Summary of MEDIALINK WORLDWIDE INC

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

In August 2008, the Company transferred its 76% ownership interests in TTX (US) LLC and TTX Limited (collectively, "Teletrax"), its digital video monitoring services segment, to Philips Electronics North America Corporation and Koninklijke Philips Electronics N.V., respectively (collectively, "Philips"). In October 2008, the Company sold the client list of Medialink UK Limited ("Medialink UK"), its UK-based media communications services business, to World Television Group plc ("World") and subsequently wound down the operation. The consolidated financial statements reflect both Teletrax and Medialink UK as discontinued operations in all periods presented.

The following discussion and analysis should be read in conjunction with the Company's consolidated financial statements and notes thereto.

Results of Operations

Year ended December 31, 2008, compared with 2007

Revenues in 2008 decreased by $2,269, or 10.4%, as compared to 2007 as a result of a decline in the volume of work. Revenues in the 2008 and 2007 include $466 and $631, respectively, of service revenues recognized under a minimum commitment arrangement for which no services were provided. This arrangement relates to a services agreement that was entered into in connection with the sale of U.S. Newswire in 2006 and contains minimum commitments of $750, $600, and $500 for the fiscal years ended September 30, 2007, 2008, and 2009, respectively.

Direct costs decreased by $1,185 in 2008 primarily as a result of a decline in the volume of work. As a percentage of revenue, direct costs in 2008 decreased to 40.6% from 41.8% in 2007 primarily as a result of certain cost cutting initiatives.

Selling, general, and administrative ("SG&A") expenses in 2008 decreased by $2,044 as compared to 2007, and as a percentage of revenue decreased to 72.3% in 2008 from 74.1% in 2007. SG&A expenses decreased as a result of certain cost cutting initiatives, including a decline in payroll costs resulting from headcount reductions, a decrease in occupancy costs as a result of consolidating certain offices, a reduction in marketing costs, and reduced non-billable travel and entertainment expenses. SG&A expenses also decreased from lower consulting costs incurred in 2008 for Sarbanes-Oxley compliance as a result of the reduced effort required in the second year of compliance.

Based on the Company's planned actions with regard to Teletrax and Medialink UK at June 30, 2008, and the continued decline in the US-based media communications services business, the Company determined that its goodwill, all of which related to the media communications services business, should be tested for impairment prior to the annual testing date of September 30. Based on this goodwill impairment test, the Company determined that the carrying value of its goodwill exceeded its fair value. Accordingly, the Company incurred a goodwill impairment charge of $3,429 as of June 30, 2008, resulting in no goodwill remaining as of that date.

Based on the Company's current and projected cash flow losses resulting from the continued decline in revenues and the uncertain economic environment, the Company reviewed its long-lived assets for impairment as of December 31, 2008. Based on this evaluation, the Company determined that the carrying value of its long-lived assets was not recoverable and exceeded the fair value of such assets. Accordingly, the Company recognized an impairment charge of $1,118 related to property and equipment as of December 31, 2008, resulting in no net book value of fixed assets remaining as of that date.

The Company incurred a charge for exit activities of $170 in 2008, which consisted of a charge of $147 related to vacating a portion of the Company's facility in New York and a charge of $23 related to a change in estimate of the Company's future lease obligations associated with vacating a facility in 2006 in connection with the sale of U.S. Newswire.

In October 2008, the Company entered into Amendment and Waiver Agreements (the "Amendments") with each of the holders of its variable rate convertible debentures (the "Debentures"), pursuant to which the Company made a payment of $2,000, $1,700 of which was applied to principal outstanding and $300 of which satisfies the Company's future interest obligations on the Debentures for the fifteen-month period following the payment date. The Company incurred a loss on extinguishment of approximately $116 in connection with the partial prepayment of principal on the Debentures.

The Company had an operating loss of $8,298 in 2008 as compared to an operating loss of $4,386 in 2007. The operating loss in 2008 includes charges totaling $4,833 related to goodwill impairment, other impairment charges, charges for exit activities, and loss on debt extinguishment. Exclusive of such charges, the Company's operating loss in 2008 was $3,465.

The Company incurred interest expense, net of interest income, of $465 in 2008 as compared to net interest expense of $70 in 2007. This increase in net interest expense is due primarily to a reduction in interest income earned as a result of the Company's declining cash balances and declining interest rates.

On August 29, 2008, the Company transferred its 76% ownership interests in Teletrax, its digital video monitoring services business, to Philips. Prior to the transaction, Philips held a 24% ownership interest in Teletrax, and upon closing of the transaction Philips owned 100% of Teletrax. In exchange for the ownership interests in Teletrax, Philips reimbursed the Company approximately $284 for net operating costs incurred prior to closing and $129 for cash balances transferred at closing, and the Company reimbursed Philips approximately $468 representing an adjustment related to working capital, resulting in a payment by the Company of $55 to Philips, which was paid in November 2008.

On October 1, 2008, the Company sold the client list of Medialink UK, its UK-based media communications services subsidiary, to World and subsequently wound down the operation. Under the terms of the agreement, the Company will receive from World a percentage of the gross profit derived from certain Medialink UK client revenue for a period of eighteen months from the closing date. In February 2009, the Company received a payment of approximately $6 related to the fourth quarter of 2008.

In September 2006, the Company sold the assets of its U.S. Newswire division to PR Newswire Association, LLC ("PR Newswire"), a wholly-owned subsidiary of United Business Media plc, for approximately $22,577. The final sale price of $22,577 included $3,307 based on the operating performance of U.S. Newswire for the twelve-month period prior to closing and $270 for additional working capital. In February 2007, the Company received additional cash proceeds of approximately $4,427, of which $3,307 represented additional sale price received directly from PR Newswire, $1,000 represented the release of the escrow balance representing deferred purchase price at closing, and $120 represented an adjustment for additional working capital.

The results of operations for the years ended December 31, 2008, include a loss from discontinued operations of $6,450, which consisted of a loss from operations of $5,983 and a loss on disposal of $467. The loss from operations is comprised of a loss from operations of $3,738 and $2,245 for Teletrax and Medialink UK, respectively, and includes impairment charges of $1,808 and $605 for Teletrax and Medialink UK, respectively, and a charge for exit activities of $635 for Medialink UK. The loss on disposal is comprised of a gain on disposal of $412 for Teletrax and a loss on disposal of $879 for Medialink UK.

The results of operations for the years ended December 31, 2007, include a loss from discontinued operations of $892, which consisted of a loss from operations of $3,495 and a gain on disposal of U.S. Newswire of $2,603. The loss from operations is comprised of a loss from operations of $2,994, $488, and $13 for Teletrax, Medialink UK, and U.S. Newswire, respectively.

Liquidity and Capital Resources

The Company continues to finance its operations and capital investment requirements from its existing cash balances, which totaled $5,354 at December 31, 2008. Working capital decreased by $7,027 in 2008 primarily as a result of the Company funding operating losses and capital investments for both continuing and discontinued operations during the year.

Cash flows from operating activities of continuing operations improved by $2,479 during 2008 as compared to 2007 due primarily to tax payments made in 2007 associated with the gain on sale of U.S. Newswire. This increase was partially offset by the receipt in 2007 of escrow funds associated with the sale of U.S. Newswire with no comparable cash receipt in 2008. During 2008 the Company repaid $1,700 of principal on the Debentures, invested $197 in new equipment and software development for its continuing operations, and incurred fees of $269 related to the disposal of Teletrax and Medialink UK.

In October 2008, the Company entered into the Amendments with each of the Debenture holders. Under the terms of the Amendments, the Company made a $2,000 payment to the Debenture holders, $1,700 of which was applied to principal outstanding and $300 of which satisfies the Company's future interest obligations on the Debentures for the fifteen-month period following the payment date. The Company also amended the exercise price from $3.99 to $0.50 on 524,637 warrants to purchase the Company's common stock held by the Debenture holders. In exchange for the foregoing, the maturity date of the remaining principal balance of the Debentures of $2,650 was extended to June 30, 2010, and certain definitions relating to events of default under the Debentures were modified. In addition, simultaneous with the execution of the Amendments, the Company and the Debenture holders entered into a Security Agreement pursuant to which the Company granted the Debenture holders a security interest in the Company's assets.

The Company expects to incur operating losses in 2009 as revenues continue to decline in the current economic climate. Revenues in the fourth quarter of 2008 of $4,938 decreased by $1,283 as compared to the comparable quarter in 2007, and the Company currently forecasts a decline in revenues in the first quarter of 2009 of approximately $1,500 from the comparable quarter in 2008. In addition, during 2009 the Company expects to spend approximately $350 related to existing severance obligations to terminated employees that are included as a component of "other liabilities", $500 related to vacant real estate obligations, $200 for costs associated with the disposal of Medialink UK, and $150 for capital improvements for equipment modernization and replacement.

The Company is currently pursuing various strategic alternatives, including obtaining additional financing or investment from potentially interested third-party investors or buyers. The Company also continues to take action to reduce its costs, and has completed, and will continue to initiate, various measures in an effort to achieve profitability. If the Company is not successful in these efforts it may not be able to finance its operations and commitments with its working capital, and therefore may not be able to continue as a going concern, which would result in the Company's inability to realize the carrying value of its assets and liquidate its liabilities.

The Company does not believe that inflation has had a material impact on its business.

Off-balance sheet arrangements

The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Critical Accounting Policies

Management must make certain estimates and assumptions in preparing the financial statements of the Company. Certain of these estimates and assumptions relate to matters that are inherently uncertain as they pertain to future events. Management believes that the estimates and assumptions used in preparing the financial statements of the Company were the most appropriate at that time, although actual results could differ significantly from those estimates under different conditions.

Note 2, "Summary of Significant Accounting Policies," to the Company's
consolidated financial statements included in this Annual Report on Form 10-K provides a detailed discussion of the various accounting policies of the Company. We believe that the following accounting policies are critical since they require subjective or complex judgments that could potentially affect the financial condition or results of operations of the Company.

Allowance for Doubtful Accounts: The Company assesses the carrying value of its accounts receivable based on management's assessment of the collectibility of specific client accounts, which includes consideration of the creditworthiness and financial condition of those specific clients. The Company also assesses the carrying value of accounts receivable balances based on other factors, including historical experience with bad debts, client concentrations, the general economic environment, and the aging of such receivables. The Company records an allowance for doubtful accounts to reduce its accounts receivable balance to the amount that is reasonably believed to be collectible. Based on the Company's estimates, an allowance for doubtful accounts of $84 was established at December 31, 2008, compared to an allowance of $118 at December 31, 2007. A change in the Company's assumptions, including the creditworthiness of clients and the default rate on receivables, would result in the Company recovering an amount of its accounts receivable that differs from its current carrying value. Such difference, either positive or negative, would be reflected as a component of the Company's SG&A expense in future periods.

Valuation of Long-Lived Assets: In assessing the carrying value of its property and equipment and other long-lived assets in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the Company reviews such assets for impairment when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability is determined by comparing the carrying value of the assets to the future undiscounted cash flows the assets are expected to generate. If it is determined that the carrying amount is not recoverable, an impairment charge is recognized equal to the amount by which the carrying value of the asset exceeds its fair market value. Based on the Company's planned actions with regard to Teletrax and Medialink UK at June 30, 2008, and other market factors related to both Teletrax and Medialink UK, the Company determined that the carrying value of the long-lived assets used in these businesses was not recoverable and exceeded the fair value of such assets at such time. Accordingly, the Company recognized impairment charges totaling $2,413 as of June 30, 2008, which consisted of an impairment charge of $1,808 related to Teletrax property and equipment and an impairment charge of $605 related to Medialink UK property and equipment. Such impairment charges for Teletrax and Medialink UK are included as a component of the loss from operations of discontinued operations.

In addition, based on the Company's current and projected cash flow losses attributable to is sole remaining business, the US-based media communications services business, the Company reviewed the long-lived assets of this business for impairment as of December 31, 2008. Based on this evaluation, the Company determined that the carrying value of its remaining long-lived assets was not recoverable and exceeded the fair value of such assets. Accordingly, the Company recognized an impairment charge of $1,118 related to property and equipment as of December 31, 2008, resulting in no net book value of fixed assets remaining as of that date.

Valuation of Goodwill: In assessing the carrying value of goodwill in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," the Company compares the carrying value of its reporting units to their fair values. The Company is required to test its goodwill for impairment at least annually, and more frequently if an event occurs or circumstances change to indicate that an impairment may have occurred. The Company's annual testing date is September
30. Based on the Company's planned actions with regard to Teletrax and Medialink UK at June 30, 2008, and the continued decline in the US-based media communications services business, the Company determined that its goodwill, all of which related to the media communication services business, should be tested for impairment prior to the annual testing date of September 30. Based on the Teletrax and Medialink UK transactions resulting in the Company having a single operating segment, the determination of fair value for purposes of the goodwill impairment test was based on quoted market prices for the Company's common stock. Based on this goodwill impairment test, the Company determined that the carrying value of its goodwill exceeded its fair value. Accordingly, the Company incurred a goodwill impairment charge of $3,429 as of June 30, 2008, resulting in no goodwill remaining as of that date.

Stock-Based Compensation: The Company adopted the provisions of SFAS No. 123 (Revised 2004), "Share-Based Payment" ("SFAS No. 123R"), on January 1, 2006, and elected to use the modified prospective application for the transition upon adoption, which requires compensation expense to be recognized on options granted subsequent to the adoption date as well as on options granted prior to the adoption date for which the requisite service period had not been completed as of December 31, 2005. The Company determines the fair value of stock options granted subsequent to the adoption of SFAS No. 123R using a binomial lattice model. The fair value of stock options granted prior to the adoption of SFAS No. 123R was determined using the Black-Scholes option-pricing model. The Company must make certain assumptions in determining the fair value of stock options, including the volatility of the Company's common stock, the future dividend yield on the Company's common stock, and the term over which stock options will remain outstanding, including making assumptions about the future behavior patterns of the holders of stock options in regard to exercising stock options prior to their expiration. In addition, the Company must make certain assumptions regarding the rate at which options will be forfeited to estimate the service period that will be completed by the holders of stock options. Any deviation in the actual volatility of the Company's common stock, the actual dividend yield, and the actual early exercise behavior of holders of stock options from that assumed in estimating the fair value of a stock option will not result in a change in the amount of compensation expense recognized by the Company, but will result in the actual value realized by the holder of the stock options to be different than the amount of compensation expense recognized. Any deviation in the actual forfeitures of non-vested stock options during the service period from that assumed will result in a change to the amount of compensation expense recognized, either as additional compensation expense or a reversal of previously recognized compensation expense in the period of change.

Income Taxes: In assessing the recoverability of its deferred tax assets, the Company compared the carrying value of its deferred tax assets to the tax-effected projections of its taxable income over future periods in which such assets could be realized. In estimating its future taxable income, the Company had to make various assumptions about its future operating performance. Based on the Company's projection of future taxable income, which include the effects of recent operating and tax losses, management believed that it was more likely than not that the benefit associated with the deferred tax assets will not be fully realized in future periods. Accordingly, a valuation allowance was established in the amount of $7,364 and $5,332 at December 31, 2008 and 2007, respectively, to reserve against the carrying value of certain of the Company's deferred tax assets. A change in the Company's assumptions, including better or worse operating performance than projected, could result in a change in the amount of deferred tax assets that will be recovered, and therefore could result in a reduction or increase to the valuation allowance established at December 31, 2008. Such an adjustment would be reflected as a component of the Company's provision for income taxes in the period of the adjustment.