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: September 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 November 1, 2007 was 4,096,782.

 

 

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

		PAGE
PART I — FINANCIAL INFORMATION			1
Item 1 Financial Statements			1
Unaudited Condensed Consolidated Balance Sheets as of December 31, 2006 and September 30, 2007			1
Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2006 and 2007			2
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 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			28
Item 4 Controls and Procedures			29
PART II — OTHER INFORMATION			29
Item 1 Legal Proceedings			29
Item 1A Risk Factors			29
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			39
SIGNATURE			41
EXHIBIT INDEX			42
EXHIBIT 12.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART I
FINANCIAL INFORMATION
PlanetOut Inc.

Item 1. Financial Statements

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

		December 31,				September 30,
		2006				2007
ASSETS
Current assets:
Cash and cash equivalents		$	9,674			$	11,025
Short-term investments			2,050				—
Restricted cash			2,854				166
Accounts receivable, net			8,963				6,270
Inventory			1,690				1,204
Prepaid expenses and other current assets			4,137				2,280
Current assets of discontinued operations			7,573				1,613
Current assets held for sale			—				2,687
Total current assets			36,941				25,245
Property and equipment, net			10,737				9,303
Goodwill			28,590				7,538
Intangible assets, net			9,763				6,445
Other assets			1,021				570
Long-term assets of discontinued operations			6,537				1,636
Long-term assets held for sale			—				2,721
Total assets		$	93,589			$	53,458
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	1,691			$	1,541
Accrued expenses and other liabilities			3,310				3,307
Deferred revenue, current portion			8,989				6,369
Capital lease obligations, current portion			694				826
Notes payable, current portion net of discount			8,817				—
Deferred rent, current portion			228				278
Current liabilities of discontinued operations			6,068				1,701
Current liabilities related to assets held for sale			—				2,451
Total current liabilities			29,797				16,473
Deferred revenue, less current portion			1,474				915
Capital lease obligations, less current portion			1,504				1,201
Notes payable, less current portion and discount			8,100				—
Deferred rent, less current portion			1,569				1,441
Long-term liabilities related to assets held for sale			—				613
Total liabilities			42,444				20,643
Commitments and contingencies (Note 8)
Stockholders’ equity:
Common stock: $0.001 par value, 100,000 shares authorized, 1,763 and 4,097 shares issued and outstanding at December 31, 2006 and September 30, 2007, respectively			17				40
Additional paid-in capital			89,532				114,289
Accumulated other comprehensive loss			(122	)			(102	)
Accumulated deficit			(38,282	)			(81,412	)
Total stockholders’ equity			51,145				32,815
Total liabilities and stockholders’ equity		$	93,589			$	53,458

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

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

		Three months ended September 30,								Nine months ended September 30,
		2006				2007				2006				2007
Revenue:
Advertising services		$	6,386			$	7,296			$	19,051			$	19,361
Subscription services			5,831				5,393				18,422				16,734
Transaction services			1,823				1,037				5,663				3,731
Total revenue			14,040				13,726				43,136				39,826
Operating costs and expenses: (*)
Cost of revenue			6,221				7,079				19,405				21,949
Sales and marketing			3,777				4,126				11,432				12,297
General and administrative			2,845				3,683				8,617				11,959
Restructuring			58				581				892				581
Depreciation and amortization			1,192				1,703				3,549				5,077
Impairment of goodwill			—				—				—				21,100
Total operating costs and expenses			14,093				17,172				43,895				72,963
Loss from operations			(53	)			(3,446	)			(759	)			(33,137	)
Interest expense			(218	)			(770	)			(616	)			(1,918	)
Other income, net			95				160				374				424
Loss from continuing operations before income taxes			(176	)			(4,056	)			(1,001	)			(34,631	)
(Provision) benefit for income taxes			(38	)			6				(38	)			6
Loss from continuing operations			(214	)			(4,050	)			(1,039	)			(34,625	)
Loss from discontinued operations, net of taxes			(1,280	)			(1,205	)			(941	)			(8,505	)
Net loss		$	(1,494	)		$	(5,255	)		$	(1,980	)		$	(43,130	)
Loss per share from continuing operations:
Basic and diluted		$	(0.12	)		$	(1.03	)		$	(0.60	)		$	(14.12	)
Loss per share from discontinued operations:
Basic and diluted		$	(0.74	)		$	(0.31	)		$	(0.54	)		$	(3.47	)
Net loss per share:
Basic and diluted		$	(0.86	)		$	(1.34	)		$	(1.14	)		$	(17.58	)
Weighted-average shares used to compute net loss per share — basic and diluted			1,733				3,920				1,730				2,453
(*) Includes stock-based compensation as follows (see Note 2):
Cost of revenue		$	11			$	36			$	17			$	164
Sales and marketing			16				2				18				37
General and administrative			34				129				12				417
Total stock-based compensation		$	61			$	167			$	47			$	618

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

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

		Nine months ended September 30,
		2006				2007
Cash flows from operating activities:
Net loss		$	(1,980	)		$	(43,130	)
Net loss from discontinued operations, net of tax			941				8,505
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			3,549				5,077
Impairment of goodwill			—				21,100
Non-cash services expense			—				135
Provision for doubtful accounts			293				162
Restructuring			19				203
Stock-based compensation expense			47				618
Amortization of debt discount			—				392
Amortization of deferred rent			(59	)			(78	)
Loss on disposal or write-off of property and equipment			15				486
Changes in operating assets and liabilities, net of acquisition effects and classification of assets and liabilities related to assets held for sale:
Accounts receivable			(1,593	)			1,405
Inventory			(83	)			(522	)
Prepaid expenses and other assets			(1,405	)			1,245
Accounts payable			1,021				(24	)
Accrued expenses and other liabilities			1,357				278
Deferred revenue			36				(555	)
Net cash provided by (used in) operating activities of continuing operations			2,158				(4,703	)
Net cash used in operating activities of discontinued operations			(3,986	)			(1,986	)
Net cash used in operating activities			(1,828	)			(6,689	)
Cash flows from investing activities:
Purchases of property and equipment			(2,632	)			(2,830	)
(Purchases) sales  of short-term investments			(769	)			2,050
Changes in restricted cash			(4,080	)			2,688
Acquisitions, net of cash acquired			76				—
Acquisitions of discontinued operations, net of cash acquired			(5,479	)			—
Net cash provided by (used in) investing activities			(12,884	)			1,908
Cash flows from financing activities:
Proceeds from exercise of common stock and warrants			312				78
Proceeds from equity financing, net of transaction costs of $2,183			—				24,017
Proceeds from issuance of notes payable			10,500				—
Proceeds from repayment of note receivable from stockholder			843				—
Principal payments under capital lease obligations and notes payable			(614	)			(17,890	)
Tax withholding payments reimbursed by restricted stock			—				(93	)
Net cash provided by financing activities			11,041				6,112
Effect of exchange rate on cash and cash equivalents			(9	)			20
Net increase (decrease) in cash and cash equivalents			(3,680	)			1,351
Cash and cash equivalents, beginning of period			18,461				9,674
Cash and cash equivalents, end of period		$	14,781			$	11,025
Supplemental disclosure of noncash investing and financing activities:
Property and equipment and related maintenance acquired under capital leases		$	2,135			$	461
Issuance of common stock warrants in connection with debt issuance		$	445			$	—

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

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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, 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 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.

     In March 2006, the Company acquired substantially all of the assets of RSVP Productions, Inc. (“RSVP”), which the Company operates as a wholly-owned subsidiary. In October 2007, the Company entered into an agreement to sell substantially all the assets of RSVP. As a result of this agreement and the Company’s decision to exit the Travel and Events business, the results of operations and financial position of RSVP are reported in discontinued operations within the condensed consolidated financial statements for the three and nine months ended September 30, 2006 and 2007. See Note 13 “Discontinued Operations.”

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.

     Reverse Stock Split

     Following the receipt of stockholder approval for a reverse stock split at the special meeting of stockholders held on August 29, 2007, the Company’s board of directors set the ratio of the reverse stock split of the Company’s common stock at one-for-ten. The reverse stock split became effective on October 1, 2007, when the Company filed an amendment to its certificate of incorporation. As a result of the reverse stock split, every ten shares of the Company’s common stock were combined into one share of common stock. The number of shares subject to the Company’s outstanding options and warrants was reduced in the same ratio as the reduction in the outstanding shares, and the per share exercise price of those options and warrants will be increased in direct proportion to the reverse stock split ratio. All references to share and per-share data for all periods presented have been adjusted to give effect to the reverse stock split.

     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 September 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 operating in three segments, and accordingly, the Company determined that it had three reporting units through September 30, 2007. However, subsequent to the quarter-end, the Company entered into an agreement to divest itself of its Travel and Events business, and going forward will be operating in two segments, with two 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 and advertising businesses 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 $21.1 million in operating expenses during the three months ended June 30, 2007. The portion of the estimated impairment charges related to the travel business is reflected under discontinued operations which includes an additional impairment charge to goodwill of $182,000 in the three months ended September 30, 2007. See Note 13 “Discontinued Operations.”

     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.

     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 September 30, 2007, the balance of unamortized direct-response advertising costs was $1,540,000 and $709,000, respectively, and is included in prepaid expenses and other current assets. Total advertising costs in the three months ended September 30, 2006 and 2007 were $920,000 and $574,000, respectively. Total advertising costs in the nine months ended September 30, 2006 and 2007 were $2,706,000 and $2,035,000, 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 assessment for years before 2004. State jurisdictions that remain subject to assessment range from 2003 to 2007. 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 nine months of 2007. The Company’s effective tax rate differs from the federal statutory rate primarily due to increases in its deferred income tax valuation allowance.

     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.

     Following the receipt of stockholder approval for a reverse stock split at the special meeting of stockholders held on August 29, 2007, the Company’s board of directors set the ratio of the reverse stock split of PlanetOut common stock at one-for-ten. The reverse stock split became effective on October 1, 2007, when the Company filed an amendment to its certificate of incorporation. As a result of the reverse stock split, every ten shares of the Company’s common stock were combined into one share of common stock. The number of shares subject to the Company’s outstanding options and warrants was reduced in the same ratio as the reduction in the outstanding shares, and the per share exercise price of those options and warrants will be increased in direct proportion to the reverse stock split ratio. All references to share and per-share data for all periods presented have been adjusted to give effect to the reverse stock split.

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

		Three months ended September 30,								Nine months ended September 30,
		2006				2007				2006				2007
Numerator:
Net loss		$	(1,494	)		$	(5,255	)		$	(1,980	)		$	(43,130	)
Denominator for basic and diluted net loss per share:
Weighted-average shares			1,733				3,920				1,730				2,453
Net loss per share:
Basic and diluted		$	(0.86	)		$	(1.34	)		$	(1.14	)		$	(17.58	)

     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):

		Nine months ended September 30,
		2006				2007
Common stock options and warrants			208				227

     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 and advertising businesses 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 $21.1 million during the three months ended June 30, 2007. Estimated impairment charges related to the travel business are included in the Company’s loss from discontinued operations. See Note 13 “Discontinued Operations.”

     The Company has engaged an independent business valuation consultant to express an opinion with respect to 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 nine months ended September 30, 2007 by reportable segment is as follows (in thousands):

		December 31,												September 30,
		2006				Adjustments				Impairment				2007
Reportable segment:
Online		$	3,403			$	—			$	—			$	3,403
Publishing			25,187				48				(21,100	)			4,135
		$	28,590			$	48			$	(21,100	)		$	7,538

     Adjustments to goodwill during the nine months ended September 30, 2007 resulted primarily from purchase price adjustments related to other current assets. Of the $25,235,000 of goodwill recorded in the Publishing segment prior to its estimated impairment charge recorded in the three months ended June 30, 2007, $19,047,000 is expected to be deductible for tax purposes.

     Intangible Assets

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

		December 31, 2006												September 30, 2007
		Gross								Net				Gross								Net
		Carrying				Accumulated				Carrying				Carrying				Accumulated				Carrying
		Amount				Amortization				Amount				Amount				Amortization				Amount
Customer lists and user bases		$	8,678			$	4,615			$	4,063			$	6,758			$	4,633			$	2,125
Tradenames			8,040				2,340				5,700				6,660				2,340				4,320
Other intangible assets			726				726				—				726				726				—
		$	17,444			$	7,681			$	9,763			$	14,144			$	7,699			$	6,445

     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 September 30, 2007, the weighted-average useful economic life of customer lists and user bases being amortized was 4.8 and 5.0 years, respectively. During the three and nine months ended September 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 September 30, 2006 and 2007 was $287,000 and $177,000, respectively. Aggregate amortization expense for intangible assets for the nine months ended September 30, 2006 and 2007 was $860,000 and $750,000, 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 September 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.” The net carrying amount of customer lists and user bases and tradenames related to RSVP that have been classified as discontinued operations totaled $1,429,000 and $940,000 as of December 31, 2006, respectively, and totaled $816,000 and $628,000 as of September 30, 2007, respectively, as described more fully in Note 13, “Discontinued Operations.”

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

Fiscal Years:
2007 (remaining three months)		$	177
2008			702
2009			680
2010			566
		$	2,125

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 three 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 September 30, 2007 are as follows (in thousands):

Current assets held for sale:
Accounts receivable, net		$	1,013
Inventory			1,008
Prepaid expenses and other current assets			666
		$	2,687
Long-term assets held for sale:
Property and equipment, net		$	102
Intangible assets, net			2,567
Other assets			52
		$	2,721
Current liabilities related to assets held for sale:
Accounts payable		$	126
Accrued expenses and other liabilities			281
Deferred revenue, current portion			2,037
Capital lease obligations, current portion			7
		$	2,451
Long-term liabilities related to assets held for sale:
Deferred revenue, less current portion		$	587
Capital lease obligations, less current portion			26
		$	613

Note 5 — Other Balance Sheet Components

     The Company’s other balance sheet components noted in this footnote exclude the assets and liabilities of the SpecPub group that have been classified as assets and liabilities related to assets held for sale on the condensed consolidated balance sheet as of September 30, 2007 as described more fully in Note 4, “Assets and Liabilities Related to Assets Held for Sale.” The Company’s other balance sheet components noted in this footnote also exclude the assets and liabilities of RSVP and DSW which have been reported as discontinued operations on the condensed consolidated balance sheets as of December 31, 2006 and September 30, 2007 as described more fully in Note 13, “Discontinued Operations.”

		December 31,				September 30,
		2006				2007
		(In thousands)
Accounts receivable:
Trade accounts receivable		$	10,532			$	7,077
Less: Allowance for doubtful accounts			(520	)			(280	)
Less: Provision for returns			(1,049	)			(527	)
		$	8,963			$	6,270

     In the three months ended September 30, 2006 and 2007, the Company provided for an increase in the allowance for doubtful accounts of $395,000 and $415,000 respectively, and wrote-off accounts receivable against the allowance for doubtful accounts totaling $424,000 and $340,000, respectively. In the nine months ended September 30, 2006 and 2007, the Company provided for an increase in the allowance for doubtful accounts of $1,292,000 and $1,167,000 respectively, and wrote-off accounts receivable against the allowance for doubtful accounts totaling $1,139,000 and $1,180,000, respectively. The allowance for doubtful accounts related to the SpecPub asset group that has been classified as assets held for sale as of September 30, 2007 totaled $227,000, as described more fully in Note 4, “Assets and Liabilities Related to Assets Held for Sale.”

     In the three months ended September 30, 2006 and 2007, the Company provided for an increase in the provision for returns of $1,106,000 and $1,205,000, respectively, and wrote-off accounts receivable against the provision for returns totaling $1,233,000 and $1,134,000, respectively. In the nine months ended September 30, 2006 and 2007, the Company provided for an increase in the provision for returns of $3,425,000 and $3,216,000, respectively, and wrote-off accounts receivable against the provision for returns totaling $3,112,000 and $3,411,000, respectively. The provision for returns related to the SpecPub asset group that has been classified as assets held for sale as of September 30, 2007 totaled $327,000, as described more fully in Note 4, “Assets and Liabilities Related to Assets Held for Sale.”

		December 31,				September 30,
		2006				2007
		(In thousands)
Inventory:
Materials for future publications		$	370			$	293
Work in process			—				13
Finished goods available for sale			1,386				940
			1,756				1,246
Less: reserve for obsolete inventory			(66	)			(42	)
		$	1,690			$	1,204

     In the three months ended September 30, 2006 and 2007, the Company provided for an increase in the provision for obsolete inventory of $12,000 and $20,000, respectively, and wrote-off inventory against the reserve for obsolete inventory totaling $8,000 and $9,000, respectively. In the nine months ended September 30, 2006 and 2007, the Company provided for an increase in the provision for obsolete inventory of $28,000 and $52,000, respectively, and wrote-off inventory against the reserve for obsolete inventory totaling $13,000 and $36,000, respectively. The provision for obsolete inventory related to the SpecPub asset group that has been classified as assets held for sale as of September 30, 2007 totaled $40,000, as described more fully in Note 4, “Assets and Liabilities Related to Assets Held for Sale.”

		December 31,				September 30,
		2006				2007
		(In thousands)
Property and equipment:
Computer equipment and software		$	13,694			$	10,312
Furniture and fixtures			1,202				1,076
Leasehold improvements			2,245				2,296
Website development costs			6,855				6,194
			23,996				19,878
Less: Accumulated depreciation and amortization			(13,259	)			(10,575	)
		$	10,737			$	9,303

     In the three months ended September 30, 2006 and 2007, the Company recorded depreciation and amortization expense of property and equipment of $901,000 and $1,527,000, respectively. In the nine months ended September 30, 2006 and 2007, the Company recorded depreciation and amortization expense of property and equipment of $2,685,000 and $4,029,000, respectively. In the nine months ended September 30, 2006 and 2007, the Company recorded non-cash impairment charges of zero and $467,000, respectively.

		December 31,				September 30,
		2006				2007
		(In thousands)
Accrued expenses and other liabilities:
Accrued payroll and related liabilities		$	1,163			$	1,481
Other accrued liabilities			2,147				1,826
		$	3,310			$	3,307

Note 6 — Related Party Transactions

     In May 2001, the Company received a promissory note from 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 nine

months ended September 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,				September 30,
		2006				2007
Notes payable to vendors		$	47			$	—
LPI note			7,075				—
Orix term loan			7,187				—
Orix revolving loan			3,000				—
			17,309				—
Less: discount			(392	)			—
			16,917				—
Less: current portion, net of discount			8,817				—
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. and payable in three equal installments of $2,358,000 in May, August and November 2007. In July 2007, the Company paid the LPI note in full. 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 $20,000 in the three months ended September 30, 2006 and 2007 in the condensed consolidated statements of operations. The Company recorded interest expense on the LPI note of $531,000 and $354,000 in the nine months ended September 30, 2006 and 2007 in the condensed consolidated statements of operations.

     In June 2006, the Company entered into a software maintenance agreement under which $90,000 was financed with a vendor. This amount was 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%. 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 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 12,000 shares of the common stock of the Company at an exercise price of $37.40. 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 is 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. 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 for a deferral fee of $150,000. In July 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 2.3 million shares of the Company’s common stock and used a portion of the proceeds to repay, in full, the Orix term loan, the Orix revolving loan, the deferral fee and $0.3 million in prepayment fees. As a result of the payment of the loans, the Company accelerated the accretion of the loan discount.

Note 8 — Commitments and 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.

Note 9 — Stock-Based Compensation

     Stock Options

     During the nine months ended September 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 nine months ended September 30, 2007 (in thousands):

		Shares
Outstanding at January 1, 2007			175
Exercised			(16	)
Forfeited/expired/cancelled			(19	)
Outstanding at September 30, 2007			140

     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 nine months ended September 30, 2007 (in thousands):

		Shares
Unvested at January 1, 2007			21
Granted			46
Vested			(15	)
Forfeited			(3	)
Unvested at September 30, 2007			49

     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 $17.50 per share.

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

Year Ending December 31,
2007 (remaining three months)			1
2008			19
2009			17
2010			12
			49

     As of September 30, 2007, there was $1,045,000 of net unrecognized compensation cost related to unvested stock-based compensation arrangements. This compensation is recognized on a straight-line basis resulting in approximately 46% of the compensation expected to be expensed in the next twelve months.

Note 10 — Stockholders’ Equity

     Equity Financing

     In July 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 2.3 million shares of its common stock at a price of $11.50 per share (the “Private Placement”). The Company realized net proceeds of approximately $24.0 million from the Private Placement after deducting fees payable to the placement agent and other transaction costs. The Company 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. In August 2007, the Company filed a registration statement on Form S-3 with the SEC pursuant to which it registered for re-sale the shares sold in the Private Placement.

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: Online, Publishing and Travel and Events. The Travel and Events segment consisted of travel and events marketed through the Company’s RSVP brand and by the Company’s consolidated affiliate, PNO DSW Events, LLC (“DSW”). In March 2007, the Company sold its membership interest in DSW, a joint venture, to the minority interest partner. In October 2007, the Company entered into an agreement to sell substantially all the assets of RSVP. As a result of the sale of the Company’s interest in DSW, its agreement to sell substantially all the assets of RSVP and the Company’s decision to exit its Travel and Events business, the Company has reported the results of operations and financial position of RSVP and DSW as discontinued operations within the condensed consolidated financial statements for the three and nine months ended September 30, 2006 and 2007 as described more fully in Note 13, “Discontinued Operations.” As of September 30, 2007, the Company has two segments remaining: Online and Publishing.

     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 to evaluate segment performance and the availability of separate financial information. 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.

     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												Three months ended
		September 30, 2006												September 30, 2007
		Online				Publishing				Total				Online				Publishing				Total
Revenue:
Advertising services		$	2,646			$	3,740			$	6,386			$	2,443			$	4,853			$	7,296
Subscription services			4,473				1,358				5,831				4,010				1,383				5,393
Transaction services			448				1,375				1,823				279				758				1,037
Total revenue			7,567				6,473				14,040				6,732				6,994				13,726
Direct operating costs and expenses:
Cost of revenue			2,446				3,775				6,221				2,842				4,237				7,079
Sales and marketing			2,440				1,337				3,777				2,125				2,001				4,126
Total direct operating costs and expenses			4,886				5,112				9,998				4,967				6,238				11,205
Contribution margin		$	2,681			$	1,361				4,042			$	1,765			$	756				2,521
Other operating costs and expenses:
General and administrative											2,845												3,683
Restructuring											58												581
Depreciation and amortization											1,192												1,703
Total other operating costs and expenses											4,095												5,967
Loss from operations											(53	)											(3,446	)
Other expense, net											(123	)											(610	)
(Provision) benefit for income taxes											(38	)											6
Loss from discontinued operations											(1,280	)											(1,205	)
Net loss										$	(1,494	)										$	(5,255	)

		Nine months ended												Nine months ended
		September 30, 2006												September 30, 2007
		Online				Publishing				Total				Online				Publishing				Total
Revenue:
Advertising services		$	7,242			$	11,809			$	19,051			$	6,891			$	12,470			$	19,361
Subscription services			13,985				4,437				18,422				12,519				4,215				16,734
Transaction services			1,617				4,046				5,663				959				2,772				3,731
Total revenue			22,844				20,292				43,136				20,369				19,457				39,826
Direct operating costs and expenses:
Cost of revenue			7,394				12,011				19,405				9,766				12,183				21,949
Sales and marketing			7,774				3,658				11,432				7,019				5,278				12,297
Total direct operating costs and expenses			15,168				15,669				30,837				16,785				17,461				34,246
Contribution margin		$	7,676			$	4,623				12,299			$	3,584			$	1,996				5,580
Other operating costs and expenses:
General and administrative											8,617												11,959
Restructuring											892												581
Depreciation and amortization											3,549												5,077
Impairment of goodwill											—												21,100
Total other operating costs and expenses											13,058												38,717
Loss from operations											(759	)											(33,137	)
Other expense, net											(242	)											(1,494	)
(Provision) benefit for income taxes											(38	)											6
Loss from discontinued operations											(941	)											(8,505	)
Net loss										$	(1,980	)										$	(43,130	)

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 $834,000, primarily related to termination benefits of approximately

$631,000 and the cost of closing redundant facilities of approximately $203,000, were recorded during the three months ended June 30, 2006. During the three months ended September 30, 2006, the Company recorded adjustments to the cost of closing redundant facilities of approximately $58,000. 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.

     In July 2007, the board of directors of the Company adopted and approved a reorganization plan to further align the Company’s resources with its strategic business objectives. As part of the plan, the Company closed its international offices located in Buenos Aires and London in order to streamline the Company’s business operations and reduce expenses. The reorganization, along with other organizational changes, reduced the Company’s total workforce by approximately 15%. Restructuring costs of approximately $581,000, primarily related to employee severance benefits of approximately $451,000 and facilities consolidation expenses of approximately $130,000, were recorded during the three months ended September 30, 2007. The Company completed this restructuring in the third quarter of 2007.

Note 13 — Discontinued Operations

     In an effort to simplify the Company’s business model, the Company has determined to exit its Travel and Events businesses. In March 2007, the Company sold its membership interest in DSW, a joint venture, to the minority interest partner. In October 2007, the Company entered into an agreement to sell substantially all the assets of RSVP, the closing of which is pending. As a result of the sale of the Company’s interest in DSW, its agreement to sell substantially all the assets of RSVP and the Company’s decision to exit its Travel and Events businesses, the Company has reported the results of operations and financial position of RSVP and DSW as discontinued operations within the condensed consolidated financial statements for the three and nine months ended September 30, 2006 and 2007.

     RSVP Productions, Inc.

     In October 2007, the Company entered into an agreement to sell substantially all of the assets of RSVP to Atlantis Events, Inc. In accordance with FAS 144, the Company has reported the results of operations and financial position of RSVP in discontinued operations within the condensed consolidated financial statements for the three and nine months ended September 30, 2006 and 2007. The Company has reported the financial position of RSVP as assets and liabilities of discontinued operations on the condensed consolidated balance sheets as of December 31, 2006 and September 30, 2007. In addition, the Company has segregated the cash flow activity of RSVP from the condensed consolidated statements of cash flows for the nine months ended September 30, 2006 and 2007. The results of operations of RSVP were previously reported and included in the results of operations and financial position of the Company’s Travel and Events segment.

     PNO DSW Events, LLC

     In March 2007, the Company sold its membership interest in DSW, a joint venture, to the minority interest partner for $270,000 and recognized a gain on the sale of approximately $77,000. In accordance with FAS 144, the Company has reported the results of operations and financial position of DSW in discontinued operations within the condensed consolidated financial statements for the three and nine months ended September 30, 2006 and 2007. The Company has reported the financial position of DSW as assets and liabilities of discontinued operations on the condensed consolidated balance sheet as of December 31, 2006. In addition, the Company has segregated the cash flow activity of DSW from the condensed consolidated statements of cash flows for the nine months ended September 30, 2006 and 2007. The results of operations of DSW were previously reported and included in the results of operations and financial position of the Company’s Travel and Events segment.

     The results of discontinued operations for the three months ended September 30, 2006 and 2007 were as follows (in thousands):

		Three months ended												Three months ended
		September 30, 2006												September 30, 2007
		RSVP				DSW				Total				RSVP				DSW				Total
Total revenue		$	1,293			$	75			$	1,368			$	7,855			$	—			$	7,855
Operating costs and expenses			2,565				84				2,649				9,065				—				9,065
Loss from operations			(1,272	)			(9	)			(1,281	)			(1,210	)			—				(1,210	)
Other income, net			—				1				1				5				—				5
Loss from discontinued operations		$	(1,272	)		$	(8	)		$	(1,280	)		$	(1,205	)		$	—			$	(1,205	)

     The results of discontinued operations for the nine months ended September 30, 2006 and 2007 were as follows (in thousands):

		Nine months ended												Nine months ended
		September 30, 2006												September 30, 2007
		RSVP				DSW				Total				RSVP				DSW				Total
Total revenue		$	5,414			$	726			$	6,140			$	17,023			$	2			$	17,025
Operating costs and expenses			6,397				639				7,036				25,516				38				25,554
Income (loss) from operations			(983	)			87				(896	)			(8,493	)			(36	)			(8,529	)
Other income, net			1				1				2				24				—				24
Minority interest			—				(47	)			(47	)			—				—				—
Income (loss) from discontinued operations		$	(982	)		$	41			$	(941	)		$	(8,469	)		$	(36	)		$	(8,505	)

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

		December 31, 2006												September 30, 2007
		RSVP				DSW				Total				RSVP
Current assets of discontinued operations:
Accounts receivable		$	374			$	—			$	374			$	1,059
Prepaid expenses and other current assets			7,172				27				7,199				554
		$	7,546			$	27			$	7,573			$	1,613
Long-term assets of discontinued operations:
Property and equipment, net		$	186			$	—			$	186			$	191
Goodwill			3,982				—				3,982				—
Intangible assets, net			2,369				—				2,369				1,444
Other assets			—				—				—				1
		$	6,537			$	—			$	6,537			$	1,636
Current liabilities of discontinued operations:
Accounts payable		$	85			$	6			$	91			$	95
Accrued expenses and other liabilities			397				—				397				306
Deferred revenue, current portion			5,580				—				5,580				1,300
		$	6,062			$	6			$	6,068			$	1,701

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 variety of products and services including online and print media properties, and other goods and services.

     In July 2007, we closed our private placement financing with a group of accredited and institutional investors and received an aggregate of approximately $26.2 million in gross proceeds from the sale of approximately 2.3 million shares of our common stock at a price of $11.50 per share. We realized net proceeds of approximately $24.0 million from the private placement after deducting fees payable to the placement agent and other transaction costs.

     As a result of further integrating our various businesses, our executive management team, and our financial and management reporting systems during fiscal 2006, we began to operate as three segments effective January 1, 2007: Online, Publishing and Travel and Events. The Travel and Events segment consisted of travel and events marketed through our RSVP Productions, Inc. (“RSVP”) brand and by our consolidated affiliate, PNO DSW Events, LLC (“DSW”). We entered into an agreement to sell our RSVP brand in October 2007 and sold our interest in DSW in March 2007. As of September 30, 2007, we have two segments remaining: Online and Publishing. In accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we have reported the results of operations and financial position of RSVP and DSW in discontinued operations within the condensed consolidated financial statements for the three and nine months ended September 30, 2006 and 2007.

     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.

     Executive Operating and Financial Summary

     Our total revenue was $13.7 million in the three months ended September 30, 2007, decreasing 2% from total revenue of $14.0 million in the three months ended September 30, 2006. Our total revenue was $39.8 million in the nine months ended September 30, 2007, decreasing 8% from total revenue of $43.1 million in the nine months ended September 30, 2006. These decreases were primarily due to decreases in our subscription and transaction services revenue.

     Total operating costs and expenses were $17.2 million in the three months ended September 30, 2007, increasing 22% above total operating costs and expenses of $14.1 million in the three months ended September 30, 2006. Total operating costs and expenses were $73.0 million in the nine months ended September 30, 2007, increasing 66% above total operating costs and expenses of $43.9 million in the nine months ended September 30, 2006. These increases were primarily due to an estimated goodwill impairment charge of $21.1 million which we recorded during the three months ended June 30, 2007. Operating costs and expenses also increased due to increased marketing costs related to direct-mail campaigns for our print properties, severance charges related to the departure of our former President and Chief Operating Officer and our former Chief Technology Officer, increased legal expenses and increased depreciation on capital expenditures as a result our on-going product development and compliance efforts.

     Loss from operations was $3.4 million in the three months ended September 30, 2007, compared to loss from operations of $0.1 million in the three months ended September 30, 2006. Loss from operations was $33.1 million in the nine months ended September

30, 2007, compared to loss from operations of $0.8 million in the nine months ended September 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 and the decrease in revenue noted above.

     For the remainder of fiscal 2007, management expects that revenue will decrease slightly in comparison to the comparable prior year period primarily 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 web applications and rebuilding our technology platform and networks.

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), 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.

     Online Segment

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

		Three months ended September 30,								Increase (decrease)
		2006				2007				$				%
Online revenue:
Advertising services		$	2,646			$	2,443			$	(203	)			(8	%)
Subscription services			4,473				4,010				(463	)			(10	%)
Transaction services			448				279				(169	)			(38	%)
Total online revenue			7,567				6,732				(835	)			(11	%)
Online direct operating costs and expenses:
Cost of revenue			2,446				2,842				396				16	%
Sales and marketing			2,440				2,125				(315	)			(13	%)
Total online direct operating costs and expenses			4,886				4,967				81				2	%
Online contribution margin		$	2,681			$	1,765			$	(916	)			(34	%)

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

		Nine months ended September 30,								Increase (decrease)
		2006				2007				$				%
Online revenue:
Advertising services		$	7,242			$	6,891			$	(351	)			(5	%)
Subscription services			13,985				12,519				(1,466	)			(10	%)
Transaction services			1,617				959				(658	)			(41	%)
Total online revenue			22,844				20,369				(2,475	)			(11	%)
Online direct operating costs and expenses:
Cost of revenue			7,394				9,766				2,372				32	%
Sales and marketing			7,774				7,019				(755	)			(10	%)
Total online direct operating costs and expenses			15,168				16,785				1,617				11	%
Online contribution margin		$	7,676			$	3,584			$	(4,092	)			(53	%)