You should read the following discussion together with our consolidated financial statements and the related notes and other financial information included elsewhere in this report. The discussion in this report contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. The cautionary statements made in this report should be read as applying to all related forward-looking statements wherever they appear in this report. Our actual results could differ materially from those discussed here.

Business Overview and Recent Events

HSW International is an online publishing company that develops and operates Internet businesses focused on providing consumers in the world's digital economies with locally relevant, high quality information and ways to connect with each other. Our international websites published under the HowStuffWorks brand provide readers in China and Brazil with thousands of articles about how the world around them works, serving as destinations for credible, easy-to-understand reference information. HSW International is the exclusive licensee in China and Brazil for the digital publication of translated content from HowStuffWorks.com, a subsidiary of Discovery Communications, Inc., and in China for the digital publication of translated content from World Book Encyclopedia. Our DailyStrength business, which was acquired on November 26, 2008, helps hundreds of thousands of readers share information and support on www.dailystrength.org, a comprehensive health-related social media website. The acquisition of DailyStrength was completed in part to diversify our business and to publish another product which offers insight on highly relevant topics. We generate revenue primarily through the sale of online advertising on our websites. We were incorporated in Delaware in March 2006. Our headquarters are located at One Capital City Plaza, 3350 Peachtree Road, Suite 1600, Atlanta, Georgia 30326.

Business Trends

The number of unique visitors, page views and time spent on our Web sites indicates volume of traffic to our sites and are key non-financial metrics we monitor, because they can influence our advertising revenue rates and our overall advertising revenue. We also monitor overall Internet advertising trends as indicators of our performance. Because data on Brazil and China is limited, we watch U.S. trends as a proxy, although trends might vary country-by-country.

The advertising market overall declined in 2008 due to the economic slowdown. This decline affected online advertising expenditures as well. The result for us has been lower revenue than expected, even in Brazil.

In this tough economy, we are cautious regarding our operating expenses and have cut costs in 2009 to attempt to better align our spending with our expectations for growth within each product line. We acquired DailyStrength in November 2008 and accordingly have added related operating expenses to our 2009 budget. Since then, we have implemented cost-cutting measures in our headcount and third-party and other professional services to better align our operating costs with our revised growth expectations and partially offset the additional charges related to DailyStrength. As described above, we expect challenges in our revenue growth and margins for 2009. As a result, we closely monitor our cash status and our progress and likelihood of success in each of our markets. Accordingly, we might decide to suspend our activities in one or more of our markets in order to focus our limited resources in the other(s).

The INTAC Merger

We completed the INTAC Merger on October 2, 2007 to assist in the development of our digital content database exclusively licensed from HowStuffWorks by
(i) accelerating our obtaining Internet licenses in China for launching our Internet platform, (ii) obtaining INTAC's knowledge of the Chinese markets, relationships, and core competencies to accelerate the growth of our Internet platforms in China, and (iii) providing additional cash flow from INTAC's established businesses. These established businesses included services related to wireless telephone training and the development and sale of educational software delivered to customers in China ("INTAC Legacy Businesses"). As discussed below, the INTAC Legacy Businesses were subsequently disposed.

Prior to the consummation of the merger with INTAC, we had only limited assets and operations incident to our formation and in preparation for the merger with INTAC and subsequent business.

In conjunction with the INTAC Merger:

· HowStuffWorks contributed exclusive digital publishing rights to HowStuffWorks' content for China and Brazil;

· our stock became publicly traded on the NASDQ Global Market under the symbol "HSWI"; and

· certain investors contributed $39.4 million (before expenses).

As more fully discussed in Note 2 to the consolidated financial statements included in this Annual Report to Form 10-K, the preliminary allocation of the purchase price of $47.9 million resulted in approximately $29.0 million of goodwill primarily from our expectations that we could utilize INTAC's knowledge of the Chinese markets, relationships, and core competencies to accelerate the growth of our Internet platforms in China. However, as discussed below, we disposed of the entire INTAC Legacy Businesses on February 29, 2008.

Business Development

On November 26, 2008, we acquired DailyStrength to diversify our business. This acquisition provides us with a footprint in the US healthcare market and we believe this addition is synergistic to our existing technology. The DailyStrength acquisition extends HSW International's proven publishing platform with social networking applications and communities. DailyStrength hosts more than 500 communities focused on issues such as weight loss, divorce, parenting and illnesses. Users of the site both read and interact with high-quality, reference information. The site features health journals, discussion forums, virtual hugs, member-created groups, and treatment reviews plus unique content provided on a daily basis by physicians and other health professionals.

Our Operations

We entered the Brazilian online publishing market in March 2007. At December 31, 2008, we had approximately 5,500 articles that were either (i) articles from the HowStuffWorks content database translated from English to Portuguese, or (ii) originally created content. The web site address is http://hsw.com.br/. We are continuing the development of our business strategy in Brazil as we continue to expand by (i) adding original proprietary digital content designed to meet the information needs of the Brazilian online community, (ii) expanding the amount of translated content from HowStuffWorks, and (iii) refining local marketing strategies. We recognized approximately $405,000 and $148,000 of revenue during the years ended December 31, 2008 and 2007, respectively.

In June 2008, we entered China's online publishing market utilizing a combination of the contributed assets from HowStuffWorks with the benefit of INTAC's relationships and knowledge of the Chinese markets in obtaining our Internet licenses. In September 2008, we announced an exclusive content partnership with World Book, Inc. In 2009, World Book will create thousands of original Chinese-language articles providing information on all branches of knowledge, including arts, sciences, history, technology, mathematics, sports, and recreation, exclusively for HSW International's Beijing-based website, BoWenWang (http://www.bowenwang.com.cn/). At December 31, 2008, we had approximately 4,400 articles.

We are developing our business strategy for DailyStrength with emphasis on expanding its offerings, in addition to integrating the best of DailyStrength's social media technologies into HSW International's web publishing platform. DailyStrength.org offers content authored by medical professionals based on current topics, support groups, a treatment directory with definitions, private messaging, one-on-one chat forums and personal goal trackers, and primarily serves English speaking territories, such as the United States, Canada, Australia and the United Kingdom. The medical panel of professionals contributes articles and journals providing insight to a number of topics relevant to the DS user group and communities. DailyStrength and its user group create online communities and support services to help people cope with health, stress and other challenges of modern life - issues that people the world over face daily.

Sale of the INTAC Legacy Businesses (Discontinued Operations) and Related Transactions

Due to an increased focus of our management and resources on our primary Internet publishing business, a change of control in our majority ownership leading to further refinement in our strategies, and an under performance of the INTAC Legacy Businesses after the INTAC Merger, in early 2008, we decided to dispose of the INTAC Legacy Businesses. The INTAC Legacy Businesses were comprised of two lines of business which were both unrelated to our core Internet platform businesses.

We had originally estimated when deciding to acquire the INTAC Legacy Businesses that, in addition to accelerating our obtaining Internet licenses in China for launching our Internet platform, INTAC would provide us (i) further knowledge of the Chinese markets, relationships, and core competencies to accelerate the growth of our Internet platforms in China, and (ii) additional cash flow from its established businesses. Following the underperformance of the INTAC Legacy Businesses in the fourth quarter of 2007, that resulted in short-term negative cash flow from these operations of $1.1 million, and a change-in-control of our business through the acquisition of our largest shareholder, HowStuffWorks, by Discovery, we reconsidered the potential risk of excessive short-term consumption of cash and management resources by our acquired non-core INTAC Legacy Businesses and refined our strategic direction.

We decided that it was critical that all our current resources be fully focused on expanding our Brazilian platform and the June 2008 launch of our Chinese Internet platform. Although we believe we have benefited in the short-term from INTAC's relationships and knowledge of the Chinese markets in obtaining our Internet licenses, this refined strategic focus did not allow us the time required to realize the expected long-term synergies, embodied in our acquired INTAC goodwill, from INTAC's knowledge of the Chinese markets, relationships, and core competencies. In addition, we were provided with and acted on an opportunity to sell the unrelated INTAC Legacy Businesses for approximately their stand-alone appraised value, and through simultaneous sale of the treasury stock received, generate significant additional cash resources for investing into our core Internet businesses.

At December 31, 2007, we recognized a loss of $24.7 million related to the February 29, 2008, INTAC legacy disposition and has been recorded as discontinued operations in the accompanying consolidated financial statements. During the year ended December 31, 2008, we recognized a loss of $133,526, which has been recorded as discontinued operations in the accompanying consolidated financial statements. All the goodwill resulting from the INTAC acquisition was included in the INTAC Legacy Businesses when we determined the potential write off, because such operations had not been integrated with our online publishing segment prior to our decision to dispose of the INTAC Legacy Businesses.

On February 29, 2008, we completed the sale of the INTAC Legacy Businesses. The INTAC Legacy Businesses were sold to China Trend Holdings Ltd., a British Virgin Islands corporation that is owned by Mr. Zhou, CEO, director and significant stockholder of INTAC prior to the INTAC Merger in October 2007. Mr. Zhou was also a member of our board of directors from October 2007 to December 2007. In accordance with the share purchase agreement with China Trend Holdings, we were to receive 5.0 million of our common shares owned by Mr. Zhou. In addition, as a condition to the February 29, 2008, INTAC Legacy Businesses disposition, the INTAC Legacy Businesses were to include $4.5 million in cash at closing.

At the February 29, 2008, INTAC Legacy Businesses disposition, we received only 4.5 million shares of our common stock from Mr. Zhou and accordingly, we only funded the INTAC Legacy Businesses with $2.7 million in cash. Mr. Zhou delivered his additional 0.5 million shares of our common stock to us on March 26, 2008, and on March 31, 2008, we released another $1.6 million in cash to the INTAC Legacy Businesses ($1.8 million for the stock received net of an estimated $0.2 million withheld for disposition expenses). As of December 31, 2008, all of HSWI's assets were in our core Internet businesses and the sole asset we retained from the INTAC Merger is the Internet licenses intangible we used to enter the Chinese markets in June 2008.

On February 15, 2008, we entered into a stock purchase agreement where we agreed to sell and two qualified institutional buyers agreed to purchase the 5.0 million shares of our common stock received from the INTAC Legacy Businesses disposition at a purchase price of $3.68 per share. Simultaneously with the February 29, 2008 disposition, we sold the 4.5 million shares we received to the institutional buyers. Subsequently on March 26, 2008, we sold the additional 0.5 million shares from Mr. Zhou to the institutional buyers.

Results of Operations - Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

The following table sets forth our results of operations for the years ended December 31, 2008 and 2007. As discussed in Notes 1, 2, and 3 to the consolidated financial statements included in this Annual Report on Form 10-K, HSWI merged with INTAC International Inc. on October 2, 2007, and the INTAC Legacy Businesses were subsequently disposed on February 29, 2008. Following the disposition, the sole asset we retained from INTAC is the indefinite-lived Internet Licenses intangible asset and no revenue was realized from this asset in 2008 or 2007. INTAC's results of operations have been recorded within discontinued operations for both years presented.

                    HSW INTERNATIONAL, INC. and SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                          (expressed in U.S. Dollars)

                                                                  Years Ended December 31,
                                                                   2008              2007

Operating revenue
Digital online publishing                                      $     234,144     $     147,535
Sales to affiliates                                                  222,862                 -
Total revenue                                                        457,006           147,535

Cost of services                                                     987,266         1,242,252

Gross margin                                                        (530,260 )      (1,094,717 )

Operating expenses
Selling, general and administrative (including stock-based
compensation expense of $4,787,756 and $7,203,738
in 2008 and 2007, respectively)                                   15,678,365        13,710,723
Licenses to operate in China impairment                            7,850,000                 -
Depreciation and amortization                                        223,548            57,748
Total operating expenses                                          23,751,913        13,768,471

Loss from continuing operations before other income
(expense) and income taxes                                       (24,282,173 )     (14,863,188 )

Other income (expense)
Interest income                                                      515,238            51,754
Interest expense                                                           -           (39,912 )
Total other income (expense)                                         515,238            11,842

Loss from continuing operations before income taxes              (23,766,935 )     (14,851,346 )

Deferred income tax benefit                                        1,962,500                 -

Loss from continuing operations                                  (21,804,435 )     (14,851,346 )

Loss from discontinued operations, net of income taxes              (133,526 )     (24,687,959 )

Net loss                                                       $ (21,937,961 )   $ (39,539,305 )

Basic and diluted weighted average shares outstanding             52,941,525        11,544,818

Net loss per basic and diluted shares                          $       (0.41 )   $       (3.42 )

Revenues

Revenue for the years ended December 31, 2008 and 2007 of approximately $405,000 and $148,000, respectively, was generated in Brazil, where we launched our website in March 2007. For the year ended December 31, 2008, approximately 86% of revenue was generated from paid-for-impression advertising and 14% was generated from pay-per-performance ads. DailyStrength contributed approximately $52,000 of revenue for the year ended December 31, 2008. There was no China digital online publishing revenue during 2008 or 2007 as the website in China was launched in June 2008.

Cost of Services

Cost of services includes the ongoing third-party costs to translate, localize and enhance articles from English to Portuguese and Mandarin Chinese, as well as costs incurred to acquire original articles written by third parties. Portuguese article translation costs totaled $777,000 and $719,000 and Chinese translation costs totaled $194,000 and $523,000 for the years ended December 31, 2008 and 2007, respectively.

Operations - Selling, General and Administrative Expenses

Our total selling, general and administrative expenses increased by $2.0 million for the year ended December 31, 2008 as compared to 2007. The increase is primarily attributable to increased costs of establishing our operations related to the Brazil website, and launching the China website, as well as additional costs incurred for compliance and operation as a public company. The increases over 2007 are primarily comprised of $1.8 million in personnel costs, $2.1 million in professional fees related to operating as a public company, as well as continued investment in our platform and technology and $0.5 million associated with directors and officers insurance costs. The increase is partially offset by a $2.4 million decrease in stock-based compensation expense for the year ended December 31, 2008 as compared to 2007 (see Note 10 to Notes to the Consolidated Financial Statements included in this Annual Report to Form 10-K). Stock-based compensation expense is a non-cash item, and in 2008 totaled $4.8 million. This amount was based primarily on vesting during the year of options at exercise prices ranging from $6.50 per share to $7.10 per share, reflecting our higher stock price in earlier periods when the options were granted.

Impairment Loss

We recorded an impairment charge related to the licenses to operate in China intangible asset in the amount of $7.9 million (see Note 6).

Other Income (Expense)

Other income (expense) increased approximately $503,000 for the year ended December 31, 2008 as compared to 2007. The increase in interest income reflects an increase in cash on hand resulting from the sale of our stock to certain institutional investors during our first quarter. The decrease in interest expense is due to full payment on an affiliated party loan during the fourth quarter of 2007.

Deferred Income Tax Benefit

We recorded a $2.0 million tax benefit related to the impairment charge against the licenses to operate in China intangible asset.

Discontinued Operations - INTAC Legacy Businesses

The discussion that follows relates to the INTAC Legacy Businesses results of operations for the years ended December 31, 2008 and 2007. Revenue was for services related to wireless telephone training and the development and sale of educational software in China. The $0.5 million loss from discontinued operations in 2008 was reduced by a $0.4 million gain upon final disposition on February 29, 2008. The $24.7 million loss from discontinued operations in 2007 was primarily due to a goodwill write off of approximately $22.5 million related to the February 29, 2008 disposition of the INTAC Legacy Businesses.

                                                                 Years Ended December 31,
                                                                  2008             2007

Revenues                                                       $    38,849     $     198,627
Loss from discontinued operations (before income taxes)           (133,526 )     (24,687,959 )
Loss from discontinued operations                              $  (133,526 )   $ (24,687,959 )

As discussed above and more fully in Notes 2 and 3 to the Consolidated Financial Statements included in this Annual Report on Form 10-K, the goodwill write off is the result of the subsequent sale of the INTAC Legacy Businesses on February 29, 2008.

Liquidity and Capital Resources

We expect to expend significant resources in expanding and gaining market share for our Internet platforms in Brazil and China and to develop our healthcare social networking strategy, including up-front expenditures to create or acquire content. These expenditures will be made in the respective markets based on our success and anticipated market conditions and trends. We expect that most of these expenditures will be paid or under commitment before we begin to realize significant revenues. We believe that our current cash balance and expected cash generated from future operations will be sufficient to fund operations for longer than the next twelve months. If cash on hand and generated from operations is insufficient to satisfy our working capital and capital expenditure requirements, we may be required to sell additional equity or obtain bank financing to fund further development and attain profitability. There is no assurance that such financing will be available or that we will be able to complete financing on satisfactory terms, if at all.

Cash and cash equivalents was $18.0 million at December 31, 2008, compared to $3.5 million at December 31, 2007. The increase in cash is primarily attributable to the sale of our stock during the first quarter of 2008.

As of December 31, 2008, our cumulative losses were $74.2 million, which included non-cash expenses of $21.8 million for stock-based compensation, $22.5 million goodwill write-off related to the February 29, 2008 INTAC Legacy Businesses disposition and an impairment charge of $5.9 million, net of tax. We used a significant amount of the $21.0 million net proceeds from the October 2, 2007, sale of stock to pay transaction costs, to pay off advances from HowStuffWorks, and to fund operations. As previously disclosed, in the first quarter of 2008, we received an additional $33.4 million before expenses from the sale of our stock.

Cash flows from operations

Our net cash used in continuing operating activities during 2008 increased by $4.3 million compared to the prior year. The increase was due to increased funding requirements to support our operations in Brazil and China while building and maintaining our technology infrastructure. Net cash used in discontinued operating activities was $0.5 million and $5.1 million for the years ended December 31, 2008 and 2007.

Cash used in investing activities

During the year ended December 31, 2008, net cash used in investing activities was $8.5 million compared to $0.6 million in 2007. Cash used in investing activities during the year ended December 31, 2008 reflects $4.5 million of cash used in conjunction with the sale of our INTAC Legacy Businesses, $3.2 million of cash used to acquire DailyStrength, as well as the purchases of property and equipment.

Cash flows from financing activities

For the year ended December 31, 2008, net cash provided by financing activities was approximately $35.2 million versus $16.5 million for 2007. The significant increase in 2008 is a direct result of the proceeds we received from the sale of our common stock during the first quarter.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. We believe that of our significant accounting policies, revenue recognition, stock-based compensation and long-lived assets including goodwill and other intangible assets may involve a higher degree of judgment and complexity.

Revenue Recognition

Online publishing revenue is generally recognized as visitors are exposed to or react to advertisements on our website. Revenue is generated from advertising in the form of sponsored links and image ads. This includes both pay-per-performance ads and paid-for-impression advertising. In the pay-per-performance model, we earn revenue based on the number of clicks associated with such ad; in the paid-for-impression model (sponsorships), revenue is derived from the display of ads.

We recognize revenue when the service has been provided, and the other criteria set forth in Staff Accounting Bulletin ("SAB") 104, Revenue Recognition, have been met; namely, the fees we charge are fixed or determinable, we and our advertisers understand the specific nature and terms of the agreed-upon transactions and the collectability is reasonably assured.

Stock-Based Compensation

Under the 2006 Equity Incentive Plan adopted April 13, 2006 (the "Plan"), HSWI authorized 8,000,000 shares for grant as part of a long term incentive plan to attract, retain and motivate its eligible executives, employees, officers, directors and consultants. Options to purchase common stock under the Plan have been granted to our officers and employees with an exercise price equal to the fair market value of the underlying shares on the date of grant. Additionally in 2008, restricted shares were granted to certain members of our Board of Directors and executives at the fair market value on the grant date. As of December 31, 2008, no options had been exercised under the Plan.

We account for stock-based compensation in accordance with SFAS 123(R) which requires us to recognize expense related to the fair value of our stock-based compensation awards.

SFAS 123(R) requires the use of a valuation model to calculate the fair value of the stock based awards. We have elected to use the Black-Scholes options pricing model to determine the fair value of stock options on the dates of grant, consistent with that used for pro forma disclosures under SFAS 123. We measure stock-based compensation based on the fair values of all stock-based awards on the dates of grant, and recognize stock-based compensation expense using the straight-line method over the vesting periods. Stock-based compensation expense was $4.8 million and $7.2 million for the years ended December 31, 2008 and 2007, respectively.

Long-Lived Assets Including Goodwill and Other Intangible Assets

We review property and equipment and amortizable intangible assets for impairment whenever events or changes in circumstances indicate that the . . .