The following Management's Discussion and Analysis of Financial Condition and Results of Operations summarizes the significant factors affecting our consolidated operating results, financial condition and liquidity for the three-year period ended December 31, 2007, should be read in conjunction with the Consolidated Financial Statements and Notes to the Consolidated Financial Statements included elsewhere in this Form 10-K, and contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act"). These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "goal," "intend," "may," "plan," "potential," "predict," "project," "seek," "should," "target," "will," "would," variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified below and under "Risk Factors," and elsewhere in this Annual Report on Form 10-K. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.

Overview

We are a leading media and entertainment company serving the worldwide lesbian, gay, bisexual and transgender, or LGBT, community. We serve this audience through a variety of products and services including online and print media properties, and other goods and services.

As a result of further integrating our various businesses, our executive management team, and our financial and management reporting systems during fiscal 2006, we began to operate as three segments effective January 1, 2007:
Online, Publishing and Travel and Events. The Travel and Events segment consisted of travel and events marketed through our RSVP Productions, Inc. ("RSVP") brand and by our consolidated affiliate, PNO DSW Events, LLC ("DSW"). We sold substantially all the assets of RSVP in December 2007 and sold our interest in DSW in March 2007. As a result of these divestitures and our decision to exit the Travel and Events business, we have two segments remaining as of December 31, 2007: Online and Publishing. In accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," we have reported the results of operations and financial position of RSVP and DSW in discontinued operations within the consolidated financial statements.

Our Online segment consists of our LGBT-focused websites, most notably Gay.com, PlanetOut.com, Advocate.com and Out.com which provide revenues from advertising services and subscription services. Our Online segment also includes our transaction-based websites, including BuyGay.com, which generate revenue through sales of products and services of interest to the LGBT community, such as fashion, books, CDs and DVDs.

Our Publishing segment includes the operations of our print media properties including the magazines The Advocate, Out, The Out Traveler and HIVPlus, among others. Our Publishing segment also generates revenue from newsstand sales of our various print properties and our book publishing businesses, Alyson and Publishers Distributing Co. ("PDC").

In July 2007, we closed a private placement financing with a group of accredited and institutional investors and received an aggregate of approximately $26.2 million in gross proceeds from the sale of approximately 2.3 million shares of our common stock at a price of $11.50 per share. We realized net proceeds of approximately $24.0 million from the private placement after deducting fees payable to the placement agent and other transaction costs.

On January 14, 2008, we announced that we have retained the services of Allen & Company, LLC to assist us in evaluating strategic alternatives, including a possible sale of the Company.

Executive Operating and Financial Summary

Our total revenue was $53.0 million in fiscal 2007, decreasing 10% from our prior year's revenue of $58.8 million, due primarily to decreases in our subscription and transaction services revenue.

Total operating costs and expenses were $94.5 million in fiscal 2007, increasing 58% from the prior year total of $60.0 million. These increases were primarily due to impairment charges to goodwill of $21.5 million and impairment charges to intangible assets of $4.4 million. Operating costs and expenses also increased due to increased marketing costs related to direct-mail campaigns for our print properties, severance charges related to the departure of our former President and Chief Operating Officer and our former Chief Technology Officer, increased legal expenses, increased costs to integrate and re-architect the core technology platform of our websites and increased depreciation on capital expenditures as a result our on-going product development and compliance efforts.

Loss from operations was $41.5 million in fiscal 2007, compared to a loss from operations of $1.2 million in fiscal 2006. This increase in loss from operations was primarily the result of the impairment charges to goodwill and intangible assets, the other increases in operating costs and expenses noted above and the decrease in revenue noted above.

We expect that revenue will decrease slightly in fiscal 2008 in comparison to fiscal 2007, primarily as a result of the planned divestiture of the SpecPub Inc. asset group and an anticipated decrease in online subscription services revenue.

We expect our operating loss will decrease in fiscal 2008 in comparison to fiscal 2007, due to non-recurrence in 2008 of the impairment charges recognized in fiscal 2007. However, we expect to incur additional expenses in re-designing our technological architecture, rewriting our web applications and rebuilding our technology platform and networks during fiscal 2008.

Results of Operations

Segment performance is measured based on contribution margin (loss), which consists of total revenues from external customers less direct operating expenses. Direct operating expenses include cost of revenue and sales and marketing expenses. Segment managers do not have discretionary control over other operating costs and expenses such as general and administrative costs (consisting of costs such as corporate management, human resources, finance and legal), and depreciation and amortization, as such, other operating costs and expenses are not evaluated in the measurement of segment performance.

Online Segment

We derive online advertising revenue from advertising contracts in which we typically undertake to deliver a minimum number of impressions to users over a specified time period for a fixed fee. We derive online subscription services revenue from paid membership subscriptions to our online media properties. Transaction services revenue includes revenue generated from the sale of products through multiple transaction-based websites.

Comparison of the year ended December 31, 2006 to the year ended December 31, 2007 (in thousands, except percentages):

                                                         Year Ended December 31,           Increase (Decrease)
                                                           2006             2007              $               %

Online revenue:
Advertising services                                   $     11,116       $   9,365      $     (1,751 )       (16 )%
Subscription services                                        18,378          16,476            (1,902 )       (10 )%
Transaction services                                          2,129           1,191              (938 )       (44 )%

Total online revenue                                         31,623          27,032            (4,591 )       (15 )%

Online direct operating costs and expenses:
Cost of revenue                                              10,240          12,673             2,433          24 %
Sales and marketing                                          10,236           9,296              (940 )        (9 )%

Total online direct operating costs and expenses             20,476          21,969             1,493           7 %

Online contribution margin                             $     11,147       $   5,063      $     (6,084 )       (55 )%

Online revenues decreased as a result of a reduction in the number of online subscribers to our Gay.com website, a decrease in sales of products on our transaction-based website properties and a reduction in our national and local advertising sales due in part to turnover in our digital sales staff. Online cost of revenue increased primarily as a result of increased costs to integrate and re-architect the core technology platform of our websites, and, to a lesser extent, increased severance and other costs related to the departure of our former Chief Technology Officer. Online sales and marketing expenses decreased as a result of decreased spending on advertising during fiscal 2007.

For fiscal 2008, we expect that online revenue will decrease from fiscal 2007 as a result of anticipated additional reductions in the number of online subscribers and reductions in online revenues contributed by the SpecPub Inc. assets group, which we plan to divest ourselves of within the next twelve months. We expect that online cost of revenue will increase as we continue to re-architect our core technology platform of our websites, partially offset by reductions in online cost of revenue contributed by the SpecPub Inc. asset group. For fiscal 2008, we expect that sales and marketing expenses may vary with the comparable prior year period depending on the timing of planned advertising to coincide with certain product development milestones.

Comparison of the year ended December 31, 2005 to the year ended December 31, 2006 (in thousands, except percentages):

                                                         Year Ended December 31,           Increase (Decrease)
                                                           2005             2006               $              %

Online revenue:
Advertising services                                   $      9,043       $  11,116      $       2,073         23 %
Subscription services                                        20,202          18,378             (1,824 )       (9 )%
Transaction services                                          1,611           2,129                518         32 %

Total online revenue                                         30,856          31,623                767          2 %

Online direct operating costs and expenses:
Cost of revenue                                               9,248          10,240                992         11 %
Sales and marketing                                          10,358          10,236               (122 )       (1 )%

Total online direct operating costs and expenses             19,606          20,476                870          4 %

Online contribution margin                             $     11,250       $  11,147      $        (103 )       (1 )%

The increase in online advertising services revenue was due, in part, to growth of the general online advertising industry and the incremental effect of certain online properties gained in the acquisition of LPI. The decrease in online subscription services revenue was primarily due to a reduction in online subscribers. The increase in online transaction services revenue was due primarily to the incremental effect of certain online properties gained in the acquisition of LPI.

The increase in online cost of revenue was primarily due to the incremental effect of certain online properties gained in the acquisition of LPI and an increase in expenses related to site operations and support infrastructure, offset partially by a decrease in stock-based compensation expense. The decrease in online sales and marketing expense was primarily due to a decrease in stock-based compensation expense and decreased advertising expenses related to our premium online subscription services, offset partially by an increase due to the incremental effect of certain online properties gained in the acquisition of LPI.

Publishing Segment

We derive publishing advertising revenue from advertisements placed in our print media properties including the magazines The Advocate, Out, The Out Traveler and HIVPlus, among others. We offer our customers five separate subscription services across our print media properties. Our publishing segment also generates revenue from newsstand sales of our various print properties and our book publishing businesses, including Alyson and PDC. We began the operations of our publishing segment with the magazine, book publishing and certain other properties gained in our acquisition of LPI in November 2005.

Comparison of the year ended December 31, 2006 to the year ended December 31, 2007 (in thousands, except percentages):

                                                         Year Ended December 31,           Increase (Decrease)
                                                           2006             2007              $               %

Publishing revenue:
Advertising services                                   $     15,363       $  16,190      $        827           5 %
Subscription services                                         6,069           5,425              (644 )       (11 )%
Transaction services                                          5,701           4,366            (1,335 )       (23 )%

Total publishing revenue                                     27,133          25,981            (1,152 )        (4 )%

Publishing direct operating costs and expenses:
Cost of revenue                                              16,504          17,213               709           4 %
Sales and marketing                                           5,356           6,970             1,614          30 %

Total publishing direct operating costs and expenses         21,860          24,183             2,323          11 %

Publishing contribution margin                         $      5,273       $   1,798      $     (3,475 )       (66 )%

Publishing revenues decreased principally due to decreased newsstand sales of our magazines and books and decreases in revenue per subscriber in subscriptions to our magazines, partially offset by an increase in advertising services revenue as a result of increased page rates charged to our advertisers as a result of our circulation base growth. Publishing cost of revenue increased primarily due to increased prices for paper used in producing our magazines and due to increased mailing costs in the delivery of magazines to our subscribers. Publishing sales and marketing expenses increased primarily due to the increase in marketing costs related to direct-mail campaigns on most of our print properties.

For fiscal 2008, we expect that total publishing revenues will decrease from fiscal 2007 primarily as a result of reductions in publishing revenues contributed by the SpecPub, Inc. asset group and the effect of advertising sales migrating from print to online. We expect that publishing direct operating costs for fiscal 2008 will increase from fiscal 2007 primarily as a result of anticipated increases in sales and marketing expenses for direct mail campaigns, increased prices for paper used in producing our magazines and increases in mailing costs due to higher postage rates, partially offset by reductions in publishing direct operating costs contributed by the SpecPub Inc. asset group.

Comparison of the year ended December 31, 2005 to the year ended December 31, 2006 (in thousands, except percentages):

                                                           Year Ended December 31,            Increase (Decrease)
                                                          2005               2006                $               %

Publishing revenue:
Advertising services                                   $     2,681       $      15,363      $     12,682         473 %
Subscription services                                          933               6,069             5,136         550 %
Transaction services                                         1,121               5,701             4,580         409 %

Total publishing revenue                                     4,735              27,133            22,398         473 %

Publishing direct operating costs and expenses:
Cost of revenue                                              2,716              16,504            13,788         508 %
Sales and marketing                                            730               5,356             4,626         634 %

Total publishing direct operating costs and expenses         3,446              21,860            18,414         534 %

Publishing contribution margin                         $     1,289       $       5,273      $      3,984         309 %

The increase in publishing revenue and direct operating costs and expenses in fiscal 2006 over fiscal 2005 resulted primarily from the incremental effect of operating of our publishing segment for a full year in fiscal 2006, compared to two months of operations in fiscal 2005.

Other Operating Costs and Expenses

Other operating costs and expenses include general and administrative costs (such as corporate management, human resources, finance and legal), restructuring, depreciation and amortization and impairment of goodwill and intangible assets. These other operating costs and expenses are not evaluated in the measurement of segment performance since segment managers do not have discretionary control over these costs and expenses.

General and Administrative. General and administrative expense consists primarily of payroll and related benefits for executive, finance, administrative and other corporate personnel, occupancy costs, professional fees, insurance and other general corporate expenses. Our general and administrative expenses were $15.1 million for 2007, up 29% from the prior year. General and administrative expenses as a percentage of revenue were 29% for 2007, up from 20% in the prior year. The increase in general and administrative expenses in both absolute dollars and as a percentage of revenue were due to increased compensation and employee related costs including severance and other costs related to the departure of our President and Chief Operating Officer in March 2007; increased legal expenses; and increased stock-based compensation expenses.

Our general and administrative expenses were $11.7 million for 2006, up 66% from the prior year. This increase was due to the incremental effect of the acquisition of LPI; increased compensation and employee related costs as a result of increases in headcount; other relocation and retention charges; and integration and other expenses associated with the acquisition of LPI such as increased legal and insurance expenses. General and administrative expenses as a percentage of revenue were 20% for both 2006 and 2005.

For fiscal 2008, we expect general and administrative expenses to decrease from fiscal 2007 primarily due to decreased compensation and employee related costs as a result of decreases in headcount and decreased legal costs.

Restructuring. In June 2006, our board of directors adopted and approved a reorganization plan to align our resources with our strategic business objectives. As part of the plan, we consolidated our media and advertising services, e-commerce services and back-office operations on a global basis to streamline our operations as part of continued integration of our acquired businesses. The reorganization, along with other organizational changes, reduced our total workforce by approximately 5%. Restructuring costs of approximately $0.8 million, primarily related to employee severance benefits of approximately $0.6 million and facilities consolidation expenses of approximately $0.2 million, were recorded during 2006. We completed this restructuring in the fourth quarter of

2006, with certain payments continuing beyond 2006 in accordance with the terms of existing severance and other agreements.

In July 2007, our board of directors adopted and approved a reorganization plan to further align our resources with our strategic business objectives. As part of the plan, we closed our international offices located in Buenos Aires and London in order to streamline our business operations and reduce expenses. The reorganization, along with other organizational changes, reduced our total workforce by approximately 15%. Restructuring costs of approximately $630,000, primarily related to employee severance benefits of approximately $500,000 and facilities consolidation expenses of approximately $130,000, were recorded during 2007. We completed this restructuring in the fourth quarter of 2007.

Depreciation and Amortization. Depreciation and amortization expense was $6.7 million for fiscal 2007, up 30% from the prior year, due primarily to an increase in depreciation expense related to capital expenditures we have made in order to support our on-going online product development and compliance efforts. Amortization of intangible assets was $0.9 million due to intangible assets which we capitalized in connection with the acquisition of LPI. Depreciation and amortization as a percentage of revenue was 13% for 2007, up from 9% in the prior year. Depreciation and amortization expense was $5.2 million for fiscal 2006, up 50% from the prior year, due primarily to an increase in the amortization of intangible assets associated with the acquisition of LPI and increased capital expenditures to support our on-going online product development and compliance efforts. Amortization of intangible assets was $1.1 million due to intangible assets which we capitalized in connection with the acquisition of LPI. Depreciation and amortization as a percentage of revenue was 9% for 2006, down from 10% in the prior year.

For fiscal 2008, we expect depreciation and amortization expense will increase over fiscal 2007 as a result of capital investments to support our on-going online product development, and to integrate and re-architect the core technology platform of our websites.

Impairment of Goodwill and Intangible Assets. During 2007, we recorded impairment charges to goodwill and to intangible assets of $21.5 million and $4.4 million, respectively. During the three months ended June 30, 2007, we recorded an estimated goodwill impairment charge of $21.1 million, primarily resulting from lower than expected advertising revenue related to our publishing segment which we believe resulted in a significant decrease in the trading price of our common stock and a corresponding reduction in our market capitalization. During the fourth quarter of 2007, we recorded an additional impairment charge to goodwill of $0.4 million related to the winding down of our international marketing efforts and the closure of our international offices in conjunction with our July 2007 restructuring plan. Also during the fourth quarter of 2007, we revised our second quarter impairment estimate as a result of the completion of an independent business valuation of certain of our intangible assets and recorded an additional impairment charge of $4.4 million to our intangible assets for the year ended December 31, 2007.

Other Income and Expenses

Interest Expense. Interest expense was $2.0 million for fiscal 2007, an increase of 66% from the prior year, due primarily to increased interest expense on the Orix term and revolving loans entered into in September 2006, offset partially by a decrease in interest expense on the LPI note entered into in November 2005. Interest expense was $1.2 million for fiscal 2006, an increase of 400% from the prior year, due primarily to the issuance of the note payable in connection with the acquisition of LPI as well as the Orix term and revolving loans. In July 2007, we used a portion of the proceeds of our equity financing to repay, in full, our indebtedness obligations under loans from Orix, as well as our obligations under the LPI note. Interest expense for the year ended December 31, 2007 includes prepayment fees of $0.3 million, loan deferral fees of $0.2 million and $0.2 million for acceleration of the loan discount.

Other Income, Net. Other income, net consists of interest earned on cash, cash equivalents, restricted cash and short-term investments as well as other miscellaneous non-operating transactions. Other income, net was $0.5 million for fiscal 2007, a decrease of 7% from the prior year, primarily due to decreased interest income during fiscal 2007 on our lower cash balance. Other income, net was $0.6 million for fiscal 2006, a decrease of 50% from the prior year, primarily due to decreased interest income during fiscal 2006 on our lower cash balance as a result of the acquisitions of LPI in November 2005 and RSVP in March 2006.

Discontinued Operations

In an effort to simplify our business model, we discontinued our Travel and Events businesses during 2007. In March 2007, we sold our membership interest in DSW, a joint venture, to the minority interest partner. In December 2007, we sold substantially all the assets of RSVP. As a result of the sale of our interest in DSW, the sale of substantially all the assets of RSVP and our decision to exit our Travel and Events businesses, we have reported the results of operations and financial position of RSVP and DSW as discontinued operations within the consolidated financial statements for the years ended December 31, 2006 and 2007 in accordance with FAS 144. We have reported the financial position of RSVP and DSW as assets and liabilities of discontinued operations on the consolidated balance sheet as of December 31, 2006. In addition, we have segregated the cash flow activity of RSVP and DSW from the consolidated statements of cash flows for the years ended December 31, 2006 and 2007. The results of operations of RSVP and DSW were previously reported and included in the results of operations and financial position of our Travel and Events segment.

The results of discontinued operations for the years ended December 31, 2006 and 2007 were as follows (in thousands):

. . .