we are required to charge additional
taxes on purchases.

We generally collect sales taxes on our internet and catalog sales only
on sales to residents of the state in which Gaiam is headquartered, where
orders are fulfilled or where Gaiam has a location. We currently collect sales
taxes on internet and catalog sales in Colorado, California and Ohio. Federal
laws currently limit the imposition of state and local taxes on internet-
related sales. However, there is a possibility that Congress may not renew this
legislation in 2001. If Congress chooses not to renew this legislation, state
and local governments would be free to impose taxes on electronically purchased
goods, which could adversely affect us. Due to the high level of uncertainty
regarding the imposition of taxes on electronic commerce, a number of states,
as well as a Congressional advisory commission, are reviewing appropriate tax
treatment for companies engaged in e-commerce. Such proposals, if adopted,
could substantially impair the growth of e-commerce and could adversely affect
our opportunity to derive financial benefit from these activities.

Many states have attempted to require that out-of-state direct marketers
collect sales and use taxes on the sale of merchandise shipped to its
residents. If Congress enacts legislation permitting states to impose sales or
use tax obligations on out-of-state direct

marketing companies, or if other changes require us to collect additional sales
or use taxes, these obligations would make it more expensive to purchase our
products and would increase our administrative costs. Audits by state tax
authorities could give rise to a retroactive assessment for tax liabilities if
it was determined we had sufficient activities in that state. State sales tax
laws typically provide for a lengthy statute of limitations, and if we were
retroactively assessed for taxes, the assessment could adversely affect our
business.

Postage and shipping costs may increase and therefore increase our expenses.

We ship our products, catalogs, and lifestyle publications to consumers
and the cost of shipping is a material expenditure. Postage and shipping prices
increase periodically and can be expected to increase in the future. Any
inability to secure suitable or commercially favorable prices or other terms
for the delivery of our merchandise and catalogs could have a material adverse
effect on our financial condition and results of operations.

Our founder and chief executive officer Jirka Rysavy controls Gaiam.

Mr. Rysavy holds 100% of Gaiam's 5,400,000 outstanding shares of class B
common stock. The shares of class B common stock are convertible into shares of
class A common stock at any time. Each share of class B common stock has ten
votes per share, and each share of class A common stock has one vote per share,
although pursuant to a voting agreement between Gaiam and Mr. Rysavy, the class
B common stock is limited to 49% of the total votes and all shares over this
percentage are voted proportionately with the class A common stock. Mr. Rysavy
also owns 2,686,200 shares of class A common stock and options to purchase
400,000 shares of class A common stock (of which options to purchase 68,000
shares of common stock are exercisable within 60 days). After giving effect to
the issuance of class A common stock in the offering, Mr. Rysavy will
beneficially own approximately 59.8% of the outstanding shares of Gaiam common
stock, assuming Mr. Rysavy's class B common stock was converted into class A
common stock. In addition, he will also have approximately 65.8% of the total
votes. As a result, Mr. Rysavy will be able to exert substantial influence over
Gaiam and to control matters requiring approval by the shareholders of Gaiam,
including the election of directors, increasing our authorized capital stock,
our dissolution, the merger or sale of our assets and the general affairs of
Gaiam. This control by Mr. Rysavy may discourage transactions involving a
change of control of Gaiam.

The price of our class A common stock may be subject to wide fluctuations and
may trade below the offering price.

The market price of our shares after the offering may vary from the
offering price and could be subject to wide fluctuations in response to factors
such as the future issuance of shares as well as the following factors that are
beyond our control:

-- quarterly variations in our operating results;

-- operating results that vary from the expectations of securities
analysts and investors;

-- changes in expectations as to our future financial performance,
including financial estimates by securities analysts and investors;

-- announcements by third parties of significant claims or proceedings
against us;

-- strategic moves by us or our competitors, such as acquisitions or
restructurings; and

-- stock market price and volume fluctuations.

Shares eligible for public sale after this offering could adversely affect our
stock price.

Sales of a substantial number of shares in the public market following
this offering, or the perception that sales could occur, could adversely affect
the market price for our shares and impair our ability to raise equity capital
in the future. Immediately after this offering 8,165,557 shares of class A
common stock and 5,400,000 shares of class B common stock (which are
immediately convertible into 5,400,000 shares of class A common stock) will be
outstanding. Of this number, approximately 4,500,000 shares will be freely
tradeable, and approximately 3,700,000 additional shares of class A common
stock and all shares of class B common stock are eligible for sales under Rule
144 of the Securities Act. Please see "Shares Eligible for Future Sale."

FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve risks
and uncertainties. These statements refer to our future plans, objectives,
expectations and intentions. We use words such as "anticipates," "believes,"
"plans," "estimates," "expects," "future," "intends," "strive" and similar
expressions to identify forward-looking statements. These forward-looking
statements involve risks and uncertainties. Gaiam's actual results could differ
materially from those anticipated in these forward-looking statements, as a
result of certain factors, as more fully described in "Risk Factors" and
elsewhere in this prospectus. We caution you that no forward-looking statement
is a guarantee of future performance, and you should not place undue reliance
on these forward-looking statements which reflect our management's view only as
of the date of this prospectus. We undertake no obligation to update any
forward-looking information.

USE OF PROCEEDS

The net proceeds to Gaiam from the sale of the shares in this offering
are estimated to be approximately $29.6 million, giving effect to the sale by
Gaiam of 2,200,000 shares at an assumed public offering price of $14.80 per
share and after deducting the estimated underwriting discounts and offering
expenses payable by Gaiam.

We intend to use approximately $10 million of the net proceeds of the
offering to reduce the amount outstanding under our Wells Fargo Bank West N. A.
revolving line of credit and to repay debt we assumed in connection with the
Real Goods Trading Corporation merger. Our revolving line of credit extends
through June 30, 2003 and bears interest at the lower of prime rate less 0.5%
or LIBOR plus 2.75%.

We plan to use the remaining proceeds to fund expansion of our media
channel, launch new products and for working capital and general corporate
purposes. We may also use a portion of the net proceeds to make acquisitions or
strategic minority interest investments. However, we currently have no
commitments or agreements and are not involved in negotiations with respect to
acquisitions. Pending these uses, we will invest the net proceeds of this
offering in short-term, interest-bearing, investment-grade securities. Please
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations."

PRICE RANGE OF COMMON STOCK

Our shares have been quoted on the Nasdaq National Market under the
symbol "GAIA" since October 29, 1999. Prior to that time, there was no public
market for the shares. The following table sets forth, for the period
indicated, the high and low bid prices per share of the shares as reported on
the Nasdaq National Market:

High Low
------ ------

1999
Fourth Quarter (commencing October 29, 1999).................. $18.25 $ 5.38

2000
First Quarter................................................. $19.00 $13.92
Second Quarter................................................ $24.69 $14.00
Third Quarter................................................. $19.00 $15.00
Fourth Quarter................................................ $18.25 $14.63

2001
First Quarter................................................. $15.75 $ 9.38
Second Quarter................................................ $16.00 $ 9.40
Third Quarter (through July 20, 2001)......................... $15.29 $13.14

On July 20, 2001, the reported last sale price of our class A common
stock on the Nasdaq National Market was $14.80. As of June 30, 2001, there were
9,086 stockholders of record of Gaiam's class A common stock and one
stockholder of record of Gaiam's class B common stock.

DIVIDEND POLICY

Gaiam has never declared or paid any cash dividends on its capital stock.
We currently intend to retain earnings, if any, to support our growth strategy
and do not anticipate paying cash dividends in the foreseeable future. In
addition, our bank credit agreement prohibits the payment of any dividends to
our shareholders.

CAPITALIZATION

The following table sets forth the capitalization of Gaiam as of March
31, 2001 on an actual basis and as adjusted to reflect the sale by Gaiam of
2,200,000 shares in this offering at an assumed public offering price of $14.80
per share, less the underwriters' discounts and commissions and estimated
offering expenses, and the application of the estimated net proceeds therefrom.
See "Use of Proceeds."

You should read this information together with our consolidated financial
statements and the notes to those statements appearing elsewhere in this
prospectus.

March 31, 2001
------------------
Pro Forma
As
Actual Adjusted
------- ---------
(Unaudited)

Long-term debt and capital leases, less current portion(1).. $ 6,780 $ 261
Stockholders' equity:
Class A Common Stock, $0.0001 par value; 150,000,000
shares authorized and 5,958,505(2) shares issued and
outstanding (actual); 8,158,505(2) shares outstanding
(pro forma)............................................. 1 1
Class B Common Stock, $0.0001 par value; 50,000,000
shares authorized and 5,400,000 shares issued and
outstanding (actual and pro forma)...................... -- --
Additional paid-in capital.................................. 15,486 45,117
Deferred compensation....................................... (405) (405)
Retained earnings........................................... 7,086 7,086
------- -------
Total stockholders' equity............................. $22,168 $51,799
------- -------
Total capitalization................................... $28,948 $52,060
======= =======

--------

(1) Gives effect to the repayment of $6.5 million of long-term debt from the
proceeds of this offering, which was outstanding as of March 31, 2001.
Gaiam has incurred approximately $3.5 million of additional long-term debt
as of June 30, 2001, which shall also be repaid with the proceeds from this
offering.

(2) Excludes an aggregate of 1,568,290 shares issuable pursuant to options and
warrants outstanding as of June 30, 2001.

SELECTED CONSOLIDATED FINANCIAL DATA

The selected statement of operations data for the years ended December
31, 1998, 1999 and 2000 and balance sheet data as of December 31, 1999 and 2000
set forth below are derived from Gaiam's audited consolidated financial
statements, which appear elsewhere in this prospectus. The selected statement
of operations for the years ended December 31, 1996 and 1997 and balance sheet
data as of December 31, 1996, 1997 and 1998 set forth below are derived from
Gaiam's audited consolidated financial statements. The selected balance sheet
data as of March 31, 2001 and selected statement of operations data for the
three-month periods ended March 31, 2000 and 2001 set forth below are derived
from Gaiam's unaudited consolidated financial statements as of March 31, 2001
and for the three-month periods ended March 31, 2000 and 2001, which appear
elsewhere in this prospectus. In the opinion of management, the unaudited
consolidated financial statements include all adjustments, consisting only of
normal recurring accruals and adjustments, necessary for a fair presentation of
the financial position and results of operations for these unaudited periods.
The historical operating results are not necessarily indicative of the results
to be expected for any other period. You should read the following selected
consolidated financial data in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Gaiam's
consolidated financial statements and related notes, included elsewhere in this
prospectus.

SELECTED CONSOLIDATED FINANCIAL DATA

(Amounts in thousands, except per share data)

Three Months
Year Ended December 31, Ended March 31,
------------------------------------------- ----------------
1996 1997 1998 1999 2000 2000 2001
------- ------- ------- ------- ------- ------- -------
(Unaudited)

Statement of Operations
Data:
Net revenues............ $14,801 $19,898 $30,739 $45,725 $60,588 $12,558 $17,672
Costs of goods sold..... 6,762 8,462 13,174 18,176 23,793 4,922 6,848
------- ------- ------- ------- ------- ------- -------
Gross profit............ 8,039 11,436 17,565 27,549 36,795 7,636 10,824
Expenses:
Selling and operating.. 9,253 10,427 14,186 22,338 27,310 6,064 8,539
Corporate, general and
administration........ 1,218 1,575 2,394 3,087 5,057 1,116 1,550
------- ------- ------- ------- ------- ------- -------
Total expenses........ 10,471 12,002 16,580 25,425 32,367 7,180 10,089
------- ------- ------- ------- ------- ------- -------
Operating income
(loss)................. (2,432) (566) 985 2,124 4,428 456 735
Other income (expense)
(1).................... 2,984 1,583 388 606 (283) (123) 68
------- ------- ------- ------- ------- ------- -------
Income before income
taxes and minority
interest............... 552 1,017 1,373 2,730 4,145 333 803
Income taxes............ (212) (363) (251) (1,063) (1,556) (125) (301)
Minority interest....... -- -- (262) 51 60 (5) (83)
------- ------- ------- ------- ------- ------- -------
Net income.............. $ 340 $ 654 $ 860 $ 1,718 $ 2,649 $ 203 $ 419
======= ======= ======= ======= ======= ======= =======
Net income per share
Basic.................. $ 0.04 $ 0.08 $ 0.11 $ 0.20 $ 0.24 $ 0.02 $ 0.04
======= ======= ======= ======= ======= ======= =======
Diluted................ $ 0.04 $ 0.08 $ 0.11 $ 0.19 $ 0.23 $ 0.02 $ 0.04
======= ======= ======= ======= ======= ======= =======
Shares outstanding
Basic.................. 8,040 8,040 8,073 8,785 10,858 10,846 11,206
Diluted................ 8,040 8,040 8,119 9,119 11,525 11,505 11,563

December 31, March 31,
------------------------------------------- ----------------
1996 1997 1998 1999 2000 2000 2001
------- ------- ------- ------- ------- ------- -------
(Unaudited)

Balance Sheet Data:
Cash.................... $ 380 $ 1,612 $ 1,410 $ 3,877 $ 8,579 $ 2,063 $ 6,374
Securities available-
for-sale (2)........... 56 4,828 1,634 -- -- -- --
Working capital
(deficiency)........... (1,838) 5,226 (81) 5,911 15,269 2,290 11,312
Total assets............ 6,256 10,774 16,677 27,260 48,477 29,445 59,118
Long-term debt (net of
current maturities).... 89 42 299 2,109 5,770 2,083 6,780
Stockholders' equity
(2).................... 920 4,736 3,661 14,951 18,111 15,154 22,168

--------
(1) Other income in 1996, 1997, 1998 and 1999 primarily reflects income from
sale of securities available-for-sale.
(2) Securities valued at fair market value in 1996, 1997 and 1998.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of Gaiam's financial condition and
results of operations should be read in conjunction with the consolidated
financial statements and related notes included elsewhere in this prospectus.

Overview

Gaiam is a lifestyle company providing a broad selection of information,
products and services to customers who value natural health, personal
development and renewable energy. Gaiam was incorporated in Boulder, Colorado
in 1988. In 1995, Gaiam began expanding nationally and making acquisitions. In
1996, Gaiam made a large investment in infrastructure and operating systems to
support its rapid growth. In 1998, a team of key executives joined Gaiam to
help facilitate future growth. From 1996 to 2000, our revenues increased from
$14.8 million to $60.6 million.

Gaiam's business model is evolving as evidenced by the increase in the
percentage of our revenues attributable to our business-to-business segment and
the launch of our internet channel. During 1998, business-to-business revenues
accounted for approximately 13% of our revenues, while in 2000 this segment's
revenues increased to approximately 28% of total revenue. In addition, Gaiam's
gross margin continues to increase because we are developing more proprietary
merchandise, on which we have better margins, and negotiating better pricing
from our vendors due to volume discounts.

In June 2000, Whole Foods Market, Inc. and Gaiam merged their internet
properties into Gaiam.com, Inc. Gaiam owns 50.1% of Gaiam.com, Whole Foods
Market owns 35% and the remainder is owned by various venture capital funds.
Gaiam.com is the exclusive e-commerce site for both Gaiam and Whole Foods
Market. Whole Foods Market and Gaiam have also entered into a 10 year joint
marketing agreement to promote each other's business and share customer data.
The companies are presenting Gaiam's lifestyle products in a store-within-a-
store concept in Whole Foods Market's larger stores.

In January 2001, we acquired Real Goods Trading Corporation in a merger.
In the merger, each shareholder of Real Goods received one share of class A
common stock for each 10 shares of Real Goods held. We have already
consolidated a majority of Real Goods' operations into our infrastructure,
significantly reducing operating expenses. We have closed Real Goods' Santa
Rosa headquarters, Ukiah distribution center and call center. We have also
improved the gross profit margin through the introduction of our proprietary
products, through our purchasing power and by streamlining the Real Goods
product offering.

Also in the first quarter of 2001, we acquired the Selfcare.com and
Gaia.com URLs, as well as selected inventory of Medical SelfCare from the
assignee for the benefit of its creditors.

Results of Operations

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

Three Months
Ended
Year Ended December 31, March 31,
--------------------------------- ------------
1996 1997 1998 1999 2000 2000 2001
----- ----- ----- ----- ----- ----- -----

Net revenues.................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Costs of goods sold........... 45.7 42.5 42.9 39.8 39.3 39.2 38.7
----- ----- ----- ----- ----- ----- -----
Gross profit.................. 54.3 57.5 57.1 60.2 60.7 60.8 61.3
Expenses:
Selling and operating....... 62.5 52.4 46.1 48.8 45.1 48.3 48.3
Corporate, general and
administrative............. 8.2 7.9 7.8 6.7 8.3 8.9 8.8
----- ----- ----- ----- ----- ----- -----
Total expenses............ 70.7 60.3 53.9 55.5 53.4 57.2 57.1
----- ----- ----- ----- ----- ----- -----
Income (loss) from
operations................... (16.4) (2.8) 3.2 4.7 7.3 3.6 4.2
Other income (expense), net... 20.1 8.0 1.3 1.3 (0.4) (1.0) (0.3)
----- ----- ----- ----- ----- ----- -----
Income before income taxes and
minority interest............ 3.7 5.2 4.5 6.0 6.9 2.6 4.5
Provision for income taxes.... (1.4) (1.8) (0.8) (2.3) (2.6) (1.0) (1.7)
Minority interest in net
income of consolidated
subsidiary, net of tax....... 0.0 0.0 (0.9) 0.1 0.1 0.0 (0.5)
----- ----- ----- ----- ----- ----- -----
Net income................ 2.3% 3.4% 2.8% 3.8% 4.4% 1.6% 2.4%
===== ===== ===== ===== ===== ===== =====

Three months ended March 31, 2001 compared to three months ended March 31,
2000

Revenues increased 40.7% to $17.7 million for the three months ended
March 31, 2001 from $12.6 million during the three months ended March 31, 2000.
Gaiam's internal growth rate was 21%, fueled primarily by the growth in sales
of Gaiam's proprietary products.

Gross profit, which consists of revenues less cost of sales (primarily
merchandise acquisition costs and in-bound freight) increased 41.7% to $10.8
million for the first quarter of 2001 from $7.6 million during the same period
in 2000. As a percentage of revenue, gross profit increased to 61.3% in the
first quarter of 2001 from 60.8% in the first quarter of 2000. This increase in
gross profit percentage was primarily the result of Gaiam's continuing efforts
to increase the number of proprietary products offered, on which Gaiam has
better margins than other products.

Selling and operating expenses, which consist primarily of sales and
marketing costs, commission and fulfillment expenses, increased 40.8%,
consistent with the revenue increase of 40.7%, to $8.5 million for the three
months ended March 31, 2001 from $6.1 million for the same period in 2000. As a
percentage of revenues, selling and operating expenses were 48.3% for the
comparable periods in both 2001 and 2000.

Corporate, general and administrative expenses increased to $1.6 million
during the first quarter of 2001, from $1.1 million during 2000, primarily as a
result of Gaiam's growth.

As a percentage of revenues, general and administrative expenses decreased to
8.8% in the first quarter of 2001 from 8.9% for the same period in 2000.

Operating income, as a result of the factors described above, increased
61.1% to $735,365 for the three months ended March 31, 2001, from $456,359 for
the comparable period in 2000.

Gaiam recorded $67,698 in other income for the three months ended March
31, 2001 compared to $122,945 in other expense for the three month ended March
31, 2000.

Minority interest in net income of consolidated subsidiaries was $82,645
during the first quarter of 2001, compared to $4,992 during the first quarter
of 2000.

Income tax provision increased to $301,390 for the three months ended
March 31, 2001 from $125,130 for the comparable period in 2000. The effective
tax rate on pre-tax income for both periods was 37.5%.

Net income, as a result of the factors described above, increased 106.1%
to $419,028 for the three months ended March 31, 2001, from $203,292 for the
three months ended March 31, 2000.

Year ended December 31, 2000 compared to year ended December 31, 1999:

Revenues increased 32.5% to $60.6 million in 2000 from $45.7 million in
1999. Gaiam's internal growth rate was 24%, fueled primarily by sales to retail
chains and by our internet business. Business-to-business revenues grew 50.3%
to $16.8 million in 2000 from $11.2 million in 1999.

Gross profit increased 33.6% to $36.8 million in 2000 from $27.5 million
during 1999. As a percentage of revenue, gross profit increased to 60.7% in
2000 from 60.2% in 1999. This was primarily attributable to the growth of our
proprietary product offerings, on which we have better margins, which
constituted 37% of sales in 2000, up from 24% in 1999.

Selling and operating expenses increased 22.3%, which is less than the
revenue increase of 32.5%, to $27.3 million in 2000 from $22.3 million in 1999.
As a percentage of revenues, selling and operating expenses decreased to 45.1%
in 2000 from 48.8% in 1999.

Corporate, general and administrative expenses increased to $5.1 million
for 2000 from $3.1 million in 1999. As a percentage of revenues, general and
administrative expenses increased to 8.3% in 2000 from 6.7% in 1999, primarily
as a result of an increase in depreciation expense and the expenses associated
with being a public company.

Operating income, as a result of the factors described above, increased
108.4% to $4.4 million in 2000 from $2.1 million in 1999.

Gaiam recorded $73,947 in other expense during 2000, compared to other
income of $971,159 in 1999. During 1999, Gaiam recognized gains on the sales of
marketable

securities held by Gaiam of $2.5 million. Net interest expense declined to
$209,167 in 2000 from $365,294 in 1999, primarily as a result of interest
income generated in the third and fourth quarters of 2000.

Minority interest net income was $59,706 in 2000 and $50,858 during 1999.

Income tax provision increased to $1.6 million in 2000, an effective tax
rate of 37.5% on pre-tax income, from $1.0 million in 1999.

Net income, as a result of the factors described above, increased 54.2%
to $2.6 million in 2000 from $1.7 million during 1999.

Year ended December 31, 1999 compared to year ended December 31, 1998:

Revenues increased 48.8% to $45.7 million in 1999 from $30.7 million in
1998. This revenue growth was primarily attributable to acquisitions. Gaiam's
internal growth rate was 18% for fiscal 1999. Business-to-business revenues
grew 49.4% to $11.2 million in 1999 compared to $3.8 million in 1998. The
commencement of internet sales in September 1999 resulted in $2.1 million of
revenues, with $2.0 million recognized during the fourth quarter.

Gross profit increased 56.8% to $27.5 million in 1999 from $17.6 million
in 1998. As a percentage of revenues, gross profit increased to 60.2% in 1999
from 57.1% in 1998. This was primarily attributable to increases in sales of
proprietary products, on which Gaiam has better margins than other products,
and continued better pricing from vendors due to increased volume.

Selling and operating expenses increased 57.5% to $22.3 million in 1999
compared to $14.2 million in 1998. As a percentage of revenues, selling and
operating expenses increased to 48.8% in 1999 from 46.1% in 1998, as a result
of the increased emphasis on revenue growth, particularly in the business-to-
business and internet sectors, and the sourcing, development and branding of
our proprietary products.

Corporate, general and administrative expenses increased to $3.1 million
in 1999 compared to $2.4 million in 1998. As a percentage of revenues, general
and administrative expenses decreased to 6.7% in 1999 from 7.8% in 1998.

Operating income, as a result of the factors described above, increased
115.7% to $2.1 million in 1999 from $984,843 in 1998.

Other income, comprised primarily of gains on sales of marketable
securities and interest expense, increased to $605,865 in 1999 from $388,491 in
1998. This change is primarily due to an increase in the number of securities
sold during 1999, and was partially offset by higher interest expense due to
borrowings and other extraordinary expenses associated with our initial public
offering, the acquisition of the minority interest in Living Arts, and expenses
associated with moving our warehousing and distribution center.

Minority interest expense decreased to a negative $50,858 for 1999
compared to $261,598 in 1998. The majority of this amount represents our former
minority partner's one-

third interest in the Living Arts losses, net of tax. During 1998, minority
interest of $261,598 represented the 33% Living Arts minority interest, net of
tax, for the period September 14, 1998 through December 31, 1998.

Income tax provision grew to $1.0 million in 1999, as compared to $251,955
in 1998. The decrease in the effective tax rate to 18.4% of pre-tax net income
for 1998 was primarily due to a one-time tax benefit related to the 1998
settlement of a Living Arts legal judgment incurred prior to Gaiam's ownership.

Net income, as a result of the factors described above, increased 99.9% to
$1.7 million for 1999 from $859,781 for 1998.

Selected Quarterly Operating Results

The following table sets forth our unaudited quarterly results of
operations for each of the quarters in 1999 and 2000 and the first quarter of
2001. In management's opinion, this unaudited financial information includes
all adjustments, consisting solely of normal recurring accruals and
adjustments, necessary for a fair presentation of the results of operations for
the quarters presented. You should read this financial information in
conjunction with our consolidated financial statements and related notes
included elsewhere in this prospectus. The results of operations for any
quarter are not necessarily indicative of future results of operations.

Quarter Ended
----------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1999 1999 1999 1999 2000 2000 2000 2000 2001
-------- -------- --------- -------- -------- -------- --------- -------- --------
(In thousands, except per share data)

Net revenue............. $9,495 $8,068 $10,288 $17,874 $12,558 $11,386 $13,630 $23,014 $17,672
Gross profit............ 5,639 4,849 6,222 10,839 7,636 6,730 8,129 14,300 10,824
Operating income
(loss)................. 110 (294) 393 1,915 456 295 982 2,695 735
Net income.............. 106 72 551 989 203 201 579 1,666 419
Net income (loss) per
share.................. $ 0.01 $ 0.01 $ 0.06 $ 0.10 $ 0.02 $ 0.02 $ 0.05 $ 0.14 $ 0.04
Weighted average shares
outstanding............ 8,215 8,420 8,826 10,633 11,505 11,552 11,538 11,506 11,563

Quarterly fluctuations in Gaiam's revenues and operating results are due
to a number of factors, including the timing of new product introductions and
mailings to customers, advertising, acquisitions (including costs of
acquisitions and expenses related to integration of acquisitions), competition,
pricing of products by vendors and expenditures on our systems and
infrastructure. The impact on revenue and operating results, due to the timing
and extent of these factors, can be significant. Our sales are also affected by
seasonal influences. On an aggregate basis, Gaiam experiences strongest
revenues and net income in the fourth quarter due to increased holiday
spending.

Liquidity and Capital Resources

Gaiam's capital needs arise from working capital required to fund our
operations, capital expenditures related to expansions and improvements to
Gaiam's infrastructure, development of e-commerce, and funds required in
connection with the acquisition of new businesses and Gaiam's anticipated
future growth. These capital requirements depend on numerous factors, including
the rate of market acceptance of Gaiam's product offerings, the ability to
expand Gaiam's customer base, the

cost of ongoing upgrades to Gaiam's product offerings, the level of
expenditures for sales and marketing, the level of investment in distribution
and other factors. The timing and amount of these capital requirements cannot
accurately be predicted. Additionally, Gaiam continues to evaluate possible
investments in businesses, products and technologies, and plans to expand sales
and marketing programs and conduct more aggressive brand promotions.

During the first six months of 1999, Gaiam raised $1.45 million from the
private placement of 331,429 shares of class A common stock and $1.425 million
in debentures. The privately placed shares were sold at $4.375 per share, and
the 8% convertible debentures matured on the earlier of one year after the date
of the debenture or the closing date of the initial public offering. In October
1999, Gaiam repaid $500,000 of the convertible debentures and, simultaneous
with the closing of the initial public offering, converted the remaining $1.475
million in debentures to 295,000 shares of class A common stock.

Gaiam's initial public offering of 1,705,000 shares of class A common
stock at $5.00 per share was completed in October 1999. Simultaneous with this
offering, Gaiam converted $1.475 million in debentures to 295,000 shares of
common stock, resulting in a total issuance of 2,000,000 shares. The offering's
underwriters also exercised their overallotment option for 102,861 additional
shares during November 1999. Net proceeds to Gaiam, after deducting all
commissions and expenses associated with the offering, were $6.1 million.

During April 2001, Gaiam entered into a new loan agreement with Wells
Fargo increasing Gaiam's borrowing capacity from $6.5 million to $14.9 million.
The new revolving line of credit, which extends through June 30, 2003, allows
borrowings up to $10 million based upon the collateral value of Gaiam's
accounts receivable and inventory held for resale. Wells Fargo has also
provided Gaiam with a term loan in the amount of up to $4.9 million, which
matures on July 1, 2006, and allowed a $537,228 term note assumed as part of
the Real Goods merger to remain outstanding. Borrowings under the agreement are
secured by a pledge of Gaiam's assets, and bear interest at the lower of prime
rate less 50 basis points or LIBOR plus 275 basis points. The Wells Fargo
credit agreement contains various financial covenants and also prohibits Gaiam
from paying cash dividends to shareholders.

Gaiam's operating activities provided net cash of $1.2 million for the
three months ended March 31, 2001, primarily as a result of an increase in cash
generated from net income and depreciation and amortization. Gaiam's operating
activities used net cash of $1.7 million and $4.6 million during 2000 and 1999,
respectively, and provided $904,245 of net cash in 1998. Gaiam's net cash used
in operating activities for 2000 arose primarily from increases in accounts
receivable of $4.1 million associated with growth in the business-to-business
segment, increased inventories of $1.7 million correlating to increased
business volumes, and $1.0 million to produce additional Living Arts video
titles. These uses were partially offset by net cash provided by operations of
$4.8 million. Net cash used during 1999 was primarily a result of increases in
accounts receivable and inventories associated with business-to-business
growth. Net cash provided during 1998 was primarily a result of Gaiam's net
income.

Gaiam's investing and acquisition activities used cash of $3.9 million
for the three months ended March 31, 2001. During the first quarter of 2001,
Gaiam acquired all of the stock and net assets of Earthlings, Inc. and Self
Care, Inc. for a total combined purchase price for both companies of $3.8
million, and completed its merger with Real Goods Trading Corporation. Gaiam's
investing activities provided net cash of $2.9 million during 2000 and used
cash of $2.4 and $1.3 million during 1999 and 1998, respectively. In June 2000,
Gaiam sold 6,000 shares of Redeemable Class A preferred stock in Gaiam.com,
Inc. at a price of $1,000 per share for an aggregate price of $6 million. On
June 30, 2000, Gaiam and Whole Foods Market, Inc. merged their internet
businesses into Gaiam.com, Inc. Gaiam owns 50.1% of Gaiam.com, Whole Foods
Market currently owns 35% and the remainder is owned by various venture capital
funds. As part of this transaction, Whole Foods Market, through its subsidiary,
contributed $6 million in cash plus other assets to Gaiam.com. During 2000,
Gaiam used approximately $8.7 million primarily for the Gaiam.com website, the
purchase of a 160 acre conference resort in Paulden, Arizona (Gaiam Yoga
Center), and additional infrastructure improvements to support Gaiam's growth.
During 1999, Gaiam generated $2.5 million from the sale of marketable
securities and used $2.7 million primarily for its acquisitions. Gaiam also
used $2.2 million primarily to expand and upgrade the internet, computer and
telecommunications systems. During 1998, Gaiam used cash to purchase a majority
interest in Living Arts.

During the three months ended March 31, 2001, Gaiam's financing
activities provided $490,290 in cash, as borrowing under Gaiam's line of credit
agreement increased $500,000. Gaiam's financing activities provided net cash of
$3.5 million during 2000, primarily from increased borrowings on Gaiam's line
of credit. During 1999, Gaiam's financing activities generated $9.5 million in
net cash, primarily from the initial public offering. During 1998, Gaiam's
financing activities generated $175,300, which resulted from the private
placement of shares and debentures, net of the reduction in other outstanding
debt.

We believe our available cash, cash expected to be generated from
operations, and borrowing capabilities will 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, unforeseen operational
difficulties or other factors.

In the normal course of our business, we investigate, evaluate and
discuss acquisition, joint venture, majority and minority investment, strategic
relationship and other business combination opportunities in the LOHAS market.
In the event of any future investment, acquisition or joint venture
opportunities, we may consider using then-available liquidity, issuing equity
securities or incurring additional indebtedness.

Quantitative and Qualitative Disclosure About Market Risk

We do not believe that any of our financial instruments have significant
risk associated with market sensitivity. We are not exposed to financial market
risks from changes in foreign currency exchange rates and are only minimally
impacted by changes in interest rates. Borrowings under our bank credit
facility are at a variable rate of interest, and

based on the current level of borrowings, we experience only modest changes in
interest expense when market interest rates change. However, in the future, we
may enter into transactions denominated in non-U.S. currencies or increase the
level of our borrowings, which could increase our exposure to these market
risks. We have not used, and currently do not contemplate using, any derivative
financial instruments.

OUR BUSINESS

Gaiam

Gaiam has established itself as a leading lifestyle brand, information
resource and authority in the LOHAS market and seeks to become a unifying
symbol of the emerging LOHAS lifestyle. Our lifestyle brand is built around our
ability to develop and offer content, products and solutions to consumers in
the LOHAS market. Our content forms the basis of our proprietary products,
which yield our highest margins, and drives demand for parallel product and
service offerings. We market our products and services direct-to-consumers and
business-to-business through five sales channels: our catalogs, the internet,
retailers, media and corporate accounts. We distribute our products in each of
these sales channels from a single fulfillment center. Gaiam's operations are
vertically integrated from content creation, through product development and
sourcing, to customer service and fulfillment.

The LOHAS Market

The LOHAS market, which represented $227 billion in sales in 2000
according to Natural Business Communication, consists of five main sectors:

. Sustainable Economy. Renewable energy, energy conservation, recycled
goods, environmental management services, sustainable manufacturing
processes and related information and services.

. Healthy Living. Natural and organic foods, dietary supplements,
personal care products and related information and services.

. Alternative Healthcare. Health and wellness solutions and
alternative health practices.

. Personal Development. Solutions, information, products and
experiences relating to mind, body and spiritual development.

. Ecological Lifestyles. Environmentally friendly cleaning and
household products, organic cotton clothing and bedding, and eco-
tourism.

Gaiam participates in all five sectors of the LOHAS industry.

Our Products

We currently stock over 7,000 SKUs. Our best selling products, by LOHAS
sector, are as follows:

Sustainable Alternative Personal Ecological
Economy Healthy Living Healthcare Development Lifestyles
---------------- ---------------- ---------------- ---------------- ----------------

Solar Panels and Air Filters Natural Lighting Yoga Information Natural Cleaners
Accessories and Accessories

Energy Systems Water Filters Back and Neck Pilates Organic Cotton
Care Products Information and Bedding
Accessories

Energy Efficient Personal Air Massage Meditation Organic Cotton
Lighting Supply Accessories Information and Towels
Accessories

Energy EMF Filters Stress Relief Fitness Organic Cotton
Information Equipment Clothing

Evaporative Personal Care Allergy and Pain Performance Wear Recycled
Coolers Products Relief Household Paper
Products

Intertie Systems Natural Beauty Sleep Enhancers Personal Growth Natural Garden
Products Information Products

Composters Whole Foods Wellness Kids Fitness Non-Toxic Pest
Brand Information Products and Control
Supplements Information

Air Dryers Natural Pet Care Aroma Therapy Relaxation Music Green Cotton
Home Accessories

Our Sales Channels

We conduct our direct-to-consumer business through our catalogs, the
internet and media. Our business-to-business customers are primarily retailers,
corporate accounts and the media.

. Catalogs

Gaiam offers a variety of LOHAS products directly to the consumer through
our catalogs and through consumer lifestyle publications such as Natural Home,
Self, Shape and Yoga Journal. We produce catalogs in all sectors of LOHAS,
using our sub-brands Gaiam Harmony (ecological lifestyles and healthy living),
Gaiam Living Arts (personal development), Gaiam Innerbalance (alternative
healthcare and healthy living), and Gaiam Real Goods (sustainable economy). Our
direct customer file has grown from approximately 300,000 as of December 31,
1996 to over 1.7 million as of the end of May 2001.

. Internet

We use the internet to sell our products and to provide information on
the LOHAS lifestyle. We currently offer over 7,000 SKUs on our website,
www.gaiam.com. We promote our website through our visual media, catalogs, print
publications, and product packaging. A key component of our internet approach
is to provide customer support for internet sales from our in-house call
center. According to a Jupiter Communications study, 90% of on-line customers
prefer human interaction when they require customer service. This is
particularly important for Gaiam because the use of many of our products is
enhanced by the extensive product education and information that we make
available online and through customer service.

. Retailers

Since the inception of our retailer channel in 1998, we have increased
its breadth and diversity, expanding our coverage to over 23,000 stores in the
United States as of the end of May 2001. Gaiam products currently are sold in a
variety of leading retailers, including lifestyle stores such as Discovery
Channel Stores and The Walking Company; women's beauty stores such as Ulta and
Origins; Sporting Goods Chains such as Sports Authority and Big 5 home
furnishing stores such as Bed, Bath and Beyond; natural food stores such as
Whole Foods Market; sporting goods stores such as Dick's and Galyan's; book
stores such as Borders and Barnes & Noble; music stores such as Musicland and
Wherehouse Music; mass merchants such as Target, Kohl's and Wal-Mart; and e-
tailers such as Amazon.com. A number of these retailers display our products in
store-within-a-store Gaiam lifestyle shops. We believe we have an opportunity
to become the single source solution for LOHAS products for retail accounts. In
addition, since entering the Canadian market in May of 2000, we have expanded
to over 2,500 stores as of the end of May 2001.

. Media

Gaiam produces information and programming targeted to consumers who
value natural health, personal development and renewable energy. Currently,
thirteen of our programs are broadcast in the United States and five are
broadcast internationally. Our programs are also available in approximately
600,000 hotel rooms in North America through on-demand visual media programming
available in such hotels as Four Seasons, Hyatt, InterContinental, Sheraton and
Westin. Our media partners include the Discovery Channel, Universal Studios and
On Command. Gaiam also publishes print media on personal development,
alternative healthcare and sustainable living and operates three music labels
with approximately 150 titles.

. Corporate Accounts

Gaiam provides products and services to businesses that are considering
renewable energy solutions or desire healthy and natural alternatives to
traditional products or processes. Such products and services include
environmental reviews, organic cotton robes and bedding, and solar-powered
safety and security systems. In addition, we have developed a line of
promotional products in organic cotton that includes t-shirts, sweatshirts,
caps and bags and other similar products for customers such as Mercedes Benz
and Aveda.

We have a design and consulting service for corporate accounts that
assesses their energy needs and makes recommendations for more efficient
solutions. We have provided our consulting services to clients including The
White House, NASA, Disney, Sony, Fetzer Winery, AT&T, the U.S. Departments of
Energy and Defense and the Government of Brazil. We expect increased demand for
this service because of national energy policy concerns and the ongoing energy
crisis in California.

Our Strategy

. Strengthen Our Lifestyle Brand

Our goal is to maintain the Gaiam brand as an authority in the LOHAS
market and to establish Gaiam as a unifying symbol of the emerging LOHAS
lifestyle. We plan to strengthen the Gaiam brand by growing our media channel,
increasing our marketing efforts, strengthening relationships with retailers,
and increasing the breadth of our proprietary product and audio, video and
print media offerings. We intend to maintain our commitment to a high level of
customer service. We maintain a "no-risk guarantee" policy, whereby a customer
is provided a full refund for products that are returned at any time, for any
reason. Our products, services and information generally bear the Gaiam symbol.

. Capitalize on Our Multi-channel Approach

Our multi-channel approach makes purchasing our lifestyle products
convenient regardless of the channel customers prefer. In our direct-to-
consumer business we are open 24 hours a day, offering our entire selection of
products on our internet site.

In our business-to-business segment, we are expanding our retail
presence. We have expanded to 25,500 current retail points and we are building
store-within-a-store Gaiam lifestyle shops in a variety of stores, including
Whole Foods Markets, Discovery Channel Stores, Dick's and Galyan's. We are
expanding into women's beauty stores such as Ulta and Origins, sporting goods
chains such as Big 5, home furnishing stores such as Bed, Bath and Beyond and
mass merchants such as Target and Wal-Mart. Our Gaiam Organix line is being
launched in August 2001 in department and specialty stores such as Jacobsons
and Fred Segal.

Our media channel, especially television broadcast and on-demand cable
programming, enables us to reach customers who might not be familiar with Gaiam
through our other sales channels.

. Expand Our Proprietary Product Selection

Our proprietary products, which we introduced in 1997, represented 40% of
our revenues in the first quarter of 2001. These products carry a higher margin
and distinguish us from many of our competitors. We now offer over 2,000 SKUs
of proprietary products that range from media products to organic cotton baby
clothes. We are expanding our supply chain with overseas suppliers in Europe
and South America and are continuing to develop and source new products in each
of the five LOHAS sectors.

Based on our success with bedding and bath products, infant clothing and
performance wear, we are planning to offer these products into our business-to-
business segment under the Gaiam Organix brand. We believe the demand for
naturally processed organic cotton clothing and home furnishing is increasing,
and we have an opportunity to increase our brand presence in our current
retailers as well as add new retailers with this initiative. We plan to use our
existing store-within-a-store lifestyle presence to support this initiative.

. Broaden Our Content Through Growth of Gaiam Media

Our media channel introduces customers to Gaiam and helps to establish
Gaiam as an authority in the LOHAS market. Our visual media programs are
currently broadcast both domestically and internationally, are shown in
approximately 600,000 hotel rooms in North America and are packaged as videos,
DVDs and CDs. Our print media becomes content for national publications,
catalogs, the internet and books.

We intend to continue to expand our media content. We will add visual
media programming on wellness, longevity and sustainable living, as well as
specialty programs on pregnancy and childcare. We expect to expand
international distribution of our visual media. We also plan to develop or
acquire additional media properties in music, magazines and book publishing.

. Complement our Existing Business with Selective Strategic Acquisitions

Even though our strategy is not dependent on acquisitions, we will
consider strategic acquisitions in the LOHAS industry that complement our
existing business, especially companies with a strong brand identity and with
customer and product information databases that augment ours. Gaiam generally
allows the acquired company's management team to retain responsibility for
front-end business functions such as creative presentation and marketing, while
consolidating operational functions under the Gaiam organization to realize
economies of scale.

Our Operations

Gaiam's brand is built around a vertically integrated business strategy,
which enables us to develop content, products and solutions for our LOHAS
market consumers. From our strong focus on new content creation, we establish a
basis from which to develop additional proprietary product lines and extend our
content-based merchandise for distribution through our five sales channels from
our single fulfillment center.

. Content Creation

We have in-house production and creative services terms that designs all
of our content, packaging, branding, media and marketing pieces, as well as our
website. After identifying a topic or solution of interest to our customers,
our creative team researches an idea and identifies an expert, where
appropriate, to develop our content. We use written materials to create print
media, internet content, packaging and magazine and catalog editorials. Using
our own production capabilities and editing facilities, we produce high quality
visual media content that we distribute by broadcast, on-demand cable
programming, videotape or DVD. We develop and maintain a library of lifestyle
photography that we use primarily for our print media, website, catalogs and
packaging. We either develop or purchase our audio titles, which are comprised
primarily of relaxation music that we sell in CD form, and background music for
our visual media content.

. Product Development and Sourcing

Gaiam branded products, are sold in our five sales channels. Non-
proprietary products are only available through our catalogs and over the
internet where we initially test products before branding them and distributing
them through our other sales channels. Proprietary product sales have increased
as a percentage of our revenue from 2% in 1997 to approximately 40% in the
first quarter of 2001. We are able to leverage our product development costs
across our multiple sales channels.

Our proprietary products are designed by our product development team,
sourced both domestically and internationally by our merchandisers and produced
by our suppliers to our specifications. Our suppliers are screened for their
environmental and social responsibility before contracts are awarded. In order
to minimize risk, we have identified an alternate supplier in a separate
location for most products. No single supplier is responsible for more than 3%
of our business except our video duplication, which is done with only one
supplier to minimize production costs. However, duplicate masters of each
program are maintained in an off-site vault allowing us to be able to switch to
a new duplicator with minimal down time.

. Customer Service

Gaiam focuses on building and maintaining customer relationships that
thrive on loyalty and trust. We maintain a "no-risk guarantee" policy, whereby
a customer is provided a full refund for products that are returned at any
time, for any reason. Our in-house customer service department includes product
specialists who have specific product knowledge and assist customers in
selecting products and solutions that meet their needs. We employ telephone
routing software that directs each call to the appropriate representative. Our
policy is to ship orders no later than the next business day, which we
accomplish by stocking inventory that supports over 90% of our orders. We
believe that by offering exceptional customer service we encourage repeat
purchases by our customers, enhance our brand identity and reputation and build
stronger relationships with our customers.

. Fulfillment

During 2000, we moved from our 64,000 square foot facility into our new
208,000 square foot fulfillment center near Cincinnati, Ohio, which provides
significant capacity to support the growth of our business. This central United
States location allows us to achieve shipping cost efficiencies to most
locations. The center is also located within 30 minutes of several major
shipping company hubs. We use a supply chain management system that supports
our entire operation, including fulfillment, inventory management, and customer
service. Our fulfillment center is connected to our other facilities by a
state-of-the art voice-over-IP telecom network that allows us to maintain a
high degree of connectivity within our organization.

. Executive Team

Gaiam has an experienced team of corporate managers. Our founder and
Chief Executive Officer, Jirka Rysavy, was the founder and Chief Executive
Officer of Corporate Express, Inc., which he built to a Fortune 500 company. He
was also the founder and Chief Executive Officer of Crystal Market, Inc., which
was sold to become the first Wild Oats Markets store. Our President and Chief
Operating Officer, Lynn Powers, has over 15 years of senior management
experience in the retail industry as a Senior Vice President of Merchandising,
Marketing and Strategic Planning of Miller's Outpost, which she helped to grow
from a $25 million startup to over $500 million in revenues. Our Chief
Information Officer, Pavel Bouska, was a member of the founding team and an
officer of Corporate Express for over 10 years, serving in various positions,
including Chief Information Officer and Vice President of Information Systems.

Our Business Segments

We separate our business into two business segments: direct-to-consumer
and business-to-business. Business-to-business revenues as a percentage of
total revenues increased to 40.4% in the first quarter of 2001 from 12.5% in
1998. See Note 12 to our consolidated financial statements included in this
prospectus for further information on our segments.

Our Intellectual Property

Gaiam, Gaiam.com and various product names are subject to trademark or
pending trademark applications filed or held by Gaiam or one of our wholly- or
majority-owned subsidiaries. We also currently hold various internet domain
names relating to our brand, including gaiam.com and gaia.com. We believe these
trademarks and domain names are significant assets to our business.

Our Competitive Position

We believe that the LOHAS market is characterized by fragmented supplier
and distribution networks, and we are not aware of a dominant leader. Gaiam's
goal is to establish itself as the market leader.

Our business is evolving and competitive. Larger and better established
entities may acquire, invest in or form joint ventures with our competitors.
Many of these entities have longer operating histories and have greater
financial and marketing resources than we have. Increased competition from
these or other competitors could reduce our revenue and profits. In addition,
the smaller businesses we compete against may be able to more effectively
personalize their relationships with customers.

Because Gaiam uses multi-channel distribution for our products, we
compete with various producers of similar products and services. Our
competitors include PPI Entertainment, Goldhil Media, Greenmarketplace.com,
thousands of small, local and regional businesses, and product lines or items
that are offered by large retailers, manufacturers, publishers and media
producers.

We believe the principal competitive factors in the LOHAS market are
authenticity of information, distinctiveness of products and services, quality
of product, brand recognition and price. We believe we compete favorably on all
these relevant factors.

We expect industry consolidation to increase competition. As our
competitors grow, they may adopt aggressive pricing or inventory policies,
which could result in reduced operating margins, loss of market share and a
diminished brand franchise.

Our success also depends upon the willingness of consumers to purchase
goods and services that promote the values we espouse. While we believe our
business plan and assumptions are reasonable, we cannot assure you that the
demographic trends on which they are based will continue or that the current
levels will be sustained. The decrease of consumer interest in purchasing goods
and services that promote the values we espouse would materially and adversely
affect the growth of our customer base and revenues and, accordingly, our
financial prospects.

Our Employees

As of May 31, 2001, Gaiam, together with our wholly-owned and majority-
owned subsidiaries, employed approximately 247 persons. None of our employees
is covered by a collective bargaining agreement.

Our Facilities

The following table sets forth information relating to our principal
facilities:

Lease
Location Size Use Expiration
-------- ---- --- ----------

Boulder
County, CO 32,000 sq. ft. Headquarters and customer service March 2002
Cincinnati, OH 208,100 sq. ft. Fulfillment center March 2006
Venice, CA 9,000 sq. ft. Creative staff offices July 2005
Hopland, CA 12 acres Renewable energy demo site Owned

We have options to renew our headquarters lease. We believe our
facilities are adequate to meet our current needs and that suitable additional
facilities will be available for lease or purchase when, and as, we need them.

Regulatory Matters

There are a number of different bills under consideration by Congress and
various state legislatures that would restrict disclosure of consumers'
personal information, which may make it more difficult for Gaiam to generate
additional names for its direct marketing, and restrict a company's right to
send unsolicited electronic mail or printed materials. Although Gaiam believes
it is generally in compliance with current laws and regulations and that these
laws and regulations have not had a significant impact on our business to date,
it is possible that existing or future regulatory requirements will impose a
significant burden on us.

We generally collect internet and catalog sales taxes only on sales to
residents of the state in which Gaiam is headquartered, where orders are
fulfilled or where Gaiam has a location. Currently, Gaiam collects sales taxes
in California, Colorado and Ohio. A number of legislative proposals have been
made at the federal, state and local level, and by foreign governments, that
would impose additional taxes on the sale of goods and services over the
internet and certain states have taken measures to tax internet-related
activities. Although Congress placed a moratorium on state and local taxes on
internet access or on discriminatory taxes on electronic commerce, existing
state or local laws were expressly excepted from this moratorium. Further, once
this moratorium is lifted, some type of federal and/or state taxes may be
imposed upon internet commerce.

Our business is also subject to a number of other governmental
regulations, including the Mail or Telephone Order Merchandise Rule and related
regulations of the Federal Trade Commission. These regulations prohibit unfair
methods of competition and unfair or deceptive acts or practices in connection
with mail and telephone order sales and require sellers of mail and telephone
order merchandise to conform to certain rules of conduct with respect to
shipping dates and shipping delays. We are also subject to regulations of the
U.S. Postal Service and various state and local consumer protection agencies
relating to matters such as advertising, order solicitation, shipment deadlines
and customer refunds and returns. In addition, merchandise imported by Gaiam is
subject to import and customs duties and, in some cases, import quotas.

Legal Proceedings

We are subject to non-material legal proceedings arising in the ordinary
course of our business. We do not believe that any of these proceedings will
materially adversely affect our business.

MANAGEMENT

Executive Officers And Directors

Our executive officers and directors, their respective ages as of June
30, 2001 and their positions are as follows:

Name Age Position
---- --- --------

Jirka Rysavy............ 47 Founder, Chairman of the Board and Chief Executive Officer
Lynn Powers............. 52 President, Chief Operating Officer and Director
Pavel Bouska............ 47 Executive Vice President and Chief Information Officer
Barnet M. Feinblum...... 53 Director
John Mackey............. 47 Director
Barbara Mowry........... 53 Director
Paul H. Ray............. 61 Director

Jirka Rysavy. Founder, Chairman and Chief Executive Officer of Gaiam. He
has been Chairman since Gaiam's inception and became the full-time Chief
Executive Officer in December 1998. In 1986, Mr. Rysavy founded Corporate
Express, Inc., which, under his leadership, grew to become a Fortune 500
company supplying office and computer products and services. He was its
Chairman and Chief Executive Officer until September 1998. Mr. Rysavy also
founded and served as Chairman and Chief Executive Officer of Crystal Market,
Inc., a health foods market, which was sold in 1987 and became the first Wild
Oats Markets store. Mr. Rysavy is also a director of Whole Foods Market, Inc.

Lynn Powers. President, Chief Operating Officer and a director of Gaiam
since February 1996. From 1992 to 1996, she was Chief Executive Officer of La
Scelta, an importer of natural fiber clothing products. Before that, Ms. Powers
was Senior Vice President Marketing/Strategic Development and Vice President
Merchandising of Miller's Outpost, a specialty retailer.

Pavel Bouska. Executive Vice President and Chief Information Officer
since March 1999. He served as a director of Gaiam from 1991 until August 1999.
Prior to joining Gaiam, from June 1988 to March 1999, Mr. Bouska was an officer
and one of the founding members of Corporate Express, serving in various
positions, including Chief Information Officer and Vice President Information
Systems, responsible for system development, information technology,
operations, systems conversions and business consolidations. Prior to joining
Corporate Express, he was project leader for Software Design & Management, a
German software company subsequently acquired by Ernst & Young.

Barnet M. Feinblum. Director since October 1999. Mr. Feinblum is a
director of Horizon Organic Dairy and served as the President and Chief
Executive Officer of Horizon from May 1995 to January 2000. From July 1993
through March 1995, Mr. Feinblum was the President of Natural Venture Partners,
a private investment company. From August 1976 until August 1993, Mr. Feinblum
held various positions at Celestial Seasonings, Inc., including President,
Chief Executive Officer, and Chairman of the Board. Mr. Feinblum is also a
director of Seventh Generation, Inc.

John Mackey. Director since September 2000. Mr. Mackey has been the
Chairman and Chief Executive Officer of Whole Foods Market, Inc., the world's
largest natural food retailer, since he co-founded the company 20 years ago.
Mr. Mackey is also a director of Jamba Juice.

Barbara Mowry. Director since October 1999. From November 1997 until
February 2001, Ms. Mowry was the President and Chief Executive Officer of
Requisite Technology, a business-to-business e-commerce company specializing in
the creation and management of electronic content and catalogs. Prior to
joining Requisite Technology, Ms. Mowry was an officer of Telecommunications,
Inc. (cable television) from 1995 to 1997. In 1990, Ms. Mowry founded, and
until 1995 served as Chief Executive Officer of, The Mowry Company, a
relationship marketing firm focusing on the development of customer relations
for businesses.

Paul H. Ray. Director since October 1999. Mr. Ray is a senior partner in
Integral Partnership, a consulting firm specializing in Cultural Creative
topics. From November 1986 to December 2000, he was Executive Vice President of
American LIVES, Inc., a market research and opinion polling firm. Prior to
joining American LIVES, Mr. Ray was Chief of Policy Research on Energy
Conservation at the Department of Energy, Mines and Resources of the Government
of Canada from 1981 to 1983. From 1973 to 1981, Mr. Ray was Associate Professor
of Urban Planning at the University of Michigan. He is the author of "The
Integral Culture Survey," which first identified the Cultural Creatives
subculture.

Each director serves for a one-year term. Each officer serves at the
discretion of the Board of Directors. There are no family relationships among
any of the directors or officers of Gaiam.

Committees of the Board of Directors

Our board has standing audit and compensation committees. We have adopted
written charters for both committees.

Audit Committee. Our audit committee consists of Messrs. Feinblum and Ray
and Ms. Mowry, and each member of the committee is independent within the
meaning of applicable NASDAQ rules. Ms. Mowry serves as chairperson of the
audit committee. The audit committee oversees (a) management's maintenance of
the reliability and integrity of our accounting policies and financial
reporting and disclosure practices; (b) management's establishment and
maintenance of processes to assure that an adequate system of internal control
is functioning; and (c) management's establishment and maintenance of processes
to assure our compliance with all laws, regulations and company policies
relating to financial reporting. The audit committee held one meeting during
fiscal 2000.

Compensation Committee. Our compensation committee consists of Messrs.
Feinblum and Ray and Ms. Mowry. Mr. Feinblum serves as chairperson of the
compensation committee. The compensation committee establishes compensation
amounts and policies applicable to executive officers and establishes salaries,
bonuses and other compensation

plans and matters for executive officers of Gaiam and administers Gaiam's stock
option plans and employee stock purchase plan. The compensation committee held
four meetings during fiscal 2000.

We do not have a nominating committee, and nominations for directors are
made by our board. Our bylaws set forth certain procedures that are required to
be followed by shareholders in nominating persons for election to our board.
Generally, written notice of a proposed nomination must be received by the
Secretary of the Corporation not later than the 45th day nor earlier than the
70th day prior to the anniversary of the mailing of the preceding year's proxy
materials.

Compensation Committee Interlocks and Insider Participation

The compensation committee consisted of Messrs. Feinblum and Ray and Ms.
Mowry during fiscal 2000. None of the members of the compensation committee is
currently, or has ever been at any time since our formation, one of our
officers or employees or an officer or employee of any of our subsidiaries.
During 2000, no executive officer of Gaiam served as a member of the board of
directors or compensation committee of any entity that had one or more
executive officers serving as a member of our Board of Directors or
compensation committee.

Director Compensation

Directors who are not employees of Gaiam or its affiliates are paid a fee
of $3,000 for each meeting of our board that they attend, and a fee of $1,000
for each telephonic meeting attended. In addition, non-employee directors are
paid a fee of $500 for attendance at each committee meeting and non-employee
chairpersons of each standing committee receive an annual fee of $1,000. All
directors have elected to receive their compensation in Gaiam shares.

During 1999, each non-employee director received a stock option to
acquire 10,000 shares of class A common stock at an exercise price of $5, which
was the offering price in our initial public offering. Mr. Mackey received a
stock option to acquire 10,000 shares of class A common stock at an exercise
price of $16.375 when he joined the Board in September 2000.

Limitation of Liability and Indemnification Matters

Gaiam's charter provides indemnity to its directors and officers to the
extent permitted by Colorado law. The charter also includes provisions to
eliminate the personal liability of its directors to Gaiam and its shareholders
to the fullest extent permitted by Colorado law. Under current law, exculpation
would cover a director's breaches of fiduciary duty, except for:

. breaches of a person's duty of loyalty to Gaiam,

. instances where a person is found not to have acted in good faith,

. instances where a person received an improper personal benefit as
the result of the breach, and

. acts in violation of the Colorado Business Corporation Act.

Gaiam's bylaws provide that Gaiam will indemnify its directors, officers
and employees against judgments, fines, amounts paid in settlement and
reasonable expenses.

Executive Compensation

The following table sets forth the compensation, for the years ended
December 31, 1998, 1999 and 2000, of Gaiam's executive officers, Mr. Rysavy and
Ms. Powers. Information is also included with respect to compensation for three
of Gaiam's Vice Presidents for 1998, 1999 and 2000:

SUMMARY COMPENSATION TABLE

Annual Long Term
Compensation Compensation (1)
-------------------- ----------------
Securities
Underlying
Name and Principal Position Year Salary Bonus Options
--------------------------- ---- -------- -------- ----------------

Jirka Rysavy....................... 2000 $140,385 -- --
Chairman and Chief Executive
Officer 1999 125,000 -- 200,000
1998 -- (2) -- --

Lynn Powers........................ 2000 140,385 $100,000 90,000
President and Chief Operating
Officer 1999 125,000 -- 160,000
1998 110,009 -- --

Pavel Bouska....................... 2000 134,231 20,000 --
Chief Information Officer 1999 100,632 -- 80,000
1998 -- -- --

Janet Mathews...................... 2000 116,724 30,000 --
Vice President, Business
Development 1999 104,592 -- 20,000
1998 102,686 10,000 --

Linda West......................... 2000 96,154 15,000 --
Vice President, Merchandising 1999 88,077 -- 20,000
1998 83,076 10,000 --

--------
(1) See table below regarding stock option grants.
(2) Gaiam began compensating Mr. Rysavy in January 1999.

Stock Option Grants

The following table provides information with respect to the individual
stock option grants to the named officers under the 1999 Long-Term Incentive
Plan during fiscal year 2000. Options under the plan vest at 2% per month
during the 11th through the 60th month after the grant.

OPTION GRANTS IN LAST FISCAL YEAR

Potential
Realizable
Value at Assumed
Number of Percent of Rates of Stock
Securities Total Options Appreciation for
Underlying Granted to Exercise or Option Term (1)
Options Employees in Base Price Expiration -----------------
Name Granted (#) Fiscal Year ($/Share) Date 5%($) 10%($)
---- ----------- ------------- ----------- ---------------- ----- ---------

Lynn Powers............. 90,000 30.8% $15.25 December 6, 2007 558,745 1,302,114

--------
(1) The 5% and 10% assumed annual rates of compound stock price appreciation
over the term of the options are computed in accordance with the rules and
regulations of the Securities and Exchange Commission and do not represent
Gaiam's estimate of stock price appreciation or a projection by Gaiam of
future stock prices.

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values

The following table provides information, with respect to the named
officers, concerning the value of unexercised stock options exercisable for
Gaiam class A common stock held as of December 31, 2000. In 2000, no named
officer exercised any stock options.

Number of Shares
Underlying Value of Unexercised
Unexercised Options at In-the-Money Options
December 31, 2000 (#) at December 31, 2000 (1)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------

Jirka Rysavy................ 32,000 168,000 354,000 1,858,500
Lynn Powers................. 25,600 224,400 283,200 1,503,675
Pavel Bouska................ 12,800 67,200 141,600 743,400
Janet Mathews............... 2,000 18,000 21,875 193,125
Linda West.................. 2,000 18,000 21,875 193,125

--------
(1) The value of unexercised in-the-money options is based on the difference
between the exercise price of the individual stock options and the closing
price of $15 7/16 as reported on the NASDAQ exchange on December 31, 2000.

Employment Agreements

Gaiam does not have any employment agreements with any of its executive
officers and does not typically enter into written employment agreements with
any employees. However, Gaiam's directors, officers and managers are required
to sign a confidentiality agreement and, upon receiving a stock option grant, a
two-year non-compete agreement commencing with the date they leave Gaiam.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On October 1, 1998, Mr. Rysavy sold InnerBalance to Gaiam for a $531,000
note carrying interest at 8% per annum, due June 30, 2001. A portion of the
note was repaid in 1998. On January 1, 1999, Gaiam issued a $289,000 8%
debenture to Mr. Rysavy for the balance. This debenture was repaid in full on
June 30, 1999.

On December 7, 1998, Ms. Powers exercised warrants she received in 1996
to purchase 40,000 shares at $1.25 per share and also purchased $50,000 in
debentures issued by Gaiam. The debenture was subject to mandatory conversion
into shares simultaneous with the closing of Gaiam's initial public offering at
the initial offering price and bore interest at 8% per annum. Simultaneous with
the closing of Gaiam's initial public offering in October 1999, Ms. Powers'
debentures were automatically converted into 10,000 shares, which are
restricted securities as defined in Rule 144 under the Securities Act. Accrued
and unpaid interest was paid in cash.

Certain sales of securities available for resale made by Gaiam in 1999
were made to a company wholly owned by Mr. Rysavy at prevailing market prices
based on NASDAQ quotations. The proceeds of these sales were $538,750 in 1999.
Gaiam obtained the securities by exercising options granted by Mr. Rysavy to
Gaiam in 1993.

During 1999 and until April 2000, Gaiam subleased its fulfillment center
in Cincinnati, Ohio from a subsidiary of Corporate Express, Inc. at an annual
rental rate of approximately $205,200, which was the same rate as paid by
Corporate Express, Inc. under its lease. During 1999, Mr. Rysavy was a director
of Corporate Express and beneficially owned approximately 4.9% of the stock of
Corporate Express but did not control Corporate Express. The lease was
terminated in April 2000 in connection with Gaiam's lease of a new 208,000
square foot distribution center.

Until October 1999, Mr. Rysavy guaranteed Gaiam's line of credit with
Wells Fargo Bank (formerly Norwest Bank). The credit agreement permitted
borrowings up to $3 million (of which $1.9 million was outstanding at December
31, 1999) based upon the collateral value of Gaiam's accounts receivable and
inventory held for resale. These borrowings were secured by a pledge of Gaiam's
assets and bore interest at the prime rate plus 1%.

In 1999, Gaiam engaged the services of ccplanet.com, Inc. to develop and
implement a new web site design using the latest technology for Gaiam's direct-
to-consumer operations. Mr. Rysavy owns a majority of ccplanet's stock. Gaiam
paid ccplanet $1.2 million for work performed on the project through December
31, 1999 and an additional $3.3 million in 2000 (the new site was placed into
service during March, 2000). Gaiam made its customer database and certain
visual media available to ccplanet in exchange for fees totaling $600,000
during 1999 and $1.4 million during 2000.

In 2000, Mr. Rysavy advanced funds to Gaiam to purchase a 70% interest in
an organic clothing manufacturer. These advances, plus applicable interest,
were repaid in December 2000. Additionally, Gaiam purchased approximately
$300,000 in inventory from

Earthlings, Inc. (a related party under common ownership with Mr. Rysavy) at
Earthlings' cost. On January 5, 2001, Gaiam purchased Earthlings for $47,509.

On June 30, 2000, Whole Foods Market, Inc., a publicly traded company,
and Gaiam merged their internet properties into Gaiam.com, Inc. Gaiam owns
50.1% of Gaiam.com, Inc., Whole Foods Market owns 35% and the remainder is
owned by various venture capital funds. Gaiam is the exclusive internet site
for both Gaiam and Whole Foods Market. Whole Foods Market and Gaiam have also
entered into a 10 year joint marketing agreement to promote each other's
business and share customer data. The companies are currently testing a store-
within-a-store concept, presenting Gaiam's lifestyle products, in 21 of Whole
Foods Market's larger stores. During 2000, a subsidiary of Whole Foods Market
engaged the services of ccplanet for total consideration of $1.5 million, and
Infocenter, Inc., a company formed by Mr. Rysavy, assumed certain liabilities
of the Whole Foods Market subsidiary and received funding ($500,000 in cash and
a note in the principal amount of $3,000,000) to satisfy such liabilities.

On December 29, 2000, Self Care Holdings, Inc., a corporation owned by
Mr. Rysavy, purchased certain inventory and other assets of Medical SelfCare,
Inc. in an auction conducted in connection with an assignment for the benefit
of creditors of Medical SelfCare. On February 1, 2001, Gaiam acquired
substantially all of the inventory and assets from Self Care Holdings by
acquiring Self Care Inc., a wholly-owned subsidiary of Self Care Holdings, for
$3.9 million, an amount equal to Self Care Holdings' purchase price for the
purchased inventory and assets plus related transaction costs.

PRINCIPAL SHAREHOLDERS

The following table sets forth information regarding the beneficial
ownership of the class A and class B common stock of Gaiam by each of our
directors, executive officers and 5% shareholders who beneficially owned
shares on July 20, 2001, and as adjusted to reflect the sale of the shares
offered in this offering (assuming no exercise of the underwriters' over-
allotment option). The address for each person, except as otherwise provided,
is 360 Interlocken Blvd., Broomfield, Colorado, 80021.

Shares to be
Beneficially
Shares Beneficially Owned
Owned Prior to this After this
Offering (8) Offering (8)(9)
------------------------ --------------------------
Number of Number
Beneficial Owner Shares (10) Percent (10) of Shares(11) Percent (11)
---------------- ----------- ------------ ------------- ------------

Jirka Rysavy (1).......... 8,154,200 71.3% 8,154,200 59.8%
Lynn Powers (2)........... 145,400 2.4% 145,400 1.8%
Pavel Bouska (3).......... 122,880 2.1% 122,880 1.5%
Barnet Feinblum (4)....... 13,304 * 13,304 *
John Mackey(5)............ 90,300 1.5% 90,300 1.1%
Barbara Mowry (6)......... 7,304 * 7,304 *
Paul Ray (7).............. 7,168 * 7,168 *
All Executive Officers and
Directors (7 persons).... 8,540,556 74.0% 8,540,556 62.2%

--------
* Less than one percent

(1) Includes options held by Mr. Rysavy to acquire a total of 68,000 shares
which options have vested or will vest within 60 days of the date of
this prospectus. Mr. Rysavy, our Chairman and Chief Executive Officer,
holds all 5,400,000 outstanding shares of class B common stock and
2,686,200 shares of the class A common stock (or approximately 45% of
the outstanding shares of class A common stock). The shares of class B
common stock vote ten votes per share. Pursuant to a voting agreement
between Mr. Rysavy and Gaiam, Mr. Rysavy has agreed to limit the number
of shares of class B common stock that he votes to 49% of the combined
votes of the class B common stock and class A common stock. His
remaining shares of class B common stock are voted in proportion to the
votes of the class A common stock. See "Description of Capital Stock--
Capital Stock" for a description of the voting rights of the class B
common stock.

(2) Includes options held by Ms. Powers to acquire a total of 54,400 shares
which options have vested or will vest within 60 days of the date of
this prospectus.

(3) Includes options held by Mr. Bouska to acquire a total of 27,200 shares
which options have vested or will vest within 60 days of the date of
this prospectus, and 1,100 shares and 4,480 in options to acquire
shares, which options have vested or will vest within 60 days of the
date of this prospectus, held by Mr. Bouska's spouse, an employee of
Gaiam.

(4) Includes options held by Mr. Feinblum to acquire a total of 5,000
shares, which options have vested or will vest within 60 days of the
date of this prospectus, and 1,000 shares held by Mr. Feinblum's spouse.

(5) Includes options held by Mr. Mackey to acquire a total of 5,000 shares,
which options have vested or will vest within 60 days of the date of
this prospectus.

(6) Includes options held by Ms. Mowry to acquire a total of 5,000 shares,
which options have vested or will vest within 60 days of the date of
this prospectus.

(7) Includes options held by Mr. Ray to acquire a total of 5,000 shares,
which options have vested or will vest within 60 days of the date of
this prospectus.

(8) Each shareholder possesses sole voting and investment power with respect
to the shares listed, except as provided by applicable community
property laws or as otherwise noted. In accordance with the rules of the
Securities and Exchange Commission, each shareholder is deemed to
beneficially own any shares obtainable by him or her upon the exercise
of stock options or warrants which are currently exercisable or which
become exercisable within 60 days after the date of this prospectus, or
the conversion of convertible securities that are currently convertible
or become convertible within 60 days after the date of this prospectus.
The inclusion in this table of shares listed as beneficially owned does
not constitute an admission of beneficial ownership.

(9) The number and percentage of shares owned after this offering assumes
none of the listed shareholders will purchase additional shares in this
offering, except as otherwise indicated.

(10) The number of shares deemed outstanding prior to this offering includes
all shares of class A common stock outstanding as of June 30, 2001. In
addition, the number of shared deemed outstanding for each shareholder
includes any shares obtainable by such shareholder through the
conversion of class B common stock or through the exercise of options to
purchase shares that are exercisable within 60 days of the date of this
prospectus.

(11) The number of shares deemed outstanding after this offering includes all
shares of class A common stock outstanding as of June 30, 2001, plus the
2,200,000 shares offered pursuant to this prospectus. In addition, for
each shareholder, such number of deemed outstanding includes any shares
obtainable by such shareholder through the conversion of class B common
stock or through the exercise of options to purchase shares that are
exercisable within 60 days of the date of this prospectus.

DESCRIPTION OF CAPITAL STOCK

General

The authorized capital stock of Gaiam is 250,000,000 shares, consisting
of 150,000,000 shares of class A common stock, $.0001 par value per share,
50,000,000 shares of class B common stock, $.0001 par value per share, and
50,000,000 shares of preferred stock, par value $.0001 per share. As of June
30, 2001, there were 5,965,557 shares of class A common stock outstanding held
by 9,086 shareholders of record, options to purchase an aggregate of 1,544,290
shares, a warrant to purchase 24,000 shares and 5,400,000 shares of class B
common stock outstanding. There were no shares of preferred stock outstanding.

Although Gaiam believes the following summary description of Gaiam's
shares, class B common stock, preferred stock, Amended and Restated Articles of
Incorporation, and Amended and Restated Bylaws covers all material provisions
affecting the rights of holders of capital stock of Gaiam, this summary is not
intended to be complete and is qualified by reference to the provisions of
applicable law and to Gaiam's Amended and Restated Articles of Incorporation
and Amended and Restated Bylaws, both of which are included as exhibits to the
Registration Statement of which this prospectus is a part. See "Where You Can
Find More Information."

Capital Stock

Each holder of shares of class A common stock is entitled to one vote for
each share held on all matters submitted to a vote of shareholders. Each share
of class B common stock is entitled to ten votes on all matters submitted to a
vote of shareholders. There are no cumulative voting rights. All holders of
shares of class A common stock and shares of class B common stock vote as a
single group on all matters that are submitted to the shareholders for a vote.
Accordingly, holders of a majority of the votes of the shares of class A common
stock and shares of class B common stock entitled to vote in any election of
directors may elect all of the directors who stand for election.

Shares of class A common stock and shares of class B common stock are
entitled to equal dividends, if any, as may be declared by the Board of
Directors out of legally available funds. In the event of a liquidation,
dissolution or winding up of Gaiam, the shares of class A common stock and
shares of class B common stock would be entitled to share ratably in Gaiam's
assets remaining after the payment of all of Gaiam's debts and other
liabilities. Holders of shares of class A common stock and shares of class B
common stock have no preemptive, subscription or redemption rights, and there
are no redemption or sinking fund provisions applicable to the shares of class
A common stock and class B common stock. The outstanding shares of class A
common stock and shares of class B common stock are, and the shares of class A
common stock offered by Gaiam in this offering will be, when issued and paid
for, fully paid and non-assessable.

The class B common stock may not be transferred unless converted into
shares of class A common stock, other than certain transfers to affiliates and
family members. The

shares of class B common stock are convertible one-for-one into shares of
class A common stock, at the option of the holder of the shares of class B
common stock.

Gaiam's Board of Directors is authorized, subject to any limitations
prescribed by Colorado law, to issue at any time up to 50,000,000 shares of
preferred stock. The Board may provide for the issuance of the preferred stock
in one or more series or classes with designations, preferences, limitations
and relative rights determined by the Board without any vote or action by the
shareholders, although the Board may not issue voting preferred stock without
the consent or approval of a majority of the class B common stock. As a
result, the Board has the power to issue preferred stock with voting,
conversion and other rights and preferences that could adversely affect the
voting power or other rights of the holders of the shares. Although Gaiam has
no current plans to issue any preferred stock, the issuance of preferred stock
or of rights to purchase preferred stock could have the effect of making it
more difficult for a third party to acquire Gaiam, or of discouraging a third
party from attempting to acquire Gaiam. Such an issuance could also dilute
your voting power.

Bylaws

The Bylaws provide that shareholders may not take action without a
shareholders' meeting. The Bylaws also require advance notice of any proposal
to be brought before an annual meeting of shareholders that relates to an
amendment to the Articles of Incorporation, a merger, the sale of all or
substantially all of Gaiam's assets, the dissolution of Gaiam, or any
nomination for election of directors other than by the Gaiam board of
directors. These provisions could have the effect of delaying, deferring or
preventing a change of control of Gaiam.

Voting Agreement

Mr. Rysavy, our Chairman and Chief Executive Officer, holds all 5,400,000
outstanding shares of class B common stock and 2,686,200 shares of the class A
common stock (or approximately 45% of the outstanding shares of class A common
stock). The shares of class B common stock vote ten votes per share. Pursuant
to a voting agreement between Mr. Rysavy and Gaiam, Mr. Rysavy has agreed to
limit the number of shares of class B common stock that he votes to 49% of the
combined votes of the class B common stock and class A common stock. His
remaining shares of class B common stock are voted in proportion to the votes
of the class A common stock.

Transfer Agent and Registrar

The transfer agent and registrar for the shares is Computershare Trust
Company, Inc.

SHARES ELIGIBLE FOR FUTURE SALE

Sales of a substantial number of shares in the public market following
this offering, or the perception that sales could occur, could adversely affect
the prevailing market price for our shares. Furthermore, because no shares will
be available for sale shortly after this offering because of the contractual
and legal restrictions on resale described below, sales of a substantial number
of shares in the public market after these restrictions lapse could adversely
affect the prevailing market price and impair our ability to raise equity
capital in the future.

Upon the closing of this offering, based upon the number of shares
outstanding as of June 30, 2001, there will be 8,165,557 shares of class A
common stock (including the 2,200,000 shares sold in this offering but assuming
no exercise of the underwriters' over-allotment option) and 5,400,000 shares of
class B common stock outstanding. Of these shares, approximately 4,500,000
shares of class A common stock (including the 2,200,000 shares sold in this
offering) will be freely tradable without restriction or further registration
under the Securities Act, other than shares that are purchased by affiliates of
Gaiam as defined in Rule 144 under the Securities Act or the shares are
purchased by holders who have entered into lock-up arrangements with the
underwriters for this offering. See "--Lock-up Agreements" below. Of the
remaining shares, approximately 3,700,000 shares of class A common stock and
all 5,400,000 shares of class B common stock will be restricted securities as
defined in Rule 144 under the Securities Act or shares held by affiliates of
Gaiam. Restricted securities and shares held by affiliates may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rule 144 under the Securities Act, which rules are
summarized below.

Securities Act Rules

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated) who has beneficially owned
restricted shares for at least one year, or any affiliate, is entitled to sell,
within any three-month period a number of shares that does not exceed the
greater of:

. 1% of the then outstanding shares (approximately 82,000 shares
immediately after this offering); or

. the average weekly trading volume of the shares on the Nasdaq
National Market during the four calendar weeks preceding the filing
of a notice on Form 144 with respect to the sale.

Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about us.

In addition, under Rule 144(k), a person who is not one of our affiliates
at any time during the 90 days preceding a sale and who has beneficially owned
the restricted shares proposed to be sold for at least two years (including the
holding period of any prior owner other than an affiliate) is entitled to sell
the shares without complying with the manner of

sale, public information, volume limitation or notice provisions of Rule 144.
Therefore, unless otherwise restricted, such shares may be sold at any time.

Lock-up Agreements

All of our directors and officers (who in the aggregate hold 2,966,476
shares of class A common stock and 5,400,000 shares of class B common stock)
are covered by lock-up agreements under which they are not permitted to
transfer or otherwise dispose of, directly or indirectly, any shares or any
securities convertible into or exercisable or exchangeable for shares, for a
period of 180 days after the closing of the offering. Transfers or dispositions
can be made sooner:

. with the prior written consent of Tucker Anthony Sutro Capital
Markets;

. in the case of certain transfers to affiliates;

. as a bona fide gift; or

. to a trust for the benefit of the transferor or immediate family
members of the transferor.

Upon expiration of the lock-up period, approximately 9,100,000 shares
(including 5,400,000 shares of class B common stock) will be available for
resale to the public in accordance with Rule 144, subject to the transfer
restrictions described above.

In addition, Gaiam has agreed not to sell or otherwise dispose of,
directly or indirectly, any shares or any securities convertible into or
exercisable or exchangeable for shares, for a period of 180 days after the
closing of the offering, without the prior written consent of Tucker Anthony
Sutro Capital Markets, except that we may:

. issue shares upon the exercise of outstanding options and warrants
and grant options to purchase shares under our 1999 Long-Term
Incentive Plan;

. issue shares under our employee stock purchase plan; and

. issue shares in connection with the acquisition of another company
if the terms of the issuance provide that the shares shall not be
resold prior to the expiration of the 180-day lock-up period
described above.

Registration Rights

We may be required to file one or more registration statements covering
up to approximately 451,429 shares held by existing shareholders. The holders
may not request the filing of registration statements until after July 20,
2001. Gaiam generally is required to bear all of the expenses of the
registrations, except underwriting discounts and commissions. In addition, if
these shares are not sold in a registered offering, the holders will be
required to comply with the provisions of Rule 144 as described above.

UNDERWRITING

The underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, provides that Gaiam has
agreed to sell to each of the underwriters named below, and each of these
underwriters has agreed to purchase from Gaiam, the respective number of shares
set forth opposite their names below:

Number of
Underwriters: Shares
------------- ---------

Tucker Anthony Incorporated......................................
Adams, Harkness & Hill, Inc. ....................................
----
Total.......................................................
====

The underwriting agreement provides that the underwriters are obligated
to purchase all of the shares of class A common stock in the offering if any
are purchased, other than those covered by the over-allotment option described
below. Tucker Anthony Incorporated and Adams, Harkness & Hill, Inc., on behalf
of the underwriters, expect to deliver the shares on or about , 2001.

We have granted the underwriters a 30 day option after the date of the
underwriting agreement to purchase, from time to time, up to 330,000 shares at
the public offering price less underwriting discounts and commissions. The
option may be exercised to cover over-allotments, if any, made in connection
with the offering. To the extent that this option is exercised, each
underwriter will be obligated, subject to certain conditions, to purchase its
pro rata portion of these additional shares based on the underwriter's
percentage underwriting commitment in the offering as indicated in the
preceding table.

The representatives of the underwriters have advised us that the
underwriters propose to offer shares of class A common stock directly to the
public at the public offering price on the cover of this prospectus and to
selected dealers, who may include the underwriters, at this public offering
price less a selling concession not in excess of $ per share. The
underwriters may allow, and the selected dealers may re-allow, a discount from
the concession not in excess of $ per share to other dealers. After the
completion of the offering, the representatives may change the public offering
price and other selling terms.

The following table summarizes the underwriting discounts and commissions
we will pay to the underwriters. These amounts are shown assuming both no
exercise and full exercise of the underwriters' option to purchase 330,000
additional shares. The underwriting fee is the difference between the initial
price to the public and the amount the underwriters pay to Gaiam for the
shares.

No Exercise of Full Exercise of
Over-allotment Over-allotment
Option Option
-------------- ----------------

Per share................................. $ $
---- ----
Total................................... $ $
==== ====

We estimate that the total expense of this offering, excluding the
underwriting discounts and commissions, will be approximately $ .

Our class A common stock is quoted on the Nasdaq National Market under
the symbol "GAIA."

We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act and liabilities incurred in
connection with the directed share program referred to below, and to contribute
to payments that the underwriters may be required to make for these
liabilities.

The representatives of the underwriters may engage in over-allotment,
stabilizing transactions, syndicate covering transactions, and penalty bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
class A common stock, in accordance with Regulation M under the Securities
Exchange Act:

. Over-allotment involves syndicate sales in excess of the offering
size, which creates a syndicate short position.

. Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a specific
maximum.

. Syndicate covering transactions involve purchases of the class A
common stock in the open market after the distribution has been
completed.

. Penalty bids permit the representatives to reclaim a selling
concession from a syndicate member when the common stock originally
sold by the syndicate member is purchased in a syndicate covering
transaction to cover syndicate short positions.

The underwriters may purchase and sell shares of class A common stock in
the open market. These transactions may include short sales, stabilizing
transactions and purchases to cover positions created by short sales. Short
sales involve the sale by the underwriters of a greater number of shares than
they are required to purchase in the offering. Covered short sales are sales
made in an amount not greater than the underwriters' option to purchase
additional shares from the issuer in the offering. The underwriters may close
out any covered short position by either exercising their option to purchase
additional shares or purchasing shares in the open market. In determining the
source of shares to close out the covered short position, the underwriters will
consider, among other things, the price of shares available for purchase in the
open market as compared to the price at which they may purchase shares through
the over-allotment option. Naked short sales are any sales in excess of such
option. The underwriters must close out any naked short position by purchasing
shares in the open market. A naked short position is more likely to be created
if the underwriters are concerned that there may be downward pressure on the
price of the class A common stock in the open market after pricing that could
adversely affect investors who purchase in the offering. Stabilizing
transactions consist of various bids for or purchases of class A common stock
made by the underwriters in the open market prior to the completion of the
offering.

Similar to other purchase transactions, the underwriters' purchases to
cover the syndicate short sales may have the effect of raising or maintaining
the market price of the class A common stock or preventing or retarding a
decline in the market price of the class A common stock. As a result, the price
of the class A common stock may be higher than the price that might otherwise
exist in the open market.

Neither we nor any of the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the class A common stock. In addition,
neither we nor any of the underwriters make any representation that the
representatives will engage in these stabilizing transactions or that any
transaction, once commenced, will not be discontinued without notice.

The underwriters have informed us that they do not intend to confirm
sales to discretionary accounts that exceed 5% of the total number of shares
offered by them.

We, our directors, officers and stockholders that hold over 5% of our
securities have agreed not to offer to sell, sell or otherwise dispose of,
directly or indirectly, any shares of capital stock or any securities that may
be converted into or exchanged for any shares of our capital stock for a period
of 180 days from the date of the prospectus without the prior written consent
of Tucker Anthony Incorporated, except that we may:

. issue shares upon the exercise of outstanding options and warrants
and grant options to purchase shares of common stock under our 1999
Long-Term Incentive Plan.

. issue shares under our employee stock purchase plan; and

See "Shares Eligible for Future Sale."

An electronic final prospectus will be available on Tucker Anthony
Incorporated's website at www.tascm.com.

Purchasers of the shares of class A common stock offered in this
prospectus may be required to pay stamp taxes and other charges under the laws
and practices of the county of purchase, in addition to the offering price
listed on the cover of this prospectus.

LEGAL MATTERS

The validity of the shares of class A common stock being offered hereby
will be passed on for Gaiam by Bartlit Beck Herman Palenchar & Scott, Denver,
Colorado. Certain legal matters will be passed upon for the underwriters by
Brobeck, Phleger and Harrison LLP, Broomfield, Colorado.

EXPERTS

The consolidated financial statements of Gaiam, Inc. at December 31, 2000
and 1999, and for each of the three years in the period ended December 31,
2000, appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given on the authority of such firm as experts in accounting and
auditing.

The financial statements of Real Goods Trading Corporation for the year
ended March 31, 2000 included in this prospectus have been audited by Moss
Adams LLP, independent auditors, as stated in their report and have been given
upon their authority as experts in accounting and auditing.

The financial statements of Real Goods Trading Corporation as of March
31, 1999 and for the year then ended included in this prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein, and have been so included in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

Gaiam files annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission (SEC). You may
read and copy any reports, statements or other information we file at the SEC's
public reference rooms at 450 Fifth Street, N.W., Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms.

Gaiam's SEC filings, including the registration statement, are also
available to the public from commercial document retrieval services and at the
web site maintained by the SEC at www.sec.gov. You may also obtain additional
information at Gaiam's web site at www.gaiam.com.

We have filed with the SEC a registration statement on Form S-1,
including various exhibits and schedules, under the Securities Act covering the
shares to be sold in this offering. This prospectus does not contain all of the
information set forth in the registration statement and the related exhibits
and schedules. Whenever we make reference in this prospectus to any of our
contracts, agreements or other documents, the references are intended to set
forth the material information regarding these contracts agreements or other
documents. These references, however, are not necessarily complete and you
should refer to the exhibits attached to the registration statement for copies
of the actual contract, agreement or other document.

We intend to send to our shareholders annual reports containing audited
consolidated financial statements and quarterly reports containing unaudited
consolidated financial statements for the first three quarters of each fiscal
year.

INDEX TO FINANCIAL STATEMENTS

Page
----

Index to Gaiam's Financial Statements:
Report of Independent Auditors......................................... F-2
Consolidated Balance Sheets.......................................... F-3
Consolidated Statements of Income.................................... F-4
Consolidated Statements of Stockholders' Equity...................... F-5
Consolidated Statements of Cash Flows................................ F-6
Notes to Consolidated Financial Statements........................... F-7

Index to Real Goods' Financial Statements:
Independent Auditors' Report--Moss Adams, LLP.......................... F-23
Independent Auditors' Report--Deloitte & Touche, LLP................... F-24
Balance Sheets....................................................... F-25
Statements of Operations............................................. F-26
Statements of Cash Flows............................................. F-27
Statements of Shareowners' Equity.................................... F-28
Notes to Financial Statements........................................ F-29
Condensed Statements of Operations................................... F-38
Condensed Statements of Cash Flows................................... F-39
Notes to Condensed Financial Statements.............................. F-40

Gaiam Unaudited Pro Forma Combined Condensed Statement of Operations..... F-43

F-1

REPORT OF INDEPENDENT AUDITORS

Stockholders and Board of Directors
Gaiam, Inc.

We have audited the accompanying consolidated balance sheets of Gaiam,
Inc. and subsidiaries as of December 31, 1999 and 2000, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 2000. These financial
statements are the responsibility of Gaiam's management. Our responsibility is
to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Gaiam,
Inc. and subsidiaries at December 31, 1999 and 2000, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.

/s/ Ernst & Young LLP

Denver, Colorado
February 27, 2001

F-2

GAIAM, INC.

CONSOLIDATED BALANCE SHEETS

December 31,
------------------------ March 31,
1999 2000 2001
----------- ----------- -----------
(unaudited)

ASSETS
Current assets:
Cash and cash equivalents............. $ 3,877,465 $ 8,578,668 $ 6,374,022
Accounts receivable, net of allowance
for doubtful accounts of $158,292 in
1999 and $301,539 in 2000............ 4,326,594 8,472,828 8,407,739
Accounts and notes receivable, other.. 755,924 1,097,390 755,110
Inventory, less allowances............ 4,555,436 6,361,046 10,332,540
Deferred advertising costs............ 2,176,325 1,625,285 1,587,663
Other current assets.................. 393,330 1,307,416 1,492,794
----------- ----------- -----------
Total current assets................ 16,085,074 27,442,633 28,949,868
Property and equipment, net............. 3,168,183 10,797,501 15,098,313
Capitalized production costs, net....... 1,636,706 2,656,666 2,634,363
Video library, net...................... 4,792,456 4,631,140 4,555,481
Goodwill, net........................... 1,239,507 2,379,861 6,032,943
Deferred tax assets..................... 87,163 146,132 1,285,132
Other assets............................ 317,837 450,409 562,004
----------- ----------- -----------
Total assets........................ $27,326,926 $48,504,342 $59,118,104
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable...................... $ 7,618,344 $ 8,091,569 $11,150,709
Accrued liabilities................... 1,734,310 2,109,036 4,416,092
Accrued royalties..................... 725,541 867,667 1,136,738
Income taxes payable.................. -- 790,267 591,832
Capital lease obligations, current.... 95,844 147,649 160,705
Other current liabilities............. -- 167,349 181,888
----------- ----------- -----------
Total current liabilities........... 10,174,039 12,173,537 17,637,964
Capital lease obligations, long-term.... 209,074 270,171 260,614
Deferred tax liability.................. 67,241 412,001 412,001
Long term debt.......................... 1,900,000 5,500,000 6,518,887
----------- ----------- -----------
Total long-term liabilities......... 2,176,315 6,182,172 7,191,502
Minority interest....................... 26,030 6,037,868 6,120,513
Redeemable Class A preferred stock in
subsidiary............................. -- 6,000,000 6,000,000
Stockholders' equity:
Class A common stock, $.0001 par
value, 150,000,000 shares authorized,
5,441,537, 5,473,184 and 5,958,505
shares issued and outstanding at
December 31, 1999 and 2000 and March
31, 2001 respectively................ 544 547 596
Class B common stock, $.0001 par
value, 50,000,000 shares authorized,
5,400,000 issued and outstanding at
December 31, 1999 and 2000, and March
31, 2001............................. 540 540 540
Additional paid-in capital............ 11,038,551 11,865,734 15,486,392
Deferred compensation................. (106,992) (422,826) (405,201)
Retained earnings..................... 4,017,899 6,666,770 7,085,798
----------- ----------- -----------
Total stockholders' equity.......... 14,950,542 18,110,765 22,168,125
----------- ----------- -----------
Total liabilities and stockholders'
equity............................. $27,326,926 $48,504,342 $59,118,104
=========== =========== ===========

See accompanying notes.

F-3

GAIAM, INC.

CONSOLIDATED STATEMENTS OF INCOME

Years ended Three months
December 31, ended March 31,
------------------------------------- ------------------------
1998 1999 2000 2000 2001
----------- ----------- ----------- ----------- -----------
(Unaudited)

Net revenue............. $30,738,540 $45,724,662 $60,588,018 $12,558,437 $17,671,513
Cost of goods sold...... 13,173,536 18,175,787 23,793,492 4,922,311 6,847,590
----------- ----------- ----------- ----------- -----------
Gross profit............ 17,565,004 27,548,875 36,794,526 7,636,126 10,823,923
Expenses:
Selling and
operating............ 14,186,215 22,337,950 27,309,857 6,063,790 8,538,352
Corporate, general and
administration....... 2,393,946 3,086,514 5,056,903 1,115,977 1,550,206
----------- ----------- ----------- ----------- -----------
Total expenses...... 16,580,161 25,424,464 32,366,760 7,179,767 10,088,558
----------- ----------- ----------- ----------- -----------
Income from operations.. 984,843 2,124,411 4,427,766 456,359 735,365
Other income (expense):
Realized gain (loss)
on sale of securities
and other, (see Note
3)................... 696,992 971,159 (73,947) (76,295) 184,615
Interest expense...... (308,501) (365,294) (209,167) (46,650) (116,917)
----------- ----------- ----------- ----------- -----------
Other income (expense),
net.................... 388,491 605,865 (283,114) (122,945) 67,698
----------- ----------- ----------- ----------- -----------
Income before income
taxes and minority
interest............... 1,373,334 2,730,276 4,144,652 333,414 803,063
Provision for income
taxes.................. (251,955) (1,062,789) (1,555,487) (125,130) (301,390)
Minority interest in net
(income) loss of
consolidated
subsidiary, net of
tax.................... (261,598) 50,858 59,706 (4,992) (82,645)
----------- ----------- ----------- ----------- -----------
Net income.......... $ 859,781 $ 1,718,345 $ 2,648,871 $ 203,292 $ 419,028
=========== =========== =========== =========== ===========
Net income per share:
Basic................. $ 0.11 $ 0.20 $ 0.24 $ 0.02 $ 0.04
Diluted............... $ 0.11 $ 0.19 $ 0.23 $ 0.02 $ 0.04
Shares used in computing
net income per share:
Basic................. 8,072,877 8,785,205 10,858,139 10,846,460 11,205,844
Diluted............... 8,118,792 9,119,108 11,525,120 11,504,973 11,563,172

See accompanying notes.

F-4

GAIAM, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Class A Class B Accumulated
Common Stock Common Stock Additional Other
---------------- ------------------ Paid-in Deferred Comprehensive Retained
Shares Amount Shares Amount Capital Compensation Income Earning Total
--------- ------ ---------- ------ ----------- ------------ ------------- ---------- -----------

Balance at January 1,
1998................ 1,005,000 $101 7,035,000 $704 $ 133,833 $ -- $3,161,263 $1,439,773 $ 4,735,674
Issuance of common
stock............... 160,000 16 -- -- 574,984 -- -- -- 575,000
Return of capital to
shareholder through
purchase of Inner
Balance, Inc........ -- -- -- -- (331,183) -- -- -- (331,183)
Comprehensive income
(loss):
Net income.......... -- -- -- -- -- -- -- 859,781 859,781
Decrease in fair
market value of
securities
available for sale,
net of
reclassification
adjustment (see
Note 1), net of tax
of $618,578........ -- -- -- -- -- -- (2,178,137) -- (2,178,137)
Total
comprehensive
loss............. (1,318,356)
--------- ---- ---------- ---- ----------- ---------- ---------- ---------- -----------
Balance at December
31, 1998............ 1,165,000 117 7,035,000 704 377,634 -- 983,126 2,299,554 3,661,135
Issuance of common
stock............... 331,429 32 -- 1,449,968 -- -- -- 1,450,000
Shares issued in
connection with IPO,
including the
underwriter's
overallotment....... 1,807,861 181 -- -- 6,142,007 -- -- -- 6,142,188
Issuance of common
stock in conjunction
with acquisitions
and share
conversion.......... 1,842,247 185 (1,635,000) (164) 1,593,971 (106,992) -- -- 1,487,000
Shares issued in
connection with
conversion of debt.. 295,000 29 -- -- 1,474,971 -- -- -- 1,475,000
Comprehensive income
(loss):
Net income.......... -- -- -- -- -- -- -- 1,718,345 1,718,345
Decrease in fair
market value of
available for sale
securities, net of
reclassification
(see Note 1)....... -- -- -- -- -- -- (983,126) -- (983,126)
--------- ---- ---------- ---- ----------- ---------- ---------- ---------- -----------
Total
comprehensive
income
--------- ---- ---------- ---- ----------- ---------- ---------- ---------- -----------
Balance at December
31, 1999............ 5,441,537 544 5,400,000 540 11,038,551 (106,992) -- 4,017,899 14,950,542
Issuance of common
stock in conjunction
with acquisitions
and compensation.... 31,647 3 827,183 (315,834) 511,352
Net income and
comprehensive
income.............. 2,648,871 2,648,871
--------- ---- ---------- ---- ----------- ---------- ---------- ---------- -----------
Balance at December
31, 2000............ 5,473,184 $547 5,400,000 $540 $11,865,734 $(422,826) -- $6,666,770 $18,110,765
Return of Capital to
shareholder through
purchase of
Earthlings, Inc. and
Selfcare, Inc.
(unaudited)......... (3,073,061) (3,073,061)
Issuance of common
stock in conjunction
with acquisitions
and compensation
(unaudited)......... 485,321 49 6,693,719 17,625 6,711,393
Net income and
comprehensive
income.............. 419,028 419,028
--------- ---- ---------- ---- ----------- ---------- ---------- ---------- -----------
Balance at March 31,
2001 (unaudited).... 5,958,505 $596 5,400,000 $540 $15,486,392 $ (405,201) -- $7,085,798 $22,168,125
========= ==== ========== ==== =========== ========== ========== ========== ===========

See accompanying notes.

F-5

GAIAM, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended
Years Ended December 31, March 31,
------------------------------------- ------------------------
1998 1999 2000 2000 2001
----------- ----------- ----------- ----------- -----------
(Unaudited)

Operating activities:
Net income............. $ 859,781 $ 1,718,345 $ 2,648,871 $ 203,292 $ 419,028
Adjustments to
reconcile net income
to net cash provided
by (used in) operating
activities
Depreciation........... 240,431 391,000 1,245,155 185,070 846,832
Amortization........... 85,466 293,315 414,695 102,357 148,738
Stock compensation..... -- -- 147,492 -- 17,625
Interest expense added
to principal of margin
loan
Minority interest in
consolidated
subsidiary............ 116,158 16,513 -- -- --
Realized gain on the
sale of securities.... 261,598 (50,858) (59,706) 4,992 82,645
Deferred tax expense... (691,137) (2,516,110) -- -- --
Changes in operating
assets and
liabilities, net of
effects from
acquisitions:......... 9,684 (53,718) 384,968 13,891 --
Accounts receivable... (1,501,242) (2,296,771) (4,127,458) 840,603 311,406
Inventory............. (591,519) (1,161,724) (1,739,231) (1,347,842) (1,601,314)
Deferred advertising
costs................ (243,630) (418,480) 551,040 240,324 146,269
Capitalized production
costs................ (212,361) (964,268) (1,019,960) (196,877) 22,303
Prepaid assets........ 8,527 (109,494) (914,086) (40,774) (338,722)
Other assets.......... (266,757) 41,615 (229,295) 19,662 (31,153)
Accounts payable...... 2,569,358 717,852 (8,730) 2,405,494 1,999,746
Accrued liabilities... 329,672 198,741 167,310 (406,344) (661,410)
Income taxes payable.. (69,784) (424,745) 805,123 111,239 (188,610)
----------- ----------- ----------- ----------- -----------
Net cash provided by
(used in) operating
activities.......... 904,245 (4,618,787) (1,733,812) 2,135,087 1,173,383
----------- ----------- ----------- ----------- -----------
Investing activities:
Purchase of property
and equipment......... (134,378) (2,212,961) (8,735,390) (3,926,934) (467,656)
Proceeds from sale of
property and
equipment............. 32,090 -- -- -- --
Proceeds from sale of
securities available-
for-sale.............. 477,500 2,548,310 -- -- --
Proceeds from sale of
stock in subsidiary... -- -- 11,959,923 -- --
Payments for
acquisitions, net of
cash acquired......... (1,656,611) (2,740,703) (305,773) -- (3,400,663)
----------- ----------- ----------- ----------- -----------
Net cash provided by
(used in) investing
activities.......... (1,281,399) (2,405,354) 2,918,760 (3,926,934) (3,868,319)
----------- ----------- ----------- ----------- -----------
Financing activities:
Principal payments on
capital leases........ (49,699) (60,671) (99,617) (22,405) (28,819)
Proceeds from issuance
of common stock....... 575,000 2,875,002 15,872 -- 19,109
Net proceeds from
initial public
offering.............. -- 6,142,188 -- -- --
Proceeds from
convertible debt...... 549,999 -- -- -- --
Net proceeds from
(payments on)
borrowings............ (900,000) 535,148 3,600,000 -- 500,000
----------- ----------- ----------- ----------- -----------
Net cash provided
(used in) financing
activities.......... 175,300 9,491,667 3,516,255 (22,405) 490,290
----------- ----------- ----------- ----------- -----------
Net change in cash and
cash equivalents....... (201,854) 2,467,526 4,701,203 (1,814,252) (2,204,646)
Cash and cash
equivalents at
beginning of year...... 1,611,793 1,409,939 3,877,465 3,877,465 8,578,668
----------- ----------- ----------- ----------- -----------
Cash and cash
equivalents at end of
period................. $ 1,409,939 $ 3,877,465 $ 8,578,668 $ 2,063,213 $ 6,374,022
=========== =========== =========== =========== ===========
Supplemental cash flow
information:
Interest paid.......... $ 126,025 $ 348,580 $ 287,080 $ 48,609 $ 98,592
Income taxes paid...... 312,100 1,541,253 82,099 -- 490,000
Common stock issued for
acquisitions.......... 1,487,000 333,131
Common stock issued for
convertible debt...... 1,425,000 --
Fixed assets acquired
under capital lease... 297,740 212,519

See accompanying notes.

F-6

GAIAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information subsequent to December 31, 2000 is unaudited.)

1. Summary of Significant Accounting Policies

Organization

Gaiam, Inc. ("Gaiam") was incorporated under the laws of the State of
Colorado on July 7, 1988. Gaiam is a multi-channel lifestyle company providing
information, goods and services to customers who value personal development,
healthy lifestyles and the environment.

Basis of Consolidation

The accompanying consolidated financial statements include the accounts
of Gaiam, its subsidiaries and partnerships in which ownership is 50% or
greater and considered to be under the control of Gaiam. All material
intercompany accounts and transaction balances have been eliminated in
consolidation.

Cash and Cash Equivalents

For purposes of the statement of cash flows, cash and cash equivalents
includes demand deposit accounts with financial institutions and all highly
liquid investments, which mature within three months of date of purchase.

Securities Available-for-Sale

Securities available-for-sale consist of equity securities and are stated
at market value. All unrealized gains or losses, net of tax, are recorded as a
separate component of stockholders' equity.

Provision for Doubtful Accounts

Gaiam records a provision for doubtful accounts for all receivables not
expected to be collected.

Interim Financial Statements

The interim consolidated financial statements included herein have been
prepared by the management of Gaiam, Inc. pursuant to the rules and regulations
of the United States Securities and Exchange Commission, and, in the opinion of
management, contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly Gaiam's consolidated financial
position as of March 31, 2001 and the interim results of operations and cash
flows for the three months ended March 31, 2000 and 2001. These interim
statements have not been audited. The consolidated financial position, results
of

F-7

GAIAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information subsequent to December 31, 2000 is unaudited.)

operations and cash flows for the interim periods disclosed within this report
are not necessarily indicative of future financial results.

Inventory

Inventory, consisting primarily of finished goods, is stated at the lower
of cost (first-in, first-out method) or market.

Deferred Advertising Costs

Deferred costs primarily relate to preparation, printing and distribution
of catalogs. Such costs are deferred for financial reporting purposes until the
catalogs are distributed, then amortized over succeeding periods (not to exceed
seven months) on the basis of estimated sales. Historical sales statistics are
the principal factor used in estimating the amortization rate. Other
advertising and promotional costs are expensed as incurred. Advertising costs
incurred were $7.1 million, $10.1 million and $10.5 million for the years ended
December 31, 1998, 1999 and 2000, respectively.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation
and amortization, which includes the amortization of assets recorded under
capital leases. Included in property and equipment is the cost of internal-use
software, including software used in connection with Gaiam's websites. Gaiam
expenses all costs related to the development of internal-use software other
than those incurred during the application development stage. Costs incurred
during the application development stage are capitalized and amortized over the
estimated useful life of the software (generally five years).

Depreciation of property and equipment is computed on the straight-line
method over estimated useful lives (generally five to ten years). Property and
equipment purchased under capital leases are amortized on a straight-line basis
over the lesser of the estimated useful life of the asset or the lease term.

Capitalized Production Costs

Capitalized production costs include costs incurred to produce
informational videos marketed by Gaiam to retail marketers and direct-mail
customers. These costs are deferred for financial reporting purposes until the
videos are released, then amortized over succeeding periods on the basis of
estimated sales. Historical sales statistics are the principal factor used in
estimating the amortization rate. Accumulated amortization at December 31, 1999
and 2000 was $1.3 million and $1.7 million, respectively.

F-8

GAIAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information subsequent to December 31, 2000 is unaudited.)

Video Library

The video library asset represents the cost of the library of produced
videos acquired through a business combination. The video library is presented
net of accumulated amortization of $332,401 and $674,059 at December 31, 1999
and 2000 and is being amortized over a 15-year life.

Goodwill

Goodwill represents the excess of the purchase price over the fair value
of assets acquired in business acquisitions accounted for under the purchase
method. Goodwill is presented net of related accumulated amortization of
$15,884 and $88,922 at December 31, 1999 and 2000, and is being amortized over
lives ranging from 10 to 20 years.

Long-Lived Assets

The carrying values of intangible and other long-lived assets are
reviewed quarterly to determine if any impairment indicators are present. To
date, no such impairment has been indicated. If it is determined that such
indicators are present and the review indicates that the assets will not be
recoverable, based on undiscounted estimated cash flows over the remaining
amortization and depreciation period, their carrying values are reduced to
estimated fair market value.

Accrued Royalties

Gaiam has various royalty agreements with instructors and artists
requiring royalty payments of specified product sales based upon unit sales, or
upon a specified minimum royalty amount. Payments are made quarterly and semi-
annually.

Income Taxes

Gaiam provides for income taxes pursuant to the liability method as
prescribed in Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. The liability method requires recognition of
deferred income taxes based on temporary differences between financial
reporting and income tax bases of assets and liabilities, using currently
enacted income tax rates and regulations.

Revenues

Gaiam recognizes revenue at the time merchandise is shipped to the
customer. Amounts billed to customers for postage and handling charges, which
approximate $2.2 million for 1998, $3.0 million for 1999, and $3.5 million for
2000, are recognized as revenue at the time that the revenues on the product
shipments are recognized. Postage and handling

F-9

GAIAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information subsequent to December 31, 2000 is unaudited.)

costs, which approximate $2.1 million for 1998, $3.0 million for 1999, and $3.3
million for 2000, are included in selling and operating expense along with
other fulfillment costs incurred to warehouse, package and deliver products to
customers. Gaiam provides a reserve for expected future returns at the time the
sale is recorded based upon historical experience.

Gaiam's sales are attributable mainly to sales within the U.S., with a
very small percentage, less than 1% of sales, to international customers. No
customer represented more than 5% of sales for any of the years ended December
31, 1998, 1999 and 2000. Gaiam generally does not require collateral.

Fair Value of Financial Instruments

Gaiam's financial instruments consist of cash and cash equivalents,
accounts receivable, payables and debt obligations. The carrying values of
these financial instruments as reported in the accompanying balance sheets are
assumed to approximate their fair value.

Use of Estimates

The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in Gaiam's financial
statements and accompanying notes, including the valuation of stated accounts
receivable and inventory balances. Actual results could differ from those
estimates.

Stock-Based Compensation

Gaiam accounts for its stock-based compensation arrangements under the
provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees ("APB No. 25") and related interpretations, including FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, rather than the alternative fair value accounting allowed by SFAS
No. 123, Accounting for Stock Based Compensation.

Defined Contribution Plan

In 1999, Gaiam adopted a defined contribution retirement plan under
Section 401(k) of the Internal Revenue Code, which covers substantially all
employees. Eligible employees may contribute amounts to the plan, via payroll
withholding, subject to certain limitations. The 401(k) plan permits, but does
not require, additional matching contributions to the 401(k) plan by Gaiam on
behalf of all participants in the 401(k) plan. To date, Gaiam has not made any
matching contributions to the 401(k) plan.

F-10

GAIAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information subsequent to December 31, 2000 is unaudited.)

Reporting Comprehensive Income

On January 1, 1998, Gaiam adopted the Financial Accounting Standards
Board ("FASB") issued SFAS No. 130, Reporting on Comprehensive Income ("SFAS
No. 130"). SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in the financial statements. The only
item of comprehensive income that Gaiam has is unrealized gains (losses) on
securities available-for-sale.

The reclassification adjustment for gains and losses included in net
income for 1998, net of tax of $618,578, include unrealized losses of $1.8
million and net realized gains of $427,813. The reclassification adjustment for
gains and losses included in net income for 1999 include unrealized losses of
$2.6 million and net realized gains of $1.6 million. As of December 1999, all
available-for-sale securities were sold.

Adoption of Accounting Standards

In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by Statements 137 and 138 in
June 1999 and June 2000, respectively. SFAS No. 133 is effective for Gaiam's
fiscal year beginning on January 1, 2001. SFAS No. 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designed as part of a hedge transaction and, if it is, the type of hedge
transaction. The adoption of SFAS No. 133, effective January 1, 2001, did not
have any impact on Gaiam's consolidated financial statements.

Reclassifications

Certain reclassifications have been made to the 2000 financial statements
to conform to 2001 presentation.

Earnings Per Share

Basic earnings per share excludes any dilutive effects of options,
warrants and dilutive securities. Basic earnings per share is computed using
the weighted average number of common shares outstanding during the period.
Diluted earnings per share is computed using the weighted average number of
common and common stock equivalent shares outstanding during the period. Common
equivalent shares are excluded from the computation if their effect is
antidilutive. All earnings per share amounts for all periods have been
presented and conform to the SFAS No. 128, Earnings per Share, requirements.

F-11

GAIAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information subsequent to December 31, 2000 is unaudited.)

The following table sets forth the computation of basic and diluted
earnings per share:

December 31, March 31,
--------------------------------- -----------------------
1998 1999 2000 2000 2001
---------- ---------- ----------- ----------- -----------
(Unaudited)

Numerator for basic
earnings per share..... $ 859,781 $1,718,345 $ 2,648,871 $ 203,292 $ 419,028
Effect of Dilutive
Securities:
8% convertible
debentures........... 19,234 56,401 -- -- --
---------- ---------- ----------- ----------- -----------
Numerator for diluted
earnings per share... $ 879,015 $1,774,746 $ 2,648,871 $ 203,292 $ 419,028
========== ========== =========== =========== ===========
Denominator:
Weighted average
shares for basic
earnings per share... 8,072,877 8,785,205 10,858,139 10,846,460 11,205,844
Effect of Dilutive
Securities:
Weighted average of
Common stock, stock
options warrants and
convertible
debentures........... 45,915 333,903 666,981 658,513 357,328
---------- ---------- ----------- ----------- -----------
Denominators for diluted
earnings per share..... 8,118,792 9,119,108 11,525,120 11,504,973 11,563,172
========== ========== =========== =========== ===========
Net income per share--
basic.................. $ 0.11 $ 0.20 $ 0.24 $ 0.02 $ 0.04
Net income per share--
diluted................ $ 0.11 $ 0.19 $ 0.23 $ 0.02 $ 0.04

2. Mergers and Acquisitions

In September 1998, Gaiam acquired a 67% ownership in a newly formed
entity, Healing Arts Publishing, LLC (dba Living Arts) for $2.5 million in
cash. Healing Arts Publishing, Inc., which produced and distributed exercise
and relaxation videos and sold environmentally oriented products through its
mail order catalogs and through sales to retailers, contributed the majority of
its assets and certain liabilities to Living Arts in exchange for a 33%
membership interest. Effective July 1999, Gaiam acquired the remaining 33%
minority interest in Living Arts. Additionally, effective November 1999, Gaiam
acquired a 50.1% controlling interest in an environmental products provider.
Total consideration paid by Gaiam for the 1999 acquisitions was $2.3 million in
cash and 207,247 shares of Gaiam's Class A common stock.

On June 30, 2000, Gaiam, Inc. and Whole Foods Market, Inc. merged their
Internet businesses into Gaiam.com, Inc. Gaiam owns 50.1% of Gaiam.com. Whole
Foods Market currently owns 35% of Gaiam.com, and the remainder is owned by
various venture capital funds. As part of the transaction, Whole Foods Market,
through its subsidiary, contributed $6 million in cash plus other assets to
Gaiam.com. On June 19, 2000, Gaiam sold 6,000 shares of Redeemable Class A
preferred stock in Gaiam.com, Inc. at a price of $1,000 per share for

F-12

GAIAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information subsequent to December 31, 2000 is unaudited.)

an aggregate price of $6,000,000. This stock doesn't carry any dividend rights
and is redeemable only upon the consummation of an offering by Gaiam.com of its
equity securities to the public pursuant to an effective registration statement
with the Securities and Exchange Commission.

Additionally, in 2000, Gaiam acquired a yoga props company and a 70%
interest in an organic clothing manufacturer. Total consideration paid by Gaiam
for these acquisitions was approximately $315,000 in cash and 21,243 shares of
Class A common stock. These acquisitions were accounted for using the purchase
method and the results of operations are included in the consolidated financial
statements of Gaiam from the effective acquisition dates. Goodwill associated
with these acquisitions totaled approximately $1.2 million, and is being
amortized on a straight line basis over a period of 20 years.

On January 29, 2001, Gaiam completed its merger with Real Goods Trading
Corporation. In the tax-free stock-for-stock transaction, Real Goods
shareholders received one share of Gaiam Class A common stock in exchange for
each ten shares of Real Goods stock owned. Gaiam issued 481,424 shares of Class
A common stock at an approximate value of $6.7 million to complete the merger.
The merger was accounted for using the purchase method and the results of
operations are included in the consolidated financial statements of Gaiam from
the effective acquisition date.

On January 5, 2001 and February 1, 2001, respectively, Gaiam acquired all
of the stock of Earthlings, Inc. and Self Care, Inc. (companies under common
ownership with the Chief Executive Officer of Gaiam) at his company's net
investment cost plus transaction expenses. As these companies were under common
control, the purchase was accounted for using historical costs, similar to a
pooling transaction. Therefore, the difference between the purchase price and
the value of net assets acquired was accounted for as a reduction to additional
paid-in capital. The total combined purchase price for both companies was
$3,848,014.

3. Securities Available-for-Sale

Securities available-for-sale consisted of shares of common stock from
one issuer. During 1998, Gaiam sold 60,000 shares of this common stock at
market value for $703,125 to a related party and recognized a gain of $696,992
on the sale. During the first and second quarters of 1999, Gaiam sold 100,000
shares of the common stock at market value for $538,750 to a related party, and
recognized a gain of $528,528 on the sale. During the third and fourth quarters
of 1999, Gaiam sold its remaining 215,000 shares of common stock for $2.0
million to a non-related party and recognized a gain of $2.0 million on the
sale.

F-13

GAIAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information subsequent to December 31, 2000 is unaudited.)

4. Property and Equipment

Property and equipment, stated at cost, consists of the following:

December 31,
------------------------
1999 2000
----------- -----------

Land........................................... -- $ 1,100,000
Buildings...................................... -- 1,800,000
Furniture, fixtures and equipment.............. $ 805,182 1,295,030
Leasehold improvements......................... 333,747 714,460
Website development (including construction-in-
process costs)................................ 1,600,728 5,391,243
Computer/telephone equipment................... 1,632,065 2,571,033
Warehouse equipment............................ 222,329 567,667
----------- -----------
4,594,051 13,439,433
Accumulated depreciation and amortization...... (1,425,868) (2,641,932)
----------- -----------
$ 3,168,183 $10,797,501
=========== ===========

5. Commitments

At December 31, 1999 and 2000, Gaiam's property held under capital leases
consisted of the following, which is included in property and equipment:

December 31,
-------------------
1999 2000
-------- ---------

Warehouse equipment................................... $ 40,229 $ 40,229
Computer/telephone equipment.......................... 365,545 578,064
-------- ---------
405,774 618,293
Accumulated amortization.............................. (99,189) (181,085)
-------- ---------
$306,585 $ 437,208
======== =========

F-14

GAIAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information subsequent to December 31, 2000 is unaudited.)

Gaiam leases equipment and office, retail, and warehouse space through
capital and operating leases. The following schedule represents the annual
future minimum payments, as of December 31, 2000:

Capital Operating
--------- ----------

2001................................................ $ 155,692 $1,100,818
2002................................................ 147,379 1,081,874
2003................................................ 125,412 1,039,092
2004................................................ 55,458 1,039,092
--------- ----------
Total minimum lease payments...................... $ 483,941 $4,260,876
==========
Less portion related to interest.................... (66,121)
Present value of future minimum lease payments...... 417,820
Less current portion................................ (147,649)
---------
$ 270,171
=========

Gaiam incurred rent expense of $646,886, $790,393 and $1,084,071 for the
years ended December 31, 1998, 1999 and 2000, respectively.

6. Line of Credit

Gaiam was a party to revolving line of credit agreements, which extended
through January 31, 2003. The credit agreements permitted borrowings up to $6.5
million based upon the collateral value of Gaiam's accounts receivable and
inventory. Borrowings under these agreements bear interest at the prime rate,
which was 9.5% at December 31, 2000. These borrowings were secured by a pledge
of Gaiam's assets, and contained various financial covenants, including
prohibiting the payment of cash dividends to its shareholders and requiring the
maintenance of certain financial ratios. At December 31, 2000, Gaiam was in
compliance with all the financial covenants.

During April 2001, Gaiam entered into new credit agreements with Wells
Fargo Bank West N.A. These agreements increase Gaiam's borrowing capacity from
$6.5 million to $14.9 million. Under a revolving line of credit, Gaiam has
availability of up to $10 million with a maturity date of June 30, 2003, and
under a term loan, Gaiam may borrow up to $4.9 million, with a maturity of July
1, 2006. Borrowings under these agreements bear interest at the lower of prime
rate less 50 basis points or LIBOR plus 275 basis points. These borrowings are
secured by a pledge of Gaiam's assets, and contain various financial covenants,
including prohibiting the payment of cash dividends to Gaiam's shareholders and
requiring the maintenance of certain financial ratios.

F-15

GAIAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information subsequent to December 31, 2000 is unaudited.)

7. Income Taxes

The provision for income taxes is comprised of the following:

December 31,
--------------------------------
1998 1999 2000
-------- ---------- ----------

Current:
Federal................................ $197,142 $1,006,008 $1,117,823
State.................................. 45,129 156,426 155,954
-------- ---------- ----------
242,271 1,162,434 1,273,777
Deferred:
Federal................................ 25,852 (37,610) 322,798
State.................................. (16,168) (62,035) (41,088)
-------- ---------- ----------
9,684 (99,645) (281,710)
-------- ---------- ----------
Total................................ $251,955 $1,062,789 $1,555,487
======== ========== ==========

Variations from the federal statutory rate are as follows:

December 31,
--------------------------------
1998 1999 2000
--------- ---------- ----------

Expected federal income tax expense at
statutory rate of 34%................. $ 466,934 $ 928,294 $1,409,182
Effect of legal judgment--permanent
difference............................ (251,609) -- --
Effect of other permanent differences.. 20,276 40,104 27,359
State income tax expense, net of
federal benefit....................... 16,354 94,391 118,946
--------- ---------- ----------
Income tax expense..................... $ 251,955 $1,062,789 $1,555,487
========= ========== ==========

The legal judgment was a liability acquired in the purchase of a 67%
interest in Healing Arts Publishing. This $740,000 liability paid by Gaiam in
1998 resulted in a permanent tax benefit.

F-16

GAIAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information subsequent to December 31, 2000 is unaudited.)

Deferred income taxes reflect net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of the
net accumulated deferred income tax asset or liability as of December 31, 1999
and 2000 are as follows:

December 31,
-------------------
1999 2000
-------- ---------

Deferred tax assets:
Reserve for bad debts.............................. $ 57,386 $ 113,373
Capitalized inventory.............................. 29,777 30,165
Amortization....................................... -- 2,594
-------- ---------
87,163 146,132
Deferred tax liabilities:
Amortization....................................... (66,060) --
Prepaid catalog costs.............................. -- (24,439)
Depreciation....................................... (1,181) (387,562)
-------- ---------
(67,241) (412,001)
-------- ---------
Deferred tax asset (liability), net.................. $ 19,922 $(265,869)
======== =========

8. Stockholders' Equity

Gaiam has warrant certificates outstanding during the year and at
December 31, 2000 that entitled the holder to purchase 24,000 shares of Class A
common stock at $.50 per share. The warrant is exercisable during a two-year
period beginning January 20, 2002 and ending January 9, 2004.

In June 1999, Gaiam completed a private placement whereby 331,429 shares
of Class A common stock were issued at $4.375 per share. A total of $2.0
million in convertible debentures with a stated interest rate of 8% were issued
during 1998 and the first six months of 1999. These debentures were convertible
automatically upon the closing of the initial public offering into Class A
common stock at the initial public offering per share price. A total of $1.5
million of these debentures were converted into 295,000 shares of Class A
common stock, and a $500,000 debenture was repaid in cash.

Gaiam's initial public offering of 1,705,000 shares of Class A common
stock at $5.00 per share was completed in October 1999. The underwriters also
exercised their overallotment option for 102,861 additional shares during
November 1999. Net proceeds to Gaiam, after deducting all commissions and
expenses associated with the offering, were $6.1 million.

F-17

GAIAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information subsequent to December 31, 2000 is unaudited.)

In 1999, Gaiam issued 207,247 shares of Class A common stock in lieu of
cash payments for acquisitions, and Gaiam's Chief Executive Officer converted
1,635,000 shares of Class B common stock into 1,635,000 shares of Class A
common stock.

During 2000, Gaiam issued 21,243 shares of Class A common stock for two
acquisitions, 6,776 shares of Class A common stock to three directors, in lieu
of cash compensation, and 3,628 shares of Class A common stock upon exercise of
options granted under the 1999 Long-Term Incentive Plan.

As of December 31, 2000, Gaiam had the following Class A common shares
reserved for future issuance:

Awards under the 1999 Long-Term Incentive Plan................... 1,127,562
Shares reserved for warrant exercise............................. 24,000
---------
Total shares reserved for future issuance...................... 1,151,562
=========

During the first quarter of 2001, Gaiam agreed to issue approximately
481,424 shares of Class A common stock in conjunction with its merger with Real
Goods, and issued 3,897 shares of Class A common stock upon exercise of options
granted under the 1999 Long-Term Incentive Plan.

9. Stock Option Plans

On June 1, 1999, Gaiam adopted the 1999 Long-Term Incentive Plan ("the
Plan"), which provides for the granting of options to purchase up to 1.6
million shares of Gaiam's common stock. Both incentive stock options and non-
qualified stock options may be issued under the provisions of the Plan.
Employees of Gaiam and its affiliates, members of the Board of Directors,
consultants and certain key advisors are eligible to participate in the plan,
which shall terminate no later than June 1, 2009. These options granted under
the Plan generally vest and become exercisable at 2% per month for the 50
months beginning in the eleventh month after the date of grant. All grants
expire 7 years from the date of grant.

Gaiam recorded deferred compensation of $106,992 and $413,320 in 1999 and
2000, respectively. In 2000, deferred compensation was recorded in connection
with: acquisitions made by Gaiam in which options were issued to employees of
an acquired company; options issued to employees whereby the grant price
differed from the deemed fair value of Gaiam's common stock; and options issued
to non-employees for services to be provided over the related terms of their
respective agreements. The amounts recorded in 1999 represent the difference
between the grant price and the deemed fair value of Gaiam's common stock for
shares subject to options granted in 1999. The amortization of deferred
compensation is charged to operations over the service period of the options,
which is typically 5 years. Total amortization expense recognized in 1999 and
2000 related to deferred compensation was $0 and $97,486, respectively.

F-18

GAIAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information subsequent to December 31, 2000 is unaudited.)

A summary of stock option activity and weighted average exercise prices
for the years ended December 31, 1999 and 2000 follows:

1999 2000
---------------- -------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------- -------- --------- --------

Outstanding at beginning of year.... -- $ -- 890,900 $ 6.10
Granted:
Price equal to fair value......... 851,200 4.51 253,500 15.96
Price less than fair value........ 39,700 7.18 39,000 15.28
Exercised........................... -- -- (3,628) 4.38
Forfeited........................... -- -- (52,210) 6.52
------- ----- --------- ------
Outstanding at end of year.......... 890,900 $6.10 1,127,562 $ 7.45
-- $ -- 128,552 $ 4.47
Exercisable at end of year..........
Shares available on December 31, for
options that may be granted........ 709,100 472,438

A summary of stock options outstanding as of December 31, 2000 follows:

Exercisable Stock
Outstanding Stock Options Options
------------------------------------------------------- -------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Shares Remaining Exercise Exercise
Prices Outstanding Life (Years) Price Shares Price
-------------- ----------- ------------ -------- ------- --------

$ 4.00--$ 4.99 637,712 5.4 $ 4.38 102,128 $ 4.38
$ 5.00--$ 5.99 171,500 5.8 $ 5.00 24,950 $ 5.00
$ 7.00--$ 7.99 33,350 5.9 $ 7.18 1,334 $ 7.18
$15.00--$15.99 193,000 6.8 $15.28 140 $15.50
$16.00--$16.99 15,000 6.6 $16.34 -- --
$17.00--$17.99 77,000 6.7 $17.18 -- --
-------------- --------- --- ------ ------- ------
$ 4.00--$17.99 1,127,562 5.9 $ 7.46 128,552 $ 4.54

F-19

GAIAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information subsequent to December 31, 2000 is unaudited.)

Had compensation cost for Gaiam's stock-based compensation plan been
determined under the fair value methodology for determining compensation cost
under SFAS No. 123, Gaiam's net income and income per share for the years ended
December 31, 2000 and 1999, would have been as follows:

For the Years Ended
December 31,
---------------------
1999 2000
---------- ----------

Net income
As reported....................................... $1,718,345 $2,648,871
Pro forma......................................... 1,599,102 2,258,005
Net income per common share
As reported....................................... $ 0.20 $ 0.24
Pro forma......................................... $ 0.18 $ 0.21
Fully diluted net income per common share:
As reported....................................... $ 0.19 $ 0.23
Pro forma......................................... $ 0.18 $ 0.20

In estimating the pro forma compensation expense for each equity award
granted during the year, Gaiam used the Black Scholes option pricing model,
with the following weighted-average assumptions used for grants in 1999 and
2000, respectively: risk-free interest rates in a range of 5.78% and 6.00%,
expected dividend yield of zero; expected option lives of 5 years, and expected
volatility of 1.29 and 0.48. Options granted prior to Gaiam's initial public
offering were valued using the minimum value method and, therefore, volatility
was not applicable.

1999 2000
------ ------

Weighted-average fair value of options granted during the
year:
Price equal to fair value............................... $ 1.85 $11.85
Price less than fair value.............................. $11.21 $11.38

10. Related Party Transactions

In 1997, Gaiam entered into a fulfillment agreement with InnerBalance
Health, publisher of a natural health catalog, (a related party under common
ownership with the Chief Executive Officer of Gaiam) to provide customer sales,
service, warehousing and distribution services. On October 1, 1998, Gaiam
acquired all of the stock and net assets of InnerBalance Health, Inc. As these
were companies under common control, Gaiam accounted for the purchase using
historical cost. Therefore, the excess of the purchase price of $523,677 over
the value of net assets was accounted for as a reduction to additional paid-in
capital.

In 1999, Gaiam engaged the services of ccplanet.com, Inc. (a related
party under common ownership with the Chief Executive Officer of Gaiam) to
develop and implement a

F-20

GAIAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information subsequent to December 31, 2000 is unaudited.)

new web site design utilizing the latest technology for its direct to consumer
operations. Gaiam paid ccplanet a total of $4.5 million for work performed on
this project during 1999 and 2000, and the new Gaiam.com website was placed
into service in March 2000. Gaiam has made its customer database and certain
visual media available to ccplanet in exchange for additional fees totaling
$600,000 during 1999 and $1.4 million in 2000.

Because of Whole Foods Market's investments in Gaiam.com, Whole Foods
Market may be considered a related party. Whole Foods Market and Gaiam have
also entered into a 10-year joint marketing agreement to promote each other's
businesses and share customer data. The companies are installing a store-
within-store concept, presenting Gaiam's lifestyle products in Whole Goods
Market's larger stores.

In 2000, the Chief Executive Officer advanced funds to purchase a 70%
interest in an organic clothing manufacturer. These advances, plus applicable
interest, were repaid in December 2000. Additionally, Gaiam purchased
approximately $300,000 in inventory from Earthlings, Inc. (a related party
under common ownership with the Chief Executive Officer of Gaiam) at
Earthling's cost.

On January 5, 2001 and February 1, 2001, respectively, Gaiam acquired all
of the Stock of Earthlings, Inc. and Self Care, Inc. (companies under common
ownership with the Chief Executive Officer of Gaiam) at his company's net
investment plus transaction expenses. As these companies were under common
control, the purchase was accounted for using historical costs, similar to a
pooling transaction. Therefore, the difference between the purchase price and
the value of net assets acquired was accounted for as reduction to additional
paid-in capital. The total combined purchase price for both companies was
$3,848,014.

11. Subsequent Events

During April 2001, Gaiam entered into new credit agreements with Wells
Fargo Bank West N.A. These agreements increase Gaiam's borrowing capacity from
$6.5 million to $14.9 million. Under a revolving line of credit Gaiam has
availability of up to $10 million with a maturity date of June 30, 2003, and
under a term loan Gaiam may borrow up to $4.9 million, with a maturity of July
1, 2006. Borrowings under these agreements bear interest at the lower of prime
rate less 50 basis points or LIBOR plus 275 basis points. These borrowings are
secured by a pledge of Gaiam's assets, and contain various financial covenants,
including prohibiting the payment of cash dividends to Gaiam's shareholders and
requiring the maintenance of certain financial ratios.

F-21

GAIAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information subsequent to December 31, 2000 is unaudited.)

12. Segment Information

Gaiam has two business segments: Direct to Consumer and Business to
Business; both of which sell products, services and information produced or
purchased from other suppliers. Although the customer bases do not overlap to
any extent, the production, purchase and delivery processes overlap in some
areas. Gaiam does not accumulate the balance sheet by segment for purposes of
management review.

Each of the two segments qualifies as such because each is more than 10%
of combined revenue. Contribution margin is defined as net sales, less cost of
goods sold and direct expenses. Financial information for Gaiam's business
segments was as follows:

Three Months Ended
Year Ended December 31, March 31
------------------------------------ ------------------------
1998 1999 2000 2000 2001
----------- ----------- ----------- ----------- -----------
(Unaudited)

Net revenue:
Direct to consumer.... $26,897,236 $34,573,540 $43,823,460 $ 9,809,655 $10,536,386
Business to business.. 3,841,304 11,151,122 16,764,558 2,748,782 7,135,127
----------- ----------- ----------- ----------- -----------
Consolidated net
revenue................ 30,738,540 $45,724,662 60,588,018 12,558,437 17,671,513
Contribution margin:
Direct to consumer.... 128,691 (243,949) 841,351 44,376 97,736
Business to business.. 856,152 2,368,360 3,586,415 411,983 637,629
----------- ----------- ----------- ----------- -----------
Consolidated
contribution margin.... 984,843 2,124,411 4,427,766 456,359 735,365
Reconciliation of
Contribution margin to
net income:
Other income
(expense)............ 388,491 605,865 283,114 (122,945) 67,698
Income tax expense.... 251,955 1,062,789 1,555,487 125,130 301,390
Minority interest
expense.............. 261,598 (50,858) (59,706) 4,992 82,645
----------- ----------- ----------- ----------- -----------
Net income.............. $ 859,781 1,718,345 $ 2,648,871 $ 203,292 $ 419,028
=========== =========== =========== =========== ===========

F-22

INDEPENDENT AUDITORS' REPORT

To the Board of Directors
Real Goods Trading Corporation

We have audited the accompanying balance sheet of Real Goods Trading
Corporation as of March 31, 2000, and the related statements of operations,
shareholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audit provides a reasonable basis for
our opinion.

In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Real Goods Trading
Corporation as of March 31, 2000, and the results of its operations and its
cash flows for the year then ended, in conformity with generally accepted
accounting principles.

/s/ Moss Adams LLP
_____________________________________
Moss Adams LLP

Santa Rosa, California
May 24, 2000

F-23

INDEPENDENT AUDITORS' REPORT

Board of Directors and Shareowners
Real Goods Trading Corporation:

We have audited the accompanying balance sheet of Real Goods Trading
Corporation (the "Company") as of March 31, 1999 and the related statements of
operations, shareowners' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material
respect, the financial position of Real Goods Trading Corporation as of March
31, 1999, and the results of its operations and its cash flows for the year
then ended in conformity with accounting principles generally accepted in the
United States of America.

/s/ Deloitte & Touche LLP
_____________________________________
Deloitte & Touche LLP

Oakland, CA
May 21, 1999

F-24

REAL GOODS TRADING CORPORATION

BALANCE SHEETS

March 31, 2000 and 1999
(In thousands except share data)

2000 1999
------- ------

ASSETS
Current assets:
Cash........................................................ $ 876 $2,048
Marketable securities....................................... 1,568 --
Accounts receivable, net of allowance of $6 in 2000 and
1999....................................................... 152 240
Note receivable............................................. -- 20
Inventories, net............................................ 3,165 2,080
Deferred catalog costs, net................................. 381 272
Prepaid expenses............................................ 150 266
Deferred income taxes....................................... 34 89
------- ------
Total current assets...................................... 6,326 5,015
Property, equipment and improvements, net..................... 4,063 3,553
Other assets.................................................. 253 198
Property held for sale........................................ 78 78
Note receivable--affiliate, net of allowance of $259 in 2000.. 60 196
Deferred income taxes......................................... 664 39
------- ------
Total assets.............................................. $11,444 $9,079
======= ======
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 1,374 $ 873
Accrued expenses............................................ 309 620
Deposits.................................................... 55 138
Current maturities of long-term debt........................ 17 16
Other taxes payable......................................... 39 57
Total current liabilities................................. 1,794 1,704
Long-term debt, less current maturities....................... 534 552
------- ------
Total liabilities......................................... 2,328 2,256
------- ------
Shareowners' equity:
Common stock, without par value:
Authorized 10,000,000 shares; issued and outstanding,
4,881,742 and 4,080,742 shares, respectively.............. 10,771 7,188
Accumulated deficit......................................... (1,655) (365)
------- ------
Total shareowners' equity................................. 9,116 6,823
------- ------
Total liabilities and shareowners' equity................. $11,444 $9,079
======= ======

See notes to financial statements

F-25

REAL GOODS TRADING CORPORATION

STATEMENTS OF OPERATIONS

Years Ended March 31, 2000 and 1999
(In thousands except share and per share data)

2000 1999
--------- ---------

Net Sales................................................ $ 18,979 $ 18,736
Cost of sales............................................ 11,145 10,904
Gross profit............................................. 7,834 7,832
Selling, general and administrative expenses............. 9,402 8,497
Loss from operations..................................... (1,568) (665)
Interest income, net..................................... 63 42
Loss on disposition of assets............................ (354) (9)
Loss before income taxes................................. (1,859) (632)
Income tax benefit....................................... 569 150
--------- ---------
Net loss................................................. $ (1,290) $ (482)
========= =========
Net loss per share, basic and diluted.................... $ (0.29) $ (0.12)
Weighted average shares outstanding, basic and diluted... 4,384,887 4,004,286

See notes to financial statements

F-26

REAL GOODS TRADING CORPORATION

STATEMENTS OF CASH FLOWS

Years Ended March 31, 2000 and 1999
(In Thousands)

2000 1999
------- ------

Cash flows from operating activities:
Net loss.................................................... $(1,290) $ (482)
Adjustments to reconcile net loss to net cash from operating
activities:
Depreciation and amortization............................. 452 344
Loss/writedown on disposition of assets................... 252 9
Deferred income taxes..................................... (570) (151)
Other..................................................... (18) 14
Changes in assets and liabilities:
Accounts receivable....................................... 88 (30)
Note receivable........................................... 20 (20)
Inventories............................................... (1,085) 256
Deferred catalog costs, net............................... (109) 167
Prepaid expenses.......................................... 116 (52)
Income taxes receivable................................... -- 167
Accounts payable.......................................... 501 147
Accrued expenses and other................................ (311) 298
Deposits.................................................. (83) (296)
------- ------
Net cash from operating activities...................... (2,037) 371
------- ------
Cash flows from investing activities:
Purchase of equipment, and construction in progress......... (962) (514)
Investments in marketable securities........................ (3,093) --
Maturities of marketable securities......................... 1,525 --
Purchase of other assets.................................... (55) (45)
Proceeds from sale of equipment and other assets............ -- 25
Note receivable--affiliate.................................. (116) (196)
------- ------
Net cash from investing activities...................... (2,701) (730)
------- ------
Cash flows from financing activities:
Proceeds from issuance of common stock, net................. 3,586 1,138
Repayment of debt........................................... (17) (17)
Purchase of common stock.................................... (3) (15)
------- ------
Net cash from financing activities...................... 3,566 1,106
------- ------
Net increase (decrease) in cash............................... (1,172) 747
Cash at beginning of period................................... 2,048 1,301
------- ------
Cash at end of period......................................... $ 876 $2,048
======= ======
Other cash flow information:
Interest paid............................................... $ 47 $ 48
Income taxes paid........................................... 1 1

See notes to financial statements

F-27

REAL GOODS TRADING CORPORATION

STATEMENTS OF SHAREOWNERS' EQUITY

Years Ended March 31, 2000 and 1999
(In thousands)

Common Stock
---------------------
Retained Total
Number of Earnings Shareowners
Shares Amount (Deficit) Equity
--------- ------- --------- -----------

Balance, March 31, 1998............... 3,857 $ 6,065 $ 117 $ 6,182
Issuance of common stock in direct
public offering, net of offering
costs of $99....................... 228 1,138 -- 1,138
Shares repurchased.................. (4) (15) -- (15)
Net loss............................ -- -- (482) (482)
----- ------- ------- -------
Balance, March 31, 1999............... 4,081 7,188 (365) 6,823
Issuance of common stock, net of
issue costs of $22................. 800 3,578 -- 3,578
Exercise of common stock options
under option plan.................. 2 8 -- 8
Shares repurchased.................. (1) (3) -- (3)
Net loss............................ -- -- (1,290) (1,290)
----- ------- ------- -------
Balance, March 31, 2000............... 4,882 $10,771 $(1,655) $ 9,116
===== ======= ======= =======

See notes to financial statements

F-28

REAL GOODS TRADING CORPORATION

NOTES TO FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Organization--Real Goods Trading Corporation (the "Company") was
organized on July 1, 1990 and sells primarily environmentally related, "healthy
living" and renewable energy products through mail order catalogs, four retail
stores, the Internet, and direct sales from its renewable energy department.

Use of Estimates--The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

Change in Presentation--Included in net sales for fiscal years 2000 and
1999 are shipping and handling fees collected from customers of $1,388,000 and
$1,516,000, respectively. Included in cost of sales for fiscal years 2000 and
1999 are freight out expenses of $1,118,000 and $1,152,000 respectively.
Previously, these amounts were presented as a net amount in selling, general
and administrative expenses. Such sales and cost of sales have been
reclassified into net sales and cost of sales for the periods presented because
management believes this more accurately represents the Company's true sales
and cost of sales amounts.

Cash and Marketable Securities--Marketable securities are classified as
available-for-sale and are available to support current operations or to take
advantage of other investment opportunities. Marketable securities are stated
at estimated fair value based upon market quotes and consist of bonds,
commercial paper and Federal agency securities. As of March 31, 2000, fair
value approximated cost and no unrealized gain or loss was included in retained
earnings. Realized gains and losses are included in other income. Interest
earned is included in interest income. The Company has deposits in money funds
in excess of federally insured levels. These deposits are placed with quality
financial institutions.

Inventories are stated at the lower of cost (first-in/first-out method)
or market. Inventories include expenses associated with acquiring the
inventory.

Deferred Catalog Costs--The Company capitalizes the direct cost of
producing and distributing its mail order catalogs. Deferred catalog costs are
amortized based on the estimated sales lives of the catalogs, generally
eighteen weeks.

Property, Equipment and Improvements are stated at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets, which range from 5 to 40 years.

F-29

REAL GOODS TRADING CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

Internet Site Costs are capitalized in accordance with AICPA Statement of
Position (SOP) 98-1 and EITF 00-2 in connection with construction of Internet
site.

Property Held For Sale--The building and land which were the former Snow
Belt Store are currently held for sale.

Note Receivable--Affiliate--The note receivable represents net funds
advanced to the Real Goods Institute for Solar Living ("ISL") and bears
interest at 5.25% per year. Interest only is payable until the ISL becomes
self-funding.

Pre-Opening Costs for retail stores are expensed as incurred.

Income Taxes--The Company accounts for its income taxes using an asset
and liability approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. In estimating
future tax consequences, the Company generally considers all expected future
events other than changes in tax laws.

Loss Per Share--Basic loss per share is computed by dividing net loss by
the weighted average number of shares outstanding for the period. Diluted loss
per share reflects the potential dilution that could occur if contracts to
issue common stock were exercised or converted to common stock. Dilutive stock
options were not included for the fiscal years ended March 31, 2000 and 1999,
as the Company incurred a net loss in each year and the effect would be
antidilutive.

Reclassification--The 1999 financial statements have been reclassified in
order to conform to the March 31, 2000 presentation.

Estimated Fair Value of Financial Instruments--Statement of Financial
Accounting Standard ("SFAS") No. 107, "Disclosures About Fair Value of
Financial Instruments" requires disclosure of the estimated fair value of
financial instruments. The carrying values of cash, marketable securities,
accounts receivable, accounts payable, and long-term debt approximates their
estimated fair values.

Stock-Based Compensation--The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees".

Comprehensive Income--Comprehensive loss and net loss are the same.

F-30

REAL GOODS TRADING CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

2. Marketable Securities

During the year ended March 31, 2000, the Company purchased marketable
securities consisting of bonds and commercial paper. The following is a summary
of short-term investments included in marketable securities (in thousands):

Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Loses Value
------ ---------- ---------- ---------

March 31, 2000:
Corporate Bonds.................. $ 411 $-- $-- $ 411
Federal agency securities........ 579 -- -- 579
Commercial Paper................. 578 -- -- 578
------ ---- ---- ------
$1,568 $-- $-- $1,568
====== ==== ==== ======

All short-term investments mature within one year of March 31, 2000.

3. Property, Equipment and Improvements

Property, equipment and improvements consist of the following at March 31
(in thousands):

2000 1999
------- -------

Land..................................................... $ 480 $ 480
Land improvements........................................ 783 783
Buildings and leasehold improvements..................... 1,821 1,551
Equipment, furniture and fixtures........................ 2,219 1,732
Internet site costs...................................... 139 --
Construction in progress................................. 84 15
------- -------
Total.................................................. 5,526 4,561
Less accumulated depreciation............................ (1,463) (1,008)
------- -------
Property, equipment and improvements, net................ $ 4,063 $ 3,553
======= =======

4. Line of Credit

The Company has a line of credit agreement for $1,500,000 with National
Bank of the Redwoods (the "Bank"), which expires on February 28, 2001.
Borrowings bear interest at 1.5% over the prime rate, payable in monthly
installments. At March 31, 2000 and 1999, no amounts were outstanding on the
Company's line of credit.

The line of credit agreement contains restrictive covenants including
debt to net worth and current ratios, restrictions on capital expenditures,
positive cash flow at a certain point in the fiscal year and prohibitions on
payment of cash dividends without the Bank's approval. The line is
collateralized by substantially all of the Company's assets, including

F-31

REAL GOODS TRADING CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

inventory, accounts receivable and mailing lists as well as a key person life
insurance policy on the life of the Company's Chairman and largest shareowner.

5. Debt

Long term debt consists of the following at March 31 (in thousands):

2000 1999
---- ----

Small Business Administration term loan, interest at 7.77%,
payable through September 2016, secured by land and building in
Hopland, California............................................ $551 $568
Less: current portion........................................... 17 16
---- ----
Long-term portion............................................... $534 $552
==== ====

Principal payments on long-term debt are as follows (in thousands):

Fiscal Year ending March 31:
2001.............................................................. $ 17
2002.............................................................. 19
2003.............................................................. 20
2004.............................................................. 22
2005.............................................................. 23
Thereafter........................................................ 450
----
Total........................................................... $551
====

6. Asset Held for Sale

The Company owns land and buildings in Amherst, Wisconsin which it is
seeking to sell. At March 31, 1999 and 2000, the land and building had a net
book value of $78,000 and was rented out while it is being offered for sale.

7. Leases

The Company has operating leases for its offices, warehouse facilities,
the Eugene and Berkeley stores and certain equipment, which expire from October
2000 through March 2010. Rental expense for the years ended March 31, 2000 and
1999 was $403,000 and $308,000 respectively.

F-32

REAL GOODS TRADING CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

Future minimum annual lease payments under operating leases are as
follows (in thousands):

Fiscal Year ending March 31:
2001............................................................ $ 533
2002............................................................ 525
2003............................................................ 463
2004............................................................ 456
2005............................................................ 193
Thereafter...................................................... 631
------
Total......................................................... $2,801
======

8. Income Taxes

Income tax benefits consist of the following for the years ended March 31
(in thousands):

2000 1999
----- -----

Current:
Federal.................................................... $ -- $ --
State...................................................... 1 1
----- -----
Total.................................................... 1 1
Deferred--federal.......................................... (570) (151)
----- -----
Total benefit............................................ $(569) $(150)
===== =====

The income tax benefit for financial reporting purposes are different
from the tax provision computed by applying the statutory federal income tax
rate. The differences for each year are reconciled as follows (in thousands):

2000 1999
----- -----

Federal income taxes at statutory income tax rate (34%).... $(632) $(215)
State taxes net of federal tax benefit..................... (112) (14)
Effect of permanent differences............................ 6 8
Valuation allowance........................................ 100 107
Other...................................................... 69 (36)
----- -----
Benefit.................................................. $(569) $(150)
===== =====

F-33

REAL GOODS TRADING CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

The components of the net deferred tax asset (liability) at year-end are
as follows (in thousands):

2000 1999
----- -----

Deferred tax assets:
Benefit of net operating loss carryforwards................ $ 792 $ 183
Allowance for doubtful accounts............................ 110 --
Stock option compensation.................................. 14 14
Reduction in cost of property.............................. 30 15
Other...................................................... 1 10
947 222
Less valuation allowance..................................... (283) (183)
----- -----
Non-current deferred tax asset........................... 664 39
----- -----
Deferred tax assets (liabilities):
Inventory reserves......................................... 47 99
Catalog costs.............................................. (22) (37)
Accruals................................................... 24 32
Other...................................................... 3 (5)
----- -----
Current deferred tax assets.............................. 52 89
Less valuation allowance..................................... (18) --
----- -----
Current deferred tax asset................................... 34 89
----- -----
Net deferred tax asset....................................... $ 698 $ 128
===== =====

Because of the uncertain nature of their ultimate utilization, a partial
valuation allowance is recorded against the deferred tax assets associated with
the net operating losses. At March 31, 2000, the Company has net operating
losses available for carryforward of approximately $1,950,000 and $1,536,000
for federal and state purposes, respectively. The federal net operating loss
and $430,000 of the state net operating losses will expire in 2013 through
2020. The remaining state net operating losses expire through 2005. The Company
intends to use various tax planning strategies to fully utilize the loss
carryforwards prior to expiration.

9. Shareowner Agreements

The Chairman of the Board, founder and largest shareowner has a renewable
one-year employment agreement with the Company which provides for an annual
salary of $125,000. As of April 1, 2000 the Chairman voluntarily agreed to a
reduction in such salary to $110,000 on a month to month basis.

The Company also has a split dollar life insurance agreement with this
individual whereby the Company pays the premiums. The Company has been granted
a security interest in the cash value and death benefit of the policy, and
certain shares of the Company stock owned by the Chairman of the Board have
been pledged as additional collateral during the

F-34

REAL GOODS TRADING CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

period in which the premiums exceed the cash surrender value. The net cash
surrender value at March 31, 2000 was $215,000 and is included in other assets.

10. Shareowners' Equity

On August 11, 1997 the Company commenced a direct public offering of up
to 1,000,000 shares of newly issued stock and 300,000 shares offered by a
selling shareholder at $5.50 per share. The offering closed on June 30, 1998.

Through March 31, 1999, the Company had issued 676,641 new shares of
common stock, generating gross proceeds of $3,620,000, and had incurred costs
of $697,000 related to the direct public offering.

In August 1998, the Company was authorized to repurchase up to $100,000
of common stock in open market and private transactions. In fiscal 1999, 3,900
shares were repurchased for $14,850. In fiscal 2000, 800 shares were
repurchased for $2,750. Through March 31, 2000, a total of 13,884 shares had
been repurchased for $66,643.

On September 23, 1999 WholePeople.com purchased 800,000 shares of common
stock for $3,578,000, net of issuance costs of $22,000.

Subsequent to year-end, in April 2000, the Company repurchased 50,000
shares for $100,000.

11. Benefit Plans and Stock Options

The Company sponsors a 401(k) retirement plan. The plan does not require
matching funds from the Company, and the Company has made no contributions to
the plan.

Under the Company's Third Amended and Restated Fiscal 1993 Stock
Incentive Plan ("Employee Plan") the Company can grant incentive and non-
qualified options to purchase 1,200,000 shares of common stock. Incentive Stock
Options can be granted at prices not less than 100% of the fair market value of
the common shares (85% for non-qualified options) on the date the option is
granted, and normally vest over a period not exceeding five years from the date
of grant. Options expire ten years from date of grant. As of March 31, 2000,
options to purchase 1,110,550 shares were outstanding.

In September 1998 the Board of Directors revised the exercise price of
all outstanding Employee Plan options to $4.50 per share.

The Company has reserved 100,000 shares of common stock for its Non-
Employee Directors' Stock Option Plan ("Director's Plan"). As of March 31,
2000, options to purchase 75,000 shares were outstanding and none have been
exercised.

F-35

REAL GOODS TRADING CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

Weighted
Number of Average
Shares Exercise Price
-------------- --------------
(in thousands)

Outstanding at March 31, 1998............. 344 $ 5.37
Granted................................. 448 4.50
Forfeited............................... (125) 5.37
Terminated as a result of option
repricing.............................. (341) 5.39
Issued as a result of option repricing.. 341 4.50
--------- --------------
Outstanding at March 31, 1999............. 667 4.59
Granted................................. 838 4.50
Forfeited............................... (317) (4.52)
Exercised............................... (2) (4.50)
--------- --------------
Outstanding at March 31, 2000............. 1,186 $ 4.57
========= ==============
Shares exercisable at March 31, 2000...... 194 $ 4.54
Shares available for grant at March 31,
2000..................................... 114
Range of exercise prices.................. $3.38 to $7.12
Weighted average remaining contractual
life at March 31, 2000................... 7.5 years

Additional Stock Plan Information

As discussed in Note 1, the Company continues to account for its stock-
based awards using the intrinsic value method in accordance with Accounting
Principles Board No. 25, "Accounting for Stock Issued to Employees" and its
related interpretations. Accordingly, no compensation expense has been
recognized in the financial statements for employee stock arrangements in
fiscal 1999 or 1998.

Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", (SFAS 123) requires the disclosure of pro forma net
income and earnings per share had the Company adopted the fair value method as
of the beginning of fiscal 1996. Under SFAS 123, the fair value of stock-based
awards to employees is calculated through the use of the option pricing models,
even though such models were developed to estimate the fair value of freely
tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models also
require subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values. The
Company's calculations were made using the Black-Scholes option pricing model
with the following weighted average assumptions: Expected life, 120 months
following vesting in fiscal 2000 and fiscal 1999, stock volatility, 32% in
fiscal 1999 and 55% in fiscal 2000; risk free interest rate 5.50% in fiscal
1999 and 5.65% in fiscal 2000; and no dividends during the expected term. The
Company's calculations are based on a multiple option valuation approach and
forfeitures are calculated

F-36

REAL GOODS TRADING CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

at a 50% rate, based on the Company's historical experience. If the computed
fair values of the fiscal 2000 and fiscal 1999 awards had been amortized to
expense over the vesting period of the awards, pro forma net loss would have
been $569,000 or $.14 per share in fiscal 1999, and the pro forma net loss
would have been $1,549,000 or $.35 per share in fiscal 2000.

12. Segment Information

The Company has three divisions (Catalog, Retail and Renewables), all of
which sell products purchased from other suppliers for sale directly to
customers. The customer bases of all three divisions overlap to some extent,
and the purchases and delivery processes to customers overlap as well.

Each of the three divisions qualifies as a reportable segment because
each is more than 10% of the combined revenue of all operating segments.
Contribution is defined as net sales less cost of goods sold and direct
expenses. Financial information for the Company's business segments was as
follows:

FY 2000 FY 1999
------- -------

Net Sales:
Catalog Division...................................... $11,699 $11,914
Retail Division....................................... 4,046 3,743
Renewables Division................................... 3,234 3,079
------- -------
Consolidated Net Sales.............................. $18,979 $18,736
======= =======
Contribution:
Catalog Division...................................... $ 5,327 $ 5,459
Retail Division....................................... 1,519 1,400
Renewables Division................................... 988 973
------- -------
Consolidated Contribution........................... $ 7,834 $ 7,832
======= =======
Reconciliation of Contribution to net loss:
Selling, general & administrative expenses
Catalog Division...................................... $ 5,757 $ 5,687
Retail Division....................................... 2,267 1,748
Renewables Division................................... 1,351 1,032
Solar Living Center................................... 27 30
------- -------
Consolidated S G & A expenses....................... 9,402 8,497
Interest (income) expense............................... (63) (42)
Loss on sales of assets................................. 354 9
Income tax benefit...................................... (569) (150)
------- -------
Net Loss............................................ $(1,290) $ (482)
======= =======

F-37

REAL GOODS TRADING CORPORATION

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)
(In thousands except share and per share data)

Six Months Ended
--------------------
Sept. 23, Sept. 25,
2000 1999
--------- ---------

Net sales................................................ $ 6,679 $ 8,101
Cost of sales............................................ 4,148 4,822
Gross profit............................................. 2,531 3,279
Selling, general and administrative expenses............. 4,033 3,807
Loss from operations..................................... (1,502) (528)
Interest income, net of interest expense................. 42 8
Loss before income taxes................................. (1,460) (520)
Income tax benefit....................................... 365 182
--------- ---------
Net loss............................................... $ (1,095) $ (338)
========= =========
Net loss per share, basic and diluted.................... $ (0.23) $ (0.08)
Weighted average shares outstanding, basic and diluted... 4,824,354 4,081,339

See notes to condensed financial statements

F-38

REAL GOODS TRADING CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)
(In thousands)

Six Months Ended
-------------------
Sept. 23, Sept. 25,
2000 1999
--------- ---------

Cash flows from operating activities:
Net loss................................................. $(1,095) $ (338)
Adjustments to reconcile net loss to net cash from
operating activities:
Depreciation and amortization.......................... 259 204
Deferred income taxes.................................. (365) (182)
Changes in assets and liabilities:
Receivables............................................ (38) (77)
Inventory.............................................. 520 (1,087)
Deferred catalog costs................................. 51 --
Prepaid expenses....................................... (40) 36
Other.................................................. -- 11
Accounts payable....................................... (532) (136)
Accrued expenses....................................... (36) (122)
Customer deposits...................................... 56 (29)
Other taxes payable.................................... 16 (30)
------- -------
Net cash from operating activities................... (1,204) (1,750)
------- -------
Cash flows from investing activities:
Purchase of equipment, improvements, and construction in
progress................................................ (372) (188)
Note and interest receivable from affiliate.............. (4) (95)
Marketable Securities.................................... 1,568 --
------- -------
Net cash from investing activities................... 1,192 (283)
------- -------
Cash flows from financing activities:
Repurchase of stock...................................... (147) (3)
Repayment of debt........................................ (8) (8)
Proceeds from issuance of common stock, net of issue
costs................................................... -- 3,587
------- -------
Net cash from financing activities................... (155) 3,576
------- -------
Net increase (decrease) in cash............................ (167) 1,543
Cash at beginning of period................................ 876 2,048
------- -------
Cash at end of period...................................... $ 709 $ 3,591
======= =======

See notes to condensed financial statements

F-39

REAL GOODS TRADING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)
For the Six Months Ended September 23, 2000

Note 1--Basis of Presentation

The accompanying unaudited condensed financial statements have been
prepared from the records of the Company and, in the opinion of management,
include all adjustments (consisting of only normal recurring accruals)
necessary to present fairly the financial position as of September 23, 2000 and
the interim results of operations and cash flows for the six months ended
September 23, 2000 and September 25, 1999. Accounting policies followed by the
Company are described in Note 1 to the audited financial statements for the
fiscal year ended March 31, 2000 included in the Company's fiscal 2000 Annual
Report to Shareowners. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted for purposes of the
condensed financial statements. The condensed financial statements should be
read in conjunction with the audited financial statements, including notes
thereto, for the year ended March 31, 2000. The results of operations for the
six month periods herein presented are not necessarily indicative of the
results to be expected for the full year.

Note 2--Presentation of Shipping and Handling Fees

Included in net sales for the six month periods ended September 23, 2000
and September 25, 1999 are shipping and handling fees collected from customers
of $226,000 and $438,000 in fiscal 2001 and $259,000 and $536,000 in fiscal
2000, respectively. Included in cost of sales for the six month periods ended
September 23, 2000 and September 25, 1999 are freight out expenses of $225,000
and $424,000 in fiscal 2001 and $184,000 and $432,000 in fiscal 2000,
respectively.

Note 3--Line of Credit

The Company has a line of credit agreement for $1,500,000 with National
Bank of the Redwoods (the "Bank") which expires on February 28, 2001.
Borrowings bear interest at 1.5% over the prime rate, payable in monthly
installments. The line of credit agreement contains restrictive covenants
including debt to net worth, current ratios, restrictions on capital
expenditures, and prohibitions on payment of cash dividends without the Bank's
approval. The line is collateralized by substantially all of the Company's
assets, including inventory, accounts receivable and mailing lists as well as a
key person life insurance policy on the life of the Company's Chairman and
largest shareowner. As of September 23, 2000, no amounts were outstanding on
the Company's line of credit.

Note 4--Shareowners' Equity

In two separate resolutions in August 1998 and April 2000, the Board of
Directors authorized the Company to purchase up to a total of $200,000 of
common stock in open

F-40

REAL GOODS TRADING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)

market and private transactions. During the first six months of fiscal 2001 the
Company repurchased 67,500 shares at an average cost of $2.17 per share.

Note 5--Segment Information

The Company has four divisions (Catalog, Internet, Retail and
Renewables), all of which sell products purchased from other suppliers directly
to customers. The customer bases of all four divisions overlap to some extent,
and the purchase and delivery processes to customers overlap as well.

Each of the four divisions qualifies as a reportable segment because each
is more than 10% of the combined revenue of all operating segments. Financial
information for the Company's business segments for the six months ended
September 23, 2000 and September 25, 1999 was as follows:

Sept. 23, Sept. 25,
2000 1999
--------- ---------

Net Sales:
Catalog Division..................................... $ 2,624 $4,066
Internet Division.................................... 833 445
Retail Division...................................... 2,083 1,701
Renewables Division.................................. 1,059 1,889
Other................................................ 80
------- ------
Consolidated Net Sales........................... 6,679 8,101
======= ======
Gross Profit:
Catalog Division..................................... 1,115 1,840
Internet Division.................................... 343 200
Retail Division...................................... 773 656
Renewables Division.................................. 270 583
Other................................................ 30 --
------- ------
Consolidated Gross Profit........................ 2,531 3,279
======= ======
Reconciliation of Gross Profit to Net Loss:
Selling, general & administrative expenses:
Catalog Division................................... 1,678 1,979
Internet Division.................................. 482 141
Retail Division.................................... 1,326 921
Renewables Division................................ 472 753
Other.............................................. 75 13
------- ------
Consolidated S G & A expenses.................... 4,033 3,807
Interest income........................................ 65 31
Interest expense....................................... (23) (23)
Gain on sale of assets................................. -- --
Income tax benefit..................................... 365 182
------- ------
Net Loss............................................... $(1,095) $ (338)
======= ======

F-41

REAL GOODS TRADING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)

Note 6--Subsequent Event

On October 13, 2000, the Company signed an agreement to merge the Company
with a subsidiary of Gaiam, Inc. subject to Real Goods shareholder approval and
other customary conditions. Details about this agreement can be found by
examining the Company's press releases and the Form 8-K filed on October 31,
2000.

F-42

GAIAM, INC.

UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS

The fiscal years for Gaiam and Real Goods differ. The following unaudited
pro forma combined condensed statements of operations for the year ended
December 31, 2000 and the three months ended March 31, 2001 are derived from
the historical consolidated condensed statements of operations of Gaiam, Inc.
and the historical condensed statements of operations of Real Goods Trading
Corporation for the twelve month period ended December 31, 2000 and the three
months ended March 31, 2000, adjusted to give effect to their consolidation
using the purchase method of accounting for business combinations.

The unaudited pro forma combined condensed statement of operations for
the twelve months ended December 31, 2000 assumes that the merger occurred on
January 1, 2000, while the unaudited pro forma combined condensed statement of
operations for the three months ended March 31, 2001 assumes that the merger
occurred on January 1, 2001.

The pro forma combined condensed statements of operations are provided
for illustrative purposes only and should be read in conjunction with the
accompanying notes thereto, and the audited consolidated financial statements
and notes thereto of Gaiam, Inc. as of and the for year ended December 31, 2000
and the unaudited consolidated financial statements of Gaiam, Inc. as of and
for the three months ended March 31, 2001, and the audited financial statements
and the notes thereto of Real Goods Trading Corporation for the year ended
March 31, 2000. The pro forma data is not necessarily indicative of the
operating results or financial position that would have been achieved had the
merger been consummated at the dates indicated, nor is it necessarily
indicative of future operating results and financial condition.

F-43

GAIAM, INC.

UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS

For the Year Ended December 31, 2000
(Unaudited)

Historical
------------------------------ Total
Real Goods Pro Forma
Gaiam, Inc. Trading Corp. (a) combined
----------- ----------------- -----------

Net revenue....................... $60,588,018 $15,897,599 $76,485,617
Cost of goods sold................ 23,793,492 9,710,211 33,503,703
----------- ----------- -----------
Gross profit...................... 36,794,526 6,187,388 42,981,914
Selling, general and
administrative................... 32,366,760 9,291,494 41,658,254
----------- ----------- -----------
Income (loss) from operations..... 4,427,766 (3,104,106) 1,323,660
Other income (expense)............ (73,947) (354,460) (428,407)
Interest income (expense)--net.... (209,167) 53,095 (156,072)
----------- ----------- -----------
Other income (expense)............ (283,114) (301,365) (584,479)
Profit (loss) before income
taxes............................ 4,144,652 (3,405,471) 739,181
Provision for income taxes........ (1,555,487) 943,139 (612,348)
Minority interest in net (income)
loss of consolidated subsidiary,
net of tax....................... 59,706 -- 59,706
----------- ----------- -----------
Net income (loss)................. $ 2,648,871 $(2,462,332) $ 186,539
=========== =========== ===========
Net income per share:
--Basic......................... $ 0.24 $ 0.02
--Diluted....................... $ 0.23 $ 0.02
Shares used in computing net
income per share (b):
--Basic......................... 10,858,139 11,339,563
--Diluted....................... 11,525,120 12,006,544

See accompanying notes.

F-44

GAIAM, INC.

UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS

For the Three Months Ended March 31, 2001
(Unaudited)

Historical
------------------------------ Total Pro
Real Goods Forma
Gaiam, Inc. Trading Corp. (c) Combined
----------- ----------------- -----------

Net revenue....................... $17,671,513 $1,416,077 $19,087,590
Cost of goods sold................ 6,847,590 961,432 7,809,022
----------- ---------- -----------
Gross profit...................... 10,823,923 454,645 11,278,568
Selling, general and
administrative................... 10,088,558 1,133,017 11,221,575
----------- ---------- -----------
Income (loss) from operations..... 735,365 (678,372) 56,993
Other income (expense)............ 184,615 -- 184,615
Interest income (expense)--net.... (116,917) 2,369 (114,548)
----------- ---------- -----------
Other income (expense)............ 67,698 2,369 70,067
Profit (loss) before income
taxes............................ 803,063 (676,003) 127,060
Provision for income taxes........ (301,390) 169,271 (132,119)
Minority interest in net (income)
loss of consolidated subsidiary,
net of tax....................... (82,645) -- (82,645)
----------- ---------- -----------
Net income (loss)................. $ 419,028 $ (506,732) $ (87,704)
=========== ========== ===========
Net income per share:
--Basic......................... $ 0.04 $ (0.01)
--Diluted....................... $ 0.04 $ (0.01)
Shares used in computing net
income per share (b):
--Basic......................... 11,205,844 11,355,651
--Diluted....................... 11,563,172 11,712,979

See accompanying notes.

F-45

GAIAM, INC.

UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS--(Continued)

Notes to Unaudited Pro Forma Combined Condensed Statements of
Operations:

(a)Represents the results of operations of Real Goods Trading Corporation from
January 1, 2000 through December 31, 2000, and was calculated by taking
the results of operations for the year ended March 31, 2000 as reported,
subtracting the results of operations for the nine month period ending
December 31, 1999, and adding the results of operations for the nine month
period ended December 31, 2000.
(b)Adjusted to reflect the issuance of 481,424 shares of Gaiam, Inc. Class A
common stock to Real Goods shareholders as of January 1, 2000 and 2001,
respectively.
(c)Represents the results of operations of Real Goods Trading Corporation from
January 1, 2001 through January 29, 2001 (the date of acquisition).

F-46

[Inside Back cover]

[Pictures]

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

The registrant's expenses in connection with the offering described in
this registration statement are set forth below. All amounts except the
Securities and Exchange Commission registration fee, the NASD filing fee and
the listing fee are estimated.

Securities and Exchange Commission registration fee............. $ 9,057.50
NASD filing fee................................................. 4,122.96
NASDAQ National Market listing fee.............................. 17,500.00
Printing and engraving expenses................................. 125,000.00
Accounting fees and expenses.................................... 100,000.00
Legal fees and expenses......................................... 200,000.00
Blue Sky fees and expenses (including legal fees)............... 10,000.00
Transfer agent's and registrar fees and expenses................ 10,000.00
Miscellaneous................................................... 500,000.00
-----------
Total........................................................... $975,680.46
===========

Item 14. Indemnification of Directors and Officers.

Colorado law provides for indemnification of directors, officers and
other employees in certain circumstances (C.R.S. (S) 7-109-101 et. seq. (1994))
and for the elimination or limitation of the personal liability for monetary
damages of directors under certain circumstances (C.R.S. (S) 7-108-402 (1994)).
The Amended and Restated Articles of Incorporation of Gaiam eliminate the
personal liability for monetary damages of directors under certain
circumstances and provide indemnification to directors and officers of Gaiam to
the fullest extent permitted by the Colorado Business Corporation Act. Among
other things, these provisions provide indemnification for officers and
directors against liabilities for judgments in and settlements of lawsuits and
other proceedings and for the advance and payment of fees and expenses
reasonably incurred by the director or officer in defense of the lawsuit or
proceeding.

Gaiam maintains a $5,000,000 directors and officers insurance policy
providing insurance indemnifying Gaiam's directors and executive officers for
certain liabilities. This insurance policy insures the past, present and future
directors and officers of Gaiam, with certain exceptions, from claims arising
out of any error, misstatement, misleading statement, act, omission, neglect or
breach of duty by any of the directors while acting in their capacities as
such. Claims include claims arising from sales and purchases of Gaiam
securities and shareholder derivative actions.

II-1

Item 15. Recent Sales of Unregistered Securities.

The following table summarizes securities issued or sold by Gaiam within
the past three years that were not sold pursuant to registered offerings:

Number of
Shares of
Class A Debentures/ Warrants/ Exemption(s)
Date Purchaser Common Stock Notes Options Consideration Claimed*
---- ------------------------- ------------ ----------- --------- ---------------- -------------------------

September 30, 1998 James Argyopoulos/ 120,000 $500,000 -- $ 1,025,000 privately negotiated sale
Argyopoulos Investor G.P. under Section 4(2) of the
Securities Act.
October 1, 1998 Jirka Rysavy -- $531,000 -- Stock of privately negotiated sale
InnerBalance under Section 4(2) of the
Securities Act.
December 7, 1998 Lynn Powers 40,000 $ 50,000 -- $ 100,000 privately negotiated sale
under Section 4(2) of the
Securities Act.
January 7, 1999 Mo Siegel 17,143 $ 75,000 -- $ 150,000 privately negotiated sale
under Section 4(2) of the
Securities Act.
April 20, 1999 Jeffrey Steiner 120,000 $500,000 -- $ 1,025,000 privately negotiated sale
under Section 4(2) of the
Securities Act.
May 6, 1999 Edward Snider 57,143 $250,000 -- $ 500,000 privately negotiated sale
under Section 4(2) of the
Securities Act.
May 6, 1999 Herbert Simon 57,143 $250,000 -- $ 500,000 privately negotiated sale
under Section 4(2) of the
Securities Act.
May 7, 1999 Mike Gilliland 22,857 $100,000 -- $ 200,000 privately negotiated sale
under Section 4(2) of the
Securities Act.
May 6, 1999 and Lennart Perlhagen 57,143 $250,000 -- $ 500,000 privately negotiated sale
June 8, 1999 under Section 4(2) of the
Securities Act.
of the Securities Act.
November 1999 Steve Troy 167,247 -- -- Stock of Jade
Mountain, Inc.
and privately negotiated sale
jademountain.com, under Section 4(2) of the
Inc. Securities Act.
November 1999 Steven P. and 40,000 -- -- Interest in
Elizabeth Adams Healing Arts privately negotiated sale
Publishing, LLC under Section 4(2) of the
(dba Living Arts) Securities Act.
February 29, 2000 Daniel and 14,000 -- -- Option to
Marylou Sanders purchase stock Privately negotiated sale
of EcoSport, under Section 4(2) of the
Inc. Securities Act.
June 20, 2000 Sharon Conroy 7,243 -- -- Stock of Fish Privately negotiated sale
Crane, Inc. under Section 4(2) of the
Securities Act.

-------
* We believe that exemptions in addition to those specified above may exist
with respect to the listed transactions.

II-2

Item 16. Exhibits and Financial Statement Schedules.

EXHIBITS:

Exhibit No. Description
----------- -----------

1.1 Form of Underwriting Agreement
3.1 Amended and Restated Articles of Incorporation of Gaiam, Inc.
(incorporated by reference to Exhibit 3.1 of Gaiam's Registration
Statement on Form S-1 (No. 333-83283)).
3.2 Bylaws of Gaiam, Inc. (incorporated by reference to Exhibit 3.2 of
Gaiam's Registration Statement on Form S-1 (No. 333-83283)).
4.1 Form of Gaiam, Inc. Stock Certificate (incorporated by reference
to Exhibit 4.1 of Gaiam's Registration Statement on Form S-1 (No.
333-83283)).
5.1 Opinion of Bartlit Beck Herman Palenchar & Scott
10.1* Loan Agreement, dated as of April 16, 2001, between Gaiam, Inc.
and Wells Fargo Bank West, N.A.
10.2 Gaiam, Inc. 1999 Long-Term Incentive Plan (incorporated by
reference to Exhibit 10.1 of Gaiam's Registration Statement on
Form S-1 (No. 333-83283)).
10.3 Lease, dated December 16, 1999, between Gaiam, Inc. and Duke-Weeks
Realty Limited Partnership (incorporated by reference to Exhibit
10.2 of Gaiam's Registration Statement on Form S-4 (No. 333-505-
60)).
10.4 Lease, dated December 18, 1997, between Gaiam, Inc. and Orix Prime
West Broomfield Venture (incorporated by reference to Exhibit 10.4
of Gaiam's Registration Statement on Form S-1 (No. 333-83283)).
21.1 Subsidiaries of Gaiam, Inc.
23.1 Consent of Ernst & Young LLP, independent auditors of Gaiam, Inc.
23.2 Consent of Bartlit Beck Herman Palenchar & Scott (included in the
opinion filed as Exhibit 5.1)
23.3 Consent of Moss Adams LLP
23.4 Consent of Deloitte & Touche LLP
24.1* Power of Attorney (included in signature page to the Registration
Statement).

--------

* Previously filed.

Item 17. Undertakings.

(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities begin registered, the registrant will, unless in
the

II-3

opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.

(b) Gaiam hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, the information omitted from the
form of prospectus filed as part of this registration statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time it was declared
effective.

(c) Gaiam hereby undertakes that, for the purpose of determining any
liability under the Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.

II-4

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to the registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Broomfield, State of Colorado, on July 23, 2001.

GAIAM, INC.

/s/ Jirka Rysavy

By: _____________________________________
Jirka Rysavy
Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the registration statement has been signed by the following persons
and by Jirka Rysavy as Attorney-in-Fact in the capacities and on the dates
indicated opposite their names.

SIGNATURE TITLE DATE

/s/ Jirka Rysavy Chairman of the Board and July 23, 2001
___________________________________________ Chief Executive Officer
Jirka Rysavy

* President, Chief Operating July 23, 2001
___________________________________________ Officer and Director
Lynn Powers

* Director July 23, 2001
___________________________________________
Barnet M. Feinblum

* Director July 23, 2001
___________________________________________
John Mackey

* Director July 23, 2001
___________________________________________
Barbara Mowry

* Director July 23, 2001
___________________________________________
Paul H. Ray

/s/ Yudhister Bahl Chief Financial Officer July 23, 2001
___________________________________________
Yudhister Bahl

* Principal Accounting Officer July 23, 2001
___________________________________________
Janet Mathews

/s/ Jirka Rysavy

*By: ________________________

Jirka Rysavy

Attorney-in-Fact