UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2007

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

PLANETOUT INC.

(Exact Name of Registrant as Specified in Its Charter)

DELAWARE		94-3391368
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
1355 SANSOME STREET, SAN FRANCISCO,
CALIFORNIA		94111
(Address of Principal Executive Offices)		(Zip Code)

(415) 834-6500
(Registrant’s Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

     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 such filing requirements for the past 90 days.     þ Yes      o No

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

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 Exchange Act).

     o Yes       þ No

     The number of shares outstanding of the registrant’s Common Stock, $0.001 par value, as of July 16, 2007 was 40,923,057.

 

 

PlanetOut Inc.
INDEX
Form 10-Q
For the Quarter ended June 30, 2007

		PAGE
PART I — FINANCIAL INFORMATION			1
Item 1 Financial Statements			1
Unaudited Condensed Consolidated Balance Sheets as of December 31, 2006 and June 30, 2007			1
Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2006 and 2007 and the Six Months Ended June 30, 2006 and 2007			2
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2007			3
Notes to Unaudited Condensed Consolidated Financial Statements			4
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3 Quantitative and Qualitative Disclosures About Market Risk			27
Item 4 Controls and Procedures			28
PART II — OTHER INFORMATION			28
Item 1 Legal Proceedings			28
Item 1A Risk Factors			28
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			38
Item 3 Defaults Upon Senior Securities			39
Item 4 Submission of Matters to a Vote of Security Holders			39
Item 5 Other Information			39
Item 6 Exhibits			40
SIGNATURE			41
EXHIBIT INDEX			42
EXHIBIT 4.7
EXHIBIT 10.32
EXHIBIT 10.33
EXHIBIT 12.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

 i

PART I
FINANCIAL INFORMATION
PlanetOut Inc.

Item 1. Financial Statements

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)

		December 31,				June 30,
		2006				2007
ASSETS
Current assets:
Cash and cash equivalents		$	9,674			$	7,016
Short-term investments			2,050				—
Restricted cash			2,854				166
Accounts receivable, net			9,337				6,085
Inventory			1,690				1,124
Prepaid expenses and other current assets			11,336				8,763
Current assets held for sale			—				2,744
Total current assets			36,941				25,898
Property and equipment, net			10,923				10,031
Goodwill			32,572				7,720
Intangible assets, net			12,132				8,853
Long-term assets held for sale			—				2,737
Other assets			1,021				643
Total assets		$	93,589			$	55,882
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	1,782			$	2,297
Accrued expenses and other liabilities			3,707				3,712
Deferred revenue, current portion			14,569				14,151
Capital lease obligations, current portion			694				819
Notes payable, current portion net of discount			8,817				13,745
Deferred rent, current portion			228				265
Current liabilities related to assets held for sale			—				2,565
Total current liabilities			29,797				37,554
Deferred revenue, less current portion			1,474				950
Capital lease obligations, less current portion			1,504				1,412
Notes payable, less current portion and discount			8,100				—
Deferred rent, less current portion			1,569				1,489
Long-term liabilities related to assets held for sale			—				630
Total liabilities			42,444				42,035
Commitments and contingencies (Note 8)
Stockholders’ equity:
Common stock: $0.001 par value, 100,000 shares authorized, 17,629 and 18,001 shares issued and outstanding at December 31, 2006 and June 30, 2007, respectively			17				17
Additional paid-in capital			89,532				90,085
Accumulated other comprehensive loss			(122	)			(98	)
Accumulated deficit			(38,282	)			(76,157	)
Total stockholders’ equity			51,145				13,847
Total liabilities and stockholders’ equity		$	93,589			$	55,882

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

PlanetOut Inc.

		Three months ended June 30,								Six months ended June 30,
		2006				2007				2006				2007
Revenue:
Advertising services		$	7,318			$	6,742			$	12,665			$	12,067
Subscription services			6,321				5,695				12,591				11,341
Transaction services			2,656				6,074				8,612				11,862
Total revenue			16,295				18,511				33,868				35,270
Operating costs and expenses: (*)
Cost of revenue			6,872				13,640				16,302				25,905
Sales and marketing			4,427				4,572				8,371				9,404
General and administrative			3,078				4,073				6,158				8,528
Restructuring			834				—				834				—
Depreciation and amortization			1,300				1,845				2,524				3,542
Impairment of goodwill			—				24,900				—				24,900
Total operating costs and expenses			16,511				49,030				34,189				72,279
Loss from operations			(216	)			(30,519	)			(321	)			(37,009	)
Interest expense			(201	)			(597	)			(398	)			(1,148	)
Other income, net			110				115				280				282
Loss before income taxes and minority interest			(307	)			(31,001	)			(439	)			(37,875	)
Provision for income taxes			—				—				—				—
Minority interest in gain of consolidated affiliate			(47	)			—				(47	)			—
Net loss		$	(354	)		$	(31,001	)		$	(486	)		$	(37,875	)
Net loss per share — basic and diluted		$	(0.02	)		$	(1.77	)		$	(0.03	)		$	(2.17	)
Weighted-average shares used to compute net loss per share — basic and diluted			17,315				17,507				17,288				17,479

Cost of revenue		$	1			$	51			$	6			$	131
Sales and marketing			1				3				2				42
General and administrative			(101	)			108				(22	)			294
Total stock-based compensation (benefit)		$	(99	)		$	162			$	(14	)		$	467

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

PlanetOut Inc.

		Six months ended June 30,
		2006				2007
Cash flows from operating activities:
Net loss		$	(486	)		$	(37,875	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			2,524				3,542
Impairment of goodwill			—				24,900
Non-cash services expense			—				69
Provision for doubtful accounts			226				94
Restructuring			41				—
Stock-based compensation expense (benefit)			(14	)			467
Amortization of debt discount			—				171
Amortization of deferrred rent			(40	)			(43	)
Loss on disposal or write-off of property and equipment			21				375
Minority interest			47				—
Changes in operating assets and liabilities, net of acquisition effects and classification of assets and liabilities related to assets held for sale:
Accounts receivable			(1,774	)			2,081
Inventory			(41	)			(447	)
Prepaid expenses and other assets			(3,216	)			1,890
Accounts payable			216				681
Accrued expenses and other liabilities			1,321				390
Deferred revenue			(1,311	)			1,667
Net cash used in operating activities			(2,486	)			(2,038	)
Cash flows from investing activities:
Acquisitions, net of cash acquired			(5,403	)			—
Purchases of property and equipment			(1,554	)			(1,681	)
Maturities of short-term investments			—				2,050
Changes in restricted cash			(4,793	)			2,688
Net cash provided by (used in) investing activities			(11,750	)			3,057
Cash flows from financing activities:
Proceeds from exercise of common stock and warrants			306				17
Proceeds from repayment of note receivable from stockholder			843				—
Principal payments under capital lease obligations and notes payable			(484	)			(3,718	)
Net cash provided by (used in) financing activities			665				(3,701	)
Effect of exchange rate on cash and cash equivalents			(13	)			24
Net decrease in cash and cash equivalents			(13,584	)			(2,658	)
Cash and cash equivalents, beginning of period			18,461				9,674
Cash and cash equivalents, end of period		$	4,877			$	7,016
Supplemental disclosure of noncash investing and financing activities:
Property and equipment and related maintenance acquired under capital leases		$	651			$	461

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

PlanetOut Inc.

Note 1 — The Company

     PlanetOut Inc. (the “Company”) was incorporated in Delaware in December 2000. The Company, together with its subsidiaries, is a leading global media and entertainment company serving the worldwide lesbian, gay, bisexual and transgender, or LGBT, community. The Company serves this audience through a wide variety of products and services, including online and print media properties, a travel marketing business and other goods and services.

     The Company’s online media properties include the leading LGBT-focused websites Gay.com, PlanetOut.com, Advocate.com and Out.com. The Company’s print media properties include the magazines The Advocate, Out, The Out Traveler and HIVPlus, among others. The Company’s travel marketing business includes LGBT travel and events marketed through its RSVP brand, such as cruises, land tours and resort vacations. The Company also offers its customers access to specialized products and services through its transaction-based websites, including Kleptomaniac.com and BuyGay.com, that generate revenue through sales of products and services of interest to the LGBT community, such as fashion, books, video and music products. The Company also generates revenue from newsstand sales of its various print properties.

Note 2 — Summary of Significant Accounting Policies

     Unaudited Interim Financial Information

     The accompanying unaudited condensed consolidated financial statements have been prepared and reflect all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary to state fairly the financial position and the results of operations for the interim periods. The balance sheet at December 31, 2006 has been derived from audited financial statements at that date. The unaudited condensed consolidated financial statements have been prepared in accordance with the regulations of the Securities and Exchange Commission (“SEC”), but omit certain information and footnote disclosures necessary to present the statements in accordance with generally accepted accounting principles. Results of interim periods are not necessarily indicative of results for the entire year. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

     Principles of Consolidation and Basis of Presentation

     The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and variable interest entities in which the Company has been determined to be the primary beneficiary. All significant intercompany transactions and balances have been eliminated in consolidation. The Company recognizes minority interest for subsidiaries or variable interest entities where it owns less than 100 percent of the equity of the subsidiary. The recording of minority interest eliminates a portion of operating results equal to the percentage of equity it does not own. The Company discontinues allocating losses to the minority interest when the minority interest is reduced to zero.

     Reclassifications

     Certain reclassifications have been made in the prior consolidated financial statements to conform to the current year presentation. These reclassifications did not change the previously reported net loss or net loss per share of the Company.

     Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant estimates and assumptions made by management include, among others, the assessment of collectibility of accounts receivable, the determination of the allowance for doubtful accounts, the determination of the reserve for inventory obsolescence, the determination of the fair market value of its common stock, the valuation and useful life of its capitalized software and long-lived assets and the valuation of deferred tax asset balances. Actual results could differ from those estimates.

     Cash Equivalents and Short-Term Investments

     The Company considers all highly liquid investments purchased with original or remaining maturities of three months or less to be cash equivalents. Investment securities with original maturities greater than three months and remaining maturities of less than one year are classified as short-term investments. The Company’s investments are primarily comprised of money market funds and certificates of deposit, the fair market value of which approximates cost.

     Restricted Cash

     Restricted cash as of June 30, 2007 consists of $166,000 of cash that is restricted as to future use by contractual agreements associated with irrevocable letters of credit relating to a lease agreement for one of the Company’s offices in New York. Restricted cash as of December 31, 2006 consisted of $160,000 of cash that is restricted as to future use by contractual agreements associated with irrevocable letters of credit relating to a lease agreement for one of the Company’s offices in New York and $2,694,000 relating to a lease agreement with a cruise line securing future deposit commitments required under that agreement which was applied against the commitments for future deposits in February 2007.

     Inventory

     Inventory consists of finished goods held for sale and materials related to the production of future publications such as editorial and artwork costs, books, paper, other publishing and novelty products and shipping materials. Inventory is stated at the lower of cost or market. Cost is determined using the weighted-average cost method for finished goods available for sale and using the first-in, first-out method for materials related to future production. The Company regularly reviews inventory quantities on hand and records a provision for excess and obsolete inventory based on the age of the inventory and forecasts of product demand.

     Property and Equipment

     Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets ranging from one to six years. Leasehold improvements are amortized over the shorter of their economic lives or lease term, generally ranging from two to seven years. Maintenance and repairs are charged to expense as incurred. When assets are retired or otherwise disposed of, the cost and accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is reflected in the consolidated statement of operations in the period realized.

     Website Development Costs and Internal Use Software

     The Company capitalizes internally developed software and website development costs in accordance with the provisions of American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 98-1, “Accounting for Costs of Computer Software Developed or Obtained for Internal Use” (“SOP 98-1”) and Emerging Issues Task Force (“EITF”) Abstract No. 00-02, “Accounting for Web Site Development Costs” (“EITF 00-02”). SOP 98-1 requires that costs incurred in the preliminary project and post-implementation stages of an internal-use software project be expensed as incurred and that certain costs incurred in the application development stage of a project be capitalized. The Company begins to capitalize costs when the preliminary project stage has been completed and technological and economical feasibility has been determined. The Company exercises judgment in determining which stage of development a software project is in at any point in time. Capitalized costs are amortized on a straight-line basis over the estimated useful life of the software, generally three years, once it is available for its intended use.

     Goodwill

     The Company accounts for goodwill using the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142 (“FAS 142”), “Goodwill and Other Intangible Assets.” FAS 142 requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests in certain circumstances. The Company performs its annual impairment test as of December 1 of each year. The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair value of the Company’s reporting unit with the reporting unit’s carrying amount, including goodwill. The Company generally determines the fair value of its reporting unit using the expected present value of future cash flows, giving consideration to the market comparable approach. If the carrying amount of the Company’s reporting unit exceeds the reporting unit’s fair value, the Company performs the second step of the goodwill impairment test. The second step of the goodwill impairment test involves comparing the implied fair value of the Company’s reporting unit’s goodwill with the carrying amount of the unit’s goodwill. If the carrying amount of the reporting unit’s goodwill is greater than the implied fair value of its goodwill, an impairment charge is recognized for the excess in operating expenses.

     The Company determined that it had one reporting unit through December 31, 2006. The results of Step 1 of the annual goodwill impairment analysis on December 1, 2006 showed that goodwill was not impaired as the estimated market value of its one reporting unit exceeded its carrying value, including goodwill. Accordingly, Step 2 was not performed. On January 1, 2007, the Company began to operate as three segments, accordingly, the Company has determined that it has three reporting units. During the three months ended June 30, 2007, the Company determined that a triggering event had occurred, primarily due to lower revenue than expected related to the Company’s travel business as well as its advertising business which the Company believes resulted in a significant decrease in the trading price of the Company’s common stock and a corresponding reduction in its market capitalization. This triggering event required the Company to test its goodwill for any impairment. Upon completion of the testing, the Company concluded that its goodwill had been impaired and, accordingly, recorded an estimated impairment charge in the amount of $24.9 million in operating expenses.

     The Company will continue to test for impairment on an annual basis and on an interim basis if an additional triggering event occurs or circumstances change that would more likely than not reduce the fair value of the Company’s reporting unit below its carrying amounts.

     Revenue Recognition

     The Company’s revenue is derived principally from the sale of premium online subscription services, magazine subscriptions, banner and sponsorship advertisements, magazine advertisements and transactions services. Premium online subscription services are generally for a period of one to twelve months. Premium online 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 have been within management’s expectations. Deferred magazine subscription revenue results from advance payments for magazine subscriptions received from subscribers and is amortized on a straight-line basis over the life of the subscription as issues are delivered. The Company provides an estimated reserve for magazine subscription cancellations at the time such subscription revenues are recorded. Newsstand revenues are recognized based on the on-sale dates of magazines and are recorded based upon estimates of sales, net of product placement costs paid to resellers. Estimated returns are recorded based upon historical experience. In January 2006, the Company began offering its customers magazine subscriptions to its print properties bundled with its premium online subscription services. In accordance with EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”), the Company defers subscription revenue on bundled subscription service offerings based on the pro-rata fair value of the individual premium online subscription services and magazine subscriptions.

     To date, the duration of the Company’s 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 the Company’s 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 no significant Company obligations remain 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. The Company’s obligations typically include undertakings to deliver a minimum number of “impressions,” or times that an advertisement appears in pages viewed by users of the Company’s online properties. To the extent that these minimums are not met, the Company defers 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.

     Transaction service revenue generated from the sale of products held in inventory is recognized when the product is shipped, net of estimated returns. The Company also earns 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 the Company receives the order and collects money from the buyer, the Company is under no obligation to make payment to the third party unless payment has been received from the buyer and the risk of return is also borne by the third party. The Company recognizes transaction service revenue from its event marketing and travel events services which include cruises, land tours and resort vacations, together with revenues from onboard and other activities and all associated direct costs of its event marketing and travel events services, upon the completion of events with durations of ten nights or less and on a pro rata basis for events in excess of ten nights. Costs directly related to such events, such as deposits on leased voyages, are deferred as prepaid expenses and charged to cost of revenue as the revenues related to the events are recognized. If the sum of the deferred costs related to the event is determined to exceed the anticipated revenue of the event, the costs are charged to cost of revenue in the period such determination is made.

     Advertising

     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. As of December 31, 2006 and June 30, 2007, the balance of unamortized direct-response advertising costs was $1,540,000 and $765,000, respectively, and is included in prepaid expenses and other current assets. Total advertising costs in the three months ended June 30, 2006 and 2007 were $875,000 and $835,000, respectively. Total advertising costs in the six months ended June 30, 2006 and 2007 were $1,786,000 and $1,462,000, respectively.

     Stock-Based Compensation

     The Company accounts for stock-based awards under SFAS No. 123 (revised 2004), “Share-Based Payment” (“FAS 123R”) using the modified prospective method, which requires measurement of compensation cost for all stock-based awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The fair value of restricted stock and restricted stock units is determined based on the number of shares granted and the quoted price of the Company’s common stock, and the fair value of stock options is determined using the Black-Scholes valuation model. Such value is recognized as expense over the service period, net of estimated forfeitures, using the straight-line method under FAS 123R. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from the Company’s current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results, and future changes in estimates, may differ substantially from the Company’s current estimates.

     Income Taxes

     The Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109” (“FIN 48”) on January 1, 2007. The Company did not have any unrecognized tax benefits and there was no effect on its financial condition or results of operations as a result of implementing FIN 48.

     The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is no longer subject to U.S. federal tax examinations for years before 2004. State jurisdictions that remain subject to examination range from 2003 to 2004. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months.

     The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of adoption of FIN 48, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the first six months of 2007. The Company’s effective tax rate differs from the federal statutory rate primarily due to reductions in its deferred income tax valuation allowance as net operating loss carryforwards were utilized to offset current tax liabilities.

     Net Income (Loss) Per Share

     Basic net income (loss) per share (“Basic EPS”) is computed by dividing net income (loss) by the sum of the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share (“Diluted EPS”) gives effect to all dilutive potential common shares outstanding during the period. The computation of Diluted EPS does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect on earnings. The dilutive effect of outstanding stock options and warrants is computed using the treasury stock method.

     The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per share amounts):

		Three months ended June 30,								Six months ended June 30,
		2006				2007				2006				2007
Numerator:
Net loss		$	(354	)		$	(31,001	)		$	(486	)		$	(37,875	)
Denominator for basic and diluted net loss per share:
Weighted-average shares			17,315				17,507				17,288				17,479
Net loss per share:
Basic and diluted		$	(0.02	)		$	(1.77	)		$	(0.03	)		$	(2.17	)

     The potential shares, which are excluded from the determination of basic and diluted net loss per share as their effect is anti-dilutive, are as follows (in thousands):

		Six months ended June 30,
		2006				2007
Common stock options and warrants			2,008				2,499

     Variable Interest Entity

     The Company determined that its interest in PNO DSW Events, LLC, a joint venture, qualifies as a variable interest entity as defined in FASB Interpretation No. 46 (revised December 2003) (“FIN 46-R”), “Consolidation of Variable Interest Entities,” and that the Company is the primary beneficiary of the joint venture. Accordingly, the financial statements of the joint venture have been consolidated into the Company’s consolidated financial statements. The creditors of the joint venture have no recourse to the general credit of the Company. Under the terms of the joint venture agreement, the Company contributed an initial investment of $250,000 and acquired a 50% interest in the joint venture. The minority interest’s share of income for the three and six months ended June 30, 2006 totaled $47,000. Excess losses attributable to the minority interest included in the condensed consolidated statements of operations for the three and six months ended June 30, 2007 were approximately zero and $36,000.

     The Company sold its membership interest in PNO DSW Events, LLC in March 2007 to the minority interest partner for $270,000 and recognized a gain on the sale of approximately $77,000; accordingly, at June 30, 2007, there is no longer an investment in a variable interest entity.

     Recent Accounting Pronouncements

     In February 2007, the FASB issued SFAS No. 159 (“FAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115” which is effective for fiscal years beginning after November 15, 2007. This statement permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. The Company is currently evaluating the potential impact of FAS 159, but does not expect the adoption of FAS 159 to have a material impact on its consolidated financial position, results of operations or cash flows.

     In September 2006, the FASB issued SFAS No. 157 (“FAS 157”), “Fair Value Measurements,” which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. FAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. FAS 157 is effective for fiscal years beginning after November 15, 2007. Earlier adoption is permitted, provided the company has not yet issued financial statements, including for interim periods, for that fiscal year. The Company is currently evaluating the impact of FAS 157, but does not expect the adoption of FAS 157 to have a material impact on its consolidated financial position, results of operations or cash flows.

Note 3 — Goodwill and Intangible Assets

     Goodwill

     The Company records as goodwill the excess of the purchase price of net tangible and intangible assets acquired over their estimated fair value. Goodwill is not amortized. In accordance with FAS 142, goodwill is subject to at least an annual assessment for impairment, and between annual tests in certain circumstances, applying a fair-value based test. The Company conducts its annual impairment test as of December 1 of each year, and between annual tests if a triggering event occurs. Based on the Company’s last annual impairment test as of December 1, 2006, the Company determined there was no impairment. During the three months ended June 30, 2007, the Company determined that a triggering event had occurred in May 2007, primarily due to lower revenue than expected related to the Company’s travel business as well as its advertising business which the Company believes resulted in a significant decrease in the trading price of the Company’s common stock and a corresponding reduction in its market capitalization. This triggering event required the Company to test its goodwill for any impairment. Upon completion of the testing, the Company concluded that its goodwill had been impaired and, accordingly, recorded an estimated impairment charge in the amount of $24.9 million.

     The Company plans to engage an independent business valuation consultant to express an opinion of the Company’s estimates of the fair market value of its reporting units that were used in calculating the Company’s estimated impairment charge. The Company expects to obtain this opinion by fiscal year-end and may accordingly revise its estimates of impairment.

     A summary of changes in the Company’s goodwill during the six months ended June 30, 2007 by reportable segment is as follows (in thousands):

		December 31,												June 30,
		2006				Adjustments				Impairment				2007
Reportable segment:
Online		$	3,403			$	—			$	—			$	3,403
Publishing			25,187				48				(21,100	)			4,135
Travel and Events			3,982				—				(3,800	)			182
		$	32,572			$	48			$	(24,900	)		$	7,720

     Adjustments to goodwill during the six months ended June 30, 2007 resulted primarily from purchase price adjustments related to other current assets. Of the $25,235,000 and $3,982,000 of goodwill recorded in the Publishing and Travel and Events segments prior to their estimated impairment charge recorded in the three months ended June 30, 2007, $19,047,000 and $3,982,000 is expected to be deductible for tax purposes, respectively.

     Intangible Assets

     The components of acquired intangible assets are as follows (in thousands):

		December 31, 2006												June 30, 2007
		Gross								Net				Gross								Net
		Carrying				Accumulated				Carrying				Carrying				Accumulated				Carrying
		Amount				Amortization				Amount				Amount				Amortization				Amount
Customer lists and user bases		$	10,488			$	4,996			$	5,492			$	8,568			$	4,975			$	3,593
Tradenames			8,980				2,340				6,640				7,600				2,340				5,260
Other intangible assets			726				726				—				726				726				—
		$	20,194			$	8,062			$	12,132			$	16,894			$	8,041			$	8,853

     Identifiable intangible assets subject to amortization consist of customer lists and user bases and are amortized over the period of estimated benefit using the straight-line method and the estimated useful lives of one to six years. The Company believes the straight-line method of amortization represents the best estimate of the distribution of the economic value of the identifiable intangible assets.

     As of December 31, 2006 and June 30, 2007, the weighted-average useful economic life of customer lists and user bases being amortized was 5.1 years. During the three and six months ended June 30, 2006 and 2007, the Company did not record amortization expense on its tradenames which it considers to be indefinitely lived assets. Aggregate amortization expense for intangible assets for the three months ended June 30, 2006 and 2007 was $401,000 and $356,000, respectively. Aggregate amortization expense for intangible assets for the six months ended June 30, 2006 and 2007 was $726,000 and $712,000, respectively. The net carrying amount of customer lists and user bases and tradenames related to the SpecPub asset group that have been classified as assets held for sale as of June 30, 2007 totaled $1,187,000 and $1,380,000, respectively, as described more fully in Note 4, “Assets and Liabilities Related to Assets Held for Sale.”

     As of June 30, 2007, expected future intangible asset amortization is as follows (in thousands):

Fiscal Years:
2007 (remaining six months)		$	491
2008			979
2009			957
2010			843
2011			277
2012			46
		$	3,593

Note 4 — Assets and Liabilities Related to Assets Held for Sale

     At such time as management determines that a material long-lived asset or a long-lived asset that is part of a group that includes other assets and liabilities (“asset group”) is to be disposed of within a twelve-month period and all other criteria required under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“FAS 144”) have been met, that material asset or asset group is reclassified on the condensed consolidated balance sheet as held for sale and recorded at the lower of its carrying amount or fair value less cost to sell.

     In June 2007, management, with the authority to approve the action, committed to a plan to sell the assets and liabilities related to its SpecPub, Inc. asset group. The Company is actively marketing the asset group and expects to complete the sale within the next six months.

     In accordance with FAS 144, the assets and liabilities related to the SpecPub, Inc. asset group have been classified as assets held for sale and liabilities related to assets held for sale. The results of the SpecPub, Inc. asset group are not recorded as discontinued operations because the primary operations of the SpecPub, Inc. asset group are part of a larger cash-flow-generating product group in the Company’s publishing segment and do not represent a separate reporting unit or component as defined by FAS 144. The carrying amounts of the major classes of assets and liabilities related to assets held for sale as of June 30, 2007 are as follows (in thousands):

Current assets held for sale:
Accounts receivable, net		$	1,077
Inventory			1,013
Prepaid expenses and other current assets			654
		$	2,744
Long-term assets held for sale:
Property and equipment, net		$	108
Intangible assets, net			2,567
Other assets			62
		$	2,737
Current liabilities related to assets held for sale:
Accounts payable		$	166
Accrued expenses and other liabilities			385
Deferred revenue, current portion			2,007
Capital lease obligations, current portion			7
		$	2,565
Long-term liabilities related to assets held for sale:
Deferred revenue, less current portion		$	602
Capital lease obligations, less current portion			28
		$	630

Note 5 — Other Balance Sheet Components

		December 31, 2006				June 30, 2007
Accounts receivable:
Trade accounts receivable		$	10,906			$	6,662
Less: Allowance for doubtful accounts			(520	)			(199	)
Less: Provision for returns			(1,049	)			(378	)
		$	9,337			$	6,085

     In the three months ended June 30, 2006 and 2007, the Company provided for an increase in the allowance for doubtful accounts of $488,000 and $355,000 respectively, and wrote-off accounts receivable against the allowance for doubtful accounts totaling $519,000 and $381,000, respectively. In the six months ended June 30, 2006 and 2007, the Company provided for an increase in the allowance for doubtful accounts of $905,000 and $752,000 respectively, and wrote-off accounts receivable against the allowance for doubtful accounts totaling $723,000 and $840,000, respectively. The allowance for doubtful accounts related to the SpecPub asset group that has been classified as assets held for sale as of June 30, 2007 totaled $233,000, as described more fully in Note 4, “Assets and Liabilities Related to Assets Held for Sale.”

     In the three months ended June 30, 2006 and 2007, the Company provided for an increase in the provision for returns of $1,178,000 and $1,066,000, respectively, and wrote-off accounts receivable against the provision for returns totaling $1,114,000 and $1,149,000, respectively. In the six months ended June 30, 2006 and 2007, the Company provided for an increase in the provision for returns of $2,319,000 and $2,011,000, respectively, and wrote-off accounts receivable against the provision for returns totaling $1,879,000 and $2,277,000, respectively. The provision for returns related to the SpecPub asset group that has been classified as assets held for sale as of June 30, 2007 totaled $405,000, as described more fully in Note 4, “Assets and Liabilities Related to Assets Held for Sale.”

		December 31,				June 30,
		2006				2007
		(In thousands)
Inventory:
Materials for future publications		$	370			$	273
Work in process			—				13
Finished goods available for sale			1,386				869
			1,756				1,155
Less: reserve for obsolete inventory			(66	)			(31	)
		$	1,690			$	1,124

     In the three months ended June 30, 2006 and 2007, the Company provided for an increase in the provision for obsolete inventory of $9,000 and $21,000, respectively, and wrote-off inventory against the reserve for obsolete inventory totaling $3,000 and $8,000, respectively. In the six months ended June 30, 2006 and 2007, the Company provided for an increase in the provision for obsolete inventory of $16,000 and $32,000, respectively, and wrote-off inventory against the reserve for obsolete inventory totaling $5,000 and $27,000, respectively. The provision for obsolete inventory related to the SpecPub asset group that has been classified as assets held for sale as of June 30, 2007 totaled $40,000, as described more fully in Note 4, “Assets and Liabilities Related to Assets Held for Sale.”

		December 31,				June 30,
		2006				2007
		(In thousands)
Prepaid expenses and other current assets:
Prepaid expenses and other current assets		$	4,183			$	3,169
Deposits on leased voyages and vacations			7,153				5,594
		$	11,336			$	8,763

		December 31,				June 30,
		2006				2007
		(In thousands)
Property and equipment:
Computer equipment and software		$	13,857			$	9,963
Furniture and fixtures			1,239				5,917
Leasehold improvements			2,269				1,195
Website development costs			6,855				2,283
			24,220				19,358
Less: Accumulated depreciation and amortization			(13,297	)			(9,327	)
		$	10,923			$	10,031

     In the three months ended June 30, 2006 and 2007, the Company recorded depreciation and amortization expense of property and equipment of $899,000 and $1,218,000, respectively. In the six months ended June 30, 2006 and 2007, the Company recorded depreciation and amortization expense of property and equipment of $1,798,000 and $2,533,000, respectively. In the three months ended June 30, 2006 and 2007, the Company recorded non-cash impairment charges of zero and $374,000, respectively. In the six months ended June 30, 2006 and 2007, the Company recorded non-cash impairment charges of zero and $467,000, respectively.

		December 31,				June 30,
		2006				2007
		(In thousands)
Accrued expenses and other liabilities:
Accrued payroll and related liabilities		$	1,499			$	1,683
Other accrued liabilities			2,208				2,028
		$	3,707			$	3,711

Note 6 — Related Party Transactions

     In May 2001, the Company issued a promissory note to an executive of the Company for $603,000 to fund the purchase of Series D redeemable convertible preferred stock. The principal and interest were due and payable in May 2006. Interest accrued at a rate of 8.5% per annum or the maximum rate permissible by law, whichever was less and was full recourse. The note was full recourse with respect to $24,000 in principal payment and the remainder of the principal was non-recourse. The note was collateralized by the shares of common stock and options owned by the executive. Interest income of zero and $9,000 was recognized in the three and six months ended June 30, 2006, respectively. In March 2006, the executive repaid the Company approximately $843,000, representing approximately $603,000 in principal and approximately $240,000 in accrued interest, fully satisfying the repayment obligations.

Note 7 — Notes Payable

     The Company’s notes payable, net of discounts were comprised of the following (in thousands):

		December 31,				June 30,
		2006				2007
Notes payable to vendors		$	47			$	—
LPI note			7,075				4,716
Orix term loan			7,187				6,250
Orix revolving loan			3,000				3,000
			17,309				13,966
Less: discount			(392	)			(221	)
			16,917				13,745
Less: current portion, net of discount			8,817				13,745
Notes payable, less current portion and discount		$	8,100			$	—

     In November 2005, the Company issued a note payable (the “LPI note”) in connection with its acquisition of the assets of LPI Media, Inc. and related entities (“LPI”) in the amount of $7,075,000 to the sellers, secured by the assets of SpecPub, Inc. (a subsidiary of the Company established to hold certain such assets) and payable in three equal installments of $2,358,000 in May, August and November 2007. The note bore interest at a rate of 10% per year, payable quarterly and in arrears. The Company recorded interest expense on the LPI note of $177,000 and $151,000 in the three months ended June 30, 2006 and 2007 in the condensed consolidated statements of operations. The Company recorded interest expense on the LPI note of $354,000 and $328,000 in the six months ended June 30, 2006 and 2007 in the condensed consolidated statements of operations. On July 9, 2007, the Company paid the LPI note in full, as described more fully in Note 13, “Subsequent Events — Equity Financing and Loan Payoff.”

     In June 2006, the Company entered into a software maintenance agreement under which $90,000 was financed with a vendor. This amount is payable in four quarterly installments beginning in July 2006. The note was paid in full in June 2007.

     In September 2006, the Company entered into a Loan and Security Agreement with ORIX Venture Finance, LLC (“Orix”), which was amended in February 2007, May 2007 and June 2007 (the “Loan Agreement”). Pursuant to the Loan Agreement, the Company borrowed $7,500,000 as a term loan and $3,000,000 as a 24-month revolving loan in September 2006. The borrowings under the line of credit were limited to the lesser of $3,000,000, which the Company had already drawn down, or 85% of qualifying accounts receivable. The term loan was payable in 48 consecutive monthly installments of principal beginning on November 1, 2006, together with interest at a rate of prime plus 5%. At June 30, 2007, the Company was current in its obligation to pay such monthly installments. The term loan provided for a prepayment fee equal to 5% of the amount prepaid in connection with any prepayment made prior to September 27, 2007. The revolving loan bore interest at a rate of prime plus 1%. The Loan Agreement contained certain financial ratios, financial tests and liquidity covenants, with which the Company was in compliance at June 30, 2007. The loans were secured by substantially all of the assets of the Company and all of the outstanding capital stock of all subsidiaries of the Company, except for the assets and capital stock of SpecPub, Inc., which were pledged as security for the LPI note. In connection with the term loan agreement, the Company issued Orix a 7-year warrant to purchase up to 120,000 shares of the common stock of the Company at an exercise price of $3.74. The warrant vested immediately, had a fair value of approximately $445,000 as of the date of issuance and will expire on September 28, 2013. The value of the warrant was recorded as a discount of the principal amount of the term loan and will be accreted and recognized as additional interest expense using the effective interest method over the life of the term loan.

     The Company and Orix entered into a waiver and amendment to the Loan Agreement in May 2007 (the “May Waiver”), pursuant to which Orix waived defaults associated with the Company’s failure to meet certain financial tests and liquidity covenants. In consideration of the May Waiver, the Company, in addition to other commitments, agreed to maintain certain minimum cash balances, increase the interest rate on the term loan to prime plus 5% and committed to raise at least $15.0 million in new equity or subordinated debt, of which $7.0 million had to be raised by June 30, 2007 and the remainder by August 31, 2007. At that time, the Company also agreed to apply at least $3.0 million of the proceeds from that transaction to pay down the term loan. As part of the amendment in June 2007, the Company and Orix agreed to modify the requirement in the May Waiver for the commitment to raise new equity or subordinated debt to be for gross proceeds of at least $25.0 million, which could be completed in one or more closings, with the first closing for not less than $4.2 million in proceeds, if applicable, occurring no later than July 10, 2007, and the entire financing being completed no later than September 30, 2007. In addition, Orix consented to, among other things, certain limited prepayments with respect to the Company’s other indebtedness in the event of the first closing and prior to the completion of the entire financing. Orix also agreed to defer the payment of principal installments due on July 1, August 1 and September 1 with respect to its term loan unless the entire financing is completed during that time, in which case the Company’s obligations become immediately due and payable. The Company agreed to pay Orix a deferral fee of $150,000 in connection with the principal payment deferral. On July 9, 2007, the Company completed a private placement financing with a group of investors for approximately $26.2 million in gross proceeds from the sale of approximately 22.8 million shares of the Company’s common stock and used a portion of the proceeds to repay, in full, the Orix term loan and the Orix revolving loan as described more fully in Note 13, “Subsequent Events — Equity Financing and Loan Payoff.”

Note 8 — Commitments and Contingencies

     Deposit Commitments

     The Company enters into leasing agreements with cruise lines and other travel providers which establish varying deposit commitments as part of the lease agreement prior to the commencement of the leased voyage or vacation. At June 30, 2007, the Company had deposits on leased voyages and vacations of $5,597,000 included in prepaid expenses and other current assets and commitments for future deposits of $3,166,000.

     Contingencies

     The Company is not currently subject to any material legal proceedings. The Company may from time to time, however, become a party to various legal proceedings, arising in the ordinary course of business. The Company may also be indirectly affected by administrative or court proceedings or actions in which the Company is not involved but which have general applicability to the Internet industry. The Company is currently involved in the matter described below. However, the Company does not believe, based on current knowledge, that this matter is likely to have a material adverse effect on its financial position, results of operations or cash flows.

     In April 2002, the Company was notified that DIALINK, a French company, had filed a lawsuit in France against it and its French subsidiary, alleging that the Company 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 the Company had not infringed DIALINK’s trademark, it had damaged DIALINK through unfair competition. The Court ordered the Company to pay damages of €50,000 (approximately US $67,000 at June 30, 2007), half to be paid notwithstanding appeal, the other half to be paid after appeal. The Court also enjoined the Company from using “gay” as a domain name for its services in France. In October 2005, the Company paid half the damage award as required by the court order and temporarily changed the domain name of its French website, from www.fr.gay.com to www.ooups.com, a domain name it has used previously in France. In January 2006, both sides appealed the French court’s decision. In November 2006, the French Court of Appeals canceled DIALINK’s trademarks, found that the Company had not engaged in unfair competition, allowed the Company to resume use of Gay.net, Gay.com and fr.gay.com in France and ordered DIALINK to return the €25,000 (approximately US $34,000 at June 30, 2007) the Company had paid previously and pay the Company €20,511 (approximately US $28,000 at June 30, 2007) in costs and interest. DIALINK appealed this matter to the French Supreme Court in February 2007 and filed its opening brief in or around early July 2007. The Company has three months within which to file its reply brief. A decision is expected by late 2008.

     A former employee of the Company has threatened to make a claim against the Company for wrongful termination. The former employee’s wrongful termination claims allege, among other things, whistleblower retaliation under the California Labor Code. The claim was referred to a special committee of the board of directors consisting of the members of the audit committee, which retained independent counsel to investigate the claim. While such investigation is not yet complete, such counsel has advised the Company that it is not currently aware of evidence that would suggest that the allegations of the former employee have merit.

Note 9 — Stock-Based Compensation

     Stock Options

     During the six months ended June 30, 2007, the Company did not grant any stock options under its existing equity incentive plans. The following table summarizes stock option activity for the six months ended June 30, 2007 (in thousands):

		Shares
Outstanding at January 1, 2007			1,747
Exercised			(14	)
Forfeited/expired/cancelled			(104	)
Outstanding at June 30, 2007			1,629

     Stock options granted under the Company’s equity incentive plans generally vest 25% one year from the date of grant and 2.08% per month thereafter, and generally expire ten years from the date of grant.

     Restricted Stock

     The following table summarizes restricted stock grant activity for the six months ended June 30, 2007 (in thousands):

		Shares
Unvested at January 1, 2007			215
Granted			416
Vested			(100	)
Forfeited			(30	)
Unvested at June 30, 2007			501

     In general, restricted stock grants vest over a period from immediately to four years and are subject to the employees’ continuing service to the Company. The cost of restricted stock is determined using the fair value of the Company’s common stock on the date of the grant. The weighted average grant date fair value for restricted stock grants awarded during the period was $1.79 per share.

     Scheduled vesting for outstanding restricted stock grants at June 30, 2007 is as follows (in thousands):

Year Ending December 31,
2007 (remaining six months)			32
2008			181
2009			165
2010			123
			501

     As of June 30, 2007, there was $1,299,000 of net unrecognized compensation cost related to unvested stock-based compensation arrangements. This compensation is recognized on a straight-line basis resulting in approximately 42% of the compensation expected to be expensed in the next twelve months.

Note 10 — Issuance of Warrant

     In May 2007, the Company retained Allen & Company LLC (“Allen”) as a financial advisor for a period of three years with respect to various matters. In consideration for Allen’s services, the Company issued a warrant to Allen to purchase 750,000 shares of the Company’s common stock at $1.69 per share, subject to certain anti-dilution provisions. The warrant vested immediately with respect to 375,000 shares and will vest with respect to 250,000 additional shares on the first anniversary of the date of issuance, with the remaining 125,000 shares vesting on the second anniversary of the date of issuance. The warrant expires in October 2017. The Company valued the warrant which vested on issuance at $485,000 by using the Black-Scholes option pricing model with an expected volatility factor of 60.5%, risk free interest rate of 4.65%, no dividend yield and the contractual life of ten years. The value of the remaining warrant is reassessed quarterly until vested in May 2008 and May 2009. In the three and six months ended June 30, 2007, the Company recorded $69,000 of non-cash services expense associated with this warrant.

Note 11 — Segment Information

     As a result of further integrating the Company’s various businesses, its executive management team, and its financial and management reporting systems during fiscal 2006, the Company began to operate as three segments effective January 1, 2007.

     Operating segments are based upon the Company’s internal organization structure, the manner in which its operations are managed, the criteria used by the Company’s Chief Operating Decision Maker (CODM) to evaluate segment performance and the availability of separate financial information. The Company has three operating segments: Online, Publishing and Travel and Events. The Online segment includes the Company’s global online properties and websites. The Publishing segment consists of the Company’s print properties, primarily magazines and a book publishing business. The Travel and Events segment consists of the LGBT travel and events marketed through the Company’s RSVP brand and by the Company’s consolidated affiliate, PNO DSW Events, LLC. The Company sold its interest in PNO DSW Events, LLC in March 2007.

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

     The following table summarizes the financial performance of the Company’s operating segments (in thousands):

		Three months ended June 30, 2006																Three months ended June 30, 2007
										Travel																Travel
										and																and
		Online				Publishing				Events				Total				Online				Publishing				Events				Total
Revenue:
Advertising services		$	2,748			$	4,569			$	—			$	7,317			$	2,543			$	4,199			$	—			$	6,742
Subscription services			4,684				1,637				—				6,321				4,241				1,454				—				5,695
Transaction services			578				1,441				638				2,657				317				984				4,773				6,074
Total revenue			8,010				7,647				638				16,295				7,101				6,637				4,773				18,511
Direct operating costs and expenses:
Cost of revenue			2,294				4,475				103				6,872				3,847				4,172				5,621				13,640
Sales and marketing			2,569				1,298				560				4,427				2,405				1,660				507				4,572
Total direct operating costs and expenses			4,863				5,773				663				11,299				6,252				5,832				6,128				18,212
Contribution margin (loss)		$	3,147			$	1,874			$	(25	)			4,996			$	849			$	805			$	(1,355	)			299
Other operating costs and expenses:
General and administrative															3,078																4,073
Restructuring															834																—
Depreciation and amortization															1,300																1,845
Impairment of goodwill															—																24,900
Total other operating costs and expenses															5,212																30,818
Loss from operations															(216	)															(30,519	)
Other expense, net															(91	)															(482	)
Minority interest															(47	)															—
Net loss														$	(354	)														$	(31,001	)

		Six months ended June 30, 2006																Six months ended June 30, 2007
										Travel																Travel
										and																and
		Online				Publishing				Events				Total				Online				Publishing				Events				Total
Revenue:
Advertising services		$	4,595			$	8,069			$	—			$	12,664			$	4,449			$	7,616			$	2			$	12,067
Subscription services			9,512				3,079				—				12,591				8,510				2,831				—				11,341
Transaction services			1,170				2,671				4,772				8,613				679				2,015				9,168				11,862
Total revenue			15,277				13,819				4,772				33,868				13,638				12,462				9,170				35,270
Direct operating costs and expenses:
Cost of revenue			4,948				8,236				3,118				16,302				6,925				7,945				11,035				25,905
Sales and marketing			5,334				2,321				716				8,371				4,894				3,277				1,233				9,404
Total direct operating costs and expenses			10,282				10,557				3,834				24,673				11,819				11,222				12,268				35,309
Contribution margin (loss)		$	4,995			$	3,262			$	938				9,195			$	1,819			$	1,240			$	(3,098	)			(39	)
Other operating costs and expenses:
General and administrative															6,158																8,528
Restructuring															834																—
Depreciation and amortization															2,524																3,542
Impairment of goodwill															—																24,900
Total other operating costs and expenses															9,516																36,970
Loss from operations															(321	)															(37,009	)
Other expense, net															(118	)															(866	)
Minority interest															(47	)															—
Net loss														$	(486	)														$	(37,875	)

Note 12 — Restructuring

     In June 2006, the board of directors of the Company adopted and approved a reorganization plan to align the Company’s resources with its strategic business objectives. As part of the plan, the Company consolidated its media and advertising services, e-commerce services and back-office operations on a global basis to streamline its operations as part of continued integration of its acquired businesses. The reorganization, along with other organizational changes, reduced the Company’s total workforce by approximately 5%. Restructuring costs of approximately $0.8 million, primarily related to termination benefits of approximately $0.6 million and the cost of closing redundant facilities of approximately $0.2 million, were recorded during the three months ended June 30, 2006. The Company completed this restructuring in the fourth quarter of 2006, with certain payments continuing beyond 2006 in accordance with the terms of existing severance and other agreements.

Note 13 — Subsequent Events

     Equity Financing and Loan Payoff

     On July 9, 2007, the Company closed its private placement financing with a group of accredited and institutional investors. The Company received an aggregate of approximately $26.2 million in gross proceeds from the sale of approximately 22.8 million shares of its common stock and used a portion of the proceeds to repay, in full, its indebtedness obligations under the LPI note, as well as its obligations under loans from Orix. The remainder of the proceeds are expected to be used for general corporate purposes and working capital. Allen & Company LLC acted as the placement agent for the transaction.

     International Restructuring

     On July 11, 2007, the board of directors adopted and approved a reorganization plan to align the Company’s resources with its strategic business objectives. As part of the plan, the Company plans to close its international offices located in Buenos Aires and London to streamline the Company’s business operations and reduce expenses. The reorganization, along with other organizational changes, will reduce the Company’s total workforce by approximately 15%. Restructuring costs, primarily related to employee severance benefits in the range of approximately $500,000-$600,000 and facilities consolidation expenses in the range of approximately $50,000-$100,000, are expected to total approximately $550,000-$700,000 and will be taken primarily during the third quarter of 2007. The Company expects to be able to complete this restructuring in the third quarter of 2007.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following discussion should be read in conjunction with the financial statements and related notes which appear elsewhere in this document. This discussion contains forward-looking statements that involve risks and uncertainties. In some cases, you can identify forward-looking statements by terminology including “would,” “could,” “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of these terms or other comparable terminology. These statements are only predictions. Forward-looking statements include statements about our business strategy, future operating performance and prospects. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this document and in our Form 10-K filed for the year ended December 31, 2006.

Overview

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

     As a result of the further integration of our acquisitions of LPI Media Inc. and related entities (“LPI”) and RSVP Productions, Inc. (“RSVP”), our executive management team and our financial and management reporting systems, we began to operate as three segments in fiscal 2007: (1) Online, (2) Publishing and (3) Travel and Events. Prior year information for these segments has been provided for comparative purposes. Our Online segment consists of our LGBT-focused websites, most notably Gay.com, PlanetOut.com, Advocate.com and Out.com which provide revenues from advertising services and subscription services. Our Online segment also includes our transaction-based websites, including Kleptomaniac.com and BuyGay.com, which generate revenue through sales of products and services of interest to the LGBT community, such as fashion, books, video and music products. Our Publishing segment includes the operations of our print media properties including the magazines The Advocate, Out, The Out Traveler and HIVPlus, among others. Our Publishing segment also generates revenue from newsstand sales of our various print properties and our book publishing business, Alyson. Our Travel and Events segment provides LGBT travel and events marketed through our RSVP brand, such as cruises, land tours and resort vacations.

     Executive Operating and Financial Summary

     Our total revenue was $18.5 million in the three months ended June 30, 2007, increasing 14% from total revenue of $16.3 million in the three months ended June 30, 2006. Our total revenue was $35.3 million in the six months ended June 30, 2007, increasing 4% from total revenue of $33.9 million in the six months ended June 30, 2006. These increases were primarily due to increased transaction services revenue attributable to our travel and events segment related to our February 2007 Caribbean cruise aboard the Caribbean Princess and our May 2007 cruise aboard the Queen Mary 2 (“QM2”), offset partially by decreases in our advertising and subscription services revenue.

     Total operating costs and expenses were $49.0 million in the three months ended June 30, 2007, increasing 197% above total operating costs and expenses of $16.5 million in the three months ended June 30, 2006. Total operating costs and expenses were $72.3 million in the six months ended June 30, 2007, increasing 111% above total operating costs and expenses of $34.2 million in the six months ended June 30, 2006. These increases were primarily due to an estimated goodwill impairment charge of $24.9 million which we recorded during the three months ended June 30, 2007 as a result of a significant decrease in the trading price of our common stock and the reduction in our market capitalization. Operating costs and expenses also increased due to increased costs related to our February 2007 Caribbean cruise aboard the Caribbean Princess and our May 2007 cruise aboard the QM2, increased marketing costs related to direct-mail campaigns for both our print properties and our RSVP travel itineraries, severance charges related to the departure of our former President and Chief Operating Officer and our former Chief Technology Officer, increased legal expenses and additional costs related to the further integration of our businesses.

     Loss from operations was $30.5 million in the three months ended June 30, 2007, compared to loss from operations of $216,000 in the three months ended June 30, 2006. Loss from operations was $37.0 million in the six months ended June 30, 2007, compared to loss from operations of $321,000 in the six months ended June 30, 2006. This increase in loss from operations was primarily the result of the estimated goodwill impairment charge and the increases in operating costs and expenses noted above, partially offset by the increase in revenue noted above.

     For the remainder of fiscal 2007, management expects that revenue will increase modestly over the comparable prior year period primarily as a result of an anticipated increase in advertising services revenue, offset partially by reductions as a result of the planned divestiture of the SpecPub Inc. asset group and an anticipated decrease in online subscription services revenue.

     We expect our operating loss will increase for the remainder of fiscal 2007 over the comparable prior year period as we incur additional expenses in re-designing our technological architecture, rewriting our website programming codes and rebuilding our website technology platform, incur restructuring costs related to the reorganization plan of our international operations adopted by our board of directors in July 2007, and recognize transaction services cost of revenue related to RSVP’s expanded schedule of larger-ship itineraries for 2007.

Results of Operations

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

     Online Segment

     Comparison of three months ended June 30, 2006 to three months ended June 30, 2007 (in thousands, except percentages):

		Three months ended June 30,								Increase (decrease)
		2006				2007				$				%
Online revenue:
Advertising services		$	2,748			$	2,543			$	(205	)			(7	%)
Subscription services			4,684				4,241				(443	)			(9	%)
Transaction services			578				317				(261	)			(45	%)
Total online revenue			8,010				7,101				(909	)			(11	%)
Online direct operating costs and expenses:
Cost of revenue			2,294				3,847				1,553				68	%
Sales and marketing			2,569				2,405				(164	)			(6	%)
Total online direct operating costs and expenses			4,863				6,252				1,389				29	%
Online contribution margin		$	3,147			$	849			$	(2,298	)			(73	%)

     Comparison of six months ended June 30, 2006 to six months ended June 30, 2007 (in thousands, except percentages):

		Six months ended June 30,								Increase (decrease)
		2006				2007				$				%
Online revenue:
Advertising services		$	4,595			$	4,449			$	(146	)			(3	%)
Subscription services			9,512				8,510				(1,002	)			(11	%)
Transaction services			1,170				679				(491	)			(42	%)
Total online revenue			15,277				13,638				(1,639	)			(11	%)
Online direct operating costs and expenses:
Cost of revenue			4,948				6,925				1,977				40	%
Sales and marketing			5,334				4,894				(440	)			(8	%)
Total online direct operating costs and expenses			10,282				11,819				1,537				15	%
Online contribution margin		$	4,995			$	1,819			$	(3,176	)			(64	%)

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

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

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

     Publishing Segment

     Comparison of three months ended June 30, 2006 to three months ended June 30, 2007 (in thousands, except percentages):

		Three months ended June 30,								Increase (decrease)
		2006				2007				$				%
Publishing revenue:
Advertising services		$	4,569			$	4,199			$	(370	)			(8	%)
Subscription services			1,637				1,454				(183	)			(11	%)
Transaction services			1,441				984				(457	)			(32	%)
Total publishing revenue			7,647				6,637				(1,010	)			(13	%)
Publishing direct operating costs and expenses:
Cost of revenue			4,475				4,172				(303	)			(7	%)
Sales and marketing			1,298				1,660				362				28	%
Total publishing direct operating costs and expenses			5,773				5,832				59				1	%
Publishing contribution margin		$	1,874			$	805			$	(1,069	)			(57	%)

     Comparison of six months ended June 30, 2006 to six months ended June 30, 2007 (in thousands, except percentages):

		Six months ended June 30,								Increase (decrease)
		2006				2007				$				%
Publishing revenue:
Advertising services		$	8,069			$	7,616			$	(453	)			(6	%)
Subscription services			3,079				2,831				(248	)			(8	%)
Transaction services			2,671				2,015				(656	)			(25	%)
Total publishing revenue			13,819				12,462				(1,357	)			(10	%)
Publishing direct operating costs and expenses:
Cost of revenue			8,236				7,945				(291	)			(4	%)
Sales and marketing			2,321				3,277				956				41	%
Total publishing direct operating costs and expenses			10,557				11,222				665				6	%
Publishing contribution margin		$	3,262			$	1,240			$	(2,022	)			(62	%)