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, 2008, 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 online media company exclusively serving the worldwide lesbian, gay, bisexual and transgender, or LGBT, community. We serve this audience through our websites Gay.com and PlanetOut.com.
As a result of the divestitures of RSVP, DSW, LPI and SpecPub and our decision to exit the Travel and Events and Publishing businesses in December 2007 and August 2008, respectively, we have one segment remaining as of December 31, 2008: Online. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," we have reported the results of operations and financial position of RSVP, DSW, LPI and SpecPub in discontinued operations within the consolidated financial statements.
On January 8, 2009, we signed a definitive agreement to combine with Here Networks LLC and Regent Entertainment Media Inc. Under the proposed business combination, the combined entity will be called Here Media Inc. ("Here Media") and will be effected through a contribution by the owners of Here Networks and Regent Entertainment Media of those businesses and an estimate of $4.7 million of cash into Here Media, a newly formed holding company. PlanetOut will concurrently be merged with a wholly owned subsidiary of Here Media. Following the contribution and the merger, all three companies will be subsidiaries of Here Media.
Executive Operating and Financial Summary Our total revenue was $19.8 million in fiscal 2008, decreasing 24% from our prior year's revenue of $26.0 million, due primarily to decreases in our advertising and subscription services revenue. Total operating costs and expenses were $27.7 million in fiscal 2008, decreasing 28% from the prior year total of $38.6 million. These decreases were primarily due to reductions in headcount, legal expenses and marketing expenditures. Loss from operations was $7.9 million in fiscal 2008, compared to a loss from operations of $12.6 million in fiscal 2007. This decrease in loss from operations was primarily the result of the reductions in operating costs in order to manage expenses against decreases in our revenues noted above.
We expect that revenue will decrease slightly in fiscal 2009 in comparison to fiscal 2008, primarily as a result of overall economic conditions. We expect our operating loss will decrease in fiscal 2009 in comparison to fiscal 2008, due to further reductions in our operating expenses including the restructuring noted in Note 14 "Subsequent Events" in our consolidated financial statements. Results of Operations
Operating 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. Other operating costs and expenses such as general and administrative costs (consisting of costs such as corporate management, human resources, finance and legal), restructuring, and depreciation and amortization do not vary proportionately with total revenues, and as such, are not evaluated in the measurement of operating performance.
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 co-marketing agreements with affiliates.

Cost of revenue primarily consists of payroll and related benefits associated with supporting our subscription-based services, the development and expansion of site operations and support infrastructure, and producing and maintaining content for our various websites. Other expenses directly related to generating revenue included in cost of revenue include transaction processing fees, computer equipment maintenance, occupancy costs, co-location and Internet connectivity fees, and purchased content. Sales and marketing expense primarily consists of payroll and related benefits for employees involved in sales, advertising client service, customer service, marketing and other support functions; marketing and promotion expenditures; and occupancy costs.
Comparison of the year ended December 31, 2007 to the year ended December 31, 2008 (in thousands, except percentages):

                                                 Year Ended December 31,                Increase (decrease)
                                                  2007               2008                $                 %
Online revenue:
Advertising services                          $      9,361         $   6,150        $     (3,211 )          (34 %)
Subscription services                               16,130            13,413              (2,717 )          (17 %)
Transaction services                                   470               257                (213 )          (45 %)

Total online revenue                                25,961            19,820              (6,141 )          (24 %)

Online direct operating costs and
expenses:
Cost of revenue                                     11,422             9,877              (1,545 )          (14 %)
Sales and marketing                                  9,191             6,651              (2,540 )          (28 %)

Total online direct operating costs and
expenses                                            20,613            16,528              (4,085 )          (20 %)


Online contribution margin                    $      5,348         $   3,292        $     (2,056 )          (38 %)

Online revenues decreased as a result of a decrease in our advertising revenues due to turnover in our sales staff and overall economic conditions and the discontinuance of our Local Scene advertising services revenue of $0.8 million in 2007, partially offset by $1.7 million of advertising revenue in fiscal 2008 related to the marketing and advertising services provided to Regent as part of the Marketing Agreement with Regent and a decrease in subscription revenues due to a reduction in the number of online subscribers to our Gay.com website. Online cost of revenue decreased primarily as a result of decreased headcount expenses of $0.6 million, a reduction in writedowns of capitalized labor of $0.5 million in 2007 related to development plan changes to our website, a reduction in expenses due to the closing of our international offices in conjunction with our July 2007 reorganization plan of $0.2 million and decreases in credit card fees of $0.2 million. Online sales and marketing expenses decreased primaritly as a result of decreased headcount expenses of $0.9 million and decreased spending on advertising and marketing of $0.8 million during fiscal 2008.
For fiscal 2009, we expect that online revenue will decrease from fiscal 2008 as a result of anticipated additional reductions in the number of online subscribers and reductions in advertising revenues as a result of overall economic conditions and the completion of advertising services to Regent under the Marketing Agreement in March 2009. We expect that online cost of revenue will decrease as a result of further reductions in headcount. For fiscal 2009, we expect that sales and marketing expenses will decrease as a result of further reductions to marketing expenditures to manage costs.
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                          $     10,683         $   9,361        $     (1,322 )          (12 %)
Subscription services                               18,040            16,130              (1,910 )          (11 %)
Transaction services                                 1,021               470                (551 )          (54 %)

Total online revenue                                29,744            25,961              (3,783 )          (13 %)

Online direct operating costs and
expenses:
Cost of revenue                                      9,491            11,422               1,931             20 %
Sales and marketing                                 10,142             9,191                (951 )           (9 %)

Total online direct operating costs and
expenses                                            19,633            20,613                 980              5 %


Online contribution margin                    $     10,111         $   5,348        $     (4,763 )          (47 %)

Online revenues decreased as a result of decreases in subscription revenue due to a reduction in the number of online subscribers to our Gay.com website, decreases in transaction revenue due to a decrease in sales of products on our former transaction-based website properties of $0.7 million in 2007 and a decrease in advertising revenue due to a reduction in national and local advertising sales due in part to turnover in our 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 of $0.2 million. Online sales and marketing expenses decreased as a result of decreased spending on advertising during fiscal 2007.
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 do not vary proportionately with total revenues, and as such, are not evaluated in the measurement of operating performance.
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 $7.2 million for 2008, down 37% from the prior year. General and administrative expenses as a percentage of revenue were 37% for 2008, down from 44% in the prior year. The decrease in general and administrative expenses in both absolute dollars and as a percentage of revenue were due to decreased compensation and employee related costs of $1.1 million as a result of reductions in headcount, including severance and other costs related to the departure of our President and Chief Operating Officer in March 2007of $0.3 million decreases in legal expenses of $1.5 million, and a reduction in expenses due to the closing of our international offices in conjunction with our July 2007 reorganization plan of $0.7 million.
Our general and administrative expenses were $11.4 million for 2007, up 45% from the prior year. General and administrative expenses as a percentage of revenue were 44% for 2007, up from 26% 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 as a result of increases in headcount expense of $1.1 million and increased legal and insurance expenses of $1.4 million and $0.2 million, respectively.
For fiscal 2009, we expect general and administrative expenses to decrease from fiscal 2008 primarily due to decreased compensation and employee related costs as a result of decreases in headcount.
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 $0.6 million, primarily related to employee severance benefits of approximately $0.5 million and facilities consolidation expenses of approximately $0.1 million, were recorded during 2007. We completed this restructuring in the fourth quarter of 2007.
For fiscal 2009, we expect additional restructuring charges of $0.5 million as a result of our January 2009 restructuring.
Depreciation and Amortization. Depreciation and amortization expense was $3.9 million for fiscal 2008, down 28% from the prior year, due primarily to a decrease in depreciable assets in service and due a decrease in amortization of loan origination costs with the repayment of our note to Orix in 2007. Depreciation and amortization as a percentage of revenue was 20% for 2008, down from 21% in the prior year. Depreciation and amortization expense was $5.5 million for fiscal 2007, up 44% from the prior year, due primarily to increased capital expenditures to support our on-going online product development and compliance efforts and amortization of loan origination costs of our note to Orix of $0.3 million. Depreciation and amortization as a percentage of revenue was 44% for 2007, up from 13% in the prior year as a result of the increased expenditures for online product development and decreased revenues from the prior year.

For fiscal 2009, we expect depreciation and amortization expense will decrease from fiscal 2008 as a result of a decrease in depreciable assets in service.
Impairment of Goodwill and Intangible Assets. During the fourth quarter of 2007, we recorded an 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.
Other Income and Expenses
Interest Expense. Interest expense was $0.1 million for fiscal 2008, a decrease of 92% from the prior year, due primarily to repayment in July 2007 of our Orix term and revolving loans entered into in September 2006. Interest expense was $1.6 million for fiscal 2007, an increase of 235% from the prior year, due primarily to the issuance of the Orix term and revolving loans. 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 on the Orix loans.
Other Income, Net. Other income, net consists of interest earned on cash, cash equivalents, and restricted cash as well as other miscellaneous non-operating transactions. Other income, net was $0.2 million for fiscal 2008, a decrease of 65% from the prior year, primarily due to decreased interest income during fiscal 2008 on our lower cash balance as a result of loss from continuing and discontinued operations. Other income, net was $0.5 million for fiscal 2007, a decrease of 10% from the prior year, primarily due to decreased interest income during fiscal 2007 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 of the assets of RSVP. In August 2008, we sold our Publishing business to Regent, which included the operations of LPI and SpecPub.
As a result of the sale of our interest in DSW, the sale of substantially all the assets of RSVP, the sale of substantially all of the assets of LPI and SpecPub and our decision to exit our Publishing and Travel and Events businesses, we have reported the results of operations and financial position of RSVP, DSW, LPI and SpecPub as discontinued operations within the condensed consolidated financial statements for the year ended December 31, 2006 in accordance with FAS 144. We have reported the financial position of LPI and SpecPub as assets and liabilities of discontinued operations on the condensed consolidated balance sheet as of December 31, 2007. In addition, we have segregated the cash flow activity of RSVP, DSW, LPI and SpecPub from the condensed 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 operations of LPI and SpecPub were previously reported and included in the results of operations and financial position of our Publishing segment.
During the three months ended June 30, 2007, we determined that a triggering event had occurred in May 2007, primarily due to lower advertising revenue than expected related to our publishing segment and lower than expected revenue related to our Travel and Events business which we believe resulted in a significant decrease in the trading price of the our common stock and a corresponding reduction in its market capitalization. As a result of this triggering event, we conducted the first step of its goodwill impairment test and determined that goodwill had been impaired. Accordingly, we conducted the second step of our impairment test to measure the impairment and recorded an estimated impairment charge to goodwill in the amount of $21.1 million in operating expenses of discontinued operations during the three months ended June 30, 2007.
During the three months ended December 31, 2007, in conjunction with our estimate to measure goodwill impairment in the three months ended June 30, 2007, we recorded an impairment charge to our customer lists and user bases and tradenames of $1.9 million and $2.5 million, respectively, as a result of the completion of an independent business valuation of the intangible assets of our LPI reporting unit.
Restructuring costs of approximately $19,000, consisting of termination benefits related to our Travel and Events business, were recorded in discontinued operations during 2007. Restructuring costs of approximately $54,000, consisting of termination benefits related to our Publishing business, were recorded in discontinued operations during 2006.

The results of discontinued operations for the years ended December 31, 2006, 2007 and 2008 were as follows (in thousands):

                                                          Year ended December 31, 2006
                                       LPI           SpecPub           RSVP           DSW           Total
Total revenue                        $ 22,108        $  6,904        $  9,158        $  730        $ 38,900
Operating costs and expenses:
Cost of revenue                        13,071           4,182           8,369            92          25,714
Sales and marketing                     4,680             770           1,317           435           7,202
General and administrative              3,192             630             890           131           4,843
Restructuring                              54               -               -             -              54
Depreciation and amortization             895             506             419             -           1,820
Impairment of goodwill and
intangible assets                           -               -               -             -               -

Total operating costs and
expenses                               21,892           6,088          10,995           658          39,633

Income (loss) from operations             216             816          (1,837 )          72            (733 )
Other income (expense), net              (482 )          (221 )             8           (44 )          (739 )

Income (loss) from discontinued
operations                           $   (266 )      $    595        $ (1,829 )      $   28        $ (1,472 )




                                                           Year ended December 31, 2007
                                        LPI           SpecPub           RSVP           DSW            Total
Total revenue                        $  20,249        $  6,803        $ 17,033        $    2        $  44,087
Operating costs and expenses:
Cost of revenue                         13,835           4,629          18,737             -           37,201
Sales and marketing                      5,514           1,561           1,525            37            8,637
General and administrative               3,118             571             262             1            3,952
Restructuring                                -               -              19             -               19
Depreciation and amortization            1,015             253             286             -            1,554
Impairment of goodwill and
intangible assets                       20,099           5,400           4,400             -           29,899

Total operating costs and
expenses                                43,581          12,414          25,229            38           81,262


Loss from operations                   (23,332 )        (5,611 )        (8,196 )         (36 )        (37,175 )
Other income (expense), net               (241 )          (103 )            25             -             (319 )

Loss from discontinued
operations                           $ (23,573 )      $ (5,714 )      $ (8,171 )      $  (36 )      $ (37,494 )




                                                           Year ended December 31, 2008
                                                LPI           SpecPub          RSVP          Total
Total revenue                                 $ 12,569        $  2,885        $    -        $ 15,454
Operating costs and expenses:
Cost of revenue                                  9,213           2,282           (23 )        11,472
Sales and marketing                              3,346             686           (21 )         4,011
General and administrative                       1,621             211            10           1,842
Restructuring                                    1,132              97             -           1,229
Depreciation and amortization                      327              31             -             358
Impairment of goodwill and intangible
assets                                           1,978           4,294             -           6,272

Total operating costs and expenses              17,617           7,601           (34 )        25,184

Income (loss) from operations                   (5,048 )        (4,716 )          34          (9,730 )
Other income (expense), net                        (15 )             1             -             (14 )

Income (loss) from discontinued
operations                                      (5,063 )        (4,715 )          34          (9,744 )
Gain (loss) on sale of discontinued
operations                                        (787 )           651             -            (136 )

Income (loss) from and gain (loss) on
sale of discontinued operations               $ (5,850 )      $ (4,064 )      $   34        $ (9,880 )

The current and non-current assets and liabilities of discontinued operations were as follows (in thousands):

                                                              December 31, 2007
                                                         LPI       SpecPub       Total
   Current assets of discontinued operations:
   Accounts receivable                                 $ 3,189     $    977     $ 4,166
   Inventory                                             1,113          314       1,427
   Prepaid expenses and other current assets             1,251          504       1,755

                                                       $ 5,553     $  1,795     $ 7,348


   Long-term assets of discontinued operations:
   Property and equipment, net                         $   620     $     54     $   674
   Goodwill                                              1,427        2,708       4,135
   Intangible assets, net                                1,870        2,567       4,437
   Other assets                                             58           51         109

                                                       $ 3,975     $  5,380     $ 9,355


   Current liabilities of discontinued operations:
   Accounts payable                                    $   495     $     73     $   568
. . .