UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

Commission File Number: 000-50879

PLANETOUT INC.

(Exact name of registrant as specified in its charter)

(415) 834-6500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock $0.001 par value

      Indicate by check mark whether the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.      Yes o          No þ

      Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.      Yes o          No þ

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes þ           No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Act).

Large accelerated filer     o           Accelerated filer      þ          Non-accelerated filer      o

      Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes o          No þ

The aggregate market value of the voting stock held by non-affiliates, computed by reference to the closing price for the common stock as quoted by the Nasdaq Stock Market as of June 30, 2005 and based upon information provided by stockholders on Schedules 13D and 13G filed with the Securities and Exchange Commission, was approximately $93,228,000. Shares of common stock held by each executive officer and director and by each person who owns 5% or more of the registrant’s outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

      As of March 1, 2006, there were 17,261,005 shares of the registrant’s common stock, $0.001 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

      Certain sections of the registrant’s definitive Proxy Statement for the 2006 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K to the extent stated herein.

PlanetOut Inc.

Form 10-K

For The Fiscal Year Ended December 31, 2005

Table of Contents

Special Note Regarding Forward-Looking Statements

      Certain statements set forth or incorporated by reference in this Form 10-K, as well as in our Annual Report to Stockholders for the year ended December 31, 2005, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks and uncertainties that could cause our results and our industry’s results, level of activity, performance or achievements to differ materially from those expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “anticipates,” “believes,” “continue,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should,” “will,” or similar terminology. You should consider our forward-looking statements in light of the risks discussed under the heading “Risk Factors” in Item 1A, as well as our Consolidated Financial Statements, related notes, and the other financial information appearing elsewhere in this report and our other filings with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statements.

PART I

Company Overview

      We are a leading global media and entertainment company serving the worldwide lesbian, gay, bisexual and transgender, or LGBT, community, a market estimated to have buying power of $610 billion in 2005 in the United States alone. We serve this audience through a wide variety of media properties, including leading LGBT-focused websites, such as Gay.com, PlanetOut.com, Advocate.com and Out.com, and magazines, such as The Advocate, Out, The Out Traveler, and HIVPlus, among others. Through these media properties and other marketing vehicles, such as live events, we generate revenue from a combination of advertising, subscription and transaction services.

      With our global reach, multiple media properties and marketing vehicles, we believe we provide advertisers with unparalleled access to the LGBT community. We generate revenue from multiple forms of online advertising including run-of-site advertising, advertising within specialized content channels and online-community areas, and member-targeted e-mails, as well as more traditional print and event advertising.

      Increasingly, we are offering multi-platform advertising opportunities through which advertisers can target the gay and lesbian market using a combination of vehicles such as the Internet, e-mail, print, and live events. We offer these services through our own properties, as well as a growing network of third-party vehicles that we represent. We also offer advertisers data on consumer behavior and the effectiveness of their online advertising campaigns with us through user feedback and independent third-party analysis. Although most of our advertising revenue comes from Fortune 500 and other large companies, we are also expanding our local directory, a service that allows smaller, local advertisers to reach the LGBT audience online.

      We believe our user base includes the most extensive network of self-identified gay and lesbian people in the world. Users can access content on our flagship websites for free and without registration, thereby generating page views and potential advertising and transaction services revenue. Those users who wish to access our online member-to-member connection services must register by providing their name, e-mail address, and other personal data. Registration on our flagship websites, Gay.com and PlanetOut.com, allows access to integrated services, including profile creation and search, basic chat and instant messaging. Registered users, or members, of our Gay.com website can connect with other members from around the world in multiple languages, including English, French, German, Italian, Portuguese and Spanish.

      Members may also subscribe to our paid premium subscription service which enables them to access a number of special features that are not generally available under our free basic membership package, including advanced search, unlimited access to profiles and photographs, enhanced chat and premium content. Our paid subscriber base on our flagship websites has grown to approximately 157,400 as of December 31, 2005 while we have reduced the churn rate among those subscribers from 9.5% in the fourth quarter of 2004 to 6.7% in the fourth quarter of 2005. We were able to realize this reduction despite the introduction, in October 2005, of a special promotion, the gratis campaign, which allowed our members outside of the United States and Canada to access these additional features free of charge for an introductory period. We believe this promotion, which helped us add approximately 118,900 international members during the fourth quarter of 2005, lays the foundation for continued revenue growth in our international markets across all three of our primary business lines.

      With our November 2005 acquisition of substantially all of the assets of LPI Media Inc. and related entities (“LPI”), we expanded the number and scope of our subscription service offerings. In addition to premium subscriptions to our Gay.com and PlanetOut.com services, we offer our customers subscriptions to eight other online and offline products and services, as well as to various combined, or bundled, packages of these subscription services, including to the leading LGBT-targeted magazines in the United States, Out and The Advocate. We believe Out magazine is the leading audited circulation magazine in the United States focused on the gay and lesbian community, while The Advocate, a pioneer in LGBT media since 1967, is the second largest. We believe these, and other properties acquired from LPI, allow us to better serve our business

and consumer customers by expanding the platforms and content that we can provide them and to more cost-effectively promote our own products and services.

      We also offer our users access to specialized products and services through our transaction-based websites, including Kleptomaniac.com and Buygay.com, that generate revenue through sales of products and services of interest to the LGBT community, including fashion, video and music products. In addition, we generate transaction revenue from third-party websites and partners for the sale of products and services to our users, as well as through newsstand sales of our various print properties. With our acquisition of substantially all of the assets of RSVP Productions, Inc. (“RSVP”), in March 2006, we intend to leverage our existing user base and multiple advertising vehicles into the estimated $65 billion per year gay and lesbian travel market with travel and event packages and promotions.

Industry Background

      We have built the foundation of our business on the Internet, a global communications medium that enables millions of people to obtain and share information, interact with one another and conduct business electronically. Worldwide, the number of estimated Internet users is expected to reach over one billion by 2007, according to March 2004 and December 2002 reports by International Data Corporation. We believe that of all of the major media formats, the Internet has the greatest potential for reaching the LGBT community in large, targeted numbers, in part because of the desire for discretion, which many members of the LGBT community feel, and the lack of LGBT-focused media alternatives in many geographic areas.

      To better serve the LGBT community, we are using the leverage provided by our large online user base to expand into other areas, such as print publication and travel and event marketing, through our LPI and RSVP acquisitions, respectively. The non-Internet based, or offline, LGBT media industry is fragmented and consists largely of independent print publications, all of which we believe have smaller audited circulations than our Out and The Advocate magazines, and a limited number of radio stations, television programs and cable outlets. We do not believe that any of these competing media formats or companies offer the targeted global reach and network efficiencies provided by our broad platform of services. While gay-themed television shows such as Will & Grace, Queer as Folk and Queer Eye for the Straight Guy have attracted large audiences, we believe their focus on general audiences makes them less attractive to advertisers who want to reach the LGBT market in the most cost-effective and targeted way.

      We believe the global LGBT market remains underserved, despite recent advances in the corporate, political and social environments, and despite the attractive demographic make-up of the gay and lesbian community. For example, in the United States alone, the gay and lesbian market had estimated buying power of over $610 billion in 2005, or approximately $40,000 per capita, compared to estimated per capita buying power of $20,000 in the African-American and $17,500 in the Hispanic-American markets.

      Approximately 7%, or 15 million adults, of the general U.S. population identify themselves as gay, lesbian, bisexual or transgender, according to “The Gay and Lesbian Market: New Trends, New Opportunities 4th Edition” published by Packaged Facts in partnership with Witeck-Combs Communications, Inc. This report also estimates that the buying power of gay and lesbian consumers in the United States will grow to approximately $641 billion in 2006.

      LGBT consumers are also loyal and active Internet users. Approximately 80% percent of gay men and 76% of lesbians actively use the Internet, and 63% of gay and lesbian consumers have made purchases online, compared to 53% of heterosexual consumers, according to Forrester Research. In addition, online advertising influences gay and lesbian buying decisions: according to the Packaged Facts/ Witeck-Combs report, while only 35% of heterosexual consumers say that online advertisements influence their purchasing decisions, 42% of gay and lesbian consumers are influenced by online advertisements. The same report estimates that 78% have reported switching to brands offered by companies with a commitment to diversity.

      As a leading LGBT-focused company with a variety of community and marketing services and competitive strengths, we believe we are uniquely positioned to take advantage of the opportunities presented by this market.

      Total U.S. advertising spending increased 3% year-over-year to $143.3 billion in 2005, according to TNS Media Intelligence. The growth was driven in part by online display advertising, which rose 13% year-over-year to $8.3 billion, and consumer magazine advertising, which rose 8% year-over-year to $21.7 billion.

      We believe online advertising will grow and diversify as it captures a larger share of total advertising dollars. The largest online advertising-based business models now regularly attempt to attract national advertisers with cross-media campaign opportunities, while smaller, niche advertising businesses are increasingly offering the option of advertising online as a means of focusing their marketing efforts on specific audiences that are often not efficiently reached through more general advertising campaigns.

      Total U.S. advertising spending is expected to increase 5% year-over-year in 2006 to $152.3 billion, while online display advertising is expected to increase 9% year-over-year and U.S. magazine advertising spending is expected to increase approximately 4% year-over-year in 2006, according to TNS Media Intelligence.

      The online paid content and services market has grown alongside the growth in Internet usage generally, as an increasing number of consumers have shown a willingness to pay for Internet content and services, including social networking and dating services, business and investment services, including business news and investment advice, and entertainment and lifestyle services, including digital music and film, recipes and other content intended for amusement, leisure and diversion.

      The Online Publishers Association estimates that consumer spending for online content increased 16% year-over-year to $986.8 million in the first half of 2005, the last period for which data was published. Sales in the online personals category during the first half of 2005 increased approximately 8% year-over-year to $245.2 million or 25% of the total.

      According to the Audit Bureau of Circulations, sales of magazine subscriptions in the U.S. totaled $7.2 billion in 2004 or 70% of the $10.3 billion in overall circulation revenue. Copies sold through subscriptions totaled approximately 312 million or 86% of the 363 million copies sold in the U.S.

      According to the U.S. Department of Commerce, total U.S. e-commerce retail sales increased an estimated 25% year-over-year to approximately $86.3 billion in 2005, well ahead of the 7% growth in total retail sales. This trend reflects the increasing acceptance of the Internet as a channel through which consumers purchase a variety of products and services. With online sales representing less than 3% of total U.S. retail sales of $3.8 trillion, we believe online sales will continue to grow and capture a larger percentage of total retail sales.

      Leisure travel is expected to increase to $674 billion in the U.S. in 2006, according to the Travel Industry Association of America. Of this large and growing market, the cruise industry is among the fastest growing segments. According to the Cruise Lines International Association, the number of passengers in the North American cruise market grew at an annual rate of over 8% from 1980 through 2004. According to this industry source, the average cruiser has taken 3.3 cruises, spends 50% more than non-cruise vacationers, and pays an average of approximately $1,600 per person for the cruise experience, including on-board expenses. Over half of cruisers indicate they expect to take a future cruise within the next three years. Within the cruise industry, we believe that the LGBT market is also growing rapidly. According to market research firm Community Marketing, Inc., 51% of the LGBT population has taken a general-audience or LGBT-targeted cruise compared to less than 20% within the overall U.S. population, and over half of all LGBT vacationers spend, on average, $5,000 or more per person on vacations.

Competitive Strengths

      We believe the following competitive strengths have led to our growth:

      Strong Community Affinity. We believe we have developed a loyal, active community of users, customers, members and subscribers. The viral marketing that occurs through these individuals is an important source of our growth, as increasing social interaction among members within our online community and word-of-mouth in the broader LGBT community help us obtain new and retain previous users and customers across our multiple platforms. We believe the Gay.com domain name is a powerful brand that helps reinforce our position as the leading network of LGBT people in the world. We believe the addition of LPI and RSVP, pioneers in LGBT media and travel, respectively, reinforces our position as a leader in serving the LGBT community.

      Critical Mass. We believe we have built the critical mass of users across multiple properties that is attractive to advertisers, vendors, and consumers alike. Out and The Advocate magazines have the two largest audited paid circulations of any LGBT-focused magazines in the United States, making them attractive vehicles for major national advertisers wishing to reach this audience through print. Similarly, we believe the combined worldwide active member base of Gay.com and PlanetOut.com constitutes the largest network of gay and lesbian people in the world. We have expanded our reach and market position by offering our online services in six languages to members who identify themselves as residing in more than 100 countries through ten localized versions of our Gay.com website. This critical mass helps us grow and serves as a barrier to entry for potential competitors, as new members looking for friendships, dating and long-term relationships are attracted to the large pool of current members on our websites. We also believe the size and attractive demographic characteristics of our global user base is appealing to advertisers who seek multiple, cost-effective ways to target the LGBT market.

      Diversified Revenue Streams. We derive our revenue from a combination of advertising, subscription and transaction services offered through multiple online and offline media properties. Although, in recent years, online premium membership services represented a majority of our revenue, this began to change in the second half of 2005 with the rapid growth of our advertising services and our acquisition of LPI. We further accelerated this diversification with our March 2006 acquisition of RSVP, a leading marketer of gay and lesbian travel and event opportunities. We believe that having multiple revenue streams allows us to better withstand periodic fluctuations in individual markets, take advantage of cross-selling opportunities to our advertising and consumer customers, and more effectively monetize the audiences and traffic that we have built through our various properties. At the same time, our prepaid subscription services, including many with automatic rebilling, provide working capital benefits and improve our ability to predict our near-term revenue.

      Scalable Business Model. We believe we have a business model in which additional revenue can be generated with relatively low increases in our expenses. As with many subscription business models, we believe the marginal cost to us of providing services to each new subscriber is relatively low. At the same time, much of the content accessible through our flagship websites is generated by members and made available at modest incremental cost. By creating additional web pages or chat screens on which we can place advertisements, each additional user on these websites also generates additional advertising capacity at little incremental cost. With the acquisition of LPI, we believe we will be able to leverage this low cost model into other media. For example, by bundling our online and offline subscriptions, we expect to grow our subscription revenue through higher-valued packages for our consumer customers and our page views and circulation base for our advertiser customers. Similarly, we believe we can leverage our numerous marketing and media platforms to grow RSVP’s business with small relative increases in our fixed cost base. The primary increase in the RSVP expenses are expected to come from adding incremental travel and event opportunities, which we expect will provide associated incremental revenue.

      Compelling Features. We offer compelling editorial and programming content to the LGBT community, in print and online, covering topics such as travel, news, entertainment, shopping, business, and health. In addition, we believe our rich and varied LGBT-focused content, the integration of our chat, profile and instant messaging features and the ability of our online members to generate and share their own content and interact with one another keeps users returning to our websites. Similarly, RSVP offers a unique market focus and

itineraries of interest to the LGBT community, resulting in a large number of repeat customers. In turn, all of these features increase user touchpoints and provide us with more opportunities to generate advertising revenue, grow our subscriber base, both online and offline, and increase product and service sales.

Growth Strategy

      Our goal is to enhance our position as a global LGBT-focused market leader by connecting, enriching and illuminating the lives of gay and lesbian people. We intend to achieve this through the following strategies:

      Growing Our User Base Across Multiple Properties. We intend to leverage our critical mass online to increase our overall revenue.

      Capitalizing on Advertising Growth and Relationships. We believe our large user base across multiple properties provides us with significantly greater reach than other LGBT-focused media providers and that we are well positioned to benefit from the growth in advertisers wishing to target the LGBT community. Prior to our acquisition of LPI, both companies had numerous, unique advertising relationships many of which we believe we can leverage across our multiple properties. In addition, by promoting packages that include, among others, Internet, print, e-mail, direct mail, and event advertising opportunities, we believe we can

differentiate our products and more effectively serve our advertising clients. Furthermore, by promoting member-generated content and cross-purposing content across our various properties, we can add new pages to our websites, grow our advertising inventory and direct our website traffic to those areas that generate higher advertising revenue. And finally, we have launched a localized business directory and local classifieds section to attract smaller advertisers. We believe that our classifieds business is an area for our future growth.

      Leveraging and Growing Our Subscriber Base. Currently, we offer ten different subscription services across multiple properties. By bundling these subscriptions into new and unique packages, we believe we can enhance the total value of the subscription to our users and expand our subscriber base. In some cases, we can also use these bundled packages and special promotions to shift subscribers into longer-term, higher-value plans. For example, during the fourth quarter of 2005, approximately 60% of our online subscribers were enrolled in annual plans, up from only 43% in the fourth quarter of 2004. This contributed to the improvement in our online subscriber churn rate from 9.5% in the fourth quarter of 2004 to 6.7% in the fourth quarter of 2005.

      Leveraging Leadership and Financial Resources into Other LGBT Opportunities. We believe the needs of the LGBT market are underserved compared to those of other niche markets such as the African-American, Asian-American and Hispanic-American markets. As with our recent acquisition of RSVP, we continue to evaluate opportunities to expand further into other LGBT-focused areas, including other online and offline media, subscription and transaction service businesses, through in-house initiatives, strategic partnerships or acquisitions of other businesses. We believe by marketing new products and services to our user base, we may be able to grow our revenue cost-effectively.

Advertising Services

      Advertisers are increasingly targeting demographic niche markets, such as the African-American, Asian-American, and Hispanic-American markets in the United States. A particular targeted audience is often not efficiently reached through general market advertising campaigns or broadcast media. As more advertisers target specific audiences, they are turning to the Internet as a cost effective way to reach their targets. We believe that traditional advertisers are also allocating larger portions of their budgets to the Internet, a trend that we believe will accelerate as the effectiveness of online advertising becomes more widely accepted. The Interactive Advertising Bureau estimates that Internet advertising revenues for 2005 exceeded $12.5 billion, a 30% increase over the previous revenue record of $9.6 billion in 2004. We believe that online advertising will continue to grow and diversify as it captures a larger share of total advertising dollars.

      By offering cross-media solutions that combine the power of online media with print, events, direct mail and other touchpoints, media companies targeting a specific audience segment are well positioned to help advertisers surround and capture a niche market. We believe that we provide advertisers with a number of effective and innovative ways to reach both the larger LGBT community and those segments within the LGBT community that may share a particular affinity for their products or services. Our value proposition to advertisers includes:

      During the years ended December 31, 2004 and 2005, no single advertiser accounted for more than 10% of our global advertising revenue. Our five largest customer categories by industry accounted for approximately 70% and 69%, respectively, of our global advertising revenue for 2004 and 2005.

      In the United States in 2005, we saw growth in the total number and average size of online campaigns from major advertisers on our flagship websites. We believe growing competition among advertisers for exclusive arrangements on our websites, either by category or channel, has the potential to increase our revenue.

      We market our advertising services through our domestic and international sales force. Our online national sales representatives are focused on specific advertising categories or countries, and sell across our networks in the United States, Europe and Latin America. Our local online sales team sells directory listings to small local advertisers. Our national print sales team sells across all of our magazine titles. For large accounts, campaigns are coordinated across multiple media platforms.

      The following is a breakdown of our global advertising revenue for our top ten categories by industry for the year ended December 31, 2005:

Subscription Services

      We offer our customers ten separate subscription services across both our online and offline properties. Of these, Gay.com, Out and The Advocate have the largest paid subscriber bases. Increasingly, we are developing new bundled packages of our various subscription services to increase their value to our customers and to generate additional subscribers, circulation and revenue.

      We have offered Gay.com members a free, real-time chat service since 1996. We launched the PlanetOut.com personals service in 1997, and we believe PlanetOut.com was the first website of significant size to offer free personals specifically tailored to the LGBT community. In 2001, we created our paid premium membership services, Gay.com Premium Services and PlanetOut PersonalsPlus. Since we introduced our online premium membership services, our subscribers have grown to approximately 157,400 as of December 31, 2005.

      We do not charge fees for registering as a member or creating a profile on either Gay.com or PlanetOut.com, but non-subscribers have limited access to member profile photographs, may only perform basic profile searches and have limited access to chat services. By joining our paid premium membership services, a Gay.com Premium Services or PlanetOut PersonalsPlus subscriber may reply to an unlimited number of profiles, bookmark and block profiles, perform advanced profile searches and view all full-sized photographs posted by other members. In addition, we frequently offer other benefits with premium membership, including free subscriptions to magazines, such as The Advocate, Cargo, Details, Men’s Fitness and Out and others, for our Gay.com subscribers. We believe these types of additional premium offerings serve as an inducement for free members to convert to paying subscribers and for lower-priced, shorter-term subscribers to convert to higher-priced, longer-term plans for which we frequently offer more incentives. We are actively working to add new promotional items to our subscription bundle to further enhance the value of our subscription services.

      We currently offer both Gay.com Premium Services and PlanetOut PersonalsPlus under tiered subscription plans. Subscriptions to Gay.com Premium Services begin at $9.95 for a seven-day trial, with $19.95 for a monthly subscription, $42.95 for a quarterly subscription and $89.95 for an annual subscription. Subscriptions to PlanetOut PersonalsPlus begin at $4.95 for a three-day trial, with $12.95 for a monthly subscription, $29.95 for a quarterly subscription and $69.95 for an annual subscription. Periodically, we also offer discounted or free trial subscriptions to these services. We renew and re-bill all premium membership subscriptions on Gay.com and PlanetOut.com automatically, unless the subscription is affirmatively cancelled. We reduced our average churn rate to 6.7% for the quarter ended December 31, 2005, down from 9.5% for the quarter ended December 31, 2004.

      In addition to the general membership services offered by Gay.com and PlanetOut.com, the Gay.com Premium Services package is currently available in six languages, including English, French, German, Italian, Portuguese and Spanish, and offers members additional enhanced features. These enhanced features include access to video chat, live customer and technical support and specialized premium content, as well as the ability to simultaneously enter several of our more than 1,500 chat rooms, many of which are international. These special premium features are not currently available on PlanetOut.com.

      While both services are available to anyone, Gay.com’s subscriber base is more heavily male and PlanetOut.com’s includes a higher percentage of females. As of December 31, 2005, approximately 95% of subscribers on Gay.com identified themselves as male and on PlanetOut.com, 54% of subscribers identified themselves as female. As of December 31, 2005, 9% of our Gay.com paid subscribers identified themselves as residing outside the United States. PlanetOut.com is offered in English only and its members reside primarily in the U.S.

      In managing our Gay.com and PlanetOut.com premium membership services, we track a number of operating metrics, including the following:

Gay.com and PlanetOut.com Premium Membership Service Operating Metrics (excluding free trial promotions)

      We have calculated these metrics using the following definitions:

      Because their terms are generally shorter than the periods that we measure, we exclude paid trial subscriptions (currently, 3- and 7-day paid trials) from these operating metrics.

      We regularly test different promotional offers, including some free trial promotions. Members who sign up for any of these promotional offers, discounted or free, provide us with payment information and authorize us to bill them at our then regular premium membership service rates, unless they cancel their subscriptions prior to the end of their promotional terms. When these promotional offers are for paid subscriptions to our annual, monthly, or quarterly plans, we include these cancellations in our churn calculations.

      However, because free subscribers do not count toward our definition of Total Subscribers, we exclude them from our definition of Total Churn.

      We are paid up-front for premium memberships, and we recognize subscription revenue ratably over the subscription period. As of December 31, 2004 and 2005, deferred revenue related to premium membership subscriptions totaled approximately $3.3 million and $4.1 million, respectively. Our subscription revenue is not subject to sales or use tax in the United States, but is subject to Value Added Tax, or VAT, in the European Union. Currently, we do not require our subscribers to reimburse us for VAT and we offset this liability against revenue.

      As our business has evolved, we have provided operating metrics on those products and services that we believe will provide investors with a better understanding of our overall business performance. With our recent acquisition of LPI, the growth in the total number of our paid subscription services from two to ten, and the

increase in bundled subscriptions across our multiple products and service lines, we do not anticipate providing separate operating statistics for our Gay.com and PlanetOut.com premium membership services in 2006.

      The properties that we acquired from LPI included a number of additional subscription services. As of December 31, 2005, the largest of these were Out magazine, with approximately 121,200 paid subscribers, and The Advocate magazine, with approximately 119,800 paid subscribers. In January 2006, we began offering Out magazine as a bundled product with our Gay.com Premium Services in the United States. As a result, in January and February 2006, we were able to increase the subscription base for Out and The Advocate by approximately 8,200 new subscribers, of which over 93% were new orders. We expect to continue to develop additional subscription bundles to offer to our users.

      We market our subscription services in the United States and internationally through a broad spectrum of advertising tools, including keyword and other online advertising, affiliate relationships, print and outdoor advertising, events, word-of-mouth, direct and e-mail marketing, contests and other promotional activities.

Transaction Services

      We offer products and services of interest to the LGBT community through multiple e-commerce websites, including Kleptomaniac.com and Buygay.com. To increase our revenue, we are also capable of taking mail and phone orders for some products that we offer. The products we sell through these sites include clothing, such as t-shirts and designer jeans, fashion accessories, such as watches and other jewelry, and DVDs and videotapes, such as the Queer as Folk and The L Word compilations and the soon-to-be released Brokeback Mountain DVD. We hold inventory for a portion of the products that we sell, such as CDs, DVDs and videotapes, at our on-site fulfillment centers in San Francisco and Los Angeles. For other products, such as fashion products and accessories, we have historically engaged third-party vendors to hold inventory and fulfill orders. We believe these arrangements allow us to reduce buying and fulfillment costs and the risk of holding unwanted inventory. We advertise these transaction services primarily through our own properties, including our websites and magazines. We also recognize transaction services revenue from third-party vendors and magazine newsstand sales.

      As a result of our recent RSVP acquisition, we expect to increase our transaction service revenue in both absolute dollars and as a percentage of our overall revenue. Through RSVP, we will be able to offer specialized travel and event packages to the LGBT market. Typically, RSVP develops travel itineraries on land, at resorts, and on cruises, by contracting with third-parties who provide the basic travel services. To these basic services, RSVP frequently adds additional programming elements, such as special entertainers, parties, and events, and markets these enhanced vacation packages to the gay and lesbian audience.

Product Development and Technology

      Our product development and technology teams have introduced features that are intended to enhance and integrate our web-based member services, while addressing numerous externally driven initiatives regarding legal and industry standard compliance. In 2005, we introduced features such as our video center, improved mass e-mailing functionality to facilitate our communications to members, and a streamlined registration process. We also upgraded our websites for improved user flow tracking and analysis, and enabled new ways of integrating advertising to drive clicks and conversions to our services and to those of our advertisers.

      We plan to introduce new features such as a website specifically designed for lesbians; expanded and integrated e-commerce services; a re-architected member connection suite for e-mail, instant messaging, and chat; expanded capabilities related to member-generated content; and enhancements to our international sites, including support for multi-currency, improved locations handling and an upgraded and enhanced local listings product featuring more localized content. We also plan to move, over time, toward integration of our technology platforms across all our web properties.

      Our capital expenditures are primarily focused on supporting the growth of our member services, growth that results both from heightened traffic and the introduction of new features and functions. We strive to

centralize our business in many classes of hardware and software with a single primary vendor when we believe it is feasible and cost-effective to do so. By reducing the number of types of systems we use, we believe we are better able to manage our systems and achieve attractive pricing with vendors with whom we have established relationships.

      Our basic network infrastructure utilizes redundant, low-cost single processor servers supported by high-capacity, high-performance database, application, and file servers from established vendors to handle our critical processes. We primarily utilize open source software and widely scalable, low-cost servers to reduce cost and enable us easily to expand technological capacity to handle increased load. We track and monitor the growth of traffic on our websites and strive to maintain reserve capacity for extraordinary loads. We attempt to streamline and consolidate our technology as we upgrade our equipment to increase capacity. We believe our infrastructure allows us to scale and grow our online business at relatively low cost and with little disruption to our members.

      We employ several methods to protect our computer networks from damage, power interruption, computer viruses and security breaches that would result in a disruption of service to our members. Our “hosted” computer network, located in San Jose and operated by a third-party vendor, provides the primary services that we offer to the public on our flagship websites. The computer equipment in our hosted network is located in an industrial-grade server room with on-site security systems and redundant uninterruptible power supply units, as well as smoke detection and fire suppression systems. The equipment is also largely deployed in a redundant configuration, designed to prevent any single computer failure from interrupting the services available on our websites. Although our hosted network currently has a single connection to the Internet, in order to reduce the risk of interruption of our member services resulting from Internet connection failure, we expect to install a second network connection to provide redundancy. This network is intended to be protected from security breaches by a firewall, including anti-virus protection. In addition, to provide further security, we implemented an intrusion detection system in 2005.

International Operations

      We have offices in London and Buenos Aires that help support our various services, particularly the localized versions of our Gay.com site. These localized versions specifically target ten distinct international markets or segments: UK and Ireland, Spain, Italy, Germany, France, Mexico, Brazil, Argentina, Latino (a general Latin American site) and Australia. We also own an interest in Gay.it S.p.A, an Italian company, which, until December 2005, we used to help promote our membership and premium membership services to Italian users through the Gay.it website.

      The staff in the London office helps market our global services and provides content and sells advertising for the UK and Ireland site, our largest international Gay.com site by revenue. In addition to offering Gay.com membership and premium membership services to users in the UK and Ireland, that site is a content portal offering editorial coverage of topics designed to appeal to the interests of gay and lesbian online users in those regions. Our London office has an editorial and advertising sales staff that supports this media business. In addition to editorial and sales staff, all European marketing is based out of our London office. We coordinate a range of traditional direct marketing activities in all of our European markets through London-based staff.

      The staff in the Buenos Aires office handles Latin American and Australian marketing, as well as international marketing operations and advertising sales for all of Gay.com’s non-European international sites. We also have a portion of our customer care services staff located in the Buenos Aires office.

      Like the UK and Ireland site, two additional sites, Mexico and Australia, offer produced content, along with user-generated content, designed to appeal to the interests of gay and lesbian online users in those regions, in addition to the Gay.com basic and premium membership services. The remaining international sites (Brazil, Spain, France, Italy, Argentina, Germany, and Latino) currently offer only Gay.com basic and premium membership services. These services are run by management located in the United States with support from staff in our Buenos Aires and London offices.

      Since October 2005, all of our international sites have offered the gratis promotion that allows users from qualified international countries to access all Gay.com premium membership services free of charge. This effort is designed to further build critical mass in international markets and pave the way for future growth.

      We believe significant growth opportunities exist for us in international markets, including in Europe, Asia and Latin America. In certain markets, we believe we are a leader in the LGBT media market and have sufficient critical mass to take advantage of growth opportunities there. In other markets, we continue to look for ways to leverage our knowledge of the LGBT community and our leading position elsewhere to explore and capture growth opportunities.

Competition

      We operate in a highly competitive environment. Across all three of our service lines, we compete with traditional media companies focused on the general population and the LGBT community, including local newspapers, national and regional magazines, satellite radio, cable networks, and network, cable and satellite television shows. In our advertising business, we compete with a broad variety of online and offline content providers, including large media companies such as Yahoo!, MSN, Time Warner and Viacom, as well as a number of smaller companies focused specifically on the LGBT community. In our subscription business, our competitors include these companies as well as other companies that offer more targeted online service offerings, such as Match.com, Yahoo! Personals, and a number of other smaller online companies focused specifically on the LGBT community. In our transaction business, we compete with traditional and online retailers. Most of these transaction service competitors target their products and services to the general audience while still serving the LGBT market. Other competitors, however, specialize in the LGBT market, particularly in the gay and lesbian travel space.

      We believe that the primary competitive factors affecting our business are quality of content and service, functionality, brand recognition, customer affinity and loyalty, ease of use, reliability and critical mass. Some of our current and many of our potential competitors have longer operating histories, larger customer bases and greater brand recognition in other business and Internet markets and significantly greater financial, marketing, technical and other resources than we do. Therefore, these competitors may be able to devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing policies or may try to attract readers, users or traffic by offering services for free and devote substantially more resources to developing their services and systems than we can.

Intellectual Property

      We use a combination of trademark, copyright and trade secret laws and confidentiality agreements to protect our proprietary intellectual property. We have registered several trademarks in the United States, including “PlanetOut,” “PlanetOut and Design,” “Gay.com and Design,” “Out,” “Out Traveler,” “Advocate,” “Kleptomaniac” and “OUT & ABOUT.” We have registered or applied for additional protection for several of these trademarks in some relevant international jurisdictions. Even if these applications are allowed, they may not provide us with a competitive advantage. To date, we have relied primarily on common law copyright protection to protect the content posted on our websites. Our printed publications are protected by copyrights registered with the U.S. Copyright office. Competitors may challenge the validity and scope of our trademarks and copyrights. From time to time, we may encounter disputes over rights and obligations concerning our use of intellectual property. We believe that the services we offer do not infringe the intellectual property rights of any third party. We cannot, however, make any assurances that we will prevail in any intellectual property dispute.

Employees

      As of December 31, 2005, we had 292 full-time employees worldwide, including eleven full-time employees in the United Kingdom and 21 in Argentina. We utilize part-time and temporary employees to handle overflow work and short-term projects. As of December 31, 2005, we had 13 part-time or temporary

employees. None of our employees is unionized, and we believe that we have good relations with our employees.

Executive Officers

      The following table sets forth information regarding our executive officers as of March 1, 2006:

      Lowell R. Selvin has served as the Chairman of our board since August 2003 and as our Chief Executive Officer since July 1999, when he joined our predecessor company, Online Partners.com, Inc. (parent company of Gay.com), as CEO. He subsequently became CEO of PlanetOut Inc. following the acquisition of PlanetOut Corporation by Online Partners in April 2001. Prior to joining PlanetOut, Mr. Selvin was Chief Executive Officer and a member of the board of directors of Arbonne International, a direct sales company. Previously, he was a Practice Director and firm-wide leader for Arthur Andersen Business Consulting in Strategic Planning, a co-founder, Executive Vice President and Director for Degree Baby Products, a consumer products company that was acquired by Johnson & Johnson, and Director of Operations and Customer Service for a high technology business serving the Fortune 500 that was acquired by Telecredit/ Equifax. Among other civic involvements, Mr. Selvin is a founding member and Chairman of the Gay and Lesbian Network of the Young Presidents’ Organization, serves on the advisory board of the Gay & Lesbian Athletics Foundation and is the Advisory Board Chair for the Hebrew Union College’s Institute for Judaism and Sexual Orientation and has served on the boards of directors of the Los Angeles Gay & Lesbian Center, West Hollywood’s Congregation Kol Ami and the Child Guidance Centers of Orange County California. Mr. Selvin holds an interdisciplinary B.S. combining studies in Physiological Psychology and Aeronautical and Astronautical Engineering from the University of Illinois.

      Jeffrey T. Soukup has served as our Chief Operating Officer and Executive Vice President since December 2005, after having previously also served as our Chief Financial Officer until February 2006. Mr. Soukup originally joined our predecessor company Online Partners.com Inc. in August 2000 as its Chief Financial Officer and Senior Vice President, Administration. From August 1999 until August 2000, Mr. Soukup served as Vice President in the consumer services and business development divisions of ChannelPoint, Inc., a business-to-business Internet-based finance company. From July 1998 until August 1999, Mr. Soukup was a Vice President of GE Equity, the private equity arm of the General Electric Corporation and, prior to that, was a co-founder of Stamos Associates, Inc., a healthcare consulting business which was acquired by Perot Systems Corporation. Previously, Mr. Soukup was legislative counsel to Senator Bill Bradley, a Senior Associate at Booz-Allen & Hamilton Inc., a consulting firm, and an associate at the law firm of Kirkland & Ellis. Mr. Soukup sits on the board of directors of the Gay and Lesbian Alliance Against Defamation (GLAAD) and was a co-chair of the board of directors of the Gay and Lesbian Victory Fund. He holds a B.A. in International Relations and a M.A. in International Policy Studies from Stanford University and a M.B.A. with a concentration in Finance and a J.D. from the University of Chicago.

      Mark D. Elderkin has served since November 2003 as our President, in which role he focuses on business development and our online media and advertising services. From April 2001 until November 2003, Mr. Elderkin served as our Chief Revenue Officer. He served as President and Chief Operating Officer of Online Partners from January 1999 until April 2001. From July 1994 until January 1999, Mr. Elderkin served

as President and Chief Executive Officer of PrideCom Productions LLC and PrideCom Productions, Inc., the operator of Gay.com, which he co-founded and which was acquired by Online Partners. Mr. Elderkin has held product management positions with RadioMail Corporation, CellNet Data Systems and Network Equipment Technologies. Mr. Elderkin holds a B.S. in Systems Engineering from Boston University and a M.B.A. with a concentration in International Marketing from the Haas School of Business at the University of California, Berkeley.

      Daniel J. Miller has served as our Chief Financial Officer, Senior Vice President since February 2006. Prior to joining us, Mr. Miller served as the Vice President, Finance and Administration at Predicant Biosciences, Inc., a life science company based in South San Francisco, a position he held from June 2002 to December 2005. From October 2000 to May 2002, Mr. Miller was the Vice President, Finance and Operations for Photuris, Inc., a telecom equipment company now owned by Meriton Networks. Prior to that, Mr. Miller served as corporate controller for Extreme Networks, Inc., held a treasury position at Genentech, Inc. and was an auditor for Deloitte & Touche. Mr. Miller is a C.P.A. and holds a bachelor’s degree from John Carroll University and a M.B.A. degree in finance from Carnegie Mellon University.

      Donna L. Gibbs has served since January 2005 as our Senior Vice President, Consumer Marketing and Commerce, overseeing our premium subscription services and e-commerce businesses, as well as our marketing communications functions. Ms. Gibbs joined PlanetOut as Senior Vice President, Corporate Marketing and Communications in July 2004. From January 2002 until June 2004, she was an independent marketing communications and brand strategy consultant. From August 1998 until August 2001, Ms. Gibbs served as Executive Vice President, Western Region, for Weber Shandwick Worldwide, a high technology marketing communications firm. Previously, Ms. Gibbs was also a founding partner in Insync Communications, a high technology consulting company acquired by Waggener-Edstrom, a public relations firm, and served as Vice President, Corporate Communications for Nike, Inc., a sports and fitness company, and as Director, Public Relations for Mattel Toys. Ms. Gibbs holds a B.A. in Communications Arts and Sciences from Michigan State University.

      Peter Kretzman currently serves as our Senior Vice President and Chief Technology Officer. Mr. Kretzman joined PlanetOut as Senior Vice President and Chief Technology Officer in July 2005. From November 2004 until June 2005, Mr. Kretzman was Chief Technology Officer for Compography, Inc., an early-startup software developer. From March 2003 until September 2004, Mr. Kretzman was Senior Vice President of Information Technology at Classmates Online, Inc., an online community connecting more than 38 million members. Mr. Kretzman was the Vice President of Information Systems and Technology for The Cobalt Group, Inc., which develops and hosts integrated e-business solutions for the automotive retail market, from December 2001 until March 2003. Prior to that, from January 1998 to October 2001, he was a co-founder and partner in Management Bridge International LLC, a transitional management services firm providing interim active senior management for its clients and has architected, implemented and operated internal and customer-facing systems in a wide array of companies, such as: AT&T Wireless, IT management at F5 Networks and development at Getty Images’ PhotoDisc. Mr. Kretzman has also held additional programming and IT management positions at Pacific Gas and Electric and Grumman Aerospace Corp., and chaired the SAS Users Group International Conference. Mr. Kretzman holds a bachelor’s degree in English and German Literature from Stanford University and a master’s degree in English from the University of California, Berkeley.

Available Information

      Our corporate website is located at http://www.planetoutinc.com. We make available free of charge, on or through the Investor Center on our corporate website, our annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with the SEC. Information contained on our corporate website, or on our flagship or other websites, is not part of this report or any other report filed with the SEC.

Item 1A.     Risk Factors

We have a history of significant losses. If we do not sustain profitability, our financial condition and stock price could suffer.

      We have experienced significant net losses and we may continue to incur losses in the future given our anticipated increase in sales and marketing expenditures. As of December 31, 2005, our accumulated deficit was approximately $34.6 million. Although we had positive net income in the year ended December 31, 2005, we may not be able to sustain or increase profitability in the near future, causing our financial condition to suffer and our stock price to decline.

If our efforts to attract and retain subscribers are not successful, our revenue will decrease.

      Because the largest portion of our revenue is derived from our subscription services, we must continue to attract and retain subscribers. Many of our new subscribers originate from word-of-mouth referrals from existing subscribers within the LGBT community. If our subscribers do not perceive our service offerings or publications to be of high quality or sufficient breadth, if we introduce new services or publications that are not favorably received or if we fail to introduce compelling new content or features or enhance our existing offerings, we may not be able to attract new subscribers or retain our current subscribers.

      Our current online content, shopping and personals platforms may not allow us to maximize potential cross-platform synergies and may not provide the most effective platform from which to launch new or improve current services for our members. If there is a delay in our plan to improve and consolidate these platforms, and this delay prevents or delays the development or integration of new features or enhancements to existing features, our subscriber growth could slow. As a result, our revenue would decrease. Our base of likely potential subscribers is also limited to members of the LGBT community, who collectively comprise a small portion of the general adult population.

      While seeking to add new subscribers, we must also minimize the loss of existing subscribers. We lose our existing subscribers primarily as a result of cancellations and credit card failures due to expirations or exceeded credit limits. Subscribers cancel their subscription to our services for many reasons, including a perception, among some subscribers, that they do not use the service sufficiently, that the service or publication is a poor value and that customer service issues are not satisfactorily resolved. We also believe that online customer satisfaction has suffered as a result of the presence in the chat rooms of our websites of adbots, which are software programs that create a member registration profile, enter a chat room and display third-party advertisements. Online members may decline to subscribe or existing online subscribers may cancel their subscriptions if our websites experience a disruption or degradation of services, including slow response times or excessive down time due to scheduled or unscheduled hardware or software maintenance or denial of service attacks. We must continually add new subscribers both to replace subscribers who cancel or whose subscriptions are not renewed due to credit card failures and to continue to grow our business beyond our current subscriber base. If excessive numbers of subscribers cancel their subscription, we may be required to incur significantly higher marketing expenditures than we currently anticipate in order to replace canceled subscribers with new subscribers, which will harm our financial condition.

Our limited operating history makes it difficult to evaluate our business.

      As a result of our recent growth and limited operating history, it is difficult to forecast our revenue, gross profit, operating expenses and other financial and operating data. Our inability, or the inability of the financial community at large, to accurately forecast our operating results could cause us to grow slower or our net profit to be smaller than expected, which could cause a decline in our stock price.

We expect our operating results to fluctuate, which may lead to volatility in our stock price.

      Our operating results have fluctuated in the past and may fluctuate significantly in the future due to a variety of factors, many of which are outside of our control. As a result, we believe that period-over-period comparisons of our operating results are not necessarily meaningful and that you should not rely on the results

of one period as an indication of our future or long-term performance. Our operating results in future quarters may be below the expectations of public market analysts and investors, which may result in a decline in our stock price.

If we fail to manage our growth, our business will suffer.

      We have significantly expanded our operations and anticipate that further expansion will be required to address current and future growth in our customer base and market opportunities. Our expansion has placed, and is expected to continue to place, a significant strain on our technological infrastructure, management, operational and financial resources. If we continue to expand our marketing efforts, we may expend cash and create additional expenses, including additional investment in our technological infrastructure, which might harm our financial condition or results of operations. If despite such additional investments our technological infrastructure is unable to keep pace with our online subscriber and member growth, members using our online services may experience degraded performance and our online subscriber growth could slow and our revenue may decline.

If we are unable to successfully expand our international operations, our business will suffer.

      We offer services and products to the LGBT community outside the United States, and we intend to continue to expand our international presence, which may be difficult or take longer than anticipated especially due to international challenges, such as language barriers, currency exchange issues and the fact that the Internet infrastructure in foreign countries may be less advanced than Internet infrastructure in the United States. In October 2005, we began offering our online premium services free of charge for a limited time in some international markets in an effort to develop critical mass in those markets. Expansion into international markets requires significant resources that we may fail to recover by generating additional revenue.

      If we are unable to successfully expand our international operations, if our limited time offer of free online premium services to some international markets fails to develop critical mass in those markets, or if critical mass is achieved in those markets and members are then unwilling to pay for our online premium services after the limited time offer of free premium services ends, our revenue may decline and our profit margins will be reduced.

Recent and potential future acquisitions could result in operating difficulties and unanticipated liabilities.

      In November 2005, we significantly expanded our operations by acquiring substantially all of the assets of LPI. In March 2006, we acquired substantially all of the assets of RSVP. In order to address market opportunities and potential growth in our customer base, we anticipate additional expansion in the future, including possible additional acquisitions of third-party assets, technologies or businesses. Such acquisitions may involve the issuance of shares of stock that dilute the interests of our other stockholders, or require us to expend cash, incur debt or assume contingent liabilities. Our recent acquisitions of LPI and RSVP and other potential future acquisitions may be associated with a number of risks, including:

      If we are unable to successfully address these or other risks associated with our recent acquisitions of LPI and RSVP or potential future acquisitions, we may be unable to realize the anticipated synergies and benefits of our acquisitions, which could adversely affect our financial condition and results of operations. In addition, the businesses we recently acquired from LPI and RSVP are in more mature markets than our online businesses. The value of these new businesses to us depends in part on our expectation that by cross-marketing their services to our existing user, member and subscriber bases, we can increase revenues in the newly acquired businesses. If this cross-marketing is unsuccessful, or if revenue growth in our acquired businesses is slower than expected, our financial condition and results of operation would be harmed.

If we do not continue to attract and retain qualified personnel, we may not be able to expand our business.

      Our success depends on the collective experience of our senior executive team and board of directors and on our ability to recruit, hire, train, retain and manage other highly skilled employees and directors. Disruptions in our senior executive team could harm our business and financial results or limit our ability to grow and expand our business. We cannot provide assurance that we will be able to attract and retain a sufficient number of qualified employees or that we will successfully train and manage the employees that we do hire.

Our success depends, in part, upon the growth of Internet advertising and upon our ability to accurately predict the cost of customized campaigns.

      Online advertising represents a significant portion of our advertising revenue. We compete with traditional media including television, radio and print, in addition to high-traffic websites, such as those operated by Yahoo!, Google, AOL and MSN, for a share of advertisers’ total online advertising expenditures. We face the risk that advertisers might find the Internet to be less effective than traditional media in promoting their products or services, and as a result they may reduce or eliminate their expenditures on Internet advertising. Many potential advertisers and advertising agencies have only limited experience advertising on the Internet and historically have not devoted a significant portion of their advertising expenditures to Internet advertising. Additionally, filter software programs that limit or prevent advertisements from being displayed on or delivered to a user’s computer are becoming increasingly available. If this type of software becomes widely accepted, it would negatively affect Internet advertising. Our business could be harmed if the market for Internet advertising does not grow.

      Currently, we offer advertisers a number of alternatives to advertise their products or services on our websites, in our publications and to our members, including banner advertisements, rich media advertisements, traditional print advertising, email campaigns, text links and sponsorships of our channels, topic sections, directories, sweepstakes, awards and other online databases and content. Frequently, advertisers request advertising campaigns consisting of a combination of these offerings, including some that may require custom development. If we are unable to accurately predict the cost of developing these custom campaigns for our advertisers, our expenses will increase and our margins will be reduced.

If advertisers do not find the LGBT market to be economically profitable, our business will be harmed.

      We focus our services exclusively on the LGBT community. Advertisers and advertising agencies may not consider the LGBT community to be a broad enough or profitable enough market for their advertising budgets, and they may prefer to direct their online and offline advertising expenditures to larger higher-traffic websites and higher circulation publications that focus on broader markets. If we are unable to attract new advertisers, if our advertising campaigns are unsuccessful with the LGBT community or if our existing advertisers do not renew their contracts with us, our revenue will decrease and operating results will suffer.

Any significant disruption in service on our websites or in our computer and communications hardware and software systems could harm our business.

      Our ability to attract new visitors, members, subscribers, advertisers and other customers to our websites is critical to our success and largely depends upon the efficient and uninterrupted operation of our computer and communications hardware and software systems. Our systems and operations are vulnerable to damage or interruption from power outages, computer and telecommunications failures, computer viruses, security breaches, catastrophic events and errors in usage by our employees and customers, which could lead to interruption in our service and operations, and loss, misuse or theft of data. Our websites could also be targeted by direct attacks intended to cause a disruption in service or to siphon off customers to other Internet services. Among other risks, our chat rooms may be vulnerable to infestation by software programs or scripts that we refer to as adbots. An adbot is a software program that creates a member registration profile, enters a chat room and displays third-party advertisements. Our members’ email accounts could be compromised by phishing or other means, and used to send spam email messages clogging our email servers and disrupting our members ability to send and receive email. Any successful attempt by hackers to disrupt our websites services or our internal systems could harm our business, be expensive to remedy and damage our reputation, resulting in a loss of visitors, members, subscribers, advertisers and other customers.

If we are unable to compete effectively, we may lose market share and our revenue may decline.

      Our markets are intensely competitive and subject to rapid change. Across all three of our service lines, we compete with traditional media companies focused on the general population and the LGBT community, including local newspapers, national and regional magazines, satellite radio, cable networks and network, cable and satellite television shows. In our advertising business, we compete with a broad variety of online and offline content providers, including large media companies such as Yahoo!, MSN, Time Warner and Viacom, as well as a number of smaller companies focused specifically on the LGBT community. In our subscription business, our competitors include these companies as well as other companies that offer more targeted online service offerings, such as Match.com, Yahoo! Personals, and a number of other smaller online companies focused specifically on the LGBT community. In our transaction business, we compete with traditional and online retailers. Most of these transaction service competitors target their products and services to the general audience while still serving the LGBT market. Other competitors, however, specialize in the LGBT market, particularly in the gay and lesbian travel space. If we are unable to successfully compete with current and new competitors, we may not be able to achieve or maintain adequate market share, increase our revenue or achieve and maintain profitability.

      We believe that the primary competitive factors affecting our business are quality of content and service, functionality, brand recognition, customer affinity and loyalty, ease of use, reliability and critical mass. Some of our current and many of our potential competitors have longer operating histories, larger customer bases and greater brand recognition in other business and Internet markets and significantly greater financial, marketing, technical and other resources than we do. Therefore, these competitors may be able to devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing policies or may try to attract readers, users or traffic by offering services for free and devote substantially more resources to developing their services and systems than we can. Increased competition may result in reduced operating margins, loss of market share and reduced revenue.

If we are unable to protect our domain names, our reputation and brand could be harmed if third parties gain rights to, or use, these domain names in a manner that would confuse or impair our ability to attract and retain customers.

      We have registered various domain names relating to our brands, including Gay.com, PlanetOut.com, Kleptomaniac.com, Out.com and Advocate.com. If we fail to maintain these registrations, a third party may be able to gain rights to or cause us to stop using these domain names, which will make it more difficult for users to find our websites and our service. For example, the injunction issued in the DIALINK matter has forced us to temporarily change our domain name in France during our appeal of that decision and may make it more difficult for French users to find our French website. The acquisition and maintenance of domain names are generally regulated by governmental agencies and their designees. The regulation of domain names in the United States may change in the near future. Governing bodies may designate additional top-level domains, such as .eu, in addition to currently available domains such as .biz, .net or ..tv, for example, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we may be unable to acquire or maintain relevant domain names. If a third party acquires domain names similar to ours and engages in a business that may be harmful to our reputation or confusing to our subscribers and other customers, our revenue may decline, and we may incur additional expenses in maintaining our brand and defending our reputation. Furthermore, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is unclear. We may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of our trademarks and other proprietary rights.

If we fail to adequately protect our trademarks and other proprietary rights, or if we get involved in intellectual property litigation, our revenue may decline and our expenses may increase.

      We rely on a combination of confidentiality and license agreements with our employees, consultants and third parties with whom we have relationships, as well as trademark, copyright and trade secret protection laws, to protect our proprietary rights. If the protection of our proprietary rights is inadequate to prevent use or appropriation by third parties, the value of our brands and other intangible assets may be diminished, competitors may be able to more effectively mimic our service and methods of operations, the perception of our business and service to subscribers and potential subscribers may become confused in the marketplace and our ability to attract subscribers and other customers may suffer, resulting in loss of revenue.

      The Internet content delivery market is characterized by frequent litigation regarding patent and other intellectual property rights. As a publisher of online content, we face potential liability for negligence, copyright, patent or trademark infringement or other claims based on the nature and content of materials that we publish or distribute. For example, we have received, and may receive in the future, notices or offers from third parties claiming to have intellectual property rights in technologies that we use in our businesses and inviting us to license those rights. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity, and we may not prevail in any future litigation. We may also attract claims that our print and online media properties have violated the copyrights, rights of privacy, or other rights of others. Adverse determinations in litigation could result in the loss of our proprietary rights, subject us to significant liabilities, require us to seek licenses from third parties or prevent us from licensing our technology or selling our products, any of which could seriously harm our business. An adverse determination could also result in the issuance of a cease and desist order, which may force us to discontinue operations through our website or websites. For example, the injunction issued in the DIALINK matter has forced us to temporarily change our domain name in France during our appeal of that decision and may make it more difficult for French users to find our French website. Intellectual property litigation, whether or not determined in our favor or settled, could be costly, could harm our reputation and could divert the efforts and attention of our management and technical personnel from normal business operations.

Existing or future government regulation in the United States and other countries could limit our growth and result in loss of revenue.

      We are subject to federal, state, local and international laws, including laws affecting companies conducting business on the Internet, including user privacy laws, regulations prohibiting unfair and deceptive trade practices and laws addressing issues such as freedom of expression, pricing and access charges, quality of products and services, taxation, advertising, intellectual property rights, display and production of material intended for mature audiences and information security. In particular, we are currently required, or may in the future be required, to:

      The restrictions imposed by, and costs of complying with, current and possible future laws and regulations related to our business could limit our growth and reduce our membership base, revenue and profit margins.

The risks of transmitting confidential information online, including credit card information, may discourage customers from subscribing to our services or purchasing goods from us.

      In order for the online marketplace to be successful, we and other market participants must be able to transmit confidential information, including credit card information, securely over public networks. Third parties may have the technology or know-how to breach the security of our customer transaction data. Any breach could cause consumers to lose confidence in the security of our websites and choose not to subscribe to our services or purchase goods from us. We cannot guarantee that our security measures will effectively prohibit others from obtaining improper access to our information or that of our users. If a person is able to circumvent our security measures, he or she could destroy or steal valuable information or disrupt our operations. Any security breach could expose us to risks of data loss, litigation and liability and may significantly disrupt our operations and harm our reputation, operating results or financial condition.

If we are unable to provide satisfactory customer service, we could lose subscribers.

      Our ability to provide satisfactory customer service depends, to a large degree, on the efficient and uninterrupted operation of our customer service centers. Any significant disruption or slowdown in our ability to process customer calls resulting from telephone or Internet failures, power or service outages, natural disasters or other events could make it difficult or impossible to provide adequate customer service and support. Further, we may be unable to attract and retain adequate numbers of competent customer service representatives, which is essential in creating a favorable interactive customer experience. If we are unable to continually provide adequate staffing for our customer service operations, our reputation could be harmed and we may lose existing and potential subscribers. In addition, we cannot assure you that email and telephone call volumes will not exceed our present system capacities. If this occurs, we could experience delays in responding to customer inquiries and addressing customer concerns.

We may be the target of negative publicity campaigns or other actions by advocacy groups that could disrupt our operations because we serve the LGBT community.

      Advocacy groups may target our business through negative publicity campaigns, lawsuits and boycotts seeking to limit access to our services or otherwise disrupt our operations because we serve the LGBT community. These actions could impair our ability to attract and retain customers, especially in our advertising business, resulting in decreased revenue, and cause additional financial harm by requiring that we incur significant expenditures to defend our business and by diverting management’s attention. Further, some investors, investment banking entities, market makers, lenders and others in the investment community may

decide not to invest in our securities or provide financing to us because we serve the LGBT community, which, in turn, may hurt the value of our stock.

Adult content in our media properties may be the target of negative publicity campaigns or subject us to restrictive or costly regulatory compliance.

      A portion of the content of our media properties is adult in nature. Our adult content increased significantly as a result of our November 2005 acquisition of assets from LPI, which included several adult-themed media properties. Advocacy groups may target our business through negative publicity campaigns, lawsuits and boycotts seeking to limit access to our services or otherwise disrupt our operations because we are a provider of adult content. These actions could impair our ability to attract and retain customers, especially in our advertising business, resulting in decreased revenue, and cause additional financial harm by requiring that we incur significant expenditures to defend our business and by diverting management’s attention. Further, some investors, investment banking entities, market makers, lenders and others in the investment community may decide not to invest in our securities or provide financing to us because of our adult content, which, in turn, may hurt the value of our stock. Additionally, future laws or regulations, or new interpretations of existing laws and regulations, may restrict our ability to provide adult content, or make it more difficult or costly to do so, such as the regulations recently adopted by the DOJ purporting to implement the Child Protection and Obscenity Act of 1988.

If one or more states or countries successfully assert that we should collect sales or other taxes on the use of the Internet or the online sales of goods and services, our expenses will increase, resulting in lower margins.

      In the United States, federal and state tax authorities are currently exploring the appropriate tax treatment of companies engaged in online commerce, and new state tax regulations may subject us to additional state sales and income taxes, which could increase our expenses and decrease our profit margins.

      In 2003, the European Union implemented new rules regarding the collection and payment of value added tax, or VAT. These rules require VAT to be charged on products and services delivered over electronic networks, including software and computer services, as well as information and cultural, artistic, sporting, scientific, educational, entertainment and similar services. These services are now being taxed in the country where the purchaser resides rather than where the supplier is located. Historically, suppliers of digital products and services that existed outside the European Union were not required to collect or remit VAT on digital orders made to purchasers in the European Union. With the implementation of these rules, we are required to collect and remit VAT on digital orders received from purchasers in the European Union, effectively reducing our revenue by the VAT amount because we currently do not pass this cost on to our customers.

      We also do not currently collect sales, use or other similar taxes for sales of our subscription services or for physical shipments of goods into states other than California and New York. In the future, one or more local, state or foreign jurisdictions may seek to impose sales, use or other tax collection obligations on us. If these obligations are successfully imposed upon us by a state or other jurisdiction, we may suffer decreased sales into that state or jurisdiction as the effective cost of purchasing goods or services from us will increase for those residing in these states or jurisdictions.

We are exposed to pricing and production capacity risks associated with our magazine publishing business, which could result is lower revenues and profit margins.

      As a result of our November 2005 acquisition of assets from LPI, we publish and distribute magazines, such as The Advocate, Out, The Out Traveler and HIVPlus, among others. The commodity prices for paper products have been increasing over the recent years, and producers of paper products are often faced with production capacity limitations, which could result in delays or interruptions in our supply of paper. In addition, mailing costs have also been increasing, primarily due to higher postage rates. If pricing of paper products and mailing costs continue to increase, or if we encounter shortages in our paper supplies, our revenues and profit margins could be adversely affected.

We may need additional capital and may not be able to raise additional funds on favorable terms or at all, which could increase our costs, limit our ability to grow and dilute the ownership interests of existing stockholders.

      We anticipate that we may need to raise additional capital in the future to facilitate long-term expansion, to respond to competitive pressures or to respond to unanticipated financial requirements. We cannot be certain that we will be able to obtain additional financing on commercially reasonable terms or at all. If we raise additional funds through the issuance of equity, equity-related or debt securities, these securities may have rights, preferences or privileges senior to those of the rights of our common stock, and our stockholders will experience dilution of their ownership interests. A failure to obtain additional financing or an inability to obtain financing on acceptable terms could require us to incur indebtedness that has high rates of interest or substantial restrictive covenants, issue equity securities that will dilute the ownership interests of existing stockholders, or scale back, or fail to address opportunities for expansion or enhancement of, our operations. We cannot assure you that we will not require additional capital in the near future.

In the event of an earthquake, other natural or man-made disaster, or power loss, our operations could be interrupted or adversely affected, resulting in lower revenue.

      Our executive offices and our data center are located in the San Francisco Bay area and we have significant operations in Los Angeles. Our business and operations could be disrupted in the event of electrical blackouts, fires, floods, earthquakes, power losses, telecommunications failures, acts of terrorism, break-ins or similar events. Because our California operations are located in earthquake-sensitive areas, we are particularly susceptible to the risk of damage to, or total destruction of, our systems and infrastructure. We are not insured against any losses or expenses that arise from a disruption to our business due to earthquakes. Further, the State of California has experienced deficiencies in its power supply over the last few years, resulting in occasional rolling blackouts. If rolling blackouts or other disruptions in power occur, our business and operations could be disrupted, and we will lose revenue. Revenue from our recently acquired RSVP travel business depends in significant part on ocean-going cruises, and could be adversely affected by hurricanes, tsunamis and other meteorological events affecting areas to be visited by future cruises. Our travel business could also be materially adversely affected by concerns about communicable infectious diseases, including future varieties of influenza.

Recent and proposed regulations related to equity compensation could adversely affect our ability to attract and retain key personnel.

      We have used stock options and other long-term incentives as a fundamental component of our employee compensation packages. We believe that stock options and other long-term equity incentives directly motivate our employees to maximize long-term stockholder value and, through the use of vesting, encourage employees to remain with our company. Several regulatory agencies and entities are considering regulatory changes that could make it more difficult or expensive for us to grant stock options to employees. For example, the Financial Accounting Standards Board has adopted changes to the U.S. generally accepted accounting principles that will require us to record a charge to earnings for employee stock option grants. In addition, regulations implemented by the Nasdaq National Market generally requiring stockholder approval for all stock option plans could make it more difficult for us to grant options to employees in the future. To the extent that new regulations make it more difficult or expensive to grant stock options to employees, we may incur increased compensation costs, change our equity compensation strategy or find it difficult to attract, retain and motivate employees, each of which could materially and adversely affect our business.

In the event we are unable to satisfy regulatory requirements relating to internal control over financial reporting, or if these internal controls are not effective, our business and our stock price could suffer.

      Section 404 of the Sarbanes-Oxley Act of 2002 requires companies to do a comprehensive and costly evaluation of their internal controls. As a result, our management is required on an ongoing basis to perform an evaluation of our internal control over financial reporting and have our independent registered public accounting firm attest to such evaluations. Our efforts to comply with Section 404 and related regulations

regarding our management’s required assessment of internal control over financial reporting and our independent registered public accounting firm’s attestation of that assessment has required, and will continue to require, the commitment of significant financial and managerial resources. If we fail to timely complete these evaluations, or if our independent registered public accounting firm cannot timely attest to our evaluations, we could be subject to regulatory scrutiny and a loss of public confidence in our internal controls, which could have an adverse effect on our business and our stock price.

Our stock price may be volatile and you may lose all or a part of your investment.

      Since our initial public offering in October 2004, our stock price has been and may continue to be subject to wide fluctuations. From October 14, 2004 through December 31, 2005, the closing sale prices of our common stock on the Nasdaq ranged from $6.25 to $13.60 per share. Our stock price may fluctuate in response to a number of events and factors, such as quarterly variations in our operating results, changes in financial estimates and recommendations by securities analysts and the operating and stock price performance of other companies that investors or analysts deem comparable to us.

      In addition, the stock markets have experienced significant price and trading volume fluctuations, and the market prices of Internet-related and e-commerce companies in particular have been extremely volatile and have recently experienced sharp share price and trading volume changes. These broad market fluctuations may impact the trading price of our common stock. In the past, following periods of volatility in the market price of a public company’s securities, securities class action litigation has often been instituted against that company. This type of litigation could result in substantial costs to us and a likely diversion of our management’s attention.

Provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable.

      Our charter documents may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable because they will:

      As a Delaware corporation, we are also subject to Delaware law anti-takeover provisions. Under Delaware law, a corporation may not engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction. Our board of directors could rely on Delaware law to prevent or delay an acquisition of us.

      None.

      We are headquartered in San Francisco, California and currently lease approximately 56,000 square feet at our headquarters facility. Our lease runs through 2012 and we have an option to terminate the lease effective January 2010 with proper notice for a fee. We also lease two additional offices each in Los Angeles, out of which we operate many of the functions supporting the publications produced by our LPI subsidiary,

and New York, out of which we operate our PlanetOut Inc. advertising sales and support and other LPI support functions. We support our international operations out of offices we lease in London and Buenos Aires. We believe that our existing facilities are adequate to meet current requirements and are currently exploring the option of consolidating some of our offices. We believe that suitable additional or substitute space will be available as needed to accommodate any further physical expansion of corporate operations and for any additional sales offices.

      For a discussion of the accounting treatment of our leased corporate headquarters, see “Note 7 — Commitments and Contingencies” of the notes to our Consolidated Financial Statements, which we incorporate by reference herein.

      In April 2002, we were notified that DIALINK, a French company, had filed a lawsuit in France against us and our French subsidiary, alleging that we had improperly used the domain names Gay.net, Gay.com and fr.gay.com in France, as DIALINK alleges that it has exclusive rights to use the word “gay” as a trademark in France. On June 30, 2005, the French court found that although we had not infringed DIALINK’s trademark, we had damaged DIALINK through unfair competition. The Court ordered us to pay damages of €50,000 (US $59,000 at December 31, 2005), half to be paid notwithstanding appeal, the other half to be paid after appeal. The Court also enjoined us from using “gay” as a domain name for our services in France. In October 2005, we paid half the damage award as required by the court order and temporarily changed the domain name of our French website, from www.fr.gay.com to www.ooups.com, a domain name we have used previously in France. This temporary change may make it more difficult for French users to locate our French website. We have accrued the full damage award and, in January 2006, appealed the French court’s decision.

      No matters were submitted to a vote of security holders during the fourth quarter of 2005.

PART II

Market Information

      Our common stock is traded on The Nasdaq Global Market under the symbol “LGBT.” Public trading of our common stock commenced in October 2004 and there was no public market for our stock prior to that time. The following table sets forth, for the periods indicated, the high and low bid prices per share of our common stock as reported on The Nasdaq Global Market:

On March 1, 2006, the closing sales price of our common stock was $9.37 per share.

      As of March 1, 2006, there were approximately 200 holders of record of our common stock. This figure does not include the number of stockholders whose shares are held of record by a broker or clearing agency, but does include each such brokerage house or clearing agency as a single holder of record.

      We have never paid cash dividends on our stock and currently anticipate that we will continue to retain any future earnings to finance the growth of our business.

      For information of securities authorized for issuance under our equity compensation plans, refer to Item 12, Part III.

Unregistered Sales of Equity Securities and Use of Proceeds

      On October 13, 2004, a registration statement on Form S-1 (No. 333-114988) was declared effective by the Securities and Exchange Commission, pursuant to which 5,347,500 shares of common stock were offered and sold by us at a price of $9.00 per share, generating total proceeds, net of underwriting discounts and commissions and issuance costs of approximately $42.9 million. In connection with the offering, we incurred approximately $2.9 million in underwriting discounts and commissions and approximately $1.9 million in other related expenses. The managing underwriters were SG Cowen & Co., LLC, RBC Capital Markets Corporation and WR Hambrecht + Co, LLC. We have used the net proceeds from our initial public offering to invest in short-term, investment grade interest-bearing securities, to pay off the principal and interest under our senior subordinated promissory note, for acquisitions and for working capital needs. We may use a portion of the net proceeds to acquire or invest in products and technologies that are complementary to our own, although no portion of the net proceeds has been allocated for any specific acquisition. None of the net proceeds of the initial public offering were paid directly or indirectly to any director, officer, general partner of PlanetOut or their associates, persons owning 10% or more of any class of our or our affiliates’ equity securities.

      From the time of receipt through December 31, 2005, the proceeds of our public offering were applied toward repayment of the principal and interest of the senior subordinated note in the amount of $5,031,000 and $25,546,000 for the acquisition of the assets of LPI. The remaining proceeds of $12,323,000 are being used as working capital and are included within cash and cash equivalents. We expect that the use of the remaining proceeds will conform to the intended use of proceeds as described in our initial public offering prospectus filed on October 14, 2004.

      The selected financial data set forth below are derived from our financial statements. The statement of operations data for the years ended December 31, 2003, 2004 and 2005, and the balance sheet data as of December 31, 2004 and 2005 are derived from our audited financial statements included elsewhere in this Form 10-K. The statement of operations data for the years ended December 31, 2001 and 2002, and the balance sheet data as of December 31, 2001 and 2002, and 2003 are derived from our audited financial statements not included in this Form 10-K. The historical results are not necessarily indicative of results to be expected for any future period. The data presented below has been derived from financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America and should be read with our financial statements, including the accompanying notes to the financial statements, and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Form 10-K.

      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, 2005, 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 global media and entertainment company serving the LGBT community, a market estimated to have buying power of $610 billion in 2005 in the United States alone. Our products, services and network of media properties, including our flagship websites Gay.com and PlanetOut.com, and The Advocate and Out magazines, allow our members to connect with and learn about other members of the LGBT community around the world.

      In 2005, we focused on three long-term strategic and financial goals:

      On November 8, 2005, we completed the purchase of substantially all of the assets of LPI for approximately $31.1 million in cash and debt plus the reimbursement of certain pre-paid deposits and other expenses totaling approximately $1.0 million. LPI is a leading content provider targeting the gay and lesbian market, distributing more than eight million copies of its magazines each year and offering numerous online services.

      On March 4, 2006, we completed the purchase of substantially all of the assets of RSVP for approximately $6.5 million and assumed liabilities, plus reimbursement of pre-paid expenses, and up to $3.0 million in additional consideration based on achievement of financial performance targets for 2007 and 2008. RSVP is a leading marketer of gay and lesbian travel and events, including cruises, land tours and resort vacations.

      These acquisitions support our strategic plan of building a diversified global media and entertainment company, growing our revenue base, and diversifying our revenue mix among advertising services, subscription services and transaction services.

      The following table sets forth the percentage of total revenue represented by items in our consolidated statements of operations:

Comparison of the Years Ended December 31, 2005 and December 31, 2004

     Summary

      Our total revenue was $35.6 million in fiscal 2005, increasing 43% above our prior year’s revenue of $25.0 million, due to growth of advertising services and subscription services, and the incremental effect of the acquisition of LPI. Excluding the effect of the acquisition of LPI, revenue would have increased 22% year-over-year.

      Total operating costs and expenses were $33.5 million, 37% above the prior year total of $24.5 million. This change was primarily due to increases in expenses associated with increases in headcount and salaries, marketing expenses, reporting and compliance expenses due to being a public company, occupancy expenses related to the relocation of our corporate headquarters to larger facilities to accommodate the growth of our businesses, and acquisition-related expenses, as well as the incremental effect of the acquisition of LPI. Our operating costs and expenses increased at a slower rate than our revenue growth primarily due to improving operating leverage across most of our businesses.

      Income from operations was $2.0 million, increasing 355% above the prior year’s income from operations of $0.4 million, due to the increased operating leverage discussed above. Our operating margin was 5.7%, up from the prior year’s operating margin of 1.8%, reflecting the improving revenue growth across most of our businesses, partially offset by higher expenses particularly associated with being a public company and the effect of the acquisition of LPI.

      Included in our 2005 operating expenses are employee stock-based compensation expenses of $74,000 for the accelerated vesting of approximately 720,000 stock options in December, reflecting the increase in the intrinsic value of these options on the date of acceleration, and $526,000, reflecting the remaining balance of unamortized unearned stock-based compensation of these options on the date of acceleration. As of

December 31, 2005, we had zero unearned stock-based compensation. We may recognize additional stock-based compensation expense in the future if we grant additional stock, stock options or other forms of equity-based compensation.

      Management anticipates that revenue will increase in fiscal 2006, primarily due to growth in our organic advertising services, subscription services and transaction services businesses, in part as a result of our planned, international expansion and the launch of our women’s brand, and due to the anticipated incremental effects of the acquisitions of LPI and RSVP.

      We expect our operating income will also increase in fiscal 2006 as we realize additional operating efficiencies in our organic and acquired businesses. For 2006, we anticipate that these gains in operating efficiencies will be partially offset by non-recurring acquisition and business integration costs, higher sales and marketing expenses associated with the expansion of our international businesses and development of our women’s brand, seasonality of the RSVP business, higher depreciation and amortization related to the acquisitions of LPI and RSVP.

     Revenue

      Advertising Services. We had advertising services revenue of $11.7 million in fiscal 2005, an increase of 79% from fiscal 2004. This improvement was due, in part, to growth of the general online advertising industry, deeper penetration into key advertising categories, growth of our subscriber base and the incremental effect of the acquisition of LPI. Excluding the effect of the acquisition of LPI, advertising services revenue increased 36% year-over-year as we successfully attracted greater commitments from advertisers in the entertainment, finance, healthcare and travel sectors. These four categories accounted for approximately $1.9 million, or 90%, of the year-over-year increase in advertising services revenue. Our advertising services revenue accounted for 33% of revenue for 2005, up from 26% for the prior year.

      For fiscal 2006, we expect advertising services revenue to increase over fiscal 2005, in both absolute dollars and as a percentage of our overall revenue as a result of both our organic growth and the effects of the acquisition of LPI.

      Subscription Services. Our subscription services revenue was $21.1 million in fiscal 2005, 26% above the prior year, due to growth in paid subscribers, an increase in the average subscription length in our online services, and the incremental effect of the acquisition of LPI. Excluding the effect of the acquisition of LPI, subscription services revenue grew 20% year-over-year, driven by a 23% increase in global online subscribers to approximately 157,400. Deferred revenue for online subscription services increased 26%, to $4.1 million, as we successfully signed subscribers to annual plans, which accounted for 60% of all subscriptions in the fourth quarter of 2005, up from 43% in the same period during the prior year. For fiscal 2005, subscription services revenues accounted for 59% of revenue, down from 67% for the prior year as a result of the higher growth rate of our organic advertising services, the introduction of the international gratis campaign in the fourth quarter of 2005, and the acquisition of LPI.

      For fiscal 2006, we expect subscription services revenue to increase over fiscal 2005, supported by service enhancements, new product and service introductions, and increased marketing. At the same time, however, we expect the percentage of our overall revenue attributable to subscription services to decrease as a result of even higher growth in our advertising and transaction service lines associated, in part, with the acquisitions of LPI and RSVP.

      Transaction Services. Our transaction services revenue totaled $2.7 million in fiscal 2005, a 66% increase from 2004, primarily due to the incremental effect of the acquisition of LPI. Excluding the effect of the acquisition of LPI, transaction services revenue decreased 13% year-over-year due to the shift in advertising inventory away from Kleptomaniac.com to our third-party advertising clients. Transaction services revenue accounted for 8% of revenue for 2005, up from 7% for the prior year.

      For fiscal 2006, we expect transaction services revenue to increase over fiscal 2005, and the percentage of our revenue attributable to transaction services revenue to increase as a result of the acquisitions of LPI and RSVP.

     Operating Costs and Expenses

      Cost of Revenue. Cost of revenue, including stock-based compensation, was $12.0 million in fiscal 2005, 48% above the prior year due to increases in employee headcount and salaries, higher occupancy expenses related to the relocation of our corporate headquarters to larger facilities to accommodate the growth of our businesses, and the incremental costs of managing the LPI assets. Excluding the incremental costs of managing the LPI assets, in particular the additional print production costs, our cost of revenue increased 13% year-over-year. Cost of revenue associated with the assets acquired from LPI accounts for a higher percentage of total expenses than it does for our online media businesses.

      Cost of revenue was 34% of revenue for 2005, up from 32% in 2004 due to the incremental effect of the acquisition of LPI. Excluding the incremental effect of the acquisition of LPI, cost of revenue as a percentage of revenue improved year-over-year.

      For fiscal 2006, we expect cost of revenue to increase over fiscal 2005 as we continue to invest in human resources and other areas in support of our strategic growth plan, and due to the acquisitions of LPI and RSVP. We expect the percentage of our revenue attributable to cost of revenue to increase in 2006 as a result of the shift in our revenue mix resulting from the acquisitions of LPI and RSVP.

      Sales and Marketing. Sales and marketing expenses, including stock-based compensation, were $11.1 million in fiscal 2005, up 26% from the prior year, due to increases in marketing promotions for the subscription services businesses, increases in employee headcount and salaries, higher occupancy expenses related to the relocation of our corporate headquarters to larger facilities to accommodate the growth of our businesses, and the incremental effect of managing the LPI properties. Excluding the effect of these incremental LPI expenses, sales and marketing expenses increased 18% year-over-year.

      Sales and marketing expenses as a percentage of revenue were 31% for 2005, down from 35% in 2004 as a result of improving operating leverage and the effect of the acquisition of LPI.

      For fiscal 2006, we expect sales and marketing expenses to increase over fiscal 2005 as we continue to invest in marketing activities, particularly in support of the women’s brand launch and our international expansion efforts, and due to the incremental costs of selling and marketing the LPI and RSVP products and services. We expect the percentage of our revenue attributable to sales and marketing to decrease as we begin to leverage operating synergies from our historical business and our acquisitions of LPI and RSVP.

      General and Administrative. Our general and administrative expenses, including stock-based compensation, were $7.0 million for 2005, up 36% from the prior year due to higher expenses associated with increased public company reporting and compliance requirements, higher insurance and risk management expenses, higher occupancy expenses related to the relocation of our corporate headquarters to larger facilities to accommodate the growth of our businesses, the incremental effect of operating the LPI properties, and integration and other expenses associated with the acquisitions of LPI and RSVP. Excluding the incremental effect of LPI, general and administrative expenses increased 25% year-over-year.

      General and administrative expenses as a percentage of revenue were 20% for fiscal 2005, down from 21% in fiscal 2004 as a result of greater operating efficiencies in our general corporate services and the effect of the acquisition of LPI.

      For fiscal 2006, we expect general and administrative expenses to increase over fiscal 2005 as we continue to invest in human resources in support of our strategic growth plan and incur expenses associated with the integration of LPI and RSVP. We expect the percentage of our revenue attributable to general and administrative expenses to decrease as we continue to manage our expenses, see improved economies of scale and scope across multiple products, services and geographies, and begin to leverage operating synergies from our acquisitions of LPI and RSVP.

      Depreciation and Amortization. Depreciation and amortization was $3.5 million for fiscal 2005, up 41% from the prior year, due primarily to increased capital expenditures to support our on-going product development and compliance efforts, and an increase in the amortization of intangible assets associated with the acquisition of LPI. Amortization of intangible assets was $0.2 million due to intangible assets which we

capitalized in connection with the acquisition of LPI. Excluding the incremental impact of the acquisition of LPI, depreciation and amortization increased 31% year-over-year.

      For fiscal 2006, we expect depreciation and amortization will increase materially over fiscal 2005 as a result of the acquisitions of LPI and RSVP, and capital investments to support of our strategic growth plan. Depreciation and amortization as a percentage of revenue remained flat at 10% for each of 2004 and 2005.

      Income from Operations. Our income from operations for fiscal 2005 was $2.0 million, an increase of 355% from the prior year. The growth in income from operations was driven by improving margin leverage, a decline in stock-based compensation and the incremental contribution from our acquisition of LPI, partially offset by higher expenses associated with being a public company. Excluding the effect of the acquisition of LPI, our income from operations increased 183% year-over-year.

      For fiscal 2006, we expect operating income to increase over fiscal 2005 as a result of overall revenue growth, continued expense management, improving economies of scale and scope, operating synergies from integrating LPI and RSVP, and the effects of the acquisitions of LPI and RSVP.

     Other Income and Expenses

      Other Income (Expense), Net. Our other income (expense), net was $0.9 million for fiscal 2005 compared to other expense (net) of $1.0 million for the prior fiscal year. The change in other income is primarily due to increased interest income we received during 2005 on our higher cash balance as a result of the completion of our initial public offering in October 2004, as well as lower interest expense in 2005 following the repayment of our senior subordinated promissory note upon completion of our initial public offering.

Comparison of Years Ended December 31, 2004 and December 31, 2003

     Revenue

      Total revenue increased approximately 31%, from $19.1 million in the twelve months ended December 31, 2003 to $25.0 million in the twelve months ended December 31, 2004.

      Advertising Services. Our advertising services revenue increased approximately 41%, from $4.6 million in the twelve months ended December 31, 2003 to $6.5 million in the twelve months ended December 31, 2004. The majority of this increase came from increases in online advertising revenue on our flagship websites, Gay.com and PlanetOut.com. In our non-classified advertising business, the number of accounts decreased while the average account size increased for the twelve months ended December 31, 2004 compared to the twelve months ended December 31, 2003, reflecting both overall growth of online advertising activity and our efforts to concentrate on larger corporate accounts. Other factors that affected our advertising revenue for the twelve months ended December 31, 2004 as compared to the twelve months ended December 31, 2003 included:

      Subscription Services. From December 31, 2003 to December 31, 2004, the number of our subscribers grew approximately 30%, from approximately 98,500 to approximately 127,500. As a result of this increase, our subscription revenue for the twelve months ended December 31, 2003 and 2004 increased approximately 32%, from $12.7 million to $16.8 million, respectively. Factors that contributed to this change in revenue included:

      Revenue from our premium membership services made up more than 96% of subscription revenue in the twelve months ended December 31, 2003 and 2004.

      Transaction Services. Our transaction services revenue declined from $1.7 million to $1.6 million in the twelve months ended December 31, 2003 and 2004, respectively. The year-over-year decline was largely due to the ongoing shift of internal promotional space on our websites away from Kleptomaniac.com toward our premium membership and advertising services. This decline also reflects the fact that sales on Kleptomaniac.com were unusually high in the first quarter of 2003 due to the popularity of DVD compilations that were released in that quarter. Revenue from Kleptomaniac.com accounted for approximately 53% of transaction services revenue in 2004 and approximately 70% in 2003. Transaction revenue from sources other than Kleptomaniac.com, while relatively small in total dollar amounts, increased for 2004 as compared to 2003.

     Operating Costs and Expenses

      Total operating expenses grew approximately 26%, from $19.5 million to $24.5 million in the twelve months ended December 31, 2003 and 2004, respectively. Increases in these expenses reflect a number of changes in key expense items, including increases in marketing and promotions, investments in new feature development and technology infrastructure, changes in stock-based compensation, and expenses associated with our initial public offering and office moves. Specifically, stock-based compensation expenses grew from $1.6 million to $2.1 million in the twelve months ended December 31, 2003 and 2004, respectively.

      Cost of Revenue. Our cost of revenue increased approximately 21%, from $6.7 million to $8.1 million in the twelve months ended December 31, 2003 to 2004, respectively. This change was principally the result of increases in labor-related expenses, including stock-based compensation, associated with increases in headcount and compensation as well as use of contract labor. These increases included a reduction in the amount of internal development expenses that we capitalized from $855,000 to $746,000 in the twelve months ended December 31, 2003 and 2004, respectively. In addition, during these periods, credit card processing fees increased by $150,000 due primarily to growth in revenue from subscription services, and hardware and

software maintenance expenses increased by $133,000. The allocation of corporate overhead to cost of revenue increased by approximately $114,000 for the twelve months ended December 31, 2004 compared to the twelve months ended December 31, 2003, reflecting higher occupancy expenses due to the relocation of our corporate headquarters in October 2004.

      Sales and Marketing. Our sales and marketing expenses increased approximately 34%, from $6.6 million to $8.8 million in the twelve months ended December 31, 2003 and 2004, respectively. This change was attributable primarily to an increase in investment in promotional activities in the amount of $1.1 million as part of a strategy to increase brand awareness, an increase in stock-based compensation expenses of $137,000 and an increase in commission payments of $119,000, reflecting an increase in advertising revenue. In addition, the allocation of corporate overhead to sales and marketing increased by approximately $155,000 for the twelve months ended December 31, 2004 compared to the twelve months ended December 31, 2003, reflecting higher occupancy expenses due to relocation of our offices in late 2004.

      General and Administrative. Our general and administrative expenses increased approximately 22% from $4.2 million to $5.2 million in the twelve months ended December 31, 2003 and 2004, respectively. This change was primarily the result of increases in labor-related expenses associated with increases in headcount and compensation of $585,000, including changes in stock-based compensation expenses of $337,000. The increase also includes changes in occupancy expense of $433,000, as a result of the relocation to our new corporate headquarters in October 2004.

      Depreciation and Amortization. Our depreciation and amortization expenses grew by approximately 21%, from $2.0 million to $2.5 million in the twelve months ended December 31, 2003 and December 31, 2004, respectively, primarily reflecting increased investment in our product development and technology infrastructure.

     Other Costs and Expenses

      Interest Expense. Our interest expense grew from $193,000 to $1.1 million in the twelve months ended December 31, 2003 and 2004, respectively. The year-over-year change reflects the effect of monthly interest payments in connection with our senior subordinated promissory note, and approximately $560,000 in expenses connected with the one-time recognition of warrant and debt issuance costs upon repayment of our senior subordinated promissory note upon completion of our initial public offering in October 2004.

      Equity in Net Loss of Affiliate. Our expenses for equity in net loss of unconsolidated affiliate increased from approximately $59,000 to approximately $94,000 in the twelve months ended December 31, 2003 and 2004, respectively. This increase reflected the higher net loss of our unconsolidated affiliate, Gay.it S.p.A., in 2004 as compared to 2003. We recognize 45% of that affiliate’s net income or net loss, as appropriate, in accordance with our holdings in that affiliate.

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. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities.

      We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis on which we make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Because this can vary in each situation, actual results may differ from the estimates under different assumptions and conditions.

      We believe the following critical accounting policies require more significant judgments and estimates in the preparation of our consolidated financial statements:

      Revenue Recognition. We derive our revenue principally from the sale of premium subscription services, banner and sponsorship advertisements and transactions services. To date, the duration of our banner advertising commitments has ranged from one week to one year. Sponsorship advertising contracts have terms ranging from three months to two years and also involve more integration with our services, such as the placement of buttons that provide users with direct links to the advertiser’s website. Advertising revenue on both banner and sponsorship contracts is recognized ratably over the term of the contract, provided that we have no significant obligations remaining at the end of a period and collection of the resulting receivables is reasonably assured at the lesser of the ratio of impressions delivered over the total number of undertaken impressions or the straight line basis. Our obligations typically include undertakings to deliver a minimum number of “impressions” or times that an advertisement appears in pages viewed by users of our online properties. To the extent that these minimums are not met, we defer recognition of the corresponding revenue until the minimums are achieved. Magazine advertising revenues are recognized, net of related agency commissions, on the date the magazines are placed on sale at the newsstands. Revenues received for advertisements in magazines to go on sale in future months are classified as deferred advertising revenue.

      Premium subscription services are generally for a period of one month to two years. Premium subscription services are generally paid for upfront by credit card, subject to cancellations by subscribers or charge backs from transaction processors. Revenue, net of estimated cancellations and charge backs, is recognized ratably over the service term. To date, cancellations and charge backs have not been significant and within management’s expectations. We update our estimated reserve for magazine subscription cancellations at the time such subscriptions are recorded.

      Transaction service revenue generated from sale of products held in inventory is recognized when the product is shipped net of estimated returns. We also earn commissions for facilitating the sale of third party products and services which are recognized when earned based on reports provided by third party vendors or upon cash receipt if no reports are provided. In accordance with EITF Issue No. 99-19, “Reporting Revenue Gross as a Principal Versus Net as an Agent,” the revenue earned for facilitating the sale of third party merchandise is reported net of cost as agent. This revenue is reported net due to the fact that although we receive the order and collect money from buyer, we are under no obligation to make payment to the third party unless payment has been received from the buyer and risk of return is also borne by the third party. We record newsstand and books sales revenue net of estimated sales and returns as described further in our discussion of our valuation allowances below.

      Advertising Costs. Costs related to advertising and promotion are charged to sales and marketing expense as incurred except for direct-response advertising costs which are amortized over the expected life of the subscription, typically a twelve month period. Direct-response advertising costs consist primarily of production costs associated with direct-mail promotion of magazine subscriptions. No advertising costs were amortized in 2003 and 2004. As of December 31, 2004 and 2005, the balance of unamortized direct-response advertising costs was zero and $173,000, respectively and is included in prepaid expenses and other current assets. Total advertising costs in 2003, 2004 and 2005 were $1,067,000, $2,513,000 and $3,260,000, respectively.

      Valuation Allowances. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances might be required. Our allowance for doubtful accounts as of December 31, 2005 was $259,000.

      We accrue an estimated amount for sales returns and allowances in the same period that the related revenue is recorded based on historical information, adjusted for current economic trends. To the extent actual returns and allowances vary from the estimated experience, revisions to the allowance may be required. Significant management judgments and estimates are made and used in connection with establishing the sales and allowances reserve in any accounting period. As of December 31, 2004 and 2005, the provision for sales returns and allowances included in accounts receivable, net was zero and $744,000, respectively.

      We have recorded a full valuation allowance of $14.0 million as of December 31, 2005 against our deferred tax assets due to uncertainties related to our ability to realize the benefit of our deferred tax assets primarily from our net operating losses. In the future, if we generate sufficient taxable income and we determine that we would be able to realize our deferred tax assets, an adjustment to the valuation allowance would impact the results of operations in that period.

      Goodwill and Other Long-lived Assets. Our long-lived assets include goodwill, intangibles, property and equipment. We are required to test goodwill for impairment on an annual basis and between annual tests in certain circumstances. Application of the goodwill impairment test requires judgment in determining the fair value of the enterprise. We complete our annual test as of December 1 and any impairment losses recorded in the future could have a material adverse impact on our financial condition and results of operations. Our test for our 2005 fiscal year showed no impairment.

      We are required to record an impairment charge on intangibles or long-lived assets to be held and used when we determine that the carrying value of these assets may not be recoverable. Based on the existence of one or more indicators of impairment, we measure any impairment based on a projected discounted cash flow method using a discount rate that we determine to be commensurate with the risk inherent in our business model. Our estimates of cash flow require significant judgment based on our historical results and anticipated results and are subject to many factors.

      Capitalized Website Development Costs. We capitalize the costs of enhancing and developing features for our websites when we believe that the capitalization criteria for these activities have been met and amortize these costs on a straight-line basis over the estimated useful life, generally three years. For 2003, 2004 and 2005 we capitalized $855,000, $1.7 million and $2.0 million, respectively. We expense the cost of enhancing and developing features for our websites in cost of revenue only when we believe that capitalization criteria have not been met. We exercise judgment in determining when to begin capitalizing costs and the period over which we amortize the capitalized costs. If different judgments were made, it would have an impact on our results of operations.

Liquidity and Capital Resources

      The following sections discuss the effects of changes in our balance sheet and cash flows, contractual obligations, certain commitments and acquisitions on our liquidity and capital resources.

      Cash flow from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows, and cash, cash equivalents and marketable securities, as reflected in the Consolidated Balance Sheet, are summarized in the table below:

      Cash, cash equivalents and marketable securities as of the end of fiscal 2005, fiscal 2004 and fiscal 2003 were $18.5 million, $43.1 million, and $2.3 million, respectively.

      The decrease in cash and cash equivalents in 2005 was primarily the result of cash used for acquisitions of businesses of $25.5 million, capital expenditures of $4.0 million, and principal payments under capital lease obligations of $1.2 million, partially offset by cash provided by operating activities of $5.5 million and cash provided by the issuance of common stock related to employee stock option exercises of $0.6 million.

      Cash flow from operating activities for 2005 was $5.5 million, driven primarily by growth of our advertising services and subscription services businesses, and the incremental impact of the acquisition of LPI, offset by a $4.0 million increase in accounts receivable and a $0.7 million decrease in accounts payable. Accounts receivable increased to $6.0 million and deferred revenue increased to $8.7 million, primarily as a result of our acquisition of LPI and the overall growth of our businesses. During the twelve months ended December 31, 2004, net cash provided by operating activities was $4.3 million, and was primarily attributable to the growth of our subscription services, offset by $1.6 million in payments for our lease settlement. During the twelve months ended December 31, 2003, net cash provided by operating activities was $2.0 million, primarily attributable to the growth of our subscription services, offset by $1.2 million in payments to settle a lease dispute related to our former San Francisco headquarters facility.

      Cash used in investing activities for 2005 was $29.5 million, of which $25.5 million was used for acquisitions of businesses, and $4.0 million for capital assets. Investments in capital assets were comprised primarily of computer and office equipment and furniture and fixtures. Net cash used in investing activities was $4.8 million in the twelve months ended December 31, 2004, and was primarily attributable to purchases of hardware, software, property and equipment, including $1.7 million of internally developed software, and $1.5 million of investment in furniture and fixtures associated with the move of our corporate headquarters. Net cash used in investing activities was $1.3 million in the twelve months ended December 31, 2003, and was primarily attributable to purchases of property and equipment.

      Net cash used by financing activities for 2005 was $0.6 million, consisting of $1.2 million for principal payments under capital lease obligations, partially offset by cash provided by the issuance of common stock related to employee stock option exercises of $0.6 million. Net cash provided by financing activities in the twelve months ended December 31, 2004 was $41.4 million and was primarily attributable to $44.8 million from the completion of our initial public offering and $5.0 million from the issuance of our senior subordinated promissory note in May 2004, net of $1.9 million of capitalizable offering-related expenses and $5.0 million for the repayment of our senior subordinated promissory note in October 2004. Net cash used by financing activities in the twelve months ended December 31, 2003 was $0.5 million and was primarily attributable to payments of capitalized lease obligations.

      We expect that cash provided by operating activities may fluctuate in future periods as a result of a number of factors, including fluctuations in our operating results, subscription trends, accounts receivable collections, inventory management, expensing stock options and the timing and amount of payments and taxes.

      Our capital requirements depend on many factors, including growth of our revenues, the resources we devote to developing, marketing and selling our products and services, the timing and extent of our introduction of new features and services, the extent and timing of potential investments or acquisitions and other factors. In particular, our subscription services consist of prepaid subscriptions that provide cash flows in advance of the actual provision of services. We expect to devote substantial capital resources to expand our product development and marketing efforts, to expand internationally and for other general corporate activities.

      Based on our current operations and planned growth, we expect that our available funds and anticipated cash flows from operations will be sufficient to meet our expected needs for working capital and capital expenditures for the next twelve months. If we do not have sufficient cash available to finance our operations, we may be required to obtain additional public or private debt or equity financing. We cannot be certain that additional financing will be available to us on favorable terms when required or at all. If we are unable to raise sufficient funds, we may need to reduce our planned operations and expansion activities.

      We believe we are in compliance with all material covenants and other requirements set forth in our credit agreements.

Off-balance Sheet Liabilities

      We did not have any off-balance sheet liabilities or transactions as of December 31, 2005.

Other Contractual Commitments

      The following table summarizes our contractual obligations as of December 31, 2005, and the effect that these obligations are expected to have on our liquidity and cash flows in future periods:

      Capital Lease Obligations. We hold property and equipment under noncancelable capital leases with varying maturities.

      Operating Leases. We lease or sublease office space and equipment under cancelable and noncancelable operating leases with various expiration dates through January 20, 2012. Operating lease amounts include minimum rental payments under our non-cancelable operating leases for office facilities, as well as limited computer and office equipment that we utilize under lease arrangements. The amounts presented are consistent with contractual terms and are not expected to differ significantly, unless a substantial change in our headcount needs requires us to exit an office facility early or expand our occupied space.

      Purchase Obligations. In November 2004, we entered into a software maintenance agreement under which we financed $332,000 with a vendor. This amount is payable in seven quarterly installments beginning in January 2005. Future total minimum payments, including interest, under this agreement are $140,000 for 2006.

      In December 2005, we entered into a payment plan agreement with Oracle to finance a purchase of system software in the amount of $82,000. This amount is payable in four quarterly installments beginning in January 2006. Future minimum payments, including interest, are $90,000 for 2006.

      In December 2005, we entered into a co-location facility agreement with a third-party service provider. In exchange for providing space for our network servers and committed levels of telecommunications bandwidth, we pay a minimum monthly fee of $34,000. In the event that bandwidth exceeds allowed variance from committed levels, we pay for additional bandwidth at a set monthly rate. Future total minimum payments under the co-location facility agreement are $411,000 for 2006.

      Note payable. In November 2005, we issued a note payable in connection with our acquisition of the assets of LPI in the amount of $7,075,000, secured by the assets of SpecPub, Inc. and payable in three equal installments of $2,358,000 in May, August and November 2007. The note bears interest at a rate of 10% per year, payable quarterly and in arrears. As of December 31, 2005, we have accrued interest on the note of $133,000.

Seasonality and Inflation

      We anticipate that our business may be affected by the seasonality of certain revenue sources. For example, print and online advertising buys are usually higher approaching year-end and lower at the beginning

of a new year than at other points during the year, and sales on our e-commerce websites are affected by the holiday season and by the timing of the release of compilations of new DVDs.

      Inflation has not had a significant effect on our revenue or expenses historically and we do not expect it to be a significant factor in the short-term. However, inflation may affect our business in the medium- to long-term. In particular, our operating expenses may be affected by a tightening of the job market, resulting in increased pressure for salary adjustments for existing employees and higher cost of replacement for employees that are terminated or resign.

Recent Accounting Pronouncements

      In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003) (“FIN 46-R”), “Consolidation of Variable Interest Entities”, which addresses accounting and disclosure requirements for variable interest entities (“VIEs”). FIN 46-R defines a VIE as a corporation, partnership, limited liability company, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting or similar rights sufficient to enable such investors to make decisions about an entity’s activities or (b) has equity investors that do not provide sufficient financial resources to support the entities’ activities without additional financial support from other parties. FIN 46-R requires a VIE to be consolidated by a company if the company is subject to, among other things, a majority of the risk or residual returns of the VIE. A company that consolidates a VIE is referred to as the primary beneficiary under FIN 46-R. In addition, FIN 46-R requires disclosure, but not consolidation, of those entities in which we are not the primary beneficiary but have a significant variable interest. The consolidation and disclosure provisions of FIN 46-R became effective for reporting periods ending after March 15, 2004.

      Management has reviewed its operations to determine the entities that we are required to consolidate under FIN 46-R. As a result of this review, we expect to consolidate an investment in PNO DSW Events, LLC, a joint venture, and its funds under management which was entered into in January 2006. As of December 31, 2005, we had $40,000 recorded as a prepaid expense with respect to this joint venture.

      In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (FAS 123R) that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for either equity instruments of the enterprise or liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. The statement eliminates the ability to account for share-based compensation transactions, using the intrinsic value method prescribed by Accounting Principles Board, or APB, Opinion No. 25, “Accounting for Stock Issued to Employees,” and generally requires that such transactions be accounted for using a fair-value-based method and recognized as expenses in our consolidated statement of income. The statement requires companies to assess the most appropriate model to calculate the value of the options. We currently use the Black-Scholes option pricing model to value options which is consistent with our valuation techniques previously utilized for options in footnote disclosures required under SFAS No. 123, “Accounting for Stock Based Compensation”, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure”. The use of a different model to value options may result in a different fair value than the use of the Black-Scholes option pricing model. In addition, there are a number of other requirements under the new standard that would result in different accounting treatment than currently required. These differences include, but are not limited to, the accounting for the tax benefit on employee stock options and the presentation of these tax benefits within the consolidated statement of cash flows. In addition to the appropriate fair value model to be used for valuing share-based payments, we are required to determine the transition method to be used at date of adoption. The allowed transition methods are the prospective and retroactive adoption alternatives. The prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of FAS 123R, while the retroactive method requires companies to record compensation expense for all unvested stock options and restricted stock beginning with the first disclosed period restated. We plan to adopt the prospective method.

      In April 2005, the Securities and Exchange Commission announced the adoption of a new rule that amends the effective date of FAS 123R. The effective date of the new standard under these new rules for our consolidated financial statements is January 1, 2006. In anticipation of the impact of adopting FAS 123R and as discussed in Note 12 of the consolidated financial statements, we accelerated the vesting of approximately 720,000 shares subject to outstanding stock options in December 2005. The primary purpose of the acceleration of vesting was to minimize the amount of compensation expense recognized in relation to the options in future periods following the adoption by us of SFAS 123R.

      We recorded additional employee stock-based compensation expense upon the acceleration of $74,000 based on the additional intrinsic value of these options on the date of acceleration. Additionally on the date of acceleration, the remaining balance of unamortized unearned stock-based compensation of these stock options of $526,000 was recorded as stock-based compensation expense in accordance with FASB Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation an Interpretation of APB No. 25” (“FIN No. 44”).

      As of December 31, 2005, the balance of unearned stock-based compensation was zero. We may recognize additional unearned stock-based compensation and stock-based compensation expense in the future if we grant additional stock or stock options. We plan to consider the issuance of restricted stock and other compensation in the future in lieu of stock options to new and existing employees as we have in the past. As a result of this change and the acceleration of the stock options noted above, we expect the adoption of FAS 123R will not materially affect our future results of operations.

      In May 2005, FASB issued Statement of Financial Accounting Standards No. 154 (“SFAS No. 154”), “Accounting Changes and Error Corrections” which replaces APB Opinion No. 20 “Accounting Changes”, and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements” and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We do not expect the application of SFAS No. 154 will have a material effect on our future results of operations.

      The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we maintain our portfolio in primarily money market funds.

      We do not use derivative financial instruments in our investment portfolio and have no foreign exchange contracts. Our financial instruments consist of cash and cash equivalents, trade accounts receivable, accounts payable and long-term obligations. We consider investments in highly-liquid instruments purchased with a remaining maturity of 90 days or less at the date of purchase to be cash equivalents. Our exposure to market risk for changes in interest rates relates primarily to our short-term investments and short-term obligations; thus, fluctuations in interest rates may have a material impact on the fair value of these securities. A hypothetical 1% increase or decrease in interest rates would increase (decrease) our earnings (loss) by approximately $40,000 per quarter.

      Our operations have been conducted primarily in United States currency and as such have not been subject to material foreign currency exchange rate risk. However, the growth in our international operations is increasing our exposure to foreign currency fluctuations as well as other risks typical of international operations, including, but not limited to differing economic conditions, changes in political climate, differing tax structures and other regulations and restrictions. Accordingly, our future results could be materially adversely impacted by changes in these or other factors. We translate income statement amounts that are denominated in foreign currency into U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency denominated transactions results in increased net revenue operating expenses and net income. Conversely, our net revenue operating expenses and net income will decrease when the U.S. dollar strengthens against foreign currencies. The effect of foreign exchange rate fluctuations for 2005 was not material.

PlanetOut Inc.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of PlanetOut Inc.:

      We have completed an integrated audit of PlanetOut Inc.’s consolidated financial statements and of its internal control over financial reporting as of December 31, 2005 and an audit of its 2005 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements and financial statement schedule

      In our opinion, the consolidated financial statements listed in the accompanying index, present fairly, in all material respects, the financial position of PlanetOut Inc. and its subsidiaries at December 31, 2005, and the results of their operations and their cash flows for the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Internal control over financial reporting

      Also, in our opinion, management’s assessment, included in Management’s Annual Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2005 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

      A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and

expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

      As described in Management’s Annual Report on Internal Control Over Financial Reporting appearing under Item 9A, management has excluded LPI Media, Inc. from its assessment of internal control over financial reporting as of December 31, 2005 because it was acquired by the Company in a purchase business combination during 2005. We have also excluded LPI Media, Inc. from our audit of internal control over financial reporting. The Company acquired substantially all of the assets of LPI Media, Inc., whose total assets and total revenues represent 20.0% and 14.4%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2005.

San Francisco, California

March 7, 2006

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and shareholders of PlanetOut Inc.:

      In our opinion, the consolidated financial statements listed in the Index To Consolidated Financial Statements And Supplementary Data present fairly, in all material respects, the financial position of PlanetOut Inc. at December 31, 2004, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule for the two years in the period ended December 31, 2004 listed in the Index To Consolidated Financial Statements And Supplementary Data, presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

San Jose, California

March 25, 2005

PlanetOut Inc.

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial statements.

PlanetOut Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these consolidated financial statements.

PlanetOut Inc.

CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE

PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

The accompanying notes are an integral part of these consolidated financial statements.

PlanetOut Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS