UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-K





x ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)


OF
THE SECURITIES EXCHANGE ACT OF 1934





For
the fiscal year ended December 31, 2008





OR





o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)


OF
THE SECURITIES EXCHANGE ACT OF 1934





For
the transition period from _____ to _____





Commission
file number 001-33720


________________________________________





HSW
INTERNATIONAL, INC.


(Exact
name of Registrant as specified in its charter)





Delaware
            
            33-1135689(State
      or other jurisdiction of
            
            (I.R.S.
      Employerincorporation
      or organization)
            
            Identification
      No.)





One
Capital City Plaza


3350
Peachtree Road, Suite 1600


Atlanta,
Georgia 30326


(Address
of principal executive offices, including zip code)





(404)
364-5823


(Registrant’s
telephone number, including area code)





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





Title of each
      class
            
            Name of each exchange
      on which registeredCommon
      Stock, $0.001 Par Value
            
            NASDAQ
      Global Market





Securities
registered pursuant to Section 12(g) of the Act:  None.





Indicate
by check mark if the Registrant is a well-known seasoned issuer (as defined in
Rule 405 of the Securities Act).


Yes o  No x





Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


Yes o  No x










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, as amended, 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.


Yes x  No o





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





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





Large
      accelerated filer o
            
            Accelerated
      filer oNon-accelerated
      filer o
            
            Smaller
      reporting company x(Do
      not check if a smaller reporting company)





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





At
March 30, 2009, 53,698,292 shares of the Registrant’s common stock, $0.001
par value per share, were outstanding.  The aggregate market value of
shares of common stock held by nonaffiliates as of June 30, 2008, was
$70,617,793.














Table of Contents





PagePART IItem
      1.
            Business
            1Item
      1A.
            Risk
      Factors
            6Item
      1B.
            Unresolved
      Staff Comments
            17Item
    2.
            Properties
            17Item
      3.
            Legal
      Proceedings
            17Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            17PART IIItem
      5.
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
            18Item
      6.
            Selected
      Financial Data
            19Item
      7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            20Item
      7A.
            Quantitative
      and Qualitative Disclosures about Market Risk
            28Item
      8.
            Financial
      Statements and Supplementary Data
            29Item
      9.
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
            55Item
      9A.
            Controls
      and Procedures
            55Item
      9B.
            Other
      Information
            55PART IIIItem
      10.
            Directors,
      Executive Officers and Corporate Governance
            56Item
      11.
            Executive
      Compensation
            61Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            66Item
      13.
            Certain
      Relationships and Related Transactions, and Director
      Independence
            69Item
      14.
            Principal
      Accounting Fees and Services
            72PART IVItem
      15.
            Exhibits
      and Financial Statement Schedules
            73SIGNATURES
            74INDEX TO
      EXHIBITS
            75











PART I





Forward-looking information





Our
disclosure and analysis in this report concerning our operations, cash flows and
financial position, including, in particular, the likelihood of our success in
expanding our business and our assumptions regarding the regulatory environment
and international markets, include forward-looking
statements.  Statements that are predictive in nature, that depend
upon or refer to future events or conditions, or that include words such as
“expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” “may” and
similar expressions are forward-looking statements.  Although these
statements are based upon reasonable assumptions, they are subject to risks and
uncertainties that are described more fully in this report in the section titled
“Part I, Item 1A. Risk Factors”.  These forward-looking
statements represent our estimates and assumptions only as of the date of this
filing and are not intended to give any assurance as to future results. As a
result, you should not place undue reliance on any forward-looking
statements.  We assume no obligation to update any forward-looking
statements to reflect actual results, changes in assumptions or changes in other
factors, except as required by applicable securities laws.








ITEM
1.  BUSINESS




Overview




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





Products
and Services





ComoTudoFunciona – HowStuffWorks
Brazil





We
entered the Brazilian online publishing market in March 2007 with the
launch of our website ComoTudoFunciona
(http://hsw.com.br), utilizing the exclusively licensed HowStuffWorks digital
content.  At December 31, 2008, we had published approximately 5,500
articles that were either (i) articles from the HowStuffWorks content database
translated from English to Portuguese, or (ii) originally created
content.  We are continuing the development of our business strategy
in Brazil as we focus on expansion by (i) adding original proprietary digital
content designed to meet the information needs of the Brazilian online
community, (ii) expanding the amount of translated content from HowStuffWorks,
and (iii) refining local marketing strategies.





BoWenWang – HowStuffWorks
China





In June
2008, we entered China’s online publishing market utilizing a combination of the
contributed assets from HowStuffWorks with the benefit of our predecessor
INTAC’s relationships and knowledge of the Chinese markets in obtaining our
Internet licenses.  Our Beijing-based website BoWenWang (http://www.bowenwang.com.cn)
initially launched with a combination of HowStuffWorks content translated from
English to Chinese and original content created by our China division, including
several hundred articles about the Beijing Olympics.  In September
2008, we entered into an exclusive content partnership with World Book, Inc. to
dramatically increase the amount of content published on BoWenWang.  In
2009, World Book will create thousands of original Chinese-language articles
providing information on all branches of knowledge, including arts, sciences,
history, technology, mathematics, sports, and recreation, exclusively for our
Chinese website.  At December 31, 2008, we had published approximately
4,400 articles in China.






1






DailyStrength





In
November 2008, we acquired Daily Strength, Inc. (“DS”), publisher of the health
social networking website DailyStrength (http://www.dailystrength.org).  DailyStrength.org
offers content authored by medical professionals based on current topics,
support groups, a treatment directory with definitions, private messaging,
one-on-one chat forums and personal goal trackers, and primarily serves
English-speaking territories such as the United States, Canada, Australia and
the United Kingdom.  The medical panel of professionals contributes
articles and journals providing insight to a number of topics relevant to the DS
user group and communities.  Additionally, DS offers users and members
the opportunity to launch a community for a group of like-minded individuals
regarding a topic of personal significance using best-of-breed community tools
to interact.





DS was
founded in 2006 by Internet veterans with more than 20 years of experience
conceiving, building, and running communities on the web, including Yahoo,
GeoCities, Facebook and more.  DS hosts more than 500 communities
focused on issues such as weight loss, divorce, parenting and
illnesses.





Our
History




HSW
International was formed on March 14, 2006, as a wholly owned subsidiary of
HowStuffWorks, Inc. in order to (i) develop businesses using exclusive
digital publishing rights to HowStuffWorks’ content for the countries of China
and Brazil, and (ii) effect the INTAC International, Inc. merger (the
“INTAC Merger”).  We completed the INTAC Merger to assist in the
development of our digital content database exclusively licensed from
HowStuffWorks by (i) accelerating our obtaining Internet licenses in China
for launching our Internet platform, (ii) obtaining INTAC’s knowledge of
the Chinese markets, relationships, and core competencies to accelerate the
growth of our Internet platforms in China, and (iii) providing additional
cash flow from INTAC’s established businesses.  These established
businesses included services related to wireless telephone training and the
development and sale of educational software delivered to customers in China
(“INTAC Legacy Businesses”).  As discussed below, these legacy
businesses were subsequently disposed.





Our
initial focus was online publishing of localized, translated Chinese and
Brazilian editions of the HowStuffWorks Internet site, utilizing strategies
based on those employed by HowStuffWorks, Inc., as tailored to the needs of each
localized market. In
November 2008, we acquired Daily Strength, Inc. (“DS”), publisher of the health
social networking website DailyStrength (http://www.dailystrength.org).  Our
acquisition of DS allows us to further leverage our web publishing
infrastructure, provides us with an opportunity to diversify our initial focus
on the emerging economies, and enter the healthcare digital
market.  The online healthcare market in the United States has matured
over the past 10 years and now represents a significant market for online
advertising.  While the global economic credit market has lowered
expectations for near-term growth in the emerging economies, our diversification
into the world’s largest online advertising economy – the United States –
provides greater access to digital revenues.





The
INTAC Merger





The INTAC
Merger and related transactions were consummated pursuant to a merger agreement
dated April 20, 2006, as amended January 29, 2007.  On October 2,
2007, we completed the INTAC Merger and related transactions pursuant to
which:





·
            HowStuffWorks
      contributed to us, in exchange for shares of our common stock, perpetual,
      fully paid up, royalty-free, exclusive digital publishing rights to
      HowStuffWorks’ existing content for the countries of China and Brazil
      which we are translating and localizing into the predominant languages of
      China and Brazil.


·
            A
      wholly owned subsidiary of ours was merged into INTAC, with INTAC
      surviving as our wholly owned subsidiary, and holders of INTAC common
      stock received one share of our common stock in exchange for each of their
      shares of INTAC common stock.


·
            Certain
      investors (referred to in this report as American investors) purchased or
      agreed to purchase shares of our common stock having an aggregate value of
      approximately $39.4 million, of which $22.5 million and $16.9 million
      (both before expenses) were received in October 2007, and January and
      February 2008, respectively.  Shelf registration statements
      covering the resale of these shares were subsequently
    filed.


·
            Our
      stock became publicly traded on the NASDAQ Global Market under the symbol
      “HSWI” in connection with the INTAC Merger.  Prior to the INTAC
      Merger, INTAC’s common stock was traded on the NASDAQ Capital Market under
      the symbol “INTN”.





2





·
            In
      connection with and as a condition of the INTAC Merger, INTAC sold its
      wireless handset and prepaid calling cards distribution businesses
      (“distribution companies”), to an entity controlled by Wei Zhou, CEO,
      director and significant stockholder of INTAC prior to the INTAC Merger
      and a member of our Board of Directors from October 2007 to December 2007,
      in exchange for 3.0 million shares of our common stock held by Mr.
      Zhou.  The 3.0 million shares of our common stock were recorded
      as treasury shares valued at cost as determined by a third party
      valuation.





On
January 31 and February 1, 2008, also in connection with the INTAC
Merger, certain investors (referred to in this report as the European investors)
purchased $5.8 million, before expenses, of our common stock and $11 million of
our shares held as treasury stock, respectively, for a price per share of
$3.68.  In this transaction, we issued approximately 1.6 million shares of
our common stock and sold 3.0 million treasury shares in the aggregate to the
European investors.




Our
Relationship with Discovery Communications, Inc.




Following
the grant of rights from HowStuffWorks to us, HowStuffWorks merged with
Discovery Communications, Inc. (“Discovery”) on December 17, 2007 (the
“Discovery Merger”), and became a wholly owned subsidiary of
Discovery.  The following summarizes the material agreements between
the parties.





·
            We
      hold a perpetual, fully paid, royalty-free, sublicensable exclusive
      license to certain of the content published on HowStuffWorks.com in local
      languages and the HowStuffWorks brand for Brazil and
  China.


·
            HowStuffWorks
      provides to us new and updated content published on HowStuffWorks.com,
      upon our request and pursuant to the same license
  terms.


·
            We
      have the right to an exclusive license for the HowStuffWorks
      trademarks for our Brazil and China websites that display the
      HowStuffWorks content.


·
            We
      hold a perpetual, fully paid up, royalty-free, sublicensable license to
      the software code for HowStuffWorks’ content management
      platform.


·
            HowStuffWorks
      has the right to designate three members of our Board of Directors, and
      the chairperson of the Nominating and Governance
      Committee.  Additionally, to the extent that HowStuffWorks owns
      any shares of our common stock in excess of 45% of the outstanding shares,
      HowStuffWorks is required to vote such excess shares in the exact
      proportion to the vote of our other shareholders.  HowStuffWorks
      may vote in its discretion its shares of our common stock up to and
      including 45% of the outstanding shares of our common stock as of any
      applicable record date.





The
merger agreement between Discovery and HowStuffWorks provided that payment to
the former HowStuffWorks shareholders for a significant portion of its ownership
of our common stock would not be paid at the October 2007 closing of the
transaction, but instead will be available to be paid in three semi-annual
installments during a period which began in October 2008.  Such payments
will be in the form of cash or shares of HSWI stock now held by
HowStuffWorks.  Accordingly, the amount of shares of our common stock
indirectly owned by Discovery in the future may fall or rise due to a
combination of the potential distributions pursuant to the terms of the
Discovery merger or our exercise of the options to publish HowStuffWorks content
in local languages in Russia and India.  All of our rights to publish
HowStuffWorks content will remain effective regardless of the number of shares
owned by HowStuffWorks in the future.  At December 31, 2008,
Discovery, through its wholly owned subsidiary HowStuffWorks, owned
approximately 42.8% of our outstanding common stock, and had not made any share
distributions of our common stock to former HowStuffWorks
shareholders.




Sale
of the INTAC Legacy Businesses and Related Transactions




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





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






3






In
February and March 2008, we sold the INTAC Legacy Businesses to an entity
owned by Mr. Zhou.  We funded the businesses with $4.3 million of
cash, net of disposition expenses, and received 5.0 million shares of our stock
in exchange.  As of December 31, 2008, all of HSWI’s assets were in our
core Internet business and the sole assets we retained from the INTAC Merger
were the Internet licenses intangible asset we used to enter the Chinese markets
in June 2008.





On
February 15, 2008, we entered into a stock purchase agreement where we
agreed to sell, and two qualified institutional buyers agreed to purchase, the
5.0 million shares of our common stock received from the INTAC Legacy Businesses
disposition at a purchase price of $3.68 per share.  We simultaneously sold
5.0 million shares to institutional buyers in a private placement raising $18.4
million additional cash.





Sales &
Support




We have
sales teams in Brazil and the United States to service advertisers and customers
for our businesses.  We conduct sales for the websites in Brazil and the
U.S. through a direct sales force, as well as strategic relationships with
companies that can represent advertising inventory.  We
are implementing the same model in China.




Marketing




The
primary business model for our websites is the sale of advertising, sponsorships
and related products and services.  By focusing on providing high-quality
web properties to end users in Brazil, China and the United States, we aim to
establish a user base attractive to advertisers.  We primarily sell
advertising based on the quantity of views delivered to advertisers or the
success of various advertising-related metrics.




Much of
our marketing effort is in fostering word-of-mouth momentum by providing
high-quality products and services and using public relations efforts. 
Additionally, we enter into relationships with existing businesses to provide
awareness of and traffic to our products and services.  We also engage in
advertising designed to inform potential users and customers about our products
and services.




Competition




The
online publishing business is highly competitive.  We encounter significant
competition in each market in which we offer our products and
services.  Our competitors include national Internet portals in China
such as Baidu, NetEase.com, Shanda Interactive Entertainment, Sina, sohu.com and
tom.com; national websites in Brazil such as Terra and UOL; and health social
media websites like MedHelp.com and trusera.com, which compete with us for
online advertising revenue and end users.




Intellectual
Property





We rely
upon patent, trademark, copyright and trade secret laws in various
jurisdictions, as well as confidentiality procedures and contractual provisions
to protect our proprietary assets and brand.  We do not own any patent or
copyright registrations.  We hold various trademarks for our brands,
and we have additional applications pending.




A number
of threats exist to our intellectual property rights.  Effective
intellectual property protection may not be available in every country in which
we intend to distribute products and services.  Additionally, it may be
time consuming and costly for us to protect our intellectual property and even
then such steps may not be sufficient or effective.





4





Government
Regulation




Our
operations in China and Brazil are subject to a number of foreign and domestic
laws and regulations that affect companies conducting business on the
Internet.  Laws and regulations are being debated and considered for
adoption in these countries and others throughout the world in areas relating to
user privacy, freedom of expression, content, advertising, information security
and intellectual property rights.




Additionally,
the Internet infrastructures in China and Brazil are subject to regulatory
control and, in the case of China, ownership by the Chinese government. 
The PRC regulates its Internet sector by enacting legislation or issuing
regulations regarding the legality of foreign investment in the PRC Internet
sector and the existence and enforcement of content restrictions on the
Internet.  We believe that our current ownership structure and localized
content complies with PRC laws and regulations.  There are, however,
substantial uncertainties regarding the interpretation and enforcement of PRC
Internet laws and regulations.  Accordingly, it is possible that the PRC
government will ultimately take a view contrary to ours.




The PRC
Ministry of Information Industry (“MII”), the Chinese governmental agency that
regulates the Internet in China, has stated that the activities of Internet
content providers are subject to regulation by various PRC government
authorities, depending on the specific activities conducted by the Internet
content provider.  Various government authorities have stated publicly that
they are in the process of preparing new laws and regulations that will govern
these activities.  The areas of regulation include, among others, online
advertising, online news reporting, online publishing, online securities
trading, online community, online video, and the provision of industry specific
(e.g., pharmaceutical-related) information over the Internet.  Other
aspects of our online operations may be subject to regulation in the
future.




The MII
also promulgated a directive, effective January 31, 2008, providing that
online videos can only be broadcast or streamed by state-owned or controlled
companies.  Subsequent interpretation was provided to exclude certain
websites that existed prior to the directive.  This directive may
prevent our Chinese website from displaying online videos, which could have a
material effect on the business.




Because
our services are accessible worldwide, certain foreign jurisdictions may claim
that we are required to comply with their laws, even where we have no local
entity, employees or infrastructure.  This could also be detrimental
to our business.




Employees




As of
December 31, 2008, we had 70 employees, located in Georgia and California,
USA; Brazil and China.




Seasonality





We expect
our business to be affected by seasonal fluctuations in Internet usage and
traditional retail seasonality.  Internet usage generally slows during the
summer months, and online shopping and related advertising typically increases
in the fourth quarter of each year.  These seasonal trends will likely
cause fluctuations in quarterly results, including fluctuations in sequential
revenue growth rates.




Available
information




Our
website address is www.hswinternational.com.  Information on our website is
not incorporated by reference herein and should not be considered a part of this
report.  We make available free of charge through our website our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed with or furnished to the
SEC.





5






ITEM 1A.  RISK
FACTORS





This
report contains forward-looking statements that involve risks and
uncertainties.  Our actual results could differ materially from those
discussed in this report.  Factors that could cause or contribute to these
differences include, but are not limited to, those discussed below and elsewhere
in this report and in any documents incorporated in this report by
reference.





We
are in the early development of our business and prospects are difficult to
evaluate.





We have
no significant operating history, and limited experience in the Chinese and
Brazilian markets.  We are in the early development of our business,
including the new strategy of entering the health social networking market with
the DailyStrength acquisition in November 2008, with a limited operating history
upon which investors and others can evaluate our current business and
prospects.  Our prospects must be considered in light of the many risks,
uncertainties, expenses, delays, and difficulties frequently encountered by
companies in their early stages of development.  Some of the risks and
difficulties we expect to encounter include our ability to:





·
            successfully
      commercialize and monetize the contributed and acquired
      assets;


·
            continue
      to raise additional working capital, the lack of which would likely have a
      significant negative impact on our long term business plan and our ability
      to take advantage of our strategic alliances and to successfully execute
      our expansion plan;


·
            manage
      our expense structure as a U.S. public company including, without
      limitation, compliance with the Sarbanes Oxley
  Act;


·
            manage
      the anticipated rise in operating
expenses;


·
            manage
      and implement successfully new business strategies including, if
      applicable, new strategies resulting from the Discovery Merger and the
      accompanying changes to the agreements between HowStuffWorks and
      us;


·
            adapt
      and successfully execute our evolving and unpredictable business model,
      with which we will have only limited
experience;


·
            establish
      and take advantage of contacts and strategic
  relationships;


·
            adapt
      to our potential diversification into other industries and geographic
      regions;


·
            manage
      and adapt to rapidly changing and expanding
  operations;


·
            implement
      and improve operational, financial and management systems and
      processes;


·
            respond
      effectively to competitive
developments;


·
            attract,
      retain and motivate qualified personnel;
and


·
            manage
      each of the other risks set forth in this
  report.




Because
of our lack of operating history and the early stage of development of our
business, we will have limited insight into trends and conditions that may exist
or might emerge and affect our business, especially with respect to the online
publishing market.  We cannot be certain that our business strategy will be
successful or that it will successfully address these risks.  Any failure
by us to successfully implement our new business plans could have a material
adverse effect on our business, results of operations and financial
condition.





We
may not have sufficient liquidity to support the time required for our business
to fully develop.





The
Company is in the process of launching Internet businesses in three different
markets, including publishing businesses in two emerging markets.  We
believe that our cash resources on hand are sufficient to fund these businesses
for less than 24 months unless revenues increase significantly or we find other
sources of capital, neither of which can be assured.  Our management and
directors continually evaluate our progress and likelihood of success in each of
our markets, and our ability to raise additional capital, against the relative
value of our resources and other opportunities. Accordingly, we might decide to
suspend our activities in one or more of our markets in order to focus our
limited resources in the other(s).





6





We
may not succeed in marketing and monetizing our assets to potential customers or
developing strategic partnerships for the distribution of our products and
services.





Our plans
to market and monetize our assets in the Chinese and Brazilian online markets
through the Internet are new and unproven.  Moreover, we will have limited
experience in determining the pricing of the products and services that we plan
to develop.  Because we have never marketed or sold these products and
services, we may not be successful in establishing a customer base or strategic
partnerships for the distribution of our products and services.  If we are
not successful in developing, releasing and marketing these products and
services on a profitable basis, our results of operations would be materially
and adversely affected.




We do not
have significant experience in the Brazilian and Chinese marketplaces. 
Additionally, we may not have the resources available to simultaneously develop
operations in China and Brazil.  Accordingly, there may be a delay in
developing such operations or we might decide not to pursue these markets, which
could affect our business plan and results of operations.





In
addition, any delay in developing our operations in Brazil and China may impact
our decision to exercise our option to acquire the exclusive digital publishing
rights for the content in India and Russia.  The option expires in May 2009
and our failure to exercise such option may have an adverse affect on our
ability to expand our international operations, which could affect our business
plan and results of operations.  Exercise of this option requires our
issuing additional shares to HowStuffWorks and we will consider the cost of the
option and the opportunities of the specific market when considering whether or
not to exercise each option. At this time we have made no determination
concerning whether these options will be exercised.





The
growth we seek is rare.





Substantial
future growth will be required in order for us to realize our business
objectives.  Growth of this magnitude is rare.  To the extent we are
capable of growing our business as necessary, we expect that such growth will
place a significant strain on our managerial, operational and financial
resources.  We must manage our growth, if any, through appropriate systems
and controls in each of these areas.  We must also establish, train and
manage a larger work force.  If we do not manage the growth of our business
effectively, our business, results of operations and financial condition could
be materially and adversely affected.





We
face intense competition, which could have an adverse effect on our business,
financial condition and results of operations.





The
online publishing market is highly competitive.  We encounter significant
competition across our business lines and in each market in which we offer our
products and services.  In the online publishing market, we expect that our
competitors will include national Internet portals in China such as Baidu,
NetEase.com, Shanda Interactive Entertainment, Sina, sohu.com and tom.com;
national websites in Brazil such as Terra and UOL; and health information
websites in the U.S. like MedHelp.com and trusera.com, which will compete with
us for online advertising revenue and end users.  Many of our
competitors have more experience, resources and visitors than us.





The
sale of INTAC’s Legacy Businesses, leaving our strategic focus on the online
publishing, could have an adverse effect on our business, financial condition
and results of operations.





INTAC’s
wireless handset distribution business accounted for approximately 95% of its
total revenues for the third quarter of fiscal year 2007, and approximately 92%
of its total revenues for the fiscal year ended September 30, 2006. 
We sold the INTAC Legacy Businesses in February 2008 which eliminates
future revenues from the INTAC Merger.  All future revenue will be derived
from online publishing market and other future business strategies.  There
is no guarantee that we will be able to offset the sale of the wireless handset
distribution business and the INTAC Legacy Businesses through comparable growth
in our online publishing businesses.





Resales
of our common stock and additional obligations to issue our common stock may
cause the market price of our stock to fall.




We have
registered for resale an aggregate of 33,634,192 shares of our common stock held
by INTAC affiliates, HowStuffWorks and investors that participated in our equity
financings, although HowStuffWorks agreed not to sell or otherwise transfer
one-third of its shares until October 2008, one-third of its shares until
April 2009 and one-third of its shares until October 2009.  In
addition, we granted HowStuffWorks a warrant to purchase 500,000 (250,000
of which are now expired) shares of our common stock.  The issuance of
these new shares and the resale of additional shares of our common stock could
depress the market price for our common stock.





7






Various
factors could negatively affect the market price or market for our common
stock




The
market for and price of our common stock could be affected by the following
factors:




·
            general
      market and economic conditions;


·
            our
      common stock has been thinly traded;
and


·
            minimal
      third party research is available regarding our
  company.





Additionally,
the terms of the Discovery merger provided that payment to HowStuffWorks
shareholders for a significant portion of HowStuffWorks’ ownership of our common
stock would not be paid at the October 2007 closing of the transaction and
instead will be paid to HowStuffWorks’ former shareholders in three semi-annual
installments beginning on or about October 2008.  Such payments will be in
the form of cash or shares of HSWI stock now held by HowStuffWorks. 
Accordingly, the amount of shares of our common stock indirectly owned by
Discovery in the future may fall or rise due to a combination of the potential
distributions pursuant to the terms of the Discovery merger or our exercise of
the options to publish HowStuffWorks content in local languages in Russia and
India.  All of our rights to publish HowStuffWorks content will remain
effective regardless of the number of shares owned by HowStuffWorks in the
future.  If Discovery and HowStuffWorks’ former shareholders’
representative elect to distribute shares of our common stock to former
HowStuffWorks shareholders, a significant number of shares may be sold by such
shareholders relative to the daily market trading volumes for our common stock.
While we intend to take reasonable measures aimed to ensure that any such
potential sales are not disruptive to the market for our common stock, we cannot
be certain as to the outcome.





These
factors may similarly affect our common stock, and may have the effect of
depressing the market price for our common stock or limiting the market for
resale of our common stock.





Our
internal control over financial reporting and our disclosure controls and
procedures may not prevent all possible errors that could occur.  Internal
control over financial reporting and disclosure controls and procedures, no
matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control system’s objective will be
met.





A control
system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance that the control system’s objectives will be
satisfied.  Internal control over financial reporting and disclosure
controls and procedures are designed to give a reasonable assurance that they
are effective to achieve their objectives.  We cannot provide absolute
assurance that all of our possible future control issues will be detected. 
These inherent limitations include the possibility that judgments in our
decision making can be faulty, and that isolated breakdowns can occur because of
simple human error or mistake.  The design of our system of controls is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed absolutely in
achieving our stated goals under all potential future or unforeseeable
conditions.  Becauseof the inherent limitations in a
cost effective control system, misstatements due to error could occur and not be
detected.





We
may have additional tax liabilities if tax positions we have taken in prior
years are challenged.





We and
our subsidiaries are subject to taxes in the United States and various foreign
jurisdictions.  We believed that our tax returns appropriately reflected
our tax liability when those tax returns were filed.  However, our tax
positions may be challenged by the applicable tax authorities.  Any
successful challenge to one or more of our prior tax positions could result in a
material tax liability to us or to one or more of our subsidiaries, including
INTAC, for one or more prior years.





8





The
state of the Internet infrastructure in China and Brazil may limit our
growth.





We rely
on the Internet for certain aspects of our business, including the publication
of content online and our Internet portals.  The Internet infrastructures
in China and Brazil are not well developed and are subject to regulatory control
and, in the case of China, ownership by the Chinese government.  The cost
of Internet access is high relative to the average income in China. 
Failure to further develop these infrastructures could limit our ability to
grow.  Alternatively, as these infrastructures improve and Internet use
increases, we may not be able to scale our systems proportionately.  Our
reliance on these infrastructures will make us vulnerable to disruptions or
failures in service, without sufficient access to alternative networks and
services.  Such disruptions or failures could reduce our user
satisfaction.  Should these risks be realized, our ability to increase
revenues and profitability would be impaired.





Our
operations are vulnerable to natural disasters and other events.





While we
believe we have adequate backup systems in place, we could still experience
system failures and electrical outages from time to time in the future, which
could disrupt our operations.  All of our servers and routers are currently
hosted in a single location, a Tier 4 data center.  We do not have a
documented disaster recovery plan in the event of damage from fire, floods,
typhoons, earthquakes, power loss, and telecommunications failures, break ins
and similar events.  If any of the foregoing occurs, we may experience a
temporary system shutdown.  If there is significant disruption or damage to
the data center hosting our web servers, our ability to provide access to our
websites would be interrupted. We do not carry any business interruption
insurance.  Although we carry property insurance, our coverage may not be
adequate to compensate us for all losses, particularly with respect to loss of
business and reputation that may occur.





Our
network operations may be vulnerable to hacking, viruses and other disruptions,
which may make our products and services less attractive and
reliable.





Internet
usage of our products could decline if any well publicized compromise of our
security occurs.  “Hacking” involves efforts to gain unauthorized access to
information or systems or to cause intentional malfunctions or loss or
corruption of data, software, hardware or other computer equipment. 
Hackers, if successful, could misappropriate proprietary information or cause
disruptions in our service.  We may be required to expend capital and other
resources to protect our website against hackers.  We cannot assure you
that any measures we may take will be effective.  In addition, the
inadvertent transmission of computer viruses could expose us to a material risk
of loss or litigation and possible liability, as well as materially damage our
reputation and decrease our user traffic.





Unauthorized
use of our intellectual property by third parties, and the expenses incurred in
protecting our intellectual property rights, may adversely affect our
business.





We regard
our copyrights, service marks, trademarks, trade secrets and other intellectual
property as critical to our success.  Unauthorized use of our intellectual
property by third parties may adversely affect our business and
reputation.  We rely on trademark and copyright law, trade secret
protection and confidentiality agreements with our employees, customers,
business partners and others to protect our intellectual property rights. 
Despite our precautions, it is possible for third parties to obtain and use our
intellectual property without authorization.  Furthermore, the validity,
enforceability and scope of protection of intellectual property in Internet
related industries are uncertain and still evolving.  In particular, the
laws of the PRC, Brazil and certain other countries are uncertain or do not
protect intellectual property rights to the same extent as do the laws of the
United States.  Moreover,litigation may be necessary in
the future to enforce our intellectual property rights, to protect our trade
secrets or to determine the validity and scope of the proprietary rights of
others.  Future litigation could result in substantial costs and diversion
of resources.





We
may be subject to intellectual property infringement claims, which may force us
to incur substantial legal expenses and, if determined adversely against us,
materially disrupt our business.





We cannot
be certain that our products and services will not infringe valid patents,
copyrights or other intellectual property rights held by third parties.  We
may in the future be subject to legal proceedings and claims from time to time
relating to the intellectual property of others in the ordinary course of our
business.  In particular, if we are found to have violated the intellectual
property rights of others, we may be enjoined from using such intellectual
property, and may incur licensing fees or be forced to develop
alternatives.  We may incur substantial expenses in defending against these
third party infringement claims, regardless of their merit.  Successful
infringement claims against us may result in substantial monetary liability or
may materially disrupt the conduct of our business.





9





Our
sublicensed content is subject to the terms and conditions of agreements between
HowStuffWorks and third parties.





Under the
terms of our contribution agreements, HowStuffWorks transferred and
contributed to us all rights, but only those rights, which belong to and are
held by HowStuffWorks pursuant to third-party licenses.  Some of those
licenses, including those with Publications International, Inc. contain
restrictions on the use of such content and termination provisions for breaches
of the license agreements.  Accordingly, a breach of any third party
license by HowStuffWorks may cause us to lose our license with such third
party, which could have a material adverse effect on the implementation of our
business plan, value of our content offering and results of our
operations.





A
slowdown or other adverse developments in the PRC or Brazil economy may
materially and adversely affect our customers, demand for our services and our
business.





Although
the PRC economy has grown significantly in recent years, we cannot assure you
that such growth will continue and we may be sensitive to a slowdown in economic
growth or other adverse changes in the PRC and Brazil economies.  This is
particularly true in light of current financial and economic
uncertainties.  In response to adverse economic developments,
companies may reduce spending on marketing and advertising.  As a result, a
slowdown in overall economic growth, an economic downturn or recession or other
adverse economic developments in China or Brazil may materially reduce the
demand for our services and materially and adversely affect our
business.





PRC
laws and regulations related to the PRC Internet sector are unclear and will
likely change in the near future.  If we are found to be in violation of
current or future PRC laws or regulations, we could be subject to severe
penalties.





The PRC
regulates its Internet sector by making pronouncements or enacting regulations
regarding the legality of foreign investment in the PRC Internet sector and the
existence and enforcement of content restrictions on the Internet.  There
are substantial uncertainties regarding the interpretation of current PRC
Internet laws and regulations, including those discussed below.





The PRC
enacted regulations applying to Internet related services and telecommunications
related activities.  While many aspects of these regulations remain
unclear, they purport to limit and require licensing of various aspects of the
provision of Internet information services.  The MII has also stated that
the activities of Internet content providers are subject to regulation by
various PRC government authorities, depending on the specific activities
conducted by the Internet content provider.  Various government authorities
have stated publicly that they are in the process of preparing new laws and
regulations that will govern these activities.  The areas of regulation
currently include online advertising, online news reporting, online publishing,
online securities trading and the provision of industry specific (e.g., drug
related) information over the Internet.  Other aspects of our online
operations may be subject to regulation in the future.





Under the
agreement reached in November 1999 between the PRC and the United States
concerning the United States’ support of China’s entry into the World Trade
Organization, or the WTO, foreign investment in PRC Internetservices was to be liberalized to allow for 30% foreign ownership in key
telecommunication services, including PRC Internet ventures, for the first year
after China’s entry into the WTO, 49% in the second year and 50%
thereafter.  China officially entered the WTO on December 11,
2001.  However, the implementation of China’s WTO accession agreements is
still subject to various conditions.





The
interpretation and application of existing PRC laws and regulations, the
directives of the MII and the possible new laws or regulations have created
substantial uncertainties regarding the legality of existing and future foreign
investments in, and the businesses and activities of, PRC Internet companies,
including us.  Accordingly, it is possible that the relevant PRC
authorities could, at any time, assert that any portion or all of our ownership
structure and business violate existing or future PRC laws, regulations or
policies.  It is also possible that the new laws or regulations governing
the PRC Internet sector that have been adopted or may be adopted in the future
will prohibit or restrict foreign investment in, or other aspects of, any of our
proposed businesses and operations.  In addition, these new laws and
regulations may be retroactively applied to us.





10





If we are
found to be in violation of any existing or future PRC laws or regulations, the
relevant PRC authorities would have broad discretion in dealing with such
violation, including, without limitation, the following:





·
            levying
      fines;


·
            confiscating
      our income;


·
            revoking
      our business licenses;


·
            pursuing
      criminal sanctions against our business and personnel;


·
            shutting
      down our servers and/or blocking our
websites;


·
            requiring
      us to restructure our ownership structure or operations;
    and


·
            requiring
      us to discontinue any portion or all of our Internet
    business.






Any of
these actions could have a material adverse effect on our financial condition
and results of operations.





The
online advertising markets in China and Brazil are still developing, and present
risk to our revenues to be generated from our online publishing business using
the contributed assets.





Our
online publishing businesses in China and Brazil are expected to derive
significant revenue from online advertisements.  The online advertising
markets in China and Brazil are still developing, and future growth and
expansion of these markets is uncertain.  If these online advertising
markets do not grow at expected rates, our results of operations and financial
condition will be materially adversely affected.





Our
international operations subject us to other significant risks including
unpredictable governmental regulation in China and Brazil.





Our
international operations expose us to a wide variety of other risks including
increased credit risks, customs duties, import quotas and other trade
restrictions, potentially greater inflationary pressures, and the risk of
failure or material interruption of wireless systems and services.  Changes
may occur in foreign trade and investment laws in the territories and countries
where we will operate.  U.S. laws and regulations relating to investment
and trade in foreign countries could also change to our detriment.  Any of
these factors could materially and adversely affect our revenues and
profits.  We are subject to risk of political instability and trade
sanctions within China.





China has
traditionally been a closed market with strict political controls.  As
China shifts to a market economy, growing economic and social freedoms may
conflict with the more restrictive political and governmental policies.  In
addition, democratic countries throughout the world have, from time to time,
attempted to use economic and other sanctions to achieve political or social
change in other countries.  Each of these factors could result in economic
sanctions, economic instability, the disruption of trading and war within China
and the Asia Pacific Rim, any of which could result in our inability toconduct business operations in China.  Because a
substantial amount of our business is expected to be within China, the
disruption of distribution channels into China would have material and adverse
consequences to our business.





In the
past, the Brazilian government has intervened in the Brazilian economy and
occasionally made drastic changes in economic policy.  The Brazilian
government’s actions to control inflation and affect other policies have
included high interest rates, wage and price controls, currency devaluations,
capital controls and limits on exports, among other actions.  Our business,
financial condition, revenues, results of operations, prospects and the market
price of our securities may be adversely affected by changes in Brazilian
government policies, as well as general economic factors,
including:





·
            currency
      fluctuations;


·
            exchange
      controls and restrictions on remittances abroad, such as those that were
      briefly imposed on such remittances (including dividends) in 1989 and in
      the beginning of 1990;


·
            inflation;


·
            price
      instability;


·
            energy
      policy;


·
            interest
      rate increases;


·
            liquidity
      of domestic capital and lending
markets;


·
            changes
      in tax policy; and


·
            other
      political, domestic, social and economic developments in or affecting
      Brazil.






11






Also, the
President of Brazil has considerable power to determine governmental policies
and actions that relate to the Brazilian economy and, consequently, affect the
operations and financial performance of businesses operating in Brazil.  We
have no control over, and cannot predict what policies or actions the Brazilian
government may take in the future.





Further
risks relating to international operations include, but are not restricted to,
unexpected changes in legal and regulatory requirements, changes in tariffs,
exchange rates and other barriers, political and economic instability, possible
effects of war and acts of terrorism, difficulties in account receivable
collection, difficulties in managing distributors or representatives,
difficulties in staffing and managing international operations, difficulties in
protecting our intellectual property overseas, seasonality of sales and
potentially adverse tax consequences.  Any of these factors could
materially and adversely affect our revenues and profits.





Restrictions
on currency exchange may limit our ability to utilize our revenues
effectively.




Some of
our operating expenses are denominated in Chinese Renminbi.  Currently, we
may purchase foreign exchange for settlement of “current account transactions”
without the approval of the Chinese State Administration for Foreign Exchange,
or SAFE.  We may also retain foreign exchange in our current account
(subject to a ceiling approved by the SAFE) to satisfy foreign exchange
liabilities or to pay dividends.  However, the relevant PRC governmental
authorities may limit or eliminate our ability to purchase and retain foreign
currencies in the future.





Additionally,
some of our revenues and operating expenses are denominated in Brazilian Reais.  Brazilian law
allows the Brazilian government to impose restrictions on the conversion of the
Real into foreign
currencies and on the remittance to foreign investors of proceeds from their
investments in Brazil.  The government may impose such restrictions
whenever there is a serious imbalance in Brazil’s balance of payments or there
are reasons to foresee a serious imbalance.  The Brazilian government last
imposed remittance restrictions for approximately six months in 1989 and early
1990.  The likelihood that the Brazilian government would impose such
restrictions again may depend on the extent of Brazil’s foreign currency
reserves, the availability of foreign currency in the foreign exchange markets
on the date a payment is due, the size of Brazil’s debt service burden relative
to the economy as a whole, Brazil’s policy toward the International Monetary
Fund and other factors.





Since a
significant amount of our revenues will be denominated in Renminbi, existing and
future restrictions on the exchange of Renminbi to other currencies may limit
our ability to use revenue generated in Renminbi to fund our business activities
outside China, if any, or expenditures denominated in foreign currencies. 
Similarly, in the event that a significant amount of our revenues are
denominated in Reais,
any future restrictions on the exchange of Reais for other currencies or
the remittance to foreign investors of proceeds from their investments in Brazil
may limit our ability to use revenue generated in Reais to fund our business
activities outside Brazil, or expenditures denominated in foreign
currencies.





We
are subject to risks of currency fluctuations and exchange
restrictions.





Currency
fluctuations, devaluations and exchange restrictions may adversely affect our
liquidity and results of operations.  In some countries, local currencies
may not be readily converted into Euros or U.S. dollars (or other “hard
currencies”) or may only be converted at government controlled rates, and, in
some countries, the transfer of hard currencies offshore has been restricted
from time to time.  Very limited hedging transactions are available in
China to reduce its exposure to exchange rate fluctuations.  To date, we
have not entered into any hedging transactions in an effort to reduce our
exposure to foreign currency exchange risk.  While we may decide to enter
into hedging transactions in the future, the availability and effectiveness of
these hedges may be limited and we may not be able to successfully hedge our
exposure, if at all.  Our revenues as expressed in our U.S. dollar
financial statements will decline in value if Renminbi or Reais depreciate relative to
the U.S. dollar.  In addition, our currency exchange losses may be
magnified by PRC exchange control regulations that restrict our ability to
convert Renminbi into U.S. dollars or by Brazilian exchange control regulations
that restrict our ability to convert Reais into U.S.
dollars.





12





Regulation
and censorship of information collection and distribution in China may adversely
affect our business.





China has
enacted regulations governing Internet access and the distribution of news and
other information.  Furthermore, the Propaganda Department of the Chinese
Communist Party has been given the responsibility to censor news published in
China to ensure, supervise and control a particular political ideology.  In
addition, the MII has published implementing regulations that subject online
information providers to potential liability for content included on their
portals and the actions of subscribers and others using their systems, including
liability for violation of PRC laws prohibiting the distribution of content
deemed to be socially destabilizing.  Because many PRC laws, regulations
and legal requirements with regard to the Internet are relatively new and
untested, their interpretation and enforcement may involve significant
uncertainty.  In addition, the PRC legal system is a civil law system in
which decided legal cases have limited binding force as legal precedents. 
As a result, in many cases it is difficult to determine the type of content that
may result in liability for a website operator.





Periodically,
the Ministry of Public Security has stopped the distribution over the Internet
of information which it believes to be socially destabilizing.  The
Ministry of Public Security has the authority to cause any local Internet
service provider to block any website maintained outside China at its sole
discretion.  If the PRC government were to take action to limit or
eliminate the distribution of information through our portals or to limit or
regulate current or future applications available to users of our portals, our
business would be adversely affected.





The State
Secrecy Bureau, which is directly responsible for the protection of state
secrets of all PRC government and Chinese Communist Party organizations, is
authorized to block any website it deems to be leaking state secrets or failing
to meet the relevant regulations relating to the protection of state secrets in
the distribution of online information.  Under the applicable regulations,
we may be held liable for any content transmitted on our portal. 
Furthermore, where the transmitted content clearly violates the laws of the PRC,
we will be required to delete it, and where the transmitted content is
considered suspicious, we are required to report such content.  We must
also undergo computer security inspections, and if we fail to implement the
relevant safeguards against security breaches, our operations in the PRC may be
shut down.





Although
the PRC has several laws and regulations relating to the use of the Internet,
addressing personal privacy in use of the Internet and the freedom of
communications, the PRC government does not restrict online service providers in
the collection, transmission and commercial use of personal information or
data.  Personal data is protected from unlawful use by general statutes and
by any contractual arrangement between the user and the service
provider.





Since spring of 2005, the National People’s Congress and the
State Council have begun legislative review of a draft Law for Protection of
Personal Information which provides a wider scope of information protection than
that required to protect the personal privacy of a citizen.  Cellular phone
number, home address, medical files and occupational information will all be
protected under the draft law.  The draft further provides that usage of
such personal information by service providers (excluding the national security
authority, research institutions, and news agency) shall be subject to the prior
authorization of each individual and violation under this law could result in
administrative, civil, and even criminal liabilities.  If regulations are
adopted addressing the collection, transmission and commercial use of personal
information or data, we could be subject to these penalties, certain aspects of
our business plan may no longer be viable and our business would thus be
adversely affected.





Potential
additional Chinese regulation could affect our business in China.





The
Ministry of Information Industry, the Chinese governmental agency which
regulates the Internet in China, promulgated a directive effective
January 31, 2008, providing that online videos can only be broadcast or
streamed by state-owned or controlled companies.  Subsequently, the
Ministry of Information Industry acted to provide exceptions for certain
non-state-owned or controlled companies.  While it is possible that our
Chinese website would not be permitted to display online videos, which could
have a material effect on the content provided on such website, it is not yet
clear what, if any, effect this regulation has upon our business in
China.





13





Political
and economic policies of the PRC government could affect our
business.





A
significant portion of our business, assets and operations are located in China
and a significant portion of our future revenues are expected to be derived from
our operations in China.  Accordingly, our business could be adversely
affected by changes in political, economic or social conditions in China,
adjustments in PRC government policies or changes in laws and
regulations.





The
economy of China differs from the economies of most countries belonging to the
Organization for Economic Cooperation and Development in a number of respects,
including:





·
            structure;


·
            level
      of government involvement;


·
            level
      of development;


·
            level
      of capital reinvestment;


·
            growth
      rate;


·
            control
      of foreign exchange; and


·
            methods
      of allocating resources.





Since
1949, China has been primarily a planned economy subject to a system of
macroeconomic management.  Although the Chinese government still owns a
significant portion of the productive assets in China, economic reform policies
since the late 1970s have emphasized decentralization, autonomous enterprises
and the utilization of market mechanisms.  We cannot predict what effects
the economic reform and macroeconomic measures adopted by the Chinese government
may have on our business or results of operations.





The
PRC legal system embodies uncertainties which could limit the legal protections
available to us.





The PRC
legal system is a civil law system based on written statutes.  Unlike
common law systems, it is a system in which decided legal cases have little
precedential value.  In 1979, the PRC government began to promulgate a
comprehensive system of laws and regulations governing economic matters in
general.  We are subject to laws and regulations applicable to foreign
investment in mainland China.  However, these laws, regulations and legal
requirements are relatively recent, and their interpretation and enforcement
involve uncertainties.  These uncertainties could limit the legal
protections available to us and other foreign investors.  In addition, we
cannot predict the effect of future developments in the PRC legal system,
particularly with regard to the Internet, ourownership
structure and currency exchange, including the promulgation of new laws, changes
to existing laws or the interpretation or enforcement thereof, or the preemption
of local regulations by national laws.





It
may be difficult to enforce any civil judgments against us or our board of
directors or officers, because in the future a significant portion of our assets
could be located outside of the United States.





Although
the combined company is incorporated in the State of Delaware, in the future a
substantial portion of our assets could be located in the PRC.  As a
result, it may be difficult for investors to enforce outside the United States
any actions brought against us in the United States, including actions
predicated upon the civil liability provisions of the federal securities laws of
the United States or of the securities laws of any state of the United
States.  In addition, certain of our directors and officers and all or a
substantial portion of their assets may be located outside the United States
(principally in the PRC).  As a result, it may not be possible for
investors to effect service of process within the United States upon those
directors and officers, or to enforce against them or us judgments obtained in
United States courts, including judgments predicated upon the civil liability
provisions of the federal securities laws of the United States or of the
securities laws of any state of the United States.  There is doubt as to
the enforceability in the PRC, in original actions or in actions for enforcement
of judgments of United States courts, of civil liabilities predicated solely
upon the federal securities laws of the United States or the securities laws of
any state of the United States.





14





If
we are not able to attract and retain key management and consultants, we may not
successfully integrate the contributed assets into our historical business or
achieve our other business objectives.





We will
depend upon our senior management and consultants for our business
success.  Key members of the senior team include Jeff Arnold, a consultant
and our current Chairman of the Board.  Our consulting agreement with
Mr. Arnold, which commenced in 2006, runs through May 31, 2009.  The
loss of the service of any of the key members of our senior management may
significantly delay or prevent the integration of the contributed assets and
other business objectives.  Our ability to attract and retain qualified
personnel, consultants and advisors will be critical to our success.  We
may be unable to attract and retain these individuals, and our failure to do so
would adversely affect our business.





The
concentration of our stock ownership will likely limit your ability to influence
corporate matters.




HowStuffWorks beneficially
owns a significant percentage of our outstanding common stock and entered into a
stockholders agreement.  The stockholders agreement entitles
HowStuffWorks to designate nominees to our board of directors. 
Furthermore, Jeff Arnold, our current Chairman of the Board, is the Chief
Executive Officer and Chairman of HowStuffWorks, and another member of our Board
of Directors is President-Digital Media and Business Development of its parent
company, Discovery.  As a result, HowStuffWorks has the ability to
influence our management and affairs and determine the outcome of matters
submitted to stockholders for approval, including the election and removal of
directors, amendments to the charter, approval of equity-based employee
compensation plans and any merger, consolidation or sale of all or substantially
all of our assets.





The
concentration of our stock ownership, as well as our Amended and Restated
Certificate of Incorporation, Amended and Restated Bylaws, stockholders
agreement and Delaware law contain provisions that may make our acquisition more
difficult without the approval of our board of directors, which could
discourage, delay or prevent a transaction involving our change of
control.





As of
March 30, 2009, HowStuffWorks owned approximately 43% of our outstanding
shares of common stock.  As a result, it will be difficult for our other
stockholders to approve a takeover of us without the cooperation of
HowStuffWorks.





Furthermore,
our Amended and Restated Certificate of Incorporation and Amended and Restated
Bylaws contain certain anti-takeover provisions, including but not limited to
the following provisions:





·
            only
      our board of directors may call special meetings of our
      stockholders;


·
            our
      stockholders may take action only at a meeting of our stockholders and not
      by written consent;


·
            we have authorized undesignated preferred stock, the terms
      of which may be established and shares of which may be issued without
      stockholder approval; and


·
            we
      require advance notice for stockholder proposals of not less than 60 nor
      more than 90 days prior to a meeting at which stockholder proposals
      may be introduced.





In
addition, the stockholders agreement gives HowStuffWorks the right to
designate nominees to our board of directors.





These
anti-takeover defenses could discourage, delay or prevent a transaction
involving a change of control of us.  These provisions could also
discourage proxy contests and make it more difficult for you and other
stockholders to cause us to take other corporate actions you may
desire.





Section 203
of the Delaware General Corporation Law may also delay, defer or prevent a
change in control that our stockholders might consider to be in their best
interest.  We are subject to Section 203 of the Delaware General
Corporation Law which, subject to certain exceptions, prohibits “business
combinations” between a publicly-held Delaware corporation and an “interested
stockholder,” which is generally defined as a stockholder who becomes a
beneficial owner of 15% or more of a Delaware corporation’s voting stock for a
three-year period following the date that such stockholder became an interested
stockholder.  Section 203 could have the effect of delaying, deferring
or preventing a change in control of us that our stockholders might consider to
be in their best interest.





15





Acquisitions,
business combinations and other transactions present integration risk and may
have negative consequences for our business and our
stockholders.




The
process of integrating acquired businesses, like DailyStrength, into our
existing operations may result in unforeseen difficulties and liabilities and
may require a disproportionate amount of resources and management attention.
Difficulties that we may encounter in integrating the operations of acquired
businesses could have a material adverse effect on our results of operations and
financial position. Moreover, we may not realize any of the anticipated benefits
of an acquisition and integration costs may exceed anticipated amounts. We may
enter into joint ventures, strategic alliances or similar arrangements with
third parties.  These transactions may result in changes in the nature
and scope of our operations and changes in our financial condition.
 Financing for these transactions may come from cash on hand, proceeds from
the issuance of additional common stock or proceeds from debt
financing.





The
issuance of additional equity or debt securities could:





·
            cause
      substantial dilution of the percentage ownership of our stockholders at
      the time of the issuance;


·
            cause
      substantial dilution of our earnings per
share;


·
            subject
      us to the risks associated with increased
  leverage;


·
            subject
      us to restrictive covenants that could limit our flexibility in conducting
      future business
activities; and


·
            adversely
      affect the prevailing market price for our outstanding
      securities.




We
may not be able to raise additional funds when needed for our business or to
exploit opportunities.





We may
need to raise additional funds to support expansion, develop new or enhanced
applications and services, respond to competitive pressures, acquire
complementary businesses or technologies or take advantage of unanticipated
opportunities.  If required, we may attempt to raise such additional funds
through public or private debt or equity financing, strategic relationships or
other arrangements.  There can be no assurance that such financing will be
available on acceptable terms, if at all, or that such financing will not be
dilutive to our stockholders.





We
face competition from other social media companies.





We face
competition for our DailyStrength website from other social media companies,
including start-ups as well as developed companies that are enhancing or
developing social media technologies.  Also, we may compete with companies
that provide health-focused websites because these companies, like us, are
trying to sell advertising for health content on the Internet.  Among the
social media and health-focused website companies, there are a number of large,
established competitors with significantly greater employees and cash resources
than we have.  We expect that some of these companies will increasingly use
their resources to compete against us in a variety of ways, including by making
acquisitions, investing more aggressively in research and development, and
competing more aggressively for advertisers and users.  If our competitors
are successful in providing similar or better social media destinations for
health, we could experience a decline in user traffic.  Any such decline
could negatively affect our revenues and growth
opportunities.





We
may not be able to successfully grow and monetize our social media
business.





Formidable
growth of users and revenue is required for our DailyStrength social media
business to generate sufficient revenue to cover operating costs.  If we
fail to maintain and enhance the “DailyStrength” brand, if we are unable to
attract sufficient users for our DailyStrength website, or if we incur excessive
expenses in these efforts, our business, operating results and financial
condition will be materially and adversely affected.





We
generate our revenue almost entirely from advertising, and the reduction in
spending by or loss of advertisers could seriously harm our
business.





We
generated the majority of our revenues in 2008 from our advertisers.  Our
advertisers can generally terminate their contracts with us at any time.
 Advertisers will not continue to do business with us if their investment
in advertising with us does not generate sales leads, and ultimately customers,
or if we do not deliver their advertisements in an appropriate and effective
manner.  If we are unable to be competitive and provide value to our
advertisers, they may stop placing ads with us, which would negatively harm our
revenues and business.  In addition, expenditures by advertisers tend to be
cyclical, reflecting overall economic conditions and budgeting and buying
patterns.  Any decreases in or delays in advertising spending due to
general economic conditions could reduce our revenues or negatively impact our
ability to grow our revenues.






16






ITEM 1B.  UNRESOLVED STAFF
COMMENTS





None.








ITEM 2.  PROPERTIES





Our
corporate headquarters are located at One Capital City Plaza, 3350 Peachtree
Road, Suite 1600, Atlanta, Georgia, which consists of approximately 6,000
square feet of leased space.  At December 31, 2008, we also leased
approximately 5,700 square feet in Beijing, China, approximately 700 square feet
in Sao Paulo, Brazil, as well as a nominal amount in California.  We
do not own any real property. We believe that our existing facilities are
adequate to meet our needs in the near term.




As of
December 31, 2008, our current total remaining lease obligations are U.S.
$465,439.







ITEM 3.  LEGAL
PROCEEDINGS





We are
not subject to any material pending legal proceeding, nor are we aware of any
material threatened claims against us.







ITEM 4.  SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS




No
matters were submitted to a vote of our security holders during the fourth
quarter of the year ended December 31, 2008.






17






PART II




ITEM
5.  MARKET FOR THE REGISTRANTS COMMON EQUITY,RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES




Our
common stock has been traded on the NASDAQ Global Market under the symbol “HSWI”
since October 2, 2007, and INTAC traded on the NASDAQ Capital Market under
the symbol “INTN” prior to that time.  The following table sets forth the
high and low sales prices of our and INTAC’s common stock, as reported per the
appropriate market.





High
            
            
            LowYear
      ended December 31, 2007First
      Quarter
            
            $
            8.92
            
            
            $
            5.65Second
      Quarter
            
            
            8.00
            
            
            
            6.50Third
      Quarter
            
            
            11.48
            
            
            
            5.00Fourth
      Quarter
            
            
            11.25
            
            
            
            4.18Year
      ended December 31, 2008First
      Quarter
            
            $
            6.23
            
            
            $
            3.20Second
      Quarter
            
            
            5.30
            
            
            
            2.61Third
      Quarter
            
            
            3.90
            
            
            
            2.05Fourth
      Quarter
            
            
            2.74
            
            
            
            0.15





Holders
of Record





As of
March 30, 2009, the last sale price of our common stock on NASDAQ Global
Market was $0.15 per share.  As of March 30, 2009, there were
approximately 25 stockholders of record.





Dividend
Policy





We have
neither paid nor declared dividends on our common stock since our inception and
do not plan to pay dividends in the foreseeable future.  Any earnings that
we may realize will be returned to finance our growth.





18




ITEM
6.  SELECTED FINANCIAL DATA





The
following table sets forth consolidated financial data with respect to us as of
and for the years ended December 31, 2008 and 2007.  The selected
consolidated financial data below should be read in conjunction with the audited
consolidated financial statements and related notes included elsewhere in this
Annual Report on Form 10-K and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” included in Item 7.  This is
particularly true because our historical financial data is difficult to compare
from period to period because of the mergers and business dispositions we have
recently consummated, as described therein.





The
following data, insofar as it relates to the years ended December 31, 2008
and 2007, has been derived from the audited consolidated financial statements,
including the consolidated balance sheets at December 31, 2008, and 2007,
and the related consolidated statements of operations, cash flows and
stockholders’ equity and comprehensive income for the years ended
December 31, 2008 and 2007, and notes thereto appearing elsewhere in this
report.





As
discussed in Notes 1, 2, and 3 to the consolidated financial statements included
elsewhere in this report, HSWI merged with INTAC International Inc. on
October 2, 2007, and the INTAC Legacy Businesses were subsequently disposed
on February 29, 2008.  Following the disposition, the sole asset we
retained from INTAC is the indefinite lived Internet Licenses intangible asset
and no revenue was realized from this asset in 2008 or 2007.





Consolidated Statement of
Operations Data:





Years
      Ended December 31,2008
            
            
            2007Operating
      revenue
            
            $
            457,006
            
            
            $
            147,535Cost
      of services
            
            
            987,266
            
            
            
            1,242,252Gross
      loss
            
            
            (530,260
            )
            
            
            (1,094,717
            )Operating
      expenses
            
            
            23,751,913
            
            
            
            13,768,471Loss
      from operations
            
            
            (24,282,173
            )
            
            
            (14,863,188
            )Other
      income
            
            
            515,238
            
            
            
            11,842Deferred
      income tax benefit
            
            
            1,962,500
            
            
            
            —Loss
      from continuing operations
            
            
            (21,804,435
            )
            
            
            (14,851,346
            )Loss
      from discontinued operations
            
            
            (133,526
            )
            
            
            (24,687,959
            )Net
      loss
            
            $
            (21,937,961
            )
            
            $
            (39,539,305
            )Per share
      data:Basic
      and diluted loss per share from continuing operations
            
            $
            (0.41
            )
            
            $
            (1.29
            )Basic
      and diluted loss per share from discontinued operations
            
            
            —
            
            
            
            (2.13
            )Basic
      and diluted loss per share
            
            $
            (0.41
            )
            
            $
            (3.42
            )Weighted
      average shares outstanding – basic and diluted
            
            
            52,941,525
            
            
            
            11,544,818




Consolidated
Balance Sheet Data:





December
      31,2008
            
            
            2007Cash
      and cash equivalents
            
            $
            18,020,159
            
            
            $
            3,476,673Goodwill
      and other intangibles
            
            
            5,799,066
            
            
            
            10,021,476Total
      assets
            
            
            26,309,653
            
            
            
            34,745,160Total
      liabilities
            
            
            1,833,231
            
            
            
            9,834,723Stockholders’
      equity
            
            
            24,476,422
            
            
            
            24,910,437




19




ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONAND RESULTS OF
OPERATIONS





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





Business
Overview and Recent Events





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





Business
Trends





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





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





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





The
INTAC Merger





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





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







20






In
conjunction with the INTAC Merger:





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


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


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





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





Business
Development





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





Our
Operations





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





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





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





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





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





21





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





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





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





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





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





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





22





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





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





HSW
INTERNATIONAL, INC. and SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


(expressed
in U.S. Dollars)





Years
      Ended December 31,2008
            
            
            2007Operating
      revenueDigital online
      publishing
            
            $
            234,144
            
            
            $
            147,535Sales to
affiliates
            
            
            222,862
            
            
            
            —Total revenue
            
            
            457,006
            
            
            
            147,535Cost
      of services
            
            
            987,266
            
            
            
            1,242,252Gross
      margin
            
            
            (530,260
            )
            
            
            (1,094,717
            )Operating
      expensesSelling, general and
      administrative (including stock-basedcompensation expense of
      $4,787,756 and $7,203,738in 2008 and 2007,
      respectively)
            
            
            15,678,365
            
            
            
            13,710,723Licenses to operate in China
      impairment
            
            
            7,850,000
            
            
            
            —Depreciation and
      amortization
            
            
            223,548
            
            
            
            57,748Total operating
      expenses
            
            
            23,751,913
            
            
            
            13,768,471Loss
      from continuing operations before other income(expense) and income
      taxes
            
            
            (24,282,173
            )
            
            
            (14,863,188
            )Other
      income (expense)Interest income
            
            
            515,238
            
            
            
            51,754Interest expense
            
            
            —
            
            
            
            (39,912
            )Total other income
      (expense)
            
            
            515,238
            
            
            
            11,842Loss
      from continuing operations before income taxes
            
            
            (23,766,935
            )
            
            
            (14,851,346
            )Deferred
      income tax benefit
            
            
            1,962,500
            
            
            
            —Loss
      from continuing operations
            
            
            (21,804,435
            )
            
            
            (14,851,346
            )Loss
      from discontinued operations, net of income taxes
            
            
            (133,526
            )
            
            
            (24,687,959
            )Net
      loss
            
            $
            (21,937,961
            )
            
            $
            (39,539,305
            )Basic
      and diluted weighted average shares outstanding
            
            
            52,941,525
            
            
            
            11,544,818Net
      loss per basic and diluted shares
            
            $
            (0.41
            )
            
            $
            (3.42
            )





23





Revenues





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





Cost
of Services





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





Operations
– Selling, General and Administrative Expenses





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





Impairment
Loss





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





Other
Income (Expense)





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





Deferred
Income Tax Benefit





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





24





Discontinued
Operations – INTAC Legacy Businesses





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





Years
      Ended December 31,2008
            
            
            2007Revenues
            
            $
            38,849
            
            
            $
            198,627Loss
      from discontinued operations (before income taxes)
            
            
            (133,526
            )
            
            
            (24,687,959
            )Loss
      from discontinued operations
            
            $
            (133,526
            )
            
            $
            (24,687,959
            )





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





Liquidity
and Capital Resources





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





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





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





Cash flows from operations





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





Cash
used in investing activities





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





25





Cash
flows from financing activities





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





Critical
Accounting Policies





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





Revenue
Recognition





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





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





Stock-Based
Compensation





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





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





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





Long-Lived
Assets Including Goodwill and Other Intangible Assets





We review
property and equipment and amortizable intangible assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable.  Recoverability of property and equipment is
measured by a comparison of the carrying amounts to future net cash flows the
assets are expected to generate.  The carrying value of the intangible
asset is compared to the fair value in order to determine if an impairment
exists.  Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.





26





In
accordance with SFAS 142, Goodwill and Other Intangible
Assets, we test goodwill and indefinite lived intangible assets for
impairment annually at December 31, or more frequently if events or changes in
circumstances indicate that this asset may be impaired.  SFAS 142 also
requires that intangible assets with definite lives be amortized over their
estimated useful lives and reviewed for impairment whenever events or
circumstances indicate an asset’s carrying value may not be recoverable in
accordance with SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets.  We amortize our acquired
intangible assets with definite lives over three to eleven years.  We
recorded an impairment charge of $5.9 million, net of tax, of the licenses to
operate in China intangible asset due to the results of the December 31, 2008
impairment analysis.





Recent
Accounting Pronouncements





In
September 2006, the FASB issued SFAS 157, Fair Value
Measurements.  SFAS 157 defines fair value, establishes a
framework for measuring fair value in accordance with generally accepted
accounting principles in the United States (“GAAP”), and expands disclosures
about fair value measurements.  SFAS 157 emphasizes that fair value is
a market-based measurement, not an entity-specific
measurement.  Therefore, a fair value measurement would be determined
based on the assumptions that market participants would use in pricing the asset
or liability.  SFAS 157 is effective for fiscal years beginning after
November 15, 2007, except for non-financing assets and
liabilities.  The adoption of SFAS 157 did not have a material impact
on our consolidated financial statements as the Company had no financial assets
other than cash and accounts receivable.





In
February 2008, the FASB issued FASB Staff Position (“FSP”) 157-2, Partial Deferral of the Effective
Date of SFAS 157, which delayed the effective date of SFAS 157 for all
nonrecurring fair value measurements of nonfinancial assets and nonfinancial
liabilities until January 1, 2009.  We are currently evaluating the
impact FSP 157-2 will have on our consolidated financial
statements.





An
associated pronouncement, SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities, was also effective at the beginning of
the Company’s 2008 fiscal year.  The Company has elected not to apply
the fair value option to measure any of the financial assets and liabilities on
its balance sheet not already valued at fair value under other accounting
pronouncements.  These other financial assets and liabilities are
primarily accounts receivable and accounts payable, which are reported at
historical value.  The fair value of these financial assets and
liabilities approximate their fair value because of their short
duration.





In
December 2007, the FASB issued SFAS 141(R), Business
Combinations.  SFAS 141(R) expands the definition of a business
combination and requires the fair value of the purchase price of an acquisition,
including the issuance of equity securities, to be determined on the acquisition
date.  SFAS 141(R) also requires that all assets, liabilities,
contingent considerations, and contingencies of an acquired business be recorded
at fair value at the acquisition date.  In addition, SFAS 141(R)
requires that acquisition costs generally be expensed as incurred, restructuring
costs generally be expensed in periods subsequent to the acquisition date, and
changes in accounting for deferred tax asset valuation allowances and acquired
income tax uncertainties after the measurement period impact income tax
expense.  SFAS 141(R) is effective for fiscal years beginning after
December 15, 2008 with early adoption prohibited.  We are
currently evaluating the impact SFAS 141(R) will have on our consolidated
financial statements.





In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements, an Amendment of ARB
51.  SFAS 160 changes the accounting and reporting for minority
interests such that minority interests will be recharacterized as noncontrolling
interests and will be required to be reported as a component of equity, and
requires that purchases or sales of equity interests that do not result in a
change in control be accounted for as equity transactions and, upon a loss of
control, requires the interest sold, as well as any interest retained, to be
recorded at fair value with any gain or loss recognized in
earnings.  SFAS 160 is effective for fiscal years beginning on or
after December 15, 2008 with early adoption prohibited.  We do
not expect the implementation of SFAS 160 will have a material impact on our
consolidated financial statements.





Off-Balance
Sheet Arrangements





None.




27




ITEM 7A.  QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK





The foreign currency financial statements of our
international operations are translated into U.S. dollars at current exchange
rates, except revenue and expenses, which are translated at average exchange
rates during each reporting period.  Net exchange gains or losses resulting
from the translation of assets and liabilities are accumulated in a separate
section of stockholders’ equity titled “accumulated other comprehensive income
(loss)”.  Generally, our foreign expenses are denominated in the same
currency as the associated foreign revenue and at this stage of development the
exposure to rate changes is minimal.





Financial
instruments that potentially subject us to a concentration of credit risk
consist principally of cash and accounts receivables. At December 31, 2008, 99%
of our cash was denominated in U.S. dollars.  The remaining 1% was
denominated in Brazilian Reais, Chinese Renminbi or Hong Kong
Dollars.  All our cash is placed with financial institutions we
believe are of high credit quality.  Our cash is maintained in bank
deposit accounts, which, at times, may exceed federally insured
limits.  We have not experienced any losses in such accounts and do
not believe our cash is exposed to any significant credit risk.





We do not
use financial instruments to hedge our foreign exchange exposure because the
effects of the foreign exchange rate fluctuations are not currently
significant.  We do not use financial instruments for trading
purposes.  The net assets of our foreign operations at December 31,
2008, were approximately $0.5 million.





We have
not entered into long-term agreements or borrowing arrangements with third
parties under which any amounts were outstanding during 2008.  Therefore,
we do not believe we have any material exposure to market risk changes in
interest rates.





We do not
use any derivative financial instruments to mitigate any of our currency
risks.  We do not currently have any credit facilities and therefore
are not subject to interest rate risk.  Due to the nature of our
short-term investments and our lack of debt, we have concluded that we face no
material market risk exposure.






28




ITEM 8.  FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA











INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS





CONSOLIDATED FINANCIAL
STATEMENTS





Report
      of Independent Registered Public Accounting Firm
            30Consolidated
      Balance Sheets
            31Consolidated
      Statements of Operations
            32Consolidated
      Statements of Stockholders’ Equity (Deficit) and Comprehensive
      Income
            33Consolidated
      Statements of Cash Flows
            34Notes
      to Consolidated Financial Statements
            35





For
supplemental quarterly financial information, see Note 13, Quarterly Results of
Operations (unaudited), of the Notes to Consolidated Financial
Statements.





29






REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM





Board of
Directors and Shareholders


HSW
International, Inc. and subsidiaries:





We have
audited the accompanying consolidated balance sheets of HSW
International, Inc. (a Delaware corporation) and subsidiaries (“the
Company”) as of December 31, 2008 and 2007, and the related consolidated
statements of operations, stockholders’ equity and comprehensive income, and
cash flows for the years then ended.  Our audits of the basic
financial statements included the consolidated financial statement schedule
listed in the table of contents appearing under Item 15 Schedule
II.  These financial statements and financial statement schedule are
the responsibility of the Company’s management.  Our responsibility is
to express an opinion on these financial statements and financial statement
schedule based on our audits.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company is not required to have, nor were we engaged to perform an audit of its
internal control over financial reporting.  Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting.  Accordingly, we express no
such opinion.  An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of HSW International, Inc.
and subsidiaries as of December 31, 2008 and 2007, and the results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of
America.  Also in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.








/s/ GRANT
THORNTON LLP








Atlanta,
Georgia


March 25,
2009






30





HSW INTERNATIONAL, INC. and SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(expressed
in U.S. Dollars)







December
      31,2008
            
            
            2007AssetsCurrent
      assetsCash and cash
      equivalents
            
            $
            18,020,159
            
            
            $
            3,476,673Trade accounts receivable (net of
      allowance for doubtful accountsof $15,343 and $0 at December 31,
      2008 and 2007, respectively)
            
            
            103,020
            
            
            
            23,212Prepaid expenses and other current
      assets
            
            
            1,660,097
            
            
            
            942,588Assets held for
    sale
            
            
            —
            
            
            
            19,988,029Total current
    assets
            
            
            19,783,276
            
            
            
            24,430,502Property
      and equipment, net
            
            
            727,311
            
            
            
            293,182Licenses
      to operate in China
            
            
            2,150,000
            
            
            
            10,000,000Goodwill
            
            
            1,972,944
            
            
            
            —Intangibles,
      net
            
            
            1,676,122
            
            
            
            21,476Total assets
            
            $
            26,309,653
            
            
            $
            34,745,160Liabilities and Stockholders’
      EquityCurrent
      liabilitiesAccounts payable
            
            $
            554,673
            
            
            $
            537,418Accrued expenses and other current
      liabilities
            
            
            322,094
            
            
            
            561,247Advances from shareholder and
      affiliate
            
            
            83,044
            
            
            
            72,927Liabilities held for
      sale
            
            
            —
            
            
            
            6,163,131Total current
      liabilities
            
            
            959,811
            
            
            
            7,334,723Deferred
      tax liability
            
            
            873,420
            
            
            
            2,500,000Commitments
      and contingenciesStockholders’
      equityPreferred stock, $.001 par value,
      10,000,000 shares authorized, none issued
            
            
            —
            
            
            
            —Common stock, $.001 par value,
      200,000,000 shares authorized, 53,638,784 issued andoutstanding at December 31, 2008,
      and 49,306,107 issued and 46,306,107 outstandingat December 31,
    2007
            
            
            53,639
            
            
            
            49,306Additional
      paid-in-capital
            
            
            98,606,934
            
            
            
            85,980,746Accumulated other comprehensive
      income (loss)
            
            
            (1,126
            )
            
            
            112,291Retained deficit
            
            
            (74,183,025
            )
            
            
            (52,245,064
            )Less: cost of treasury stock,
      3,000,000 shares in 2007
            
            
            —
            
            
            
            (8,986,842
            )Total stockholders’
      equity
            
            
            24,476,422
            
            
            
            24,910,437Total liabilities and
      stockholders’ equity
            
            $
            26,309,653
            
            
            $
            34,745,160





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





31





HSW INTERNATIONAL, INC. and
SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


(expressed
in U.S. Dollars)





Years
      Ended December 31,2008
            
            
            2007Operating
      revenueDigital online
      publishing
            
            $
            234,144
            
            
            $
            147,535Sales to
affiliates
            
            
            222,862
            
            
            
            —Total revenue
            
            
            457,006
            
            
            
            147,535Cost
      of services
            
            
            987,266
            
            
            
            1,242,252Gross
      margin
            
            
            (530,260
            )
            
            
            (1,094,717
            )Operating
      expensesSelling, general and
      administrative (including stock-basedcompensation expense of
      $4,787,756 and $7,203,738in 2008 and 2007,
      respectively)
            
            
            15,678,365
            
            
            
            13,710,723Impairment loss
            
            
            7,850,000
            
            
            
            —Depreciation and
      amortization
            
            
            223,548
            
            
            
            57,748Total operating
      expenses
            
            
            23,751,913
            
            
            
            13,768,471Loss
      from continuing operations before other income(expense) and income
      taxes
            
            
            (24,282,173
            )
            
            
            (14,863,188
            )Other
      income (expense)Interest income
            
            
            515,238
            
            
            
            51,754Interest expense
            
            
            —
            
            
            
            (39,912
            )Total other income
      (expense)
            
            
            515,238
            
            
            
            11,842Loss
      from continuing operations before income taxes
            
            
            (23,766,935
            )
            
            
            (14,851,346
            )Deferred
      income tax benefit
            
            
            1,962,500
            
            
            
            —Loss
      from continuing operations
            
            
            (21,804,435
            )
            
            
            (14,851,346
            )Loss
      from discontinued operations, net of income taxes
            
            
            (133,526
            )
            
            
            (24,687,959
            )Net
      loss
            
            $
            (21,937,961
            )
            
            $
            (39,539,305
            )Basic
      and diluted loss per shareLoss from continuing
      operations
            
            $
            (0.41
            )
            
            $
            (1.29
            )Loss from discontinued
      operations
            
            
            —
            
            
            
            (2.13
            )Net loss per share
            
            $
            (0.41
            )
            
            $
            (3.42
            )Basic
      and diluted weighted average shares outstanding
            
            
            52,941,525
            
            
            
            11,544,818





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





32





HSW
INTERNATIONAL, INC. and SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) AND COMPREHENSIVE
INCOME


(expressed
in U.S. Dollars)





Accumulated
            
            
            
            
            
            TotalAdditional
            
            
            
            
            
            
            
            
            Other
            
            
            
            
            
            Stockholders’Common
      Stock
            
            
            Paid-in
            
            
            Treasury
            
            
            Comprehensive
            
            
            Accumulated
            
            
            EquityShares
            
            
            Amount
            
            
            Capital
            
            
            Shares
            
            
            Stock
            
            
            Income
      (Loss)
            
            
            Deficit
            
            
            (Deficit)Balance
      at December 31, 2006
            
            
            10
            
            
            $
            —
            
            
            $
            9,810,987
            
            
            
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            (12,705,759
            )
            
            $
            (2,894,772
            )Comprehensive
      loss:Net loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (39,539,305
            )
            
            
            (39,539,305
            )Foreign currency
      translation
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            112,291
            
            
            
            —
            
            
            
            112,291Total comprehensive
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (39,427,014
            )Issuance of shares
      toHowStuffWorks in
      exchangefor digital publishing
      rights
            
            
            22,940,717
            
            
            
            22,941
            
            
            
            (22,941
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Issuance of shares due
      tomerger with
INTAC
            
            
            22,940,727
            
            
            
            22,941
            
            
            
            38,965,425
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            38,988,366Issuance of shares
      toinvestors, net
            
            
            3,424,653
            
            
            
            3,424
            
            
            
            21,036,695
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            21,040,119Stock-based
      compensationexpense
            
            
            —
            
            
            
            —
            
            
            
            7,203,738
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            7,203,738Treasury stock
            
            
            —
            
            
            
            —
            
            
            
            8,986,842
            
            
            
            (3,000,000
            )
            
            
            (8,986,842
            )
            
            
            —
            
            
            
            —
            
            
            
            —Balance
      at December 31, 2007
            
            
            49,306,107
            
            
            
            49,306
            
            
            
            85,980,746
            
            
            
            (3,000,000
            )
            
            
            (8,986,842
            )
            
            
            112,291
            
            
            
            (52,245,064
            )
            
            
            24,910,437Comprehensive
      loss:Net loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (21,937,961
            )
            
            
            (21,937,961
            )Foreign currency
      translation
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (113,417
            )
            
            
            —
            
            
            
            (113,417
            )Total comprehensive
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (22,051,378
            )Shares received from sale
      ofINTAC
      Legacy Businesses
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (5,000,000
            )
            
            
            (18,400,000
            )
            
            
            —
            
            
            
            —
            
            
            
            (18,400,000
            )Issuance
      of shares toinvestors, net
            
            
            4,268,812
            
            
            
            4,269
            
            
            
            7,838,496
            
            
            
            8,000,000
            
            
            
            27,386,842
            
            
            
            —
            
            
            
            —
            
            
            
            35,229,607Restricted stock
      grants
            
            
            63,865
            
            
            
            64
            
            
            
            (64
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Stock-based
      compensationexpense
            
            
            —
            
            
            
            —
            
            
            
            4,787,756
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            4,787,756Balance
      at December 31, 2008
            
            
            53,638,784
            
            
            $
            53,639
            
            
            $
            98,606,934
            
            
            
            —
            
            
            $
            —
            
            
            $
            (1,126
            )
            
            $
            (74,183,025
            )
            
            $
            24,476,422





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





33





HSW INTERNATIONAL, INC. and
SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(expressed
in U.S. Dollars)





Years
      Ended December 31,2008
            
            
            2007Cash
      flows from continuing operating activities:Net
      loss from continuing operations
            
            $
            (21,804,435
            )
            
            $
            (14,851,346
            )Adjustments
      to reconcile net loss from continuing operations to net cash used
      incontinuing operating
      activities:Impairment loss
            
            
            7,850,000
            
            
            
            —Stock-based
      compensation
            
            
            4,787,756
            
            
            
            7,203,738Deferred income
    taxes
            
            
            (1,962,500
            )
            
            
            —Depreciation and
      amortization
            
            
            223,548
            
            
            
            57,748Provision for doubtful
      accounts
            
            
            15,343
            
            
            
            —Changes in operating assets and
      liabilities from continuing operations:Accounts
    receivable
            
            
            (102,430
            )
            
            
            (23,212
            )Prepaid expenses and other
      current assets
            
            
            (822,302
            )
            
            
            (956,169
            )Accounts payable, accrued
      expenses, and other liabilities
            
            
            37,744
            
            
            
            1,119,532Net
      cash used in continuing operating activities
            
            
            (11,777,276
            )
            
            
            (7,449,709
            )Cash
      flows from discontinued operating activities:Net
      loss from discontinued operations
            
            
            (133,526
            )
            
            
            (24,687,959
            )Adjustments
      to reconcile net loss from discontinued operations to net cash used
      indiscontinued operating
      activities:Goodwill write off related to
      disposition
            
            
            —
            
            
            
            22,518,382Provision for doubtful
      accounts
            
            
            —
            
            
            
            1,210,631Depreciation and
      amortization
            
            
            170,475
            
            
            
            280,103Gain on sale of
      businesses
            
            
            (343,990
            )
            
            
            —Changes in operating assets and
      liabilities from discontinued operations:Accounts
    receivable
            
            
            31,030
            
            
            
            374,694Prepaid expenses and other
      current assets
            
            
            (56,419
            )
            
            
            371,712Accounts payable, accrued
      expenses, and other liabilities
            
            
            (189,000
            )
            
            
            (5,263,987
            )Payable to
    affiliates
            
            
            —
            
            
            
            86,611Net
      cash used in discontinued operating activities
            
            
            (521,430
            )
            
            
            (5,109,813
            )Net
      cash used in operating activities
            
            
            (12,298,706
            )
            
            
            (12,559,522
            )Cash
      flows from continuing investing activities:Purchases of property and
      equipment
            
            
            (644,546
            )
            
            
            (237,103
            )Sale of INTAC Legacy
      Businesses
            
            
            (4,500,000
            )
            
            
            —Daily Strength, Inc. acquisition,
      net of cash received of $76,880
            
            
            (3,215,074
            )
            
            
            —INTAC merger related costs,
      net
            
            
            (107,027
            )
            
            
            (339,892
            )Cash
      used in continuing investing activities
            
            
            (8,466,647
            )
            
            
            (576,995
            )Cash
      flows from discontinued investing activities:Purchases of property and
      equipment
            
            
            —
            
            
            
            (25,002
            )Cash
      used in discontinued investing activities
            
            
            —
            
            
            
            (25,002
            )Net
      cash used in investing activities
            
            
            (8,466,647
            )
            
            
            (601,997
            )Cash
      flows from financing activities:Proceeds from issuance of common
      stock, net
            
            
            35,229,607
            
            
            
            21,040,119Proceeds of advance from
      shareholder
            
            
            —
            
            
            
            4,460,529Repayment of advance from
      shareholder
            
            
            —
            
            
            
            (8,716,013
            )Repayment of affiliated party
      loan
            
            
            —
            
            
            
            (280,320
            )Cash
      provided by financing activities
            
            
            35,229,607
            
            
            
            16,504,315Net
      change in cash and cash equivalents
            
            
            14,464,254
            
            
            
            3,342,796Impact
      of currency translation on cash
            
            
            (83,926
            )
            
            
            63,773Cash
      and cash equivalents at beginning of period, including
      $163,158reclassified to assets held for
      sale
            
            
            3,639,831
            
            
            
            233,262Cash
      and cash equivalents at end of period
            
            $
            18,020,159
            
            
            $
            3,639,831





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





34





HSW
INTERNATIONAL, INC. and SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED)


(continued)


(expressed
in U.S. Dollars)





Years
      Ended December 31,2008
            
            
            2007Supplemental
      disclosure of cash flow informationCash paid for
taxes
            
            $
            —
            
            
            $
            —Cash paid for
    interest
            
            
            —
            
            
            
            56,208Non-cash
      business acquisition activitiesIssuance of equity including
      $100,000 fair value of options assumed
            
            $
            —
            
            
            $
            38,988,366Deferred tax
      liabilities
            
            
            —
            
            
            
            4,055,000Net liabilities assumed, excluding
      cash
            
            
            —
            
            
            
            3,155,656Other
      non-cash financing and investing activitiesReceipt of shares for sale of
      INTAC Legacy Businesses
            
            $
            18,400,000
            
            
            $
            —Receipt of shares for sale of
      INTAC distribution companies
            
            
            —
            
            
            
            8,986,842Issuance of shares for digital
      publishing rights
            
            
            —
            
            
            
            22,941





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





35





HSW INTERNATIONAL, INC.
and SUBSIDIARIES


Notes
to Consolidated Financial Statements


(expressed
in U.S. Dollars)





1.  DESCRIPTION
OF ORGANIZATION AND BUSINESS OPERATIONS





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





In June
2008, we entered China’s online publishing market utilizing a combination of the
contributed assets from HowStuffWorks with the benefit of INTAC’s relationships
and knowledge of the Chinese markets in obtaining our Internet
licenses.  We currently maintain offices in China, Brazil, Los
Angeles, California and Atlanta, Georgia, our corporate
headquarters.





Prior to
the INTAC Merger and related financing transactions, our sole shareholder was
HowStuffWorks, a privately-held online publishing company founded in 1999 that
provides objective and useful information for people to learn about the world
around them and make informed decisions.  On December 17, 2007,
HowStuffWorks, our largest shareholder, merged with Discovery Communications,
Inc. (“Discovery”) becoming a wholly-owned subsidiary of
Discovery.  As of December 31, 2008, Discovery, through its
wholly owned subsidiary HowStuffWorks, owned approximately 42.8% of our
outstanding common stock.  HowStuffWorks remains based in Atlanta,
Georgia.





On
October 2, 2007, the date of our merger with INTAC, the following
occurred:





·
            HowStuffWorks
      contributed to us in exchange for shares of our common stock, exclusive
      digital publishing rights to HowStuffWorks’ content for the countries of
      China and Brazil which we translate and localize into the predominant
      languages of China and Brazil.


·
            Our
      stock became publicly traded on the NASDAQ Global Market under the symbol
      “HSWI” in connection with our merger with INTAC, with INTAC becoming our
      wholly owned subsidiary.  We were determined to be the
      accounting acquirer under the applicable guidance.  At the date
      of the INTAC Merger, holders of INTAC common stock received one share of
      our common stock in exchange for each of their shares of INTAC common
      stock. Prior to the INTAC Merger, INTAC’s common stock was traded on the
      NASDAQ Capital Market under the symbol
“INTN”.


·
            Certain
      investors purchased or agreed to purchase shares of our common stock
      (equity financings) having an aggregate value of approximately $39.4
      million of which $22.5 million and $16.9 million (both before expenses)
      were received in October 2007, and January and
      February 2008, respectively (see Notes 3 and
  10).


·
            In
      connection with and as a condition of the INTAC Merger, INTAC sold its
      wireless handset and prepaid calling cards distribution business
      (“distribution companies”), to an entity controlled by Wei Zhou, INTAC’s
      Chief Executive Officer and President, in exchange for 3.0 million shares
      of our common stock held by Mr. Zhou.  The 3.0 million shares of
      our common stock were recorded as treasury shares valued at cost as
      determined by a third party
valuation.





On February 29, 2008, based on an increased focus on our
Internet based publishing segment, we disposed of all INTAC’s remaining legacy
businesses which included services related to wireless telephone training and
the development and sale of educational software in China (“INTAC Legacy
Businesses”).  Following the disposition the sole asset we retain from the
INTAC acquisition is the Internet Licenses intangible we are using to enter the
Chinese market.  The operations from the INTAC Legacy Businesses will be
reflected as discontinued operations in our consolidated financial statements in
subsequent periods.  All intercompany balances and transactions have been
eliminated.





36





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





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





In
November 2008, we acquired Daily Strength, Inc. (“DS”), publisher of the health
social networking website DailyStrength
(http://www.dailystrength.org).  DailyStrength was founded in 2006 by
internet veterans with more than 20 years of experience conceiving, building,
and running communities on the web, including Yahoo Mail, Yahoo Message Boards,
Yahoo Groups, GeoCities, Facebook and more. DailyStrength hosts more than 500
communities focused on issues such as weight loss, divorce, parenting and
illnesses. Users of the site both read and interact with high-quality, accurate
reference information. The site features health journals, discussion forums,
virtual hugs, member-created groups, and treatment reviews plus unique content
provided on a daily basis by physicians and other health
professionals.








2.  ACQUISITION
OF INTAC INTERNATIONAL, INC.





On
October 2, 2007, the INTAC Merger became effective with INTAC becoming our
wholly owned subsidiary.  The results of the INTAC Legacy Businesses have
been included in discontinued operations in our consolidated financial
statements since that date until their disposition on February 29, 2008 (see
Note 3).  At the date of the INTAC Merger, holders of INTAC common
stock received one share of our common stock in exchange for each of their
shares of INTAC common stock.





INTAC was
acquired to assist in our primary business focus, the development of our digital
content database exclusively licensed from HowStuffWorks by
(i) accelerating our obtaining Internet licenses in China for launching our
Internet platform, (ii) obtaining INTAC’s knowledge of the Chinese markets,
relationships, and core competencies and (iii) providing additional cash
flow from its established businesses.





In the
INTAC acquisition we also obtained two legacy businesses - services related to
wireless telephone training and the development and sale of educational software
delivered to customers in China. However, due to (i) an increased focus of
our management and resources on our primary Internet publishing business,
(ii) a change of control in our majority ownership leading to further
refinement in our strategies, and (iii) an under performance of the INTAC
Legacy Businesses subsequent to the INTAC Merger, we sold these legacy
businesses on February 29, 2008 (see Note 3).  Following the
disposition, the sole asset we retained from the INTAC acquisition is the
Internet Licenses intangible we used to enter the China market in June
2008.





The purchase price at October 2, 2007 consisted of the
following (dollars in thousands):




Exchange
      of 19,940,727 HSWI common shares for all INTAC sharesoutstanding including $100 of fair
      value for options assumed
            
            $
            38,988Direct
      acquisition costs
            
            
            1,774Other
            
            
            4740,809Net
      liabilities assumed
            
            
            3,037Deferred
      tax liabilities
            
            
            4,055Total purchase
    price
            
            $
            47,901





For
convenience, we designated October 1, 2007, as the effective date for this
acquisition.





37





We noted
that SFAS 141, “Business Combinations” states that “the fair value of securities
traded in the market is generally more clearly evident than the fair value of
the acquired entity” and “that the quoted market price of a security issued to
effect a business combination generally should be used to estimate the fair
value of an acquired entity after recognizing possible effects of price
fluctuations, quantities traded, issues costs and the like.”  However, HSWI
as the acquirer was not publicly traded until after the merger with
INTAC.  In addition we considered the unique facts and circumstances
in the INTAC Merger, including HSWI’s limited historical operations; the
transaction being a merger of equals; and lastly, using INTAC’s public stock
price, and determined INTAC’s public stock price was also not a fair value of
the equity security because, among other reasons, (i) the public stock
price was affected by historical performance of the INTAC distribution business
which was sold simultaneously with the Merger, (ii) the INTAC stock was
thinly traded and (iii) a majority of the stock was held by insiders. 
As a result, we obtained an independent valuation, (using recognized valuation
techniques) of our enterprise value post-merger to determine the fair value of
our common stock issued for the INTAC common shares.





The
deferred tax liabilities approximating $4.1 million relate to the
non-deductibility (for tax purposes) of the acquired intangibles in
China.





As part
of the acquisition, we assumed 500,000 INTAC outstanding stock options. 
The per share fair value of our stock options issued in exchange for all of
INTAC’s outstanding options was estimated using the Black-Scholes options
pricing model (see Note 10).  All of the options assumed were either
already fully vested at the time of the merger or vested in full as a result of
the INTAC Merger.  Therefore, the fair value of the assumed options,
$100,000, is treated as part of the purchase price.





The
following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition (dollars in
thousands).





Cash and cash equivalents
            
            $
            118Trade
      accounts receivable
            
            
            4,584Other
      current assets
            
            
            1,683Property
      and equipment
            
            
            298Other
      assets
            
            
            90Licenses
      to operate in China (indefinite life)
            
            
            10,000Vendor
      endorsement in China (indefinite life)
            
            
            4,400Acquired
      database (5 year life)
            
            
            1,335Acquired
      software (5 year life)
            
            
            1,500Coursework
      books (4 year life)
            
            
            1,035Franchise
      agreements (4 year life)
            
            
            680Goodwill
            
            
            28,951Assets acquired
            
            
            54,674Accounts
      payable and other liabilities
            
            
            (9,810
            )Deferred
      tax liabilities
            
            
            (4,055
            )Net assets
acquired
            
            $
            40,809





The
purchase price allocation is based on estimates of the fair value of the
tangible and intangible assets acquired and liabilities assumed. These estimates
were arrived at utilizing recognized valuation techniques with the assistance of
an independent valuation firm. Goodwill of approximately $29.0 million resulted
primarily from our expectation that we could utilize INTAC’s knowledge of the
Chinese markets, relationships, and core competencies to accelerate the growth
of our Internet platform in China. However as discussed in Note 3, subsequent to
December 31, 2007, we decided to dispose of the entire INTAC Legacy
Businesses prior to our integrating INTAC with our online publishing segment.
Accordingly all goodwill at December 31, 2007, along with all other
intangibles and net assets acquired except for the Internet Licenses intangible
was allocated to the INTAC Legacy Businesses in our determination of the
appropriate carrying values of our acquired INTAC assets, considering our
expected loss on disposition (see Note 3).  Goodwill is not expected to be
deductible for tax purposes in the China.





The
intangible assets, other than the indefinite lived goodwill, Internet licenses,
and the vendor endorsement, are being amortized over their useful lives of 4.0
to 5.0 years with a weighted-average amortization period of
4.62 years. We recorded no in-process research and development related to
this acquisition.





Following
the February 2008 disposition, the sole assets we retained from the INTAC Legacy
Businesses were the Internet Licenses intangible asset that has an indefinite
life and is not amortized and from which no revenue has been generated from the
date of acquisition to December 31, 2008.  Therefore, any pro forma
information assuming the acquisition of this remaining asset as of the beginning
of the respective periods would provide no additional useful
information.







38






In
connection with and as a condition of the INTAC Merger, INTAC sold its
distribution companies to an entity controlled by Mr. Zhou, in exchange for 3.0
million shares of our common stock held by Mr. Zhou.  The 3.0 million
shares of our common stock were recorded as treasury shares valued at cost as
determined by a third party valuation for similar reasons that an independent
valuation was performed to value the INTAC Merger, as discussed
above.








3.  DISCONTINUED
OPERATIONS – INTAC LEGACY BUSINESSES





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





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





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





On
February 15, 2008, we entered into a share purchase agreement to sell the INTAC
Legacy Businesses.  On February 29, 2008, we completed the sale of the
subsidiaries that comprised the INTAC Legacy Businesses.  These
subsidiaries were sold to China Trend Holdings Ltd., a British Virgin Islands
corporation that is owned by Mr. Zhou, CEO, director and significant stockholder
of INTAC prior to the INTAC Merger in October 2007.  Mr. Zhou was also
on our board of directors from October 2007 to December 2007.  In
accordance with the Share Purchase Agreement with China Trend Holdings, we were
to receive 5.0 million of our common shares owned by Mr. Zhou.  In
addition, as a condition to the February 29, 2008, INTAC Legacy Businesses
disposition, the INTAC Legacy Businesses were to include $4.5 million in cash at
closing.





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





In the
year ended December 31, 2007, we recognized a preliminary goodwill write
off of approximately $22.5 million related to the February 29, 2008, INTAC
Legacy Businesses disposition.  All goodwill resulting from the INTAC
acquisition was included with the INTAC Legacy Businesses when we determined the
potential write off, because such operations had not been integrated with our
online publishing segment prior to our decision to dispose of the INTAC Legacy
Businesses. The goodwill write off due to disposition resulted from the fair
value of the expected net proceeds of 5.0 million shares of our common stock
valued at $3.68 per share (less estimated disposal costs) being less than the
combined cash to be transferred in the disposition plus the carrying value of
the net assets and intangibles sold in the disposition. The disposition proceeds
of 5.0 million shares of our common stock, 4.5 million at closing with an
additional 0.5 million shares delivered to us on March 26, 2008, were recorded
to treasury stock at $3.68 per share based on a Stock Purchase Agreement entered
into on February 15, 2008 where we agreed to sell and two qualified
institutional buyers agreed to purchase 5.0 million shares of our common stock
at a purchase price of $3.68 per share.






39





As a
result of this disposition, the operations of the INTAC Legacy Businesses have
been segregated and reported as discontinued operations for all the periods
presented in our consolidated statements of operations.  The results
of discontinued operations for the years ended December 31, 2008 and 2007 are as
follows:





Years
      Ended December 31,2008
            
            
            2007Revenues
            
            $
            38,849
            
            
            $
            198,627Loss
      from discontinued operations (before income taxes)
            
            
            (133,526
            )
            
            
            (24,687,959
            )Loss
      from discontinued operations
            
            $
            (133,526
            )
            
            $
            (24,687,959
            )





The
following table presents (i) the INTAC Legacy Businesses’ carrying value of the
assets and liabilities disposed on February 29, 2008, and (ii) the carrying
value of the assets and liabilities at December 31, 2007 that have been
reclassified as “held for resale” for the consolidated balance sheet at December
31, 2007:





At
      Date of DispositionFebruary
      29, 2008
            
            
            December
      31, 2007Cash
      and cash equivalents
            
            $
            —
            
            
            $
            164Trade
      accounts and other receivables
            
            
            2,967
            
            
            
            2,998Prepaid
      expenses and other
            
            
            1,451
            
            
            
            1,401Property
      and equipment
            
            
            270
            
            
            
            291Intangible
      assets
            
            
            8,627
            
            
            
            8,701Goodwill
            
            
            6,540
            
            
            
            6,433Total assets
    disposed
            
            
            19,855
            
            
            
            19,988Accrued
      liabilities and other
            
            
            4,909
            
            
            
            4,633Deferred
      tax liabilities
            
            
            1,514
            
            
            
            1,530Total liabilities
      disposed
            
            
            6,423
            
            
            
            6,163Net
      assets disposed before cash transferred to disposed
      subsidiaries
            
            
            13,432
            
            
            
            13,825Cash
      to be transferred to disposed subsidiaries
            
            
            4,500
            
            
            
            4,500Net
      assets disposed
            
            $
            17,932
            
            
            $
            18,325





The
estimated goodwill write off due to disposition, based on the expected fair
value resulting from disposition was preliminary at December 31,
2007.  Upon final disposition on February 29, 2008 proceeds received
of $18.4 million of our common stock (including 500,000 shares received in March
2008) exceeded the net assets carrying value of $17.9 million by $0.5 million
partially offset by our estimated disposition costs accrual of $0.1 million,
resulting in a net recovery on disposition of $0.4 million in the quarter ended
March 31, 2008.  The recovery primarily resulted from our operation of
the disposed subsidiaries at a $0.5 million loss through the disposition date
resulting in the carrying value of net assets and liabilities decreasing from
normal activities such as depreciation and amortization, disbursements and cash
receipts on accounts receivable. We recorded this net recovery of $0.4 million
on disposition in the Loss from Discontinued Operations that partially offset
the discontinued operations operating loss of $0.5 million.







40





4.  SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES





Principles
of Consolidation





The
consolidated financial statements from continuing operations include the
accounts of (1) HSWI, (2) our subsidiary HSW Brasil - Tecnologia e Informação
Ltda. (“HSW Brazil”), (3) HSW (HK) Inc. Limited, (4) Bonet (Beijing) Technology
Limited Liability Company, (5) BoWenWang Technology (Beijing) Limited Liability
Company, and (6) Daily Strength, Inc.  The equity of certain of these
entities is partially or fully held by citizens of the country of incorporation
to comply with local laws and regulations.  The operations of the
INTAC Legacy Businesses since October 2, 2007, the date of the INTAC Merger,
through February 29, 2008, the date of INTAC Legacy Businesses disposition are
reflected as discontinued operations, and the assets and liabilities for the
year ended December 31, 2007, have been reclassified as “held for
sale”.





All
intercompany balances and transactions have been eliminated in
consolidation.  During the periods reported, our revenue was derived
primarily from advertising revenue from our Internet website in
Brazil.  Net losses from HSW Brazil and China for the years ended
December 31, 2008, and 2007, were $3.3 million and $3.7 million,
respectively.





Revenue
Recognition Policies





Online Publishing Revenue





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





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





Cost
of Revenues





Online Publishing





The
online publishing cost of revenue represents the cost of translating and
localizing content and acquiring original articles written by third
parties.





Liquidity





Due to
the start up nature of the online publishing segment of HSWI, revenue recorded
for the years ended December 31, 2008 and 2007, were approximately $457,000
and $148,000, respectively.





As of
December 31, 2008, our cumulative losses were $74.2 million which included non
cash expenses of $21.8 million for stock-based compensation, $22.5 million
goodwill write-off related to the February 29, 2008 INTAC Legacy Businesses
disposition and an impairment charge of $5.9 million, net of tax.  We used
a significant amount of the $21.0 million net proceeds from the October 2,
2007, sale of stock in the equity financing to pay transaction costs, to pay off
advances from HowStuffWorks, and to fund operations.  In the first quarter
of 2008, we received an additional $33.4 million from the sale of our stock.
 We believe the proceeds from the sale of our stock in our first quarter of
2008 will provide us sufficient working capital to establish our operations in
Brazil, China and the US and provide sufficient working capital for at least the
next twelve months.





41





Concentration
of Credit Risk and Accounts Receivable




Financial
instruments that potentially subject us to a concentration of credit risk
consist principally of cash and accounts receivables.  At December 31,
2008, 99% of our cash was denominated in U.S. dollars, and 1% represented cash
denominated in Brazilian Reais, Chinese Renminbi or Hong Kong dollars.  All
our cash is placed with financial institutions we believe are of high credit
quality.  Our cash is maintained in bank deposit accounts, which, at
times, may exceed federally insured limits.  We have not experienced
any losses in such accounts and do not believe our cash is exposed to any
significant credit risk.





We
believe we are not exposed to a significant concentration of credit or accounts
receivable risk.  However, cash is subject to foreign currency
fluctuations against the U.S. dollar.  Our risk in foreign currency is
somewhat mitigated at this time as U.S. funds are transferred monthly to Brazil
and China to fund that month’s operating activity.  If however the
U.S. dollar is devalued significantly against the Brazilian Reais or the Chinese
Renminbi, the cost tofurther develop our websites in Brazil
and China could exceed our original estimates.





We
regularly evaluate the collectability of trade receivable balances based on a
combination of factors such as customer credit-worthiness, past transaction
history with the customer, current economic industry trends and changes in
customer payment patterns.  If we determine that a customer will be
unable to fully meet its financial obligation, such as in the case of a
bankruptcy filing or other material events impacting its business, we record a
specific reserve for bad debt to reduce the related receivable to the amount
expected to be recovered.





Cash
and Cash Equivalents





We
consider all highly liquid investments with original maturities of three months
or less to be cash equivalents.  We maintain our cash in financial
institutions we believe are of high credit quality and do not believe any undue
risk is associated with our cash balances.  A large portion of the
cash balance is maintained at one financial institution.





Use
of Estimates





The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States requires us to make
estimates and assumptions that affect amounts reported and disclosed in the
consolidated financial statements and accompanying notes.  Actual results
could differ materially from those estimates.  On an ongoing basis, we
evaluate our estimates, including those related to accounts receivable,
intangible assets and goodwill, useful lives of intangible assets, property and
equipment, and income taxes, among other things.





Reclassifications





Certain
reclassifications have been made to prior year financial information to conform
to the current year presentation.





Income
Taxes





We
recognize income taxes under the asset and liability method.  Deferred
income tax assets and liabilities are computed for differences between the
financial statement and tax basis of assets and liabilities that will result in
future taxable or deductible amounts, based on enacted tax laws and rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized.





Effective
January 1, 2007, we adopted the provisions of Financial Accounts Standards
Board (“FASB”) Interpretation (“FIN”) 48, Accounting for Uncertainty in Income
Taxes.  FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in a company’s financial statements in accordance with
Statement of Financial Accounting Standard (“SFAS”) 109, Accounting for Income
Taxes.  FIN 48 requires a company to determine whether it is
more-likely-than-not that a tax position will be sustained upon examination
based upon the technical merits of the position. If the more-likely-than-not
threshold is met, a company must measure the tax position to determine the
amount to recognize in the financial statements.





In
May 2007, the FASB issued FASB Staff Position (“FSP”) FIN 48-1, Definition of Settlement in FASB
Interpretation 48.  FSP FIN 48-1 amends FIN 48, to provide
guidance on how an enterprise should determine whether a tax position is
effectively settled for the purposes of recognizing previously unrecognized tax
benefits.  We are required to apply the guidance provided in FSP FIN
48-1, the application of which has not had a material effect on our financial
position, results of operations, or cash flows.







42






The
application of income tax law is inherently complex.  Laws and
regulation in this area are voluminous and are often ambiguous. As such, we are
required to make many subjective assumptions and judgments regarding our income
tax exposures.  Interpretations of, and guidance surrounding
income tax laws and regulations change overtime.  As
such, changes in our subjective assumptions and judgments can materially affect
amounts recognized in the balance sheets and statements of
operations.





We intend
to classify interest and penalties arising from unrecognized income tax
positions in the statement of operations as general and administrative expenses
if they occur. At December 31, 2008 and 2007, we had no accrued interest or
penalties related to uncertain tax positions.  The tax years 2007,
2006 and 2005 are not or have not been under examination but remain open to
examination under IRS statute.





The INTAC
Merger and the stock transactions in October 2007, more fully discussed in
notes 1, 2, 3 and 10 created an ownership change that may limit our ability to
utilize its net operating loss carry forward.





Stock
Based Compensation





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





SFAS
123(R) requires the use of a valuation model to calculate the fair value of the
stock based awards.  We have elected to use the Black-Scholes options
pricing model to determine the fair value of stock options on the dates of
grant, consistent with that used for pro forma disclosures under SFAS 123, Accounting for Stock-Based
Compensation.  We measure stock-based compensation based on the fair
values of all stock-based awards on the dates of grant, and recognize
stock-based compensation expense using the straight-line method over the vesting
periods.





Foreign
Currency





The
functional currency of our international subsidiaries is the local currency,
Reais in Brazil, Renminbi in China or Hong Kong dollars.  The financial
statements of these subsidiaries are translated to U.S. dollars using month-end
rates of exchange for assets and liabilities, and average rates of exchange for
revenue, costs and expenses.  Translation gains and losses are
recorded in accumulated other comprehensive income (loss) as a component of
stockholders’ equity.  Net gains and losses resulting from foreign
exchange transactions are recorded in selling, general and administrative
expenses.  Both currency translation and transaction losses during
2008 and 2007 were not material to our consolidated financial
statements.




Capitalized
Transaction Costs




The
Company complies with SFAS 141, “Business Combinations,” which requires all
internal costs associated with a merger to be expensed as incurred.  SFAS
141 also requires companies to capitalize and include in the purchase accounting
all incremental costs to outside consultants and other professionals directly
associated with the merger.  Accordingly, the Company included $1.7 million
of vendor costs, principally legal costs, directly associated with the INTAC
Merger, in the INTAC Merger purchase price. (See Note 2).




The
Company also complies with the requirements of the SEC Staff Accounting Bulletin
(SAB) Topic 5A — “Expenses of Offering”.  In 2007, we incurred $1.5 million
of costs related to the equity financing closed in 2007.  These costs were
netted against the proceeds from the transaction and included in additional paid
in capital.





Purchase
Price Allocations





From time
to time, we enter into material business combinations.  In accordance
to SFAS 141, Business
Combinations, the purchase price is allocated to the various assets
acquired and liabilities assumed at their estimated fair value.  Fair
values of assets acquired and liabilities assumed are based upon available
information and may involve us engaging an independent third party to perform an
appraisal of certain tangible and intangible assets.  Estimating fair
values can be complex and subject to significant business judgment and most
commonly impacts property, plant and equipment and intangible assets, including
those with indefinite lives.  Generally, we have, if necessary, up to
one year from the date of acquisition to obtain all of the information that we
have arranged to obtain and that is known to be obtainable to finalize the
purchase price allocation.  Until such time, the purchase price
allocation may remain subject to change based on final valuations of assets
acquired and liabilities assumed and may be subject to material
revision.






43






Property
and Equipment





Property
and equipment is stated at cost less accumulated depreciation. 
Depreciation, recorded within operating expenses in the consolidated statements
of operations, is computed using the straight-line method over the estimated
useful lives of the assets, generally one to three years for computer equipment
and software and three to five years for building improvements and office
equipment.  Costs represent the purchase price and any directly
attributable costs of bringing the asset to working condition for its intended
use.  Repairs and maintenance are expensed as incurred.  Betterments
and capital improvements are capitalized and depreciated over the remaining
useful life of the related asset.





Legal
and Auditing Fees





Legal and
auditing fees are expensed in the period incurred.





Advertising
Expenses





We
expense advertising costs in the year in which they are
incurred.  Advertising expense for each of the years ended December
31, 2008 and 2007 was $0.2 million.





Commitments
and Contingencies





Liabilities
for loss contingencies arising from claims, assessments and litigation and other
sources are recorded when it is probable that a liability has been incurred and
the amount of the assessment can be reasonably estimated.  In the
opinion of management, after consultation with legal counsel, there are no
claims, assessments and litigation against the Company.





Long-Lived
Assets Including Goodwill and Other Intangible Assets





We review
property and equipment and amortizable intangible assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable.  Recoverability of property and equipment is
measured by a comparison of the carrying amounts to future net cash flows the
assets are expected to generate.  The carrying value of the intangible
asset is compared to the fair value in order to determine if an impairment
exists.  Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.





In
accordance with SFAS 142, Goodwill and Other Intangible
Assets, we test goodwill and indefinite lived intangible assets for
impairment annually at December 31, or more frequently if events or changes in
circumstances indicate that this asset may be impaired.  SFAS 142 also
requires that intangible assets with definite lives be amortized over their
estimated useful lives and reviewed for impairment whenever events or
circumstances indicate an asset’s carrying value may not be recoverable in
accordance with SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets.  We amortize our acquired
intangible assets with definite lives over three to eleven years.  We
recorded an impairment charge of $5.9 million, net of tax, of the licenses to
operate in China intangible asset due to the results of the December 31, 2008
impairment analysis.





Taxes
Collected from Customers





Taxes
collected from customers and remitted to governmental authorities are presented
on a net basis in cost of sales in the accompanying Consolidated Statements of
Operations.





Net
Loss per Share





We
compute net loss per share in accordance with SFAS 129, Earnings per Share, which
requires dual presentation of basic and diluted earnings or loss per share
(“EPS”).





Basic
loss per share is computed by dividing net loss applicable to common
shareholders by the weighted average number of common shares outstanding during
the period.  Diluted loss per share is calculated by dividing net loss
by the weighted-average number of common shares and dilutive potential common
shares, if any, outstanding during the period.  Our stock options were not
included in the computation of diluted loss per share because their effects are
anti-dilutive.





44





Recent
Accounting Pronouncements





In
September 2006, the FASB issued SFAS 157, Fair Value
Measurements.  SFAS 157 defines fair value, establishes a
framework for measuring fair value in accordance with generally accepted
accounting principles in the United States (“GAAP”), and expands disclosures
about fair value measurements.  SFAS 157 emphasizes that fair value is
a market-based measurement, not an entity-specific
measurement.  Therefore, a fair value measurement would be determined
based on the assumptions that market participants would use in pricing the asset
or liability.  SFAS 157 is effective for fiscal years beginning after
November 15, 2007, except for non-financing assets and
liabilities.  The adoption of SFAS 157 did not have a material impact
on our consolidated financial statements as the Company had no financial assets
other than cash and accounts receivable.





In
February 2008, the FASB issued FASB Staff Position (“FSP”) 157-2, Partial Deferral of the Effective
Date of SFAS 157, which delayed the effective date of SFAS 157 for all
nonrecurring fair value measurements of nonfinancial assets and nonfinancial
liabilities until January 1, 2009.  We are currently evaluating the
impact FSP 157-2 will have on our consolidated financial
statements.





An
associated pronouncement, SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities, was also effective at the beginning of
the Company’s 2008 fiscal year.  The Company has elected not to apply
the fair value option to measure any of the financial assets and liabilities on
its balance sheet not already valued at fair value under other accounting
pronouncements.  These other financial assets and liabilities are
primarily accounts receivable and accounts payable, which are reported at
historical value.  The fair value of these financial assets and
liabilities approximate their fair value because of their short
duration.





In
December 2007, the FASB issued SFAS 141(R), Business
Combinations.  SFAS 141(R) expands the definition of a business
combination and requires the fair value of the purchase price of an acquisition,
including the issuance of equity securities, to be determined on the acquisition
date.  SFAS 141(R) also requires that all assets, liabilities,
contingent considerations, and contingencies of an acquired business be recorded
at fair value at the acquisition date.  In addition, SFAS 141(R)
requires that acquisition costs generally be expensed as incurred, restructuring
costs generally be expensed in periods subsequent to the acquisition date, and
changes in accounting for deferred tax asset valuation allowances and acquired
income tax uncertainties after the measurement period impact income tax
expense.  SFAS 141(R) is effective for fiscal years beginning after
December 15, 2008 with early adoption prohibited.  We are
currently evaluating the impact SFAS 141(R) will have on our consolidated
financial statements.





In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements, an Amendment of ARB
51.  SFAS 160 changes the accounting and reporting for minority
interests such that minority interests will be recharacterized as noncontrolling
interests and will be required to be reported as a component of equity, and
requires that purchases or sales of equity interests that do not result in a
change in control be accounted for as equity transactions and, upon a loss of
control, requires the interest sold, as well as any interest retained, to be
recorded at fair value with any gain or loss recognized in
earnings.  SFAS 160 is effective for fiscal years beginning on or
after December 15, 2008 with early adoption prohibited.  We do
not expect the implementation of SFAS 160 will have a material impact on our
consolidated financial statements.








5. 
ACQUISITION





On
November 26, 2008, the Company acquired 100% of Daily Strength, Inc., a
comprehensive health-related social networking site, for $3.125 million before
$167,000 of expenses.  The Company is contingently obligated to pay an
earnout of up to an additional $3.525 million based on the achievement of
certain page view targets.





Our
acquisition of DailyStrength allows us to further leverage our web publishing
infrastructure, provides us with an opportunity to diversify our initial focus
on the emerging economies, and enter the healthcare digital market. 
Maturity within the online healthcare market provides us with additional access
to digital revenues and the ability to enter the social networking space with
relevant and useful content for individuals who share common
concerns.





45





Allocation
of Purchase Price





The
application of purchase accounting under SFAS 141 requires that the total
purchase price be allocated to the fair value of assets acquired and liabilities
assumed based on their fair values at the acquisition date. The allocation
process requires an analysis of customer relationships, contractual commitments
and legal contingencies to identify and record the fair value of all assets
acquired and liabilities assumed. In valuing acquired assets and assumed
liabilities, fair values are based on, but are not limited to: future expected
cash flows; current replacement cost for similar capacity for certain fixed
assets; and appropriate discount rates and growth rates.





Goodwill
resulting from the acquisitions discussed below was assigned to the Company’s
one business segment.  The goodwill and intangible assets acquired are
not tax deductible. The deferred tax liabilities related to finite-lived
intangible assets will be reflected as a tax benefit in the consolidated
statements of income in proportion to and over the amortization period of the
related intangible assets.





The
following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition (dollars in
thousands):





Cash
      and cash equivalents
            
            $
            77Trade
      accounts receivable
            
            
            12Prepaid
      expenses and other current assets
            
            
            5Property
      and equipment
            
            
            30Website
      trade name (indefinite life)
            
            
            988Non-compete
      agreement (3 year life)
            
            
            354Website
      features (7 year life)
            
            
            151Website
      content (6 year life)
            
            
            117Member
      relationships (11 year life)
            
            
            63Goodwill
            
            
            1,973Assets acquired
            
            
            3,770Accounts
      payable and other liabilities
            
            
            (142
            )Deferred
      tax liabilities
            
            
            (336
            )Net assets
acquired
            
            $
            3,292





Unaudited
pro forma results of operations data for the year ended December 31, 2008 and
the year ended December 31, 2007 as if HSWI and the entity described above had
been combined as of January 1, 2007, follow.  The pro forma results
include estimates and assumptions which management believes are
reasonable.  However, pro forma results do not include any anticipated
cost savings or other effects of the planned integration of these entities, and
are not necessarily indicative of the results that would have occurred if the
business combinations had been in effect on the dates indicated, or which may
result in the future.





Unaudited
      Pro Forma Results of OperationsYears
      Ended December 31,2008
            
            
            2007Revenue
            
            $
            773,921
            
            
            $
            257,369Loss
      from continuing operations before other income(expense) and income
      taxes
            
            
            (26,107,006
            )
            
            
            (16,836,833
            )Net
      loss
            
            
            (23,752,913
            )
            
            
            (41,426,337
            )Basic
      and diluted loss per share
            
            
            (0.45
            )
            
            
            (3.59
            )Basic
      and diluted weighted average shares outstanding
            
            
            52,941,525
            
            
            
            11,544,818





The
Company is satisfied that no material change in value has occurred in these
acquisitions or other acquisitions since the acquisition dates. The results of
all acquired entities have been included in the Company’s consolidated financial
statements since the respective acquisition dates.




46





6. 
GOODWILL AND INTANGIBLE ASSETS





The
Company performed its testing of impairment of goodwill and other intangibles as
of December 31, 2008.  The fair values of the Company’s intangible
assets were estimated using the expected present value of future cash flows,
using estimates, judgments and assumptions that management believes were
appropriate in the circumstances.  The Company recorded an impairment
charge related to the licenses to operate in China intangible asset in the
amount of $7.9 million during the fourth quarter of 2008 due to the slowdown of
growth internationally and other economic challenges affecting the advertising
marketplace in China.





On
November 26, 2008, we acquired DailyStrength and recorded $2.0 million of
goodwill and $1.7 million of intangible assets.  The Company performed an
impairment test of its goodwill and indefinite life intangible at December 31,
2008 and determined that no impairment existed.





Our
Brazil operation has recorded intangible assets of $16,429 and $21,476 as of
December 31, 2008 and 2007, respectively, for site domains.





Intangibles
include the following as of December 31, 2008:





Gross
            
            
            Accumulated
            
            
            Net
      CarryingOriginal
      Life
            
            Carrying
      Value
            
            
            Amortization
            
            
            ValueWebsite
      trade name
            Indefinite
      life
            
            $
            988,000
            
            
            $
            —
            
            
            $
            988,000Non-compete
      agreement
            3
      years
            
            
            353,700
            
            
            
            9,825
            
            
            
            343,875Website
      features
            7
      years
            
            
            151,574
            
            
            
            1,804
            
            
            
            149,770Website
      content
            6
      years
            
            
            117,152
            
            
            
            1,627
            
            
            
            115,525Member
      relationships
            11
      years
            
            
            63,000
            
            
            
            477
            
            
            
            62,523Site
      domains
            Indefinite
      life
            
            
            16,429
            
            
            
            —
            
            
            
            16,429Total
            
            
            $
            1,689,855
            
            
            $
            13,733
            
            
            $
            1,676,122





The
following table summarizes future intangible amortization at December 31,
2008:





IntangibleAmortization2009
            
            $
            164,8062010
            
            
            164,8062011
            
            
            154,9812012
            
            
            46,9062013
            
            
            46,906Thereafter
            
            
            93,288Total
            
            $
            671,693








7. 
PREPAID EXPENSES AND OTHER CURRENT ASSETS





As of
December 31, 2008 and 2007, prepaid expenses and other assets consisted of
the following:





December 31,2008
            
            
            2007Prepaid
      content acquisition costs
            
            $
            800,000
            
            
            $
            —Prepaid
      insurance
            
            
            637,012
            
            
            
            788,674Deposits
      and other
            
            
            223,085
            
            
            
            153,914Total
            
            $
            1,660,097
            
            
            $
            942,588





47





8.  PROPERTY
AND EQUIPMENT, NET





As of
December 31, 2008 and 2007, property and equipment consisted of the
following:





December 31,2008
            
            
            2007Computer
      equipment
            
            $
            487,154
            
            
            $
            155,909Furniture
      and fixtures
            
            
            135,391
            
            
            
            95,613Software
            
            
            234,927
            
            
            
            68,859Leasehold
      improvements
            
            
            102,532
            
            
            
            31,616Total
            
            
            960,004
            
            
            
            351,997Less
      accumulated depreciation
            
            
            (232,693
            )
            
            
            (58,815
            )Property
      and equipment, net
            
            $
            727,311
            
            
            $
            293,182





Approximately
61%, 22% and 17% of our property and equipment, net are in the U.S., China and
Brazil, respectively.








9. 
INCOME TAXES





We are
subject to income taxes on income arising in or derived from the tax
jurisdictions in which we are domiciled and operate.  Due to net operating
losses for book and tax purposes, no U.S. Federal or Foreign current or deferred
tax provisions have been made for the year ended December 31,
2007.  We recorded a deferred tax benefit for the year ended December
31, 2008 as a result of the impairment charge to the China license.





We have
substantial net operating loss carryforwards in some of our companies.  As
a result, most of these companies have net deferred tax assets.  We have,
however, provided a valuation allowance for all these deferred tax assets based
on the uncertainty of generating future taxable income.





The
provision for income taxes for the years ended December 31, 2008 and 2007
differs from the amount computed by applying the U.S. income tax rate of 34% to
loss before taxes as follows:





Years
      Ended December 31,2008
            
            
            2007Computed
      “expected” tax expense
            
            $
            (8,076,088
            )
            
            $
            (13,443,364
            )Tax
      effect of non-deductible goodwill
            
            
            —
            
            
            
            7,656,250Change
      in valuation allowance
            
            
            4,807,712
            
            
            
            4,349,967Tax
      effect of losses and rates in non-US jurisdictions
            
            
            523,281
            
            
            
            1,515,959Tax
      effect of other permanent items
            
            
            782,595
            
            
            
            (78,812
            )$
            (1,962,500
            )
            
            $
            —





December 31,2008
            
            
            2007Deferred
      tax assets:Net operating loss
      carryforwards
            
            $
            7,794,786
            
            
            $
            3,986,811Amortization
            
            
            123,703
            
            
            
            175,482Depreciation of fixed
      assets
            
            
            16,456
            
            
            
            —Deferred income and
      reserves
            
            
            67,664
            
            
            
            477,266Stock-based compensation
      expense
            
            
            7,344,630
            
            
            
            5,785,006Total
      deferred tax assets
            
            
            15,347,239
            
            
            
            10,424,565Deferred
      tax liabilities:Acquired
    intangibles
            
            
            (1,106,465
            )
            
            
            (4,030,106
            )Foreign exchange
      gain/loss
            
            
            (5,696
            )
            
            
            —Depreciation of fixed
      assets
            
            
            —
            
            
            
            (7,340
            )Valuation
    allowance
            
            
            (15,108,498
            )
            
            
            (10,417,228
            )Net
      deferred tax liability
            
            $
            (873,420
            )
            
            $
            (4,030,109
            )






48






The increase in the valuation allowance of $4.7
million as of December 31, 2008 relates to tax effected losses incurred during
the year of approximately $4.8 million, a valuation allowance incurred of
approximately $1.1 million as a result of the DailyStrength acquisition, removal
of a valuation allowance of approximately $1.6 million as a result of the INTAC
Legacy Business disposition, state tax effected net operating losses of $0.6
million and other net decreases of approximately $0.2 million.  The
increase to the valuation allowance for 2007 and 2008 are due to continuing
losses during these years.  Management concluded that it was more
likely than not that additional deferred tax assets would not be recovered and
recorded an additional valuation allowance.  The valuation allowance
as of December 31, 2007, includes an approximate $1.8 million allowance
resulting from the INTAC Merger.





The net
operating losses available at December 31, 2008, to offset future taxable
income in the U.S. federal and state, Hong Kong, China and Brazil jurisdictions
are $18,279,745, $13,882,854, $142,940, $942,732 and $4,866,500,
respectively.  The income tax rates for Hong Kong, China and Brazil are
17.5%, 25% and 15%, respectively.  The net operating losses in the
U.S. include losses in the amount of $3.9 million related to the purchase of
DailyStrength.  The U.S. net operating losses are subject to certain
rules under Internal Revenue Code Section 382 limiting their annual
usage.  The federal net operating losses expire between the years 2024
and 2028.  The state net operating losses expire between the years
2016 and 2026.  The net operating losses generated in Hong Kong have
no expiration date and carry forward indefinitely.  The net operating
losses generated in China have a five year carryover period.  The net
operating losses generated in Brazil have no expiration date and up to 30% of
the net operating loss may be utilized each year.





On
January 1, 2007, we adopted the provisions of FIN 48.  As a
result of applying the provisions of FIN 48, we recognized no increase in
the liability for unrecognized tax benefits, and no increase in accumulated
deficit as of January 1, 2007.  We had no unrecognized tax benefits as
of December 31, 2008 and 2007.  We do not expect our unrecognized tax
benefits to change significantly over the next
12 months.





We file
U.S., state, and foreign income tax returns in jurisdictions with varying
statutes of limitations.  The 2005, 2006 and 2007 tax years generally
remain subject to examination by federal and most state tax authorities. 
In significant foreign jurisdictions, the 2003 through 2007 tax years generally
remain subject to examination by their respective tax
authorities.








10. 
STOCKHOLDERS’ EQUITY





Common
Stock





As
discussed in Note 1, on October 2, 2007, we completed the INTAC Merger and
related transactions affecting our stockholders’ equity as follows:





·
            We
      issued 22,940,717 and 22,940,727 million shares of our stock to
      HowStuffWorks and to INTAC shareholders,
  respectively.


·
            Three
      million shares of common stock were recorded as treasury shares valued at
      cost, $9.0 million.


·
            We sold 3,424,653 shares of our common stock to certain
      investors for $22.5 million prior to expenses.  On
      February 4, 2008, we issued 2,689,464 additional shares to these
      investors pursuant to an adjustment mechanism provided for in their stock
      purchase agreement.  The stock purchase agreement with these
      investors requires shelf registration statements covering the resale of
      their shares.


·
            We
      entered into a stock purchase agreement with certain investors who agreed
      to purchase shares of our common stock, conditioned upon the shares being
      publicly registered.  Such registration was subsequently
      declared effective on January 14, 2008.  On January 31,
      2008, we issued 1,579,348 shares of our stock in exchange for $5.8 million
      in cash before expenses and, on February 1, 2008, we sold our 3
      million treasury shares for $11.0 million in cash before
      expenses.





On
February 29, 2008, we completed the INTAC Legacy Businesses
disposition.  In accordance with the share purchase agreement, we were
to receive 5.0 million of our common shares owned by Mr. Zhou and the INTAC
Legacy Businesses were to include $4.5 million in cash.  At the
February 29, 2008, disposition, we received only 4.5 million of our shares
and we only funded the INTAC Legacy Businesses with $2.7 million in cash (see
Note 3).  Concurrently, we sold the 4.5 million shares of common stock to
two qualified institutional buyers for $16.6 million in cash before
expenses.  Our stock purchase agreement with the investors allows them to
request registration of resale of their stock within 180 days of the sale, if
they are not able to sell their shares under Rule 144 at that
time.







49






We
received the additional 0.5 million shares of our stock from Mr. Zhou on
March 26, 2008, and released another $1.8 million in cash to the INTAC Legacy
Businesses.  The additional 0.5 shares were sold to the institutional
buyers for $1.8 million pursuant to the Stock Purchase Agreement.





Each
share of our common stock entitles its holder to one voting right.





Stock
Based Compensation





Under the
2006 Equity Incentive Plan adopted April 13, 2006 (the “Plan”), HSWI
authorized 8,000,000 shares for grant as part of a long term incentive plan to
attract, retain and motivate its eligible executives, employees, officers,
directors and consultants.  Options to purchase common stock under the
Plan have been granted to our officers and employees with an exercise price
equal to or more than the fair market value of the underlying shares on the date
of grant.





On
August 23, 2006, we completed a stock option grant covering 6,337,500
shares, (“the 2006 Grants”) at an exercise price of $6.50.  Of the
6,337,500 shares subject to the options granted, 2,000,000 vested on the date of
grant, 2,000,000 vested on the date of the second anniversary date of the grant
date, 600,000 options vest over the period from August 23, 2006 to
June 4, 2007, and 1,737,500 vest over three years.





On
October 10, 2007, we granted stock options covering 730,000 shares, (“the
2007 Grant”) at an exercise price of $7.10 per share.   Of the 730,000
shares subject to the options granted, 218,889 vested on the date of grant,
319,444 vest monthly over the period from date of grant through August 23,
2009, 76,667 vest annually over two years ending August 23, 2009, 40,000
vest annually over three years ending April 23, 2010, 50,000 vest annually
over three years ending October 10, 2010, and 25,000 vest annually over
three years ending November 19, 2010.





On
March 10, 2008, we granted stock options covering 12,000 shares, at an
exercise price of $4.26 per share.   These options vest annually over
three years ending March 10, 2011.





On May
28, 2008, we granted stock options covering 25,000 shares, at an exercise price
of $3.80 per share.  These options vest annually over three years
ending May 28, 2011.





On August
12, 2008, we granted stock options covering 125,000 shares, at an exercise price
of $3.25 per share.  Of the 125,000 shares subject to the options
granted, 33,400 vested on January 31, 2009 due to achievement of certain
performance criteria, 66,600 shares subject to the options granted will not vest
due to unattained performance criteria, and 25,000 vest annually over three
years ending August 12, 2011.





On
September 22, 2008, we granted stock options covering 350,000 shares, at an
exercise price of $3.68 per share.  These options vest on May 31,
2009.





On
November 26, 2008, we granted stock option covering 25,000 shares, at an
exercise price of $0.37 per share.  Of the 25,000 shares subject to
the options granted, 8,333 vest on the first anniversary of the grant date and
the remaining shares vest monthly over the two years ending November 26,
2011.  The March 10, 2008, May 28, 2008, August 12, 2008, September
22, 2008 and November 26, 2008 stock option grants are collectively the “2008
Grants”.





On March
10, 2008, we granted 33,096 shares of restricted stock to four members of the
Board of Directors.  The grant date fair value was $4.23 per
share.  The restricted stock vested on December 31, 2008.





On August
12, 2008, we granted 30,769 shares of restricted stock to six
executives.  The grant date fair value was $3.25 per
share.  Of the 30,769 shares of restricted stock, 10,277 vested on
January 31, 2009 due to achievement of certain performance criteria and 20,492
shares of restricted stock will not vest due to unattained performance
criteria.





As of
December 31, 2008, unrecognized compensation expense relating to non-vested
restricted stock approximated $6,000 and is expected to be recognized by January
31, 2009.





50





The per
share fair value of the stock options granted, estimated on the date of the
grant, was $3.37 and $3.78 for the 2006 Grant and  2007 Grant,
respectively, and a range of $0.25 to $2.20 for the 2008 Grants.  We use
the Black-Scholes options pricing model to value our options, using the
assumptions in the following table.  Expected volatilities are based on the
historical volatility of our stock and of similar entities.  The expected
term of options represents the period of time that the options granted are
expected to be outstanding.  We use the simplified method, or
management’s judgment when unable to use the simplified method, to calculate
expected term.  The risk-free rate of periods during the contractual
life of the option is based on the U.S. Treasury yield curve in effect at the
time of grant.





2008
      Grants
            
            2007
      Grants
            
            2006
      GrantsExpected
      volatility
            50%
      – 75%
            
            50%
            
            50%Expected
      life in years
            4.0
      – 6.0
            
            6.0
            
            5.6Dividend
      yield
            —
            
            —
            
            —Risk
      free interest rate
            2.22%
      – 3.32%
            
            4.49%
            
            4.83%





In
accordance with SFAS 123(R), stock-based compensation cost is measured at grant
date based on the fair value of the award, and is recognized as an expense over
the employee’s requisite service period.  Stock-based compensation expense
for the years ended December 31, 2008 and 2007, were $4.8 million and $7.2
million, respectively.  Unrecognized compensation expense as of
December 31, 2008, relating to non-vested stock options approximated $1.7
million and is expected to be recognized through 2011.  At
December 31, 2008, no options have been exercised under this
plan.





A summary
of stock option activity and related information as of December 31, 2008,
and changes during the year then ended is presented below:




WeightedWeighted
              
              
              averageaverage
              
              
              remaining
              
              
              AggregateNumber
              
              
              exercise
              
              
              contract
              
              
              intrinsicOptions
              
              of options
              
              
              price
              
              
              term (yrs)
              
              
              valueOutstanding
      at January 1, 2008
              
              
              6,683,056
              
              
              $
              6.56Granted
              
              
              537,000
              
              
              
              3.44Forfeited
      or expired
              
              
              (116,600
              )
              
              
              4.90Exercised
              
              
              —
              
              
              
              —Total
      outstanding at December 31, 2008
              
              
              7,103,456
              
              
              $
              6.35
              
              
              
              7.6
              
              
              $
              250Options
      exercisable at December 31, 2008
              
              
              6,111,389
              
              
              $
              6.55
              
              
              
              7.7
              
              
              
              —
  The fair
value of options vested during the years ended December 31, 2008 and 2007,
were $8.9 million and $4.0 million, respectively.





We
assumed 500,000 INTAC stock options as part of the INTAC Merger and exchanged
them for an equal amount of HSWI options.  All of these options were either
already fully vested at the time of the merger or vested in full as a result of
the INTAC Merger. Therefore, the fair value of the assumed options was treated
as part of the purchase price and no related expense was recorded (see Note
2).  The per share fair value of our stock options issued in exchange for
all of INTAC’s options was estimated using the Black-Scholes options pricing
model, resulting in a $0.04 to $0.39 fair value range per option (weighted
average fair value options assumed is $0.33). The fair value of each option
grant was estimated on the date of grant using the following assumptions:
underlying stock price of $1.95; no dividend yield; expected volatility of 50%;
risk-free interest rate of 5.0%; and expected life of seven
years.  Subsequent to the merger, 250,000 INTAC stock options
expired.  The following table provides a summary of the stock option
activity of the remaining options as of December 31, 2008:





WeightedWeighted
            
            
            averageaverage
            
            
            remaining
            
            
            AggregateNumber
            
            
            exercise
            
            
            contract
            
            
            intrinsicOptions
            
            of options
            
            
            price
            
            
            term (yrs)
            
            
            valueOutstanding
      at January 1, 2008
            
            
            250,000
            
            
            $
            5.49
            
            
            
            2.8
            
            
            $
            409,500Forfeited
      or expired
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Exercised
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Total
      outstanding at December 31, 2008
            
            
            250,000
            
            
            $
            5.49
            
            
            
            4.8
            
            
            $
            —Options
      exercisable at December 31, 2008
            
            
            250,000
            
            
            $
            5.49
            
            
            
            4.8
            
            
            $
            —






51






The aggregate intrinsic value in the above tables represents the
total pre-tax intrinsic value (the difference between the HSWI closing stock
price on the last trading date of the periods presented and the exercise price,
multiplied by the number of options).  The amount of aggregate intrinsic
value will change based on the fair market value of our stock.





In
conjunction with merger, simultaneously with the assumption of the INTAC stock
options and as discussed in Note 2, we issued warrants to purchase 500,000
shares of our common stock to HowStuffWorks on the same terms as the INTAC stock
options, with a provision that as the exchanged stock options are forfeited or
expire, a similar amount of the warrants expire.  At December 31,
2008, there were 250,000 warrants outstanding.





On May
13, 2008, HSWI entered into a Separation Agreement with the Company’s former
Chief Financial Officer (“CFO”) in conjunction with the CFO’s desire to
retire.  This Agreement provided for the CFO to continue as an
employee and officer of HSWI through July 31, 2008, and as a consultant for six
months thereafter.  The CFO was paid a lump sum severance payment of
$200,000 upon termination as an employee in accordance with his employment
contract, and allowed his stock options to remain exercisable for the full
10-year term notwithstanding his termination.  The change in
contractual term was accounted for as a modification under SFAS 123(R), which
resulted in an additional $43,000 of stock-based compensation expense, which was
recognized immediately as the options were fully vested.





On April
3, 2008, the Company extended the stock option term for a member of the
Company’s board of directors who was also a former member of INTAC’s board of
directors.  The options were extended from a 7-year term to a 10-year
term.  The change in contractual term was accounted for as a
modification under SFAS 123(R), which resulted in an additional $78,000 of
stock-based compensation expense, which was recognized immediately as the
options were fully vested.





Earnings
per Share




The
following is a reconciliation of the numerators and denominators of our basic
and diluted earnings per share computations:





Years
      Ended December 31,2008
            
            
            2007Loss
      per share:Loss
      from continuing operations
            
            $
            (21,804,435
            )
            
            $
            (14,851,346
            )Loss
      from discontinued operations
            
            
            (133,526
            )
            
            
            (24,687,959
            )Net
      loss
            
            $
            (21,937,961
            )
            
            $
            (39,539,305
            )Weighted
      average shares outstanding
            
            
            52,941,525
            
            
            
            11,544,818Basic
      and diluted loss per shareLoss
      from continuing operations
            
            $
            (0.41
            )
            
            $
            (1.29
            )Loss
      from discontinued operations
            
            
            —
            
            
            
            (2.13
            )Net
      loss
            
            $
            (0.41
            )
            
            $
            (3.42
            )Weighted
      average shares outstanding
            
            
            52,941,525
            
            
            
            11,544,818Dilutive
      stock options
            
            
            —
            
            
            
            —Total
      common shares and dilutive securities
            
            
            52,941,525
            
            
            
            11,544,818





Stock
options and warrants are not included in the diluted earnings per share
calculation above as they are anti-dilutive.




52





11.  RELATED
PARTY TRANSACTIONS





In
August 2006, HSW Brazil entered into a 36-month services agreement
with Administradora de Bens Capela (“Capela”), a Brazilian corporation, whereby
Capela provides sales, business development, and operations personnel to our
Brazilian subsidiary.  The terms of the agreement provided to
Capela 800,000 stock options at $6.50, the market value on the contract and
grant date vesting over the three year contract period.  These options
are included in the options described in Note 10.





During 2006, we entered into six unsecured notes payable with
Capela that had various maturity dates in 2007.  Interest on these loans
was based on the Interbank Certificate of Deposit rate plus 0.3% through
0.5%.  The notes payable balance was paid in full in 2007 and accordingly,
there is no note payable outstanding at December 31, 2008.





From time
to time, Capela purchases advertising space on our Brazilian website “Como Tudo
Functiona”.  The revenue associated with these transactions is
classified as “Sales to Affiliates” in the accompanying financial
statements.  We recognized approximately $223,000 of revenue from
affiliates during 2008, no revenue was recognized in 2007 from
Capela.





Capela
was deemed an affiliate due to an ownership interest in HowStuffWorks, our
largest shareholder.  As of December 17, 2007, Capela no longer had an
ownership interest in HowStuffWorks.





During
2008, the Company had amounts payable to China Trend Holdings Ltd., related to
the INTAC Legacy Businesses disposition.  China Trend Holdings Ltd. is
owned by Mr. Zhou, CEO, director and significant stockholder of INTAC prior to
the INTAC Merger in October 2007.  Mr. Zhou was also on our board of
directors from October 2007 to December 2007.  In accordance with the
share purchase agreement, disposition expenses related to this transaction were
to be split evenly between the Company and China Trend Holdings
Ltd.  The Company withheld $200,000 of the purchase price to cover
China Trend Holdings Ltd. estimated portion of disposition
expenses.  As the Company paid disposition expenses, half of those
costs reduce the advance from affiliate balance on the consolidated balance
sheet.  As of December 31, 2008, the Company’s disposition payments
offset the $200,000 withheld from China Trend Holdings Ltd., therefore, no
amount is due China Trend Holdings Ltd.








12. 
COMMITMENTS AND CONTINGENCIES





Commitments





We have
entered into operating leases for office space.  Rental expense for
operating leases, which is recognized on a straight-line basis over the lease
term, was $444,933 and $144,763 for years ended December 31, 2008 and 2007,
respectively.  We have not entered into any capital
leases.





The
following table summarizes the approximate future minimum rentals under
noncancelable operating leases and other commitments in effect at
December 31, 2008:





Minimum
      Commitments2009
            
            $
            1,172,5062010
            
            
            92,9332011
            
            
            —2012
            
            
            —2013
            
            
            —Thereafter
            
            
            —Total
            
            $
            1,265,439





Savings
Plan





We
sponsor a defined contribution plan to help eligible employees provide for
retirement.  All contributions to the plan are made by
employees.  Currently, there are no Company-funded contributions to
the plan on behalf of employees.




53





13.  QUARTERLY RESULTS OF OPERATIONS
(UNAUDITED)





The
following table sets forth our unaudited quarterly results of operations for the
eight quarters ended December 31, 2008.





Three
      Months EndedMarch
      31, 2008
            
            
            June
      30, 2008
            
            
            September
      30, 2008
            
            
            December
      31, 2008Revenue
            
            $
            44,837
            
            
            $
            127,989
            
            
            $
            116,236
            
            
            $
            167,944Operating
      expenses
            
            
            (4,899,539
            )
            
            
            (4,536,560
            )
            
            
            (4,274,198
            )
            
            
            (11,028,882
            )Loss
      from operations
            
            
            (4,854,702
            )
            
            
            (4,408,571
            )
            
            
            (4,157,962
            )
            
            
            (10,860,938
            )Other
      income (expense)
            
            
            91,907
            
            
            
            165,352
            
            
            
            150,454
            
            
            
            107,525Deferred
      income tax benefit
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1,962,500Loss
      from discontinued operations
            
            
            (133,526
            )
            
            
            —
            
            
            
            —
            
            
            
            —Net
      loss
            
            $
            (4,896,321
            )
            
            $
            (4,243,219
            )
            
            $
            (4,007,508
            )
            
            $
            (8,790,913
            )Net
      loss per basic and diluted share
            
            $
            (0.09
            )
            
            $
            (0.08
            )
            
            $
            (0.07
            )
            
            $
            (0.16
            )Basic
      and diluted weighted averageshares
    outstanding
            
            
            51,027,422
            
            
            
            53,574,919
            
            
            
            53,574,919
            
            
            
            53,574,919





Three
      Months EndedMarch
      31, 2007
            
            
            June
      30, 2007
            
            
            September
      30, 2007
            
            
            December
      31, 2007Revenue
            
            $
            —
            
            
            $
            32,674
            
            
            $
            60,288
            
            
            $
            54,573Operating
      expenses
            
            
            (2,886,785
            )
            
            
            (3,310,958
            )
            
            
            (3,473,872
            )
            
            
            (5,339,108
            )Loss
      from operations
            
            
            (2,886,785
            )
            
            
            (3,278,284
            )
            
            
            (3,413,584
            )
            
            
            (5,284,535
            )Other
      income (expense)
            
            
            —
            
            
            
            (19,871
            )
            
            
            (11,156
            )
            
            
            42,869Loss
      from discontinued operations
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (24,687,959
            )Net
      loss
            
            $
            (2,886,785
            )
            
            $
            (3,298,155
            )
            
            $
            (3,424,740
            )
            
            $
            (29,929,625
            )Net
      loss per basic and diluted share
            
            $
            (288,678
            )
            
            $
            (329,816
            )
            
            $
            (342,474
            )
            
            $
            (0.65
            )Basic
      and diluted weighted averageshares
    outstanding
            
            
            10
            
            
            
            10
            
            
            
            10
            
            
            
            45,802,780




54




ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE





None.








ITEM 9A.  CONTROLS AND
PROCEDURES





Disclosure
Controls and Procedures




We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and that such information is accumulated and communicated
to the management, including our Vice Chairman (principal executive officer) and
the Chief Financial Officer (principal financial officer), as appropriate, to
allow timely decisions regarding required disclosure. As of the end of the
period covered by this Form 10-K, we carried out an evaluation, under the
supervision and with the participation of our management, including our Vice
Chairman and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures.  Based upon that
evaluation and subject to the foregoing, our Vice Chairman and Chief Financial
Officer concluded that our disclosure controls and procedures were effective as
of December 31, 2008.





In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives.  The Company’s management, including the Vice Chairman and
Chief Financial Officer, does not expect that our disclosure controls can
prevent all errors and all fraud.  A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met.  There
are inherent limitations in all control systems, including the realities that
judgments in decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake.  Additionally, controls can be
circumvented by the individual acts of one or more persons.  The
design of any system of controls also is based in part upon certain assumptions
about the likelihood of future events, and, while our disclosure controls and
procedures are designed to be effective under circumstances where they should
reasonably be expected to operate effectively, there can be no assurance that
any design will succeed in achieving its stated goals under all potential future
conditions.  Because of the inherent limitations in any control
system, misstatements due to error or fraud may occur and not be
detected.





Management’s
Annual Report On Internal Control Over Financial Reporting
 
 Management
is responsible for establishing and maintaining adequate internal control over
financial reporting for the Company.  With the participation of
our Vice Chairman and Chief Financial Officer, management conducted an
evaluation of the effectiveness of our internal control over financial reporting
as of December 31, 2008 based on the Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission.  Based on this evaluation, management concluded that our
internal control over financial reporting was effective as of December 31,
2008.  There were no changes in our internal control over financial
reporting during the quarter ended December 31, 2008 that materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
  This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by our
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only management’s report in
this annual report.








ITEM 9B.  OTHER
INFORMATION





None.





55





PART III





ITEM 10.  DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





DIRECTORS





The name
of and certain information regarding each director as of March 30, 2009, is set
forth below.  There are no family relationships among directors,
director nominees or executive officers of HSWI.  Each director is
elected to serve until the next Annual Meeting of Shareholders.





Name
            Age
            Position with
      HSWIJeffrey
      T. ArnoldMarch
      14, 2006
            39
            Chairman
      of the Board of DirectorsHenry
      N. AdornoOctober
      2, 2007
            61
            Vice
      Chairman of the Board of DirectorsTheodore
      P. BottsOctober
      2, 2007
            63
            DirectorBruce
      L. CampbellDecember
      14, 2007
            41
            DirectorBoland
      T. JonesOctober
      2, 2007
            49
            DirectorArthur
      F. KingsburyDecember
      14, 2007
            60
            DirectorKai-Shing
      TaoOctober
      2, 2007
            32
            Director





Jeffrey T. Arnold, age 39,
has served as a member and Chairman of HSWI’s Board of Directors since 2006. Mr.
Arnold served as the president and chief executive officer of HSWI until October
2, 2007.  Mr. Arnold has a proven track record in creating successful
business enterprises. Mr. Arnold’s most recent venture was The Convex Group,
which included HowStuffWorks, Inc. and was acquired by Discovery Communications,
Inc., or Discovery, in December 2007. Prior to starting The Convex Group, Mr.
Arnold was founder and CEO of WebMD, an ehealthcare company seeking to transform
healthcare into a more accessible, efficient and innovative system utilizing the
Internet. Between August 1998 and September 2000, Mr. Arnold negotiated over ten
acquisitions, growing WebMD from 60 people and $75,000 in annual revenues to
over 5,000 people and 2001 revenues of close to $1 billion. Additionally, at
WebMD Mr. Arnold raised over $1.5 billion in public and private capital in a 12
month period, negotiated over 100 strategic partnerships with both established
Fortune 500 and emerging companies and established a strong operational
management team. Prior to founding WebMD, Mr. Arnold was chairman and CEO of
Quality Diagnostic Services (QDS), a cardiac arrhythmia monitoring company,
which he founded in 1994. After growing QDS to one of the nation’s largest
cardiac-event monitoring companies, he soldQDS
to Matria Healthcare for $25 million in 1998. In 1997, Mr. Arnold started
Endeavor Technologies, Inc. to explore enhanced applications for Internet and
computer telephony services. Endeavor, with the proceeds from the sale of QDS,
became WebMD in August 1998.





56




Henry N. Adorno, age 61, has
served as a member and Vice Chairman of our Board of Directors since
2007.  Mr. Adorno is also the founder and President of Adorno &
Yoss, the largest certified minority-owned law firm in the country, with over
270 practicing attorneys. Mr. Adorno began his career working with the Dade
County Attorney’s Office in the Major Crimes Division.  He later
served as the Chief Assistant to State Attorney Janet Reno.  Beyond
his professional responsibilities, Mr. Adorno is the Chair of Our Kids, a
non-profit organization which utilizes community outreach to manage child
welfare and protection for abused, abandoned, and neglected
children.  Mr. Adorno holds a Bachelor of Arts and a Juris Doctor,
both from the University of Florida. Mr. Adorno is a member of the American Bar
Association, The Florida Bar Association, and the Miami Business
Forum.





Theodore P. Botts, age 63,
has served as a member of HSWI’s Board of Directors since 2007. He is also
President of Kensington Gate Capital, LLC, a private corporate finance advisory
firm. Since 2002 until its merger with HSW International, Mr. Botts served on
INTAC International’s board of directors as chairman of the audit committee.
Prior to 2000, Mr. Botts served in executive capacities at UBS Group and Goldman
Sachs. Mr. Botts is also a member the Board of Trustees and head of development
for REACH Prep, a non-profit organization serving the educational needs of
underprivileged African-American and Latino children in Fairfield and
Westchester counties since 2003. Mr. Botts graduated with honors from Williams
College and received a MBA from the NYU Graduate School of Business
Administration.





Bruce L. Campbell, age 41,
has served as a member of HSWI’s Board of Directors since 2007. He is currently
President of Digital Media and Corporate Development at Discovery, where he
directs worldwide business development, including acquisitions, joint ventures
and all major business transactions. His responsibilities include the
development of new distribution platforms for original content, the creation of
digital media extensions for Discovery’s stable of brands and oversight of
digital media services. Before joining Discovery in 2007, Mr. Campbell was
Executive Vice President, Business Development at NBC Universal, where he was
responsible for strategic planning, acquisitions and divestitures, joint
ventures and portfolio investments. Prior to his time at NBC, Mr. Campbell was a
lawyer at O’Melveny & Myers LLP. He is a graduate of Princeton University
and Harvard Law School.





Boland T. Jones, age 49, has
served as a member of HSWI’s Board of Directors since 2007. He is also Chairman
and Chief Executive Officer of Premiere Global Services, Inc. Prior to founding
Premiere Global Services, Inc. in 1991, Mr. Jones served as Chairman, Chief
Executive Officer and President of American Network Exchange, a diversified
transmission provider specializing in niche markets. Mr. Jones has received
numerous awards during his career, including being named Ernst & Young
Entrepreneur of the Year Southeast Region. Mr. Jones is also actively involved
in a number of community programs in education, cancer research and the arts.
Mr. Jones graduated with a degree in finance from Miami University in Ohio,
where he remains active as a guest lecturer and teacher at the University’s
Entrepreneurship Resource Center.





Arthur F. Kingsbury, age 60,
has served as a member of HSWI’s Board of Directors since 2007. He is currently
a private investor. Mr. Kingsbury has over thirty-five years of business and
financial experience in the media and communications sectors. His experience
includes financial, senior executive and director positions at companies engaged
in newspaper publishing, radio broadcasting, database publishing, internet
research, cable television and cellular telephone communications. Specific
positions included President and COO of VNU-USA, Inc., Vice Chairman and COO of
BPI Communications, Inc., and CFO of Affiliated Publications, Inc. Mr. Kingsbury
has served as a director on the boards of three other publicly traded companies,
NetRatings (NASDAQ), Affiliated Publications (NYSE-listed publisher of the
Boston Globe), and McCaw Cellular (NASDAQ). Mr. Kingsbury holds a BSBA in
Business Administration from Babson College.





Kai-Shing Tao, age 32, has
served as a member of HSWI’s Board of Directors since 2007.  He is
also Chairman and Chief Investment Officer of Pacific Star Capital, a private
investment group.  Prior to founding Pacific Star Capital, Mr. Tao was
a Partner at FALA Capital Group, a single family investment office, where he
headed the global liquid investments outside the operating companies. Mr. Tao is
also a member of the Real Estate Roundtable and US-China and US-Taiwan Business
Council.  Mr. Tao graduated from the New York University Stern School
of Business.




57





EXECUTIVE
OFFICERS




The
following table sets certain information about each of our executive officers
and other key employees as of March 30, 2009.




Name
            Age
            PositionExecutive
      OfficersHenry
      N. Adorno
            61
            Vice
      Chairman and Principal Executive OfficerGregory
      M. Swayne
            50
            President
      and Chief Operating OfficerShawn
      G. Meredith
            39
            Chief
      Financial OfficerOther Key
      EmployeesAlexandre
      de Freitas
            40
            Chief
      Executive Officer, HSW BrasilDouglas
      J. Hirsch
            38
            Senior
      Vice President, DailyStrengthEric
      J. Orme
            34
            Chief
      Technology OfficerBradley
      T. Zimmer
            30
            Executive
      Vice President and General Counsel




Executive
Officers





Henry N. Adorno has been Vice
Chairman of HSW International, Inc.’s Board of Directors and our Principal
Executive Officer since October 2007.  Mr. Adorno is also the founder
and President of Adorno & Yoss, the largest certified minority-owned
law firm in the country, with over 270 practicing attorneys. 
Mr. Adorno began his career working with the Dade County Attorney’s Office
in the Major Crimes Division.  He later served as the Chief Assistant to
State Attorney Janet Reno.  Beyond his professional responsibilities,
Mr. Adorno is the Chair of Our Kids, a non-profit organization which
utilizes community outreach to manage child welfare and protection for abused,
abandoned, and neglected children.  Mr. Adorno holds a Bachelor of
Arts and a Juris Doctor, both from the University of Florida. Mr. Adorno is
a member of the American Bar Association, The Florida Bar Association and the
Miami Business Forum.




Gregory M. Swayne has been our
President and Chief Operating Officer since October 2007.  Mr. Swayne
was previously the President and Chief Operating Officer of
HowStuffWorks, Inc., following its purchase by The Convex Group in 2002.
Mr. Swayne joined The Convex Group in 2001, and was part of the management
team of N2 Broadband, one of Convex’s first investments.  Prior to Convex,
Mr. Swayne was the co-founder and President of publicly-listed
A.D.A.M., Inc. and its predecessor Medical Legal Illustrations, Inc.
A.D.A.M. provides health information services and benefit management solutions
to healthcare organizations, employers, benefit brokers, consumers and the
educational market through its online offerings of health information,
decision-support applications, benefits management solutions and enrollment
services.  Mr. Swayne holds a Bachelor of Arts from the University of
South Carolina and a Master of Science in Medical Illustration from the Medical
College of Georgia.




Shawn G.
Meredith became our Chief Financial Officer in August
2008.  Ms. Meredith joined us in May 2008 as Vice President of
Finance.  Prior to joining us, she was a consultant to and Corporate
Controller for Network Communications, Inc., an Internet-integrated media
company and the largest national publisher of local printed and online magazines
for the real estate market, from September 2005 to April 2008.  Ms.
Meredith also held positions as vice president, finance and accounting for
Medical Doctor Associates, from October 2004 to August 2005, and as an audit
manager for PricewaterhouseCoopers LLP, from October 2001 to September
2004.  Ms. Meredith graduated from the University of Florida with a
Bachelor of Science in Accounting and a Master of Accounting from Florida
International University.  Ms. Meredith is a certified public
accountant.





58





Other
Key Employees





Alexandre de Freitas has been
our Chief Executive Officer, HSW Brasil since October 2006.  Mr. de
Freitas started his career at Citigroup Inc. (NYSE: C) in Brazil and rose to the
position of senior manager.  He moved to be the marketing director at
ABN-AMRO Bank (NYSE: ABN) to develop a new marketing strategy focused on
business expansion in Brazil.  During the last ten years he was the
Marketing and Sales Executive Vice President of UOL, the leading online media
portal and Internet company in Brazil.  Mr. de Freitas holds bachelor
degrees in Business Administration from University of São Paulo and Information
Technology from Mackenzie University, and is specialized in Marketing from FGV
Institute.





Douglas J. Hirsch has been our
Senior Vice President, DailyStrength since we acquired it.  He founded
DailyStrength in 2006, and has more than 12 years of experience conceiving,
building and managing the biggest community and entertainment sites on the
Web.  As one of the first employees of Yahoo Inc., he conceived and/or
managed product development for all of Yahoo's community and communication
products.  Between 1996 and 2001, Mr. Hirsch led product development
for services which generated more than 75% of Yahoo's traffic and virtually all
registrations.  After leaving Yahoo to travel around the world in
2001, Mr. Hirsch returned to Yahoo as the General Manager of Yahoo!
Entertainment.  In August 2005, Mr. Hirsch joined Facebook, Inc., as
the Vice President of Production.  During his tenure at Facebook, Mr.
Hirsch conceived, managed and launched Facebook's photo sharing product and
Facebook's high school product.  Mr. Hirsch is a magna cum laude
graduate of Tufts University, with additional coursework at Oxford University
and UCLA.





Eric J. Orme has been our
Chief Technology Officer since November 2007.  Mr. Orme has been
involved in information technology leadership in the web hosting, education
technology, and online media markets for the past fifteen years.  His
technical background includes work for both start-ups and larger global
corporations, including Georgia-Pacific, web.com, and Ashworth
University.  Mr. Orme has been central in orchestrating the launch of
the online media company into China and Brazil.





Bradley T. Zimmer has been
Executive Vice President, General Counsel and Corporate Secretary for HSW
International, Inc. since December 2007.  He previously served as
General Counsel and Corporate Secretary of The Convex Group, an entertainment
and media company, and its subsidiary HowStuffWorks, Inc. through the companies'
acquisition by Discovery Communications, Inc. in December 2007.  Prior
to The Convex Group, Mr. Zimmer was responsible for business strategy at
Southeast Interactive Technology Funds, a venture capital firm focused on
information technology and communications investments.  Mr. Zimmer
holds Bachelor of Arts in Public Policy and Juris Doctor degrees from
Duke University. He is a member of the American Bar Association and North
Carolina State Bar, and is a member of the boards of directors of Mobil
Travel Guide and Flexplay Technologies.




59






CORPORATE
GOVERNANCE MATTERS





Audit
Committee





The Audit
Committee of our Board of Directors is responsible for overseeing the
qualifications, performance and independence of our independent auditors, the
integrity of our financial statements and disclosures, the performance of our
internal audit function and internal controls, and compliance with legal and
regulatory requirements.  The Audit Committee currently consists of
Theodore P. Botts (Chairman), Boland T. Jones, Kai-Shing Tao and Arthur F.
Kingsbury, all of whom are independent directors as defined in Rule 4200(a)(14)
of the NASDAQ listing standards and Rule 10A(m)(3) of the Exchange
Act.  The Board has determined that Mr. Botts qualifies as an “audit
committee financial expert” as defined in Item 407(d) of Regulation S-K
promulgated by the SEC.





Selection
of Nominees for the Board of Directors





The
Nominating Committee of our Board of Directors is responsible for establishing
the procedures for our stockholders to nominate candidates to the Board of
Directors.  There were no material changes in 2008 to the procedures
by which security holders may recommend nominees to our Board of
Directors.





Code
of Business Conduct and Ethics





We have
adopted a Code of Business Conduct and Ethics that is designed to promote high
standards of ethical conduct by our directors and employees.  The Code
requires that our directors and employees avoid conflicts of interest, comply
with all laws and other legal requirements, conduct business in an honest and
ethical manner, and otherwise act with integrity and in HSWI’s best
interest.  It includes a code of ethics for our chief executive
officer, chief financial officer, chief accounting officer or controller, and
persons performing similar functions.





As a
mechanism to encourage compliance with the Code of Business Conduct and the Code
of Ethics, we have established procedures to receive, retain, and address
complaints received regarding accounting or auditing matters.  These
procedures ensure that individuals may submit concerns regarding questionable
accounting or auditing matters in a confidential and anonymous
manner.





In
addition, the Board of Directors routinely reviews its own performance to ensure
that the Board is acting in the best interests of HSWI and its
stockholders.





Our Code
of Business Conduct and Ethics is available for review under the Corporate
Governance section on our website at www.hswinternational.com.





Section
16(a) Beneficial Ownership Reporting Compliance





Section
16(a) of the Securities Exchange Act requires our officers and directors, and
persons who own more than 10% of a registered class of our equity securities, to
file reports of ownership on Form 3 and changes in ownership on Form 4 or Form 5
with the Securities and Exchange Commission and NASDAQ.  Officers,
directors and 10% stockholders are also required by SEC rules to furnish us with
copies of all such forms that they file.  Based solely on a review of
the copies of forms received by HSWI, or written representations from reporting
persons, we believe that during 2008, all of our officers, directors and 10%
stockholders complied with applicable Section 16(a) filing requirements, except
for the following:




·
            Discovery
      Communications, Inc.’s initial report on Form 3 was due on January 2, 2008
      and was filed on January 4, 2008;


·
            Eastern
      Advisors Capital Group LLC’s initial report on Form 3 was due on March 14,
      2008 and was filed on March 26, 2008, and its Form 4 reporting purchases
      of an aggregate of 521,000 shares of our Common Stock on March 20, 2008
      was due on March 24, 2008 and filed on March 31,
  2008;


·
            Gregory
      M. Swayne’s initial report on Form 3 was due on October 15, 2007 and his
      Form 4 reporting the grant of 100,000 stock options on October 10, 2007
      was due on October 12, 2007, both of which were filed in April 2008;
      and


·
            Henry
      N. Adorno’s Form 4 reporting the grant of 250,000 stock options on October
      10, 2007 was due October 12, 2007 and was filed in April
    2008.






60





ITEM
11.  EXECUTIVE COMPENSATION





Compensation
Discussion and Analysis





Introduction





Compensation
Committee Process





The
Compensation Committee of the Board of Directors approves all compensation and
awards to the individuals included on the Summary Compensation Table (the “named
executive officers”).  Annually, the Compensation Committee reviews
the performance and compensation of the principal executive officer (“PEO”) and,
following discussions with the PEO and, where it deems appropriate, other
advisors, establish any modifications to executives’ compensation levels for the
subsequent year. For the remaining named executive officers, the PEO makes
recommendations to the Compensation Committee for approval.





The
Compensation Committee met eleven times in 2008. The Compensation Committee’s
charter provides that it will (i) develop, approve, and report to the Board
regarding the Company's overall compensation philosophy and strategy,
(ii) establish corporate goals and objectives relevant to PEO compensation,
evaluate the PEO’s performance in light of those goals and objectives, and
determine and approve the PEO’s compensation level based on this evaluation,
(iii) review and approve the compensation structure for the other executive
officers and review and approve the PEO’s recommendations with respect to
executive officer compensation, (iv) oversee PEO and executive succession
planning and development, and (v) make recommendations to the Board with
respect to director compensation. In addition to the committee members, in the
past the PEO and other officers from the Company have been asked to attend
meetings from time to time as the committee deems appropriate. The Compensation
Committee makes reports to the full Board of Directors based on its activities
and, for certain activities, such as the determination of Board of Directors
compensation, the Compensation Committee will make recommendations to the full
Board for approval.





General
Compensation Philosophy, Objectives and Purpose





We work
to attract and retain proven, talented executives who we believe will help to
put us in the best position for growth and to meet our Company’s objectives. We
attempt to recruit executives with technology, internet, media or other
experience that we believe is transferable to our business with the expectation
that they will share their knowledge to create and develop a successful
organization. We strive to provide our named executive officers with a
compensation package that is competitive for a given position in our industry
and geographic region. The purpose of our executive compensation program is to
provide incentives for our executives to meet or exceed expectations. We believe
our compensation objectives are achieved through a combination of base salary,
incentive bonus, equity compensation and other benefits. With the exception of
equity, or stock-based compensation, the compensation is paid in
cash.





Our
stock-based compensation provides a means for our executives to obtain a degree
of ownership of our Company in an attempt to align corporate and individual
goals. The issuance of equity compensation is generally not based on performance
but rather a component of each officer’s initial compensation offering package.
As bonuses are based on both individual and company-wide performance and
objectives, we offer a market-competitive base salary for executive positions so
as to mitigate the volatility we may experience with regards to overall
performance and objectives. It is our philosophy that bonuses are to be used to
provide an added incentive to meet additional objectives which exceed ordinary
expectations and not as salary itself.





61





Elements
of Total Compensation





Components
of our executive compensation are as follows:





Base Salary Base salary for
our executives is determined based on the specific level and experience of the
executive and responsibilities of a position. Generally, the goal is to achieve
a salary that is competitive with the salary for similar positions in similar
industries within our Company’s geographic region. Salaries are reviewed during
the annual review process when an increase, if any, is determined. Any increase
in salary for the named executive officers is subject to Compensation Committee
approval. In addition, base salaries may be adjusted, on occasion at the
Compensation Committee’s discretion, to realign a particular salary or salaries
with current market conditions.  Prior to his relocation to Atlanta in
2008, we paid Mr. Adorno an annual salary of $225,000 and a living expense
allowance of $180,000 per year.  Upon his move, we eliminated the
living expense allowance and increased his base salary by $180,000.





Incentive Bonus We use bonuses
to provide an added incentive to meet additional objectives which exceed
ordinary expectations. For 2008, the target bonuses were based on certain
stretch goals reflecting operational and financial key performance indicators of
our Company.





On
August 12, 2008, our Board of Directors adopted the 2008 Executive
Compensation Plan (“Plan”).  The purpose of the Plan was to promote the
interests of our company by motivating our key employees to execute upon and
achieve our business plan and to retain key employees.




The Plan
established a bonus pool consisting of an aggregate of 30,769 restricted shares
of our common stock, 100,000 options to acquire shares of our common stock and
$100,000, which is to be used as a tax offset for the equity portion of the
Plan.  The shares of restricted stock and shares issuable under the options
granted under the Plan will be issued out of the shares available under our 2006
Equity Incentive Plan.  Six key employees participated in the Plan,
including our Vice Chairman, Henry Adorno, our President and Chief Operating
Officer, Gregory Swayne, and our Chief Financial Officer, Shawn
Meredith.




The
performance criteria are tied to foreign website development, activity and
revenue during 2008. Each criterion achieved caused 33.4%, 33.3% and 33.3%,
respectively, of the bonus pool to vest. As only the foreign website
development criteria was met during 2008, only 33.4% of the bonus pool vested
and was paid to the key employees.




Long-term Equity Incentive AwardsGranting stock options encourages our executives to focus on our
Company’s future success. The Company issues grants for stock options under the
2006 Equity Incentive Plan adopted April 31, 2006.  The number of
grants recipients receive is generally based on their particular position within
the Company.  All grants require the approval of the Compensation
Committee of our Board.  In the event of a change in control in HSW
International, any unvested options held by each of our named executive officers
will fully vest on the date of the change of control.





Payments
in Connection with a Change of Control or Termination





We
provided protection to Mr. Darnell by including severance provisions in his
employment agreement.  Severance payments will only be paid in the
event that we terminate Mr. Darnell without cause as defined in his employment
agreement.  In the event of a change in control in HSW International,
any unvested options held by each of Messrs. Arnold, Adorno and Swayne and Ms.
Meredith shall fully vest on the date of the change of control.






62





Summary
Compensation Table





The
following table sets forth information concerning the compensation awarded to,
earned by, or paid for services rendered to us and our subsidiaries in all
capacities during the years ended December 31, 2007 and December 31, 2008 by (1)
our principal executive officer, (2) our two most highly compensated executive
officers other than the principal executive officer who were serving as
executive officers at the end of the last completed fiscal year, and (3) an
additional individual for whom disclosure would have been provided but for the
fact that he was not serving as an executive officer of HSWI at the end of the
last completed fiscal year.  The officers listed on the table set
forth below are referred to collectively in this annual report as the “Named
Executive Officers”.





Summary
Compensation Table





Name and Principal
      Position
            Year
            
            Salary
              ($)
            
            
            Bonus
              ($)
            
            
            Option
      Awards
              ($)
            
            
            All
      Other
              Compensation
              ($)(1)
            
            
            Total
              ($)Henry
      N. AdornoVice
      Chairman and
            2008
            
            $
            405,012
            
            
            $
            10,020
            
            
            $
            32,064
            
            
            
            
            
            $
            447,096Principal Executive
      Officer
            2007
            
            $
            225,000
            
            
            
            
            
            
            $
            944,550
            
            
            $
            180,000
            
            
            $
            1,349,550J.
      David DarnellChief
      Financial Officer – Retired (2)
            2008
            
            $
            131,250
            
            
            
            
            
            
            
            
            
            
            $
            300,000
            
            
            $
            431,2502007
            
            $
            187,500
            
            
            $
            25,000
            
            
            
            
            
            
            
            
            
            
            $
            212,500Gregory
      M. SwaynePresident
      and Chief Operating Officer
            2008
            
            $
            225,000
            
            
            $
            10,020
            
            
            $
            32,064
            
            
            
            
            
            
            $
            267,0842007
            
            $
            158,855
            
            
            
            
            
            
            $
            377,820
            
            
            
            
            
            
            $
            536,675Shawn
      G. MeredithChief
      Financial Officer (3)
            2008
            
            $
            125,939
            
            
            $
            3,340
            
            
            $
            111,938
            
            
            
            
            
            
            $
            241,217





(1)
            Henry
      N. Adorno’s Other Compensation consisted of a living expense
      allowance.  J. David Darnell’s Other Compensation consisted of a
      $200,000 severance payment and $100,000 of consulting
  fees.





(2)
            J.
      David Darnell’s 2007 compensation includes compensation paid by
      INTAC.  Mr. Darnell retired as our Chief Financial Officer
      effective July 31, 2008.  We entered into a six month consulting
      agreement with Mr. Darnell ending January 31, 2009.  Mr. Darnell
      was paid $20,000 per month in exchange for his
  services.





(3)
            Shawn
      Meredith was appointed Chief Financial Officer on August 12,
      2008.





63





Outstanding
Equity Awards at Year-End 2008





The
following table provides information about the number and value of unexercised
options for the named executive officers as of December 31, 2008.  No
named executive officers exercised any stock options during fiscal years 2008 or
2007 and no SARs have been granted.





Name
            Number
      of
              securities
              underlying
              unexercised
              options
              (#)
              exercisable
            Number
      of
              securities
              underlying
              unexercised
              options
      (#)
              unexercisable
            Option
              exercise
              price
              ($)
            Option
              expiration
              dateHenry
      N. Adorno
            194,444
            55,556
            $6.50
            August
      23, 2016Henry
      N. Adorno
            194,444
            55,556
            $7.10
            October
      10, 2017Henry
      N. Adorno
            —
            10,020
            $3.25
            August
      12, 2018Gregory
      M. Swayne
            77,778
            22,222
            $6.50
            August
      23, 2016Gregory
      M. Swayne
            77,778
            22,222
            $7.10
            October
      10, 2017Gregory
      M. Swayne
            —
            10,020
            $3.25
            August
      12, 2018J.
      David Darnell
            150,000
            —
            $3.50
            July
      29, 2012Shawn
      G. Meredith
            —
            25,000
            $3.80
            May
      28, 2018Shawn
      G. Meredith
            —
            25,000
            $3.25
            August
      12, 2018Shawn
      G. Meredith
            —
            3,340
            $3.25
            August
      12, 2018





Compensation
of Directors





Our
certificate of incorporation and bylaws specifically grant to our Board of
Directors the authority to fix the compensation of the directors.  For
2008 service, we paid our non-employee directors the amounts set forth in the
following table:





2008
Director Compensation





Name
            
            Fees
      Earned or Paid in Cash ($)(1)
            
            Stock
      Awards ($)
            
            Option
      Awards ($)(2)
            
            All
      Other Compensation ($)
            
            Total
              ($)(2)Jeffrey
      T. Arnold
            
            $0
            
            $0
            
            $402,500
            
            $0
            
            $402,500Theodore
      P. Botts
            
            $20,000
            
            $35,000
            
            $0
            
            $0
            
            $55,000Kai-Shing
      Tao
            
            $17,500
            
            $35,000
            
            $0
            
            $0
            
            $52,500Arthur
      F. Kingsbury
            
            $17,500
            
            $35,000
            
            $0
            
            $0
            
            $52,500Boland
      T. Jones
            
            $15,000
            
            $35,000
            
            $0
            
            $0
            
            $50,000





(1)           Includes
annual retainers for members of the Board of Directors and retainers for the
chairman of each of the Audit, Compensation and Nominating
Committees.





(2)           Bruce
L. Campbell and Jeffrey T. Arnold received no compensation as directors because
they are employed by Discovery, which owns approximately 43% of our
shares.  Mr. Arnold received all of his compensation pursuant to his
Consulting Agreement, described below.





On March
10, 2008, our board of directors adopted a Director Compensation Plan for the
year ended December 31, 2008, for its independent directors. Such plan provides
for the following:





Annual
      cash retainer
            $15,000Annual
      restricted stock grant value
            $35,000Total
      annual compensation
            $50,000







64





In
addition, the Chairmen of our Compensation, Governance and Nominating Committees
each receives additional cash compensation of $2,500 per year, and the Chairman
of our Audit Committee receives additional compensation of $5,000 per year. We
also reimburse all directors for HSWI-related travel expenses in accordance with
our Company-wide policy.


The terms
for the payment of our independent director compensation include the
following:





·
            Cash
      retainers are paid quarterly in
arrears.


·
            Restricted
      stock is granted at the beginning of the year in an amount then equal to
      the specified cash value determined as the average of the first 15 trading
      days of the year, resulting in a per share value for our 2008 grant of
      $4.23.


·
            Restricted
      stock vests in full on December 31 of the year of grant, contingent upon
      the recipient having attended at least 75% of board meetings held during
      the year; otherwise, vesting will be prorated based on
      attendance.





Arnold
Consulting Agreement





On
September 22, 2008, we amended the consulting agreement with Mr. Arnold that we
originally entered into on August 23, 2006.  The amendment extended
the term of the consulting agreement through May 31, 2009, and provided as
compensation for the extended service term a grant to Mr. Arnold of a five-year
option to acquire 350,000 shares of our common stock.  We agreed with
Mr. Arnold that the options would have a per share exercise price of $3.68,
which represents the price at which we had most recently sold shares to
investors, and was higher than the market closing price on the date of grant,
September 22, 2008.  The options will vest at the end of the amended
term, May 31, 2009.





The
consulting agreement permits Mr. Arnold to engage in non-competitive employment
or consulting activities, including specifically activities for and on behalf of
HowStuffWorks.  Mr. Arnold is prohibited from competing with us in our
territories during the term of the consulting agreement and for a period of one
year thereafter.  The consulting agreement provides that Mr. Arnold is
obligated to notify either HowStuffWorks or us of any corporate opportunities
that may benefit us as well as HowStuffWorks, and HowStuffWorks and we will
thereafter determine how to act upon such opportunity.





As
compensation for the initial term of his consulting services, we granted Mr.
Arnold a ten-year option to acquire 3,000,000 shares of HSW International's
common stock, which grant was made on August 23, 2006.  The consulting
agreement also provided that we grant options to acquire an additional 1,000,000
shares to one or more individuals in the eligible grantee group, which includes
Mr. Arnold.  The consulting agreement further provided that Mr. Arnold
shall recommend to us a suggested manner of allocating the additional options,
and we granted 1,000,000 options based on Mr. Arnold’s suggestion on August 23,
2006.  All of the options granted under the initial term of the
consulting agreement have a per share exercise price of $6.50, the fair market
value on the date of grant.  All of these initial 4,000,000 options
have vested in full.





In the
event that Mr. Arnold is terminated for cause under the consulting agreement,
any unvested options shall terminate with the termination of the consulting
agreement.  Cause is defined in the consulting agreement as (i)
conviction of, or plea of nolo contendere to, a felony that results in material
damage to our business or reputation, (ii) gross misconduct that results in
material damage to our business or reputation, (iii) act of dishonesty or fraud
in connection with the performance of his responsibilities with the intention
that such act results in improper and substantial personal enrichment, (iv)
violation or breach of any contractual duty that results in substantial monetary
harm to us or any fiduciary duty owed to us.  Cause shall not exist
under (iv) if such act is done by Mr. Arnold in the good faith belief that it
would be beneficial to us or failure to act is done in the good faith belief
that the act would be materially harmful to us.





If a
change of control (as defined in our equity incentive plan) of the company shall
occur during the term of the consulting agreement, any unvested options shall
fully vest as of the date of the change in control.  To the extent
vested, the options shall be irrevocable and may be exercised by Mr. Arnold’s
heirs or estate.





65




ITEM
12.  SECURITY
OWNERSHIPOF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS





The
following table sets forth certain information regarding the beneficial
ownership of our common stock as of March 30, 2009 for the
following:





·
            Each
      person or entity known to own beneficially more than 5% of the outstanding
      common stock;


·
            Each
      director;


·
            Each
      of the executive officers named in the Summary Compensation table;
      and


·
            All
      current executive officers and directors as a
  group.





Applicable
percentage ownership is based on 53,698,292 shares of common stock outstanding
as of March 30, 2009, together with applicable options for each
stockholder.  Beneficial ownership is determined in accordance with
the rules of the SEC, based on factors including voting and investment power
with respect to shares.  Common stock subject to options currently
exercisable, or exercisable within 60 days after March 30, 2009, are deemed
outstanding for the purpose of computing the percentage ownership of the person
holding those options, but are not deemed outstanding for computing the
percentage ownership of any other person.  The address of each
executive officer and director is c/o HSW International, Inc., One Capital City
Plaza, 3350 Peachtree Road, Suite 1600, Atlanta, Georgia 30326. For information
relating to beneficial owners of greater than 5% of our common stock who are not
insiders, we rely upon the reports filed by such persons or entities on Schedule
13G.





Name
      of Beneficial Owners
            
            Number
      of Shares
              Beneficially
      Owned
            
            
            Percentage
      of
              OwnershipDiscovery
      Communications, Inc.(1)
            
            
            23,190,727
            
            
            
            43.19
            %One
      Discovery PlaceSilver
      Spring, Maryland 20814Eastern
      Advisors Capital Group, Ltd.(2)
            
            
            8,007,259
            
            
            
            14.91
            %c/o
      Caledonian Fund Services (Cayman) LimitedCaledonian
      House69
      Dr. Roy’s DriveGrand
      Cayman KY1 - 1102Cayman
      IslandsCapital
      Research Global Investors
            
            
            3,686,380
            
            
            
            6.86
            %333
      South Hope StreetLos
      Angeles, California 90071





66





Name of
      Beneficial Owners
            
            Number
      of Shares
              Beneficially
      Owned
            
            
            Percentage
      of
              OwnershipExecutive
      Officers and Directors:Jeffrey
      T. Arnold (3)
            
            
            26,400,727
            
            
            
            49.16
            %Henry
      N. Adorno (4)
            
            
            476,728
            
            
            
            *Gregory
      M. Swayne (5)
            
            
            214,229
            
            
            
            *J.
      David Darnell (6)
            
            
            184,000
            
            
            
            *Theodore
      P. Botts (7)
            
            
            108,274
            
            
            
            *Shawn
      G. Meredith (8)
            
            
            13,076
            
            
            
            *Boland
      T. Jones
            
            
            8,274
            
            
            
            *Arthur
      F. Kingsbury
            
            
            8,274
            
            
            
            *Kai-Shing
      Tao
            
            
            8,274
            
            
            
            *Bruce
      L. Campbell
            
            
            —
            
            
            
            *All
      Executive Officers and Directors as a Group (10 people)
            
            
            27,421,856
            
            
            
            51.07
            %





*
            Represents
      less than 1%.





(1)
            Includes
      22,940,727 shares of our common stock and 250,000 exercisable warrants
      beneficially owned by HowStuffWorks,
Inc.





(2)
            Based
      on information contained in Schedule 13G/A filed with the SEC on February
      12, 2009 by Eastern Advisors Capital Group, LLC, Eastern Advisors Capital,
      Ltd. and Scott Booth.  All three report shared voting and
      dispositive power over the shares.  The address for Eastern
      Advisors Capital Group, LLC and Scott Booth is 101 Park Avenue, 48th
      floor, New York, New York 10178.





(3)
            Includes
      (i) 22,940,727 shares of our common stock and 250,000 exercisable warrants
      beneficially owned by HowStuffWorks, Inc., over which Mr. Arnold could be
      deemed to have voting and dispositive power in his capacity as Chief
      Executive Officer of HowStuffWorks, (ii) 3,200,000 shares of our common
      stock that may be acquired upon the exercise of options and (iii) 10,000
      shares owned directly by Mr.
Arnold.





(4)
            Includes
      467,498 shares of our common stock that may be acquired upon the exercise
      of options and 9,230 shares owned by Mr.
Adorno.





(5)
            Includes
      204,999 shares of our common stock that may be acquired upon the exercise
      of options and 9,230 shares owned by Mr.
Swayne.





(6)
            Includes
      150,000 shares of our common stock that may be acquired upon the exercise
      of options and 34,000 shares owned by Mr.
  Darnell.





(7)
            Includes
      100,000 shares of our common stock that may be acquired upon the exercise
      of options and 8,274 shares owned by Mr.
Botts.





(8)
            Includes
      10,000 shares of our common stock that may be acquired upon the exercise
      of options and 3,076 shares owned by Ms.
  Meredith.





67





Equity
Compensation Plan Information





The
following table provides information as of December 31, 2008 on our equity
compensation plans currently in effect.





(a)
              Number
      of Securities to be issued Upon Exercise of Outstanding Options, Warrants
      and Rights
            
            
            (b)
              Weighted
      Average Exercise Price of Outstanding Options, Warrants and
      Rights
            
            
            (c)
              Number
      of Securities Remaining Available for Future Issuance Under Equity
      Compensation Plans (Excluding Securities RelatedEquity
      compensation plans approvedby security
holders
            
            
            7,603,456
            
            
            $
            6.30
            
            
            
            896,544Equity
      compensation plans not approvedby security
holders
            
            
            —
            
            
            $
            N/A
            
            
            
            —Total
            
            
            7,603,456
            
            
            $
            6.30
            
            
            
            896,544






68




ITEM 13.  CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE





Director
Independence





Our Board
of Directors is currently composed of seven directors, four of whom our Board
has determined to be independent within the meaning of the NASDAQ Marketplace
Rules.  These four directors are Messrs. Botts, Jones, Kingsbury and
Tao.  As part of such determination of independence, our Board has
affirmatively determined that none of these directors has any relationship with
HSWI that would interfere with the exercise of independent judgment in carrying
out his responsibilities as a director.





Related
Party Transactions





Our
policy regarding transactions with our officers, directors, principal
shareholders and their affiliates is that they may be made on terms no less
favorable to us than could have been obtained from unaffiliated third
parties.  All transactions between us and our officers, directors,
principal stockholders and their affiliates must be approved by our Audit
Committee or a majority of the disinterested directors, and must continue to be
on terms no less favorable to us than could be obtained from unaffiliated third
parties.





Contribution
Agreements





Pursuant
to the terms of two contribution agreements, HowStuffWorks contributed content
owned by or licensed to HowStuffWorks to us by granting to us a perpetual, fully
paid, royalty-free, sublicensable, exclusive license in certain territories. The
content specifically consists of the right to render Chinese and Portuguese
translations of, the right to publish or use any or all actual renderings in the
translated languages and all such actual renderings of, such licensed and
sublicensed content, including derivative works, solely in digital and/or
electronic form. All sublicensed content is subject to the terms, conditions and
restrictions set forth in the applicable third party licenses from which the
sublicensed content is sublicensed. HowStuffWorks is the sole and exclusive
owner of the licensed content, the applicable third party licensors are the sole
and exclusive owners of the applicable sublicensed content and we are the sole
and exclusive owner of the content, subject to HowStuffWorks and its licensors’
rights in the underlying content.





HowStuffWorks
also granted to us a limited, perpetual, fully paid, royalty-free,
non-sublicensable, non-transferable, exclusive license in the territories to (i)
use the content solely for purposes of translating it into the translation
languages, and (ii) use limited excerpts of the licensed content translated into
the translation languages in print format with limited distribution to
businesses solely for purposes of marketing, business development, financings
and other similar legitimate business purposes, provided that any such limited
print excerpts are not distributed publicly.





HowStuffWorks
may terminate the licenses in either of the territories upon written notice to
us if: (i) we file a petition for bankruptcy or are adjudicated bankrupt; (ii) a
petition in bankruptcy is filed against us and this petition is not dismissed
within ninety calendar days; (iii) we become insolvent or make an assignment for
the benefit of our creditors or an arrangement for our creditors pursuant to any
bankruptcy law; (iv) we discontinue the business that is covered by either of
the contribution agreements; (v) a receiver is appointed for us or our business;
or (vi) we are in material breach of any of the terms or conditions set forth in
either of the contribution agreements, which breach remains uncured 30 days
after written notice of such breach from HowStuffWorks so long as such material
breach was not caused by any action or inaction of HowStuffWorks, and
HowStuffWorks did not prevent or limit our attempts to cure such
breach.





Update
Agreement





Pursuant
to the terms of an update agreement, HowStuffWorks will provide all updates
(i.e., modifications and new content) to us for our purchase. With respect to
updated content that we elect to purchase, HowStuffWorks will grant to us the
same license rights as those granted pursuant to the contribution agreements
with respect to any updates to the content licensed pursuant to the contribution
agreement for a fee equal to (i) one percent per territory of HowStuffWorks’
fully allocated costs directly attributable to producing the updates purchased
by us and (ii) HowStuffWorks’ actual cost in transferring the purchased updates
to us, plus (iii) five percent of (i) and (ii) above. Sublicensed content
restrictions, ownership rights and termination rights are the same as those
granted pursuant to the contribution agreements.  HowStuffWorks may
suspend its obligation to provide updates to us if we fail to pay any update fee
for 90 days after such fee was due or if we become insolvent.





69




Letter
Agreement





Pursuant
to the terms of a letter agreement, we have the option to acquire the exclusive
digital publishing rights for the content in India and Russia in the local
languages on the same terms and conditions as those with respect to China and
Brazil under the contribution agreements and the update agreement.  We
have the right to exercise this option until April 2, 2009. If we exercise this
option, a limited partnership or limited liability company will be formed, and
we will, and will also cause INTAC to, contribute all of their respective assets
to the formed entity.  In exchange, we and INTAC will receive in the
aggregate a number of units in the formed entity equal to the total number of
shares of our common stock then outstanding. The number of units to be received
by us and INTAC will be allocated based on the relative fair market value of
their assets contributed to the formed entity.  HowStuffWorks will
contribute the exclusive digital publishing rights for the content in India and
Russia to the formed entity and receive 6,000,000 units in the
entity.  HowStuffWorks will have the right to exchange any or all of
its units for shares of our common stock. Income and loss of the formed entity
will be allocated among the parties on a pro rata basis. Upon the issuance of
any shares of our common stock, we will be issued from the formed entity one
additionalunit for each share of our common
stock issued. In exchange, we will transfer to the formed entity the net
proceeds (if any) received by us upon the issuance of such shares. As a result
of the consummation of the HowStuffWorks and Discovery merger, the agreement was
amended to provide that HSW International’s option to acquire the exclusive
digital publishing rights for HowStuffWorks’ content in India and Russia cannot
be exercised so long as the issuance of securities in connection with such
exercise would result in HowStuffWorks’ ownership of HSW International, directly
or indirectly, exceeding 50%; provided that the option shall be extended for any
time period during which it cannot be exercised in accordance with the
foregoing.





Trademark
License Agreement





A
trademark side letter dated April 20, 2006, between HowStuffWorks and HSW
International was amended to provide that the license fee will be 2% of HSW
International’s net revenue derived from use of the licensed name and marks in
the territory, up to a limit of $100,000 annually for the territory, and that
HSW International shall have the right to an option to an exclusive license from
HowStuffWorks for use of HowStuffWorks’ name and other marks in India and
Russia, which right must be exercised at the same time the option contemplated
by the India and Russia Side Letter Agreement is exercised and for which the
license fee will be 2% of HSW International’s net revenue derived from use of
the licensed name and marks in India and Russia, up to an aggregate limit of
$100,000 annually for India and Russia.





Stockholders
Agreement





Transfer Restrictions.
HowStuffWorks may not make or solicit any sale of, or create, incur or assume
any encumbrance with respect to, our common stock issued to it pursuant to the
asset contribution (referred to as the HowStuffWorks asset contribution stock)
during the period ending (i) 12 months after the closing of our merger with
INTAC with respect to one-third of the shares of HowStuffWorks asset
contribution stock, (ii) 18 months after the closing of the merger with respect
to the next one-third of the shares of HowStuffWorks asset contribution stock
and (iii) 24 months after the closing of the merger with respect to the
remaining one-third of the shares of HowStuffWorks asset contribution stock,
except that during the applicable restricted period HowStuffWorks may make or
solicit a sale to a permitted transferee.  No sale of HowStuffWorks
asset contribution stock to a permitted transferee will be effective if it was a
purpose of such transfer to circumvent the restrictions above.





Corporate Governance. HSW
International and HowStuffWorks have entered into a First Amendment to Amended
and Restated Stockholders Agreement.  HowStuffWorks has the right to
designate three directors of HSW International (one of whom shall be an
independent director), and HowStuffWorks has the right to designate the
chairperson of the Nominating and Governance Committee. All shares of HSW
International owned by HowStuff Works in excess of 45% of the outstanding shares
of HSW International as of any applicable record date, if any, shall be voted in
exact proportion to the vote of HSW International stockholders other than
HowStuffWorks.  HowStuffWorks will have the right to vote in its
discretion its shares up to and including 45% of the outstanding shares as of
any applicable record date.  The three HowStuffWorks-designated
members are Jeffrey Arnold, Arthur Kingsbury and Bruce Campbell.





Additional Content. If we
acquire any rights in any text, images, designs, graphics, artwork or other
content (referred to in this Annual Report on Form 10-K as the additional
content), we will use commercially reasonable efforts to obtain, as a part of
such acquisition, (i) the worldwide digital publishing rights to such additional
content and (ii) digital publishing rights for HowStuffWorks in respect of such
additional content for use outside the territories ((i) and (ii), referred to as
the additional rights). Notwithstanding the foregoing, we will not be required
to pay or be obligated to incur additional fees or costs for additional rights
obtained for HowStuffWorks unless HowStuffWorks agrees to bear such additional
fees and/or costs.





70






Non-Competition. We agree
that, during the term of the stockholders agreement, we will not, and will use
our best efforts to cause each of our subsidiaries to not, within the United
States, (a) enter into any agreement with, hold any equity or financial interest
in, or permit our name or any part thereof to be associated in business with,any person that provides any services or
products that compete with any services or products of HowStuffWorks in the
United States, or (b) otherwise provide any services or products that compete
with any services or products of HowStuffWorks in the United States, except with
the prior written consent of HowStuffWorks.





Termination. The stockholders
agreement may be terminated by written agreement of all parties with rights
under the stockholders agreement, or upon the expiration of (i) all rights
created pursuant to the stockholders agreement and (ii) all applicable statutes
of limitations applicable to the enforcement of claims under the stockholders
agreement, except that our right to participate in other markets transactions
and HowStuffWorks’ rights to any additional content will terminate three years
after the date of the stockholders agreement. The rights of HowStuffWorks
pursuant to the provisions regarding transfer restrictions and corporate
governance will terminate on the date HowStuffWorks beneficially owns less than
10% of our common stock on a fully diluted basis. The transfer restrictions will
terminate upon a change of control of us or a sale of all or substantially all
of our assets.





Registration Rights Agreements





In
connection with the merger, we also entered into a registration rights agreement
with HowStuffWorks that provides it the right to make three requests to us to
register its shares on Form S-3, and unlimited requests to us to include shares
on other registration statements filed by us.





Stock
Purchase Agreements





In
connection with the merger, Ashford Capital Partners, L.P. Inc., which held
approximately 5.3% of INTAC’s common stock prior to the merger, purchased
456,621 shares of our common stock for a price per share equal to $6.57, subject
to adjustment on the eleventh trading day after the registration statement for
their shares became effective. On February 4, 2008, an additional 358,596 shares
of our common stock were issued to Ashford Capital Partners, L.P. pursuant to
the purchase price adjustment.





In
connection with the merger, DWS Finanz-Service GmbH (one of the European
investors) agreed to purchase $16 million of our common stock on the eleventh
trading day after the registration statement for their shares was declared
effective by the SEC. In connection with the closing of such issuance, the
purchase amount was reduced to approximately $11 million.  The
purchase price for the common stock was the lesser of $6.57 or 90% of the 10
trading day volume weighted average price of our common stock commencing on the
first trading day following the date on which the registration statement for the
resale of such shares was declared effective by the SEC. The terms of the stock
purchase were the same as the other European investors (with one investor
subject to an additional provision that if the per share purchase price
calculated is greater than the highest trading price of our common stock on the
closing date of the purchase, then the per share purchase price will be adjusted
to be such highest trading price). Deutsche Bank Aktiengesellschaft , an
affiliate of DWS Finanz-Service GmbH, owned approximately 8.8% of INTAC’s common
stock prior to the merger.





Sale
of the INTAC Legacy Businesses and Related Transactions





As
described in Item 1.
Business, in February and March 2008 we sold two INTAC legacy businesses
to Wei Zhou, who was the president and chief executive officer of INTAC, for
5,000,000 of our common shares owned by Mr. Zhou. Simultaneous with the
disposition, we sold the 5,000,000 shares we received from Mr. Zhou to the
Eastern Advisors funds.  As a result of these transactions, Eastern
Advisors beneficially owns approximately 11.07% of our outstanding
stock.





71




ITEM 14.  PRINCIPAL
ACCOUNTANT FEES AND SERVICES





Summary of Auditor Fees and Pre-Approval
Policy





Our Audit
Committee has adopted a policy for the pre-approval of all audit and permitted
non-audit services that may be performed by our independent registered public
accounting firm. Under this policy, each year, at the time it engages the
auditors, the Audit Committee pre-approves the audit engagement terms and fees
and may also pre-approve detailed types of audit-related and permitted tax
services, subject to certain dollar limits, to be performed during the year. All
other permitted non-audit services are required to be pre-approved by the Audit
Committee on an engagement-by-engagement basis. All of the auditor fees for the
last two years, as detailed below, were pre-approved by the Audit Committee or
full Board. The Audit Committee may delegate its authority to pre-approve
services to one or more of its members, whose activities are reported to the
Audit Committee at each regularly scheduled meeting.





The
following table summarizes the aggregate fees billed for professional services
rendered to HSWI by Grant Thornton LLP in 2007 and 2008.  A
description of these various fees and services follows the table.





2007
            
            
            2008Audit
      Fees
            
            $
            654,094
            
            
            $
            299,531Audit-Related
      Fees
            
            $
            21,646
            
            
            $
            —Tax
      Fees
            
            $
            —
            
            
            $
            —All
      Other Fees
            
            $
            —
            
            
            $
            —Total
            
            $
            675,740
            
            
            $
            299,531





Audit
Fees





The
aggregate fees billed to us by Grant Thornton LLP in connection with the annual
audit, for the reviews of HSWI’s financial statements included in the quarterly
reports on Form 10-Q, and for other services normally provided in connection
with statutory and regulatory filings, were approximately $654,094 for 2007 and
$299,531 for 2008.





Audit-Related
Fees





The
aggregate fees billed to us by Grant Thornton LLP for audit-related services
were approximately $21,646 for due diligence related services in
2007.  Grant Thornton LLP did not provide audit-related services for
2008.





Tax
Fees





Grant
Thornton LLP did not provide tax related services for 2007 or 2008.





All
Other Fees





We did
not engage Grant Thornton LLP for any services other than those listed above
during 2007 or 2008.





72





PART IV





ITEM
15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES





SCHEDULE
II:  VALUATION AND QUALIFIYING ACCOUNTS





For the
years ended December 31, 2008 and 2007





Schedule
II


HSW
International, Inc.


Valuation &
Qualifying Accounts





AdditionsBalance
      at
            
            
            chargedbeginning
            
            
            to
      costs and
            
            
            
            
            
            Balance
      atClassification
            
            of
      year
            
            
            expenses
            
            
            Deductions
            
            
            end
      of yearAllowance
      for doubtful accounts:2008
            
            $
            —
            
            
            
            15,343
            
            
            
            —
            
            
            $
            15,3432007
            
            $
            —
            
            
            
            —
            
            
            
            —
            
            
            $
            —





All other
schedules have been omitted because they are not required, not applicable, or
the required information is otherwise included.





(a)(3)
The exhibits to this report are listed on the Index to Exhibits following the
signature pages of this report.





(b)
Exhibits.





See the
Exhibit Index following the signature pages of this
report.




73






SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized this 31st day of
March 2009.





HSW
      INTERNATIONAL, INC.By:
            /s/ Henry N.
      AdornoHenry
      N. AdornoVice
      Chairman




Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the 31st day of
March 2009.





Name
            
            Title/s/
      Henry N. Adorno
            
            Vice
      Chairman and DirectorHenry
      N. Adorno
            
            (Principal
      Executive Officer)/s/
      Shawn G. Meredith
            
            Chief
      Financial OfficerShawn
      G. Meredith
            
            (Principal
      Financial and Accounting Officer)/s/
      Jeffrey T. Arnold
            
            Chairman
      of the BoardJeffrey
      T. Arnold/s/
      Theodore P. Botts
            
            DirectorTheodore
      P. Botts/s/
      Bruce L. Campbell
            
            DirectorBruce
      L. Campbell/s/
      Boland T. Jones
            
            DirectorBoland
      T. Jones/s/
      Arthur F. Kingsbury
            
            DirectorArthur
      F. Kingsbury/s/
      Kai-Shing Tao
            
            DirectorKai-Shing
      Tao





74






(b)  Exhibits.





Exhibit
            
            
            
            Registrant’s
            
            
            
            Exhibit
            
            FiledNumber
            
            Description
      of Document
            
            Form
            
            Dated
            
            Number
            
            Herewith2.1
            
            Agreement
      and Plan of Merger, dated as of April 20, 2006, among HowStuffWorks,
      Inc., HSW International, Inc., HSW International Merger Corporation and
      INTAC International, Inc.
            
            S-4/A
            
            07/10/07
            
            Annex
      A2.2
            
            First
      Amendment to Agreement and Plan of Merger, dated January 29, 2007,
      among HowStuffWorks, Inc., HSW International, Inc., HSW International
      Merger Corporation and INTAC International, Inc.
            
            S-4/A
            
            07/10/07
            
            Annex
      B2.3
            
            Second
      Amendment to Agreement and Plan of Merger, dated August 23, 2007,
      among HowStuffWorks, Inc., HSW International, Inc., HSW
      International Merger Corporation and INTAC
      International, Inc.
            
            S-1/A
            
            01/14/08
            
            2.32.4
            
            Share
      Purchase Agreement among INTAC International, Inc., China Trend Holdings
      Ltd. and Wei Zhou, dated February 15, 2008
            
            8-K
            
            2/20/08
            
            2.43.1
            
            Amended
      and Restated Certificate of Incorporation of
      HSW International, Inc.
            
            8-A12B
            
            10/03/07
            
            99.23.2
            
            Second
      Amended and Restated Bylaws of HSW
International, Inc.
            
            8-K
            
            12/18/07
            
            3.24.1
            
            Specimen
      certificate of common stock of HSW
International, Inc.
            
            S-4/A
            
            07/10/07
            
            4.14.2
            
            HSW
      International 2006 Equity Incentive Plan.
            
            S-8
            
            11/05/07
            
            4.24.3
            
            Registration
      Rights Agreement among HSW International, Inc., HowStuffWorks, Inc.
      and Wei Zhou dated as of October 2, 2007.
            
            8-K
            
            10/09/07
            
            10.64.4
            
            Registration
      Rights Agreement among HSW International, Inc. and American investors
      dated as of October 2, 2007.
            
            8-K
            
            10/09/07
            
            10.54.5
            
            Affiliate
      Registration Rights Agreement dated as of October 2,
      2007.
            
            8-K
            
            10/09/07
            
            10.710.1
            
            Amended
      and Restated Stockholders Agreement, dated as of January 29, 2007,
      among HowStuffWorks, Inc., HSW International, Inc. and Wei
      Zhou.
            
            S-4/A
            
            07/10/07
            
            Annex
      H10.2
            
            First
      Amendment to Amended and Restated Stockholders Agreement, dated as of
      December 17, 2007, among HowStuffWorks, Inc., HSW International
      and Wei Zhou.
            
            S-1/A
            
            01/14/08
            
            10.2






75




Exhibit
            
            
            
            Registrant’s
            
            
            
            Exhibit
            
            FiledNumber
            
            Description
      of Document
            
            Form
            
            Dated
            
            Number
            
            Herewith10.3
            
            Contribution
      Agreement (PRC Territories) between HowStuffWorks, Inc. and
      HSW International, Inc., dated as of October 2,
      2007.
            
            8-K
            
            10/09/07
            
            10.210.4
            
            Contribution
      Agreement (Brazil) between HowStuffWorks, Inc. and
      HSW International, Inc. dated as of October 2,
      2007.
            
            8-K
            
            10/09/07
            
            10.110.5
            
            Update
      Agreement between HowStuffWorks, Inc. and
      HSW International, Inc. dated as of October 2,
      2007.
            
            8-K
            
            10/09/07
            
            10.410.6
            
            Stock
      Purchase Agreement dated as of January 29, 2007 between HSW
      International, Inc. and Ashford Capital
      Management, Inc.
            
            S-4/A
            
            07/10/07
            
            Annex
      I-a10.7
            
            First
      Amendment to Stock Purchase Agreement dated as of August 23, 2007
      between HSW International, Inc. and Ashford Capital
      Partners, L.P.
            
            S-1/A
            
            01/14/08
            
            10.710.8
            
            Stock
      Purchase Agreement dated as of January 29, 2007 between HSW
      International, Inc. and Harvest 2004, LLC.
            
            S-4/A
            
            07/10/07
            
            Annex
      I-b10.9
            
            First
      Amendment to Stock Purchase Agreement dated as of August 23, 2007
      between HSW International, Inc. and Harvest
      2004, LLC.
            
            S-1/A
            
            01/14/08
            
            10.910.10
            
            Stock
      Purchase Agreement dated as of January 29, 2007 between HSW
      International, Inc. and the Purchasers named therein.
            
            S-4/A
            
            07/10/07
            
            Annex
      I-c10.11
            
            First
      Amendment to Stock Purchase Agreement dated as of August 23, 2007
      between HSW International, Inc. and the Purchasers named
      therein.
            
            S-1/A
            
            01/14/08
            
            10.1110.12
            
            Stock
      Purchase Agreement dated April 20, 2006 between
      HSW International and DWS Finanz-Service GmbH.
            
            S-4/A
            
            07/10/07
            
            Annex
      K10.13
            
            First
      Amendment to Stock Purchase Agreement dated January 29, 2007 between
      HSW International and DWS Finanz-Service GmbH.
            
            S-4/A
            
            07/10/07
            
            Annex
      L10.14
            
            Amended
      and Restated Consulting Agreement dated August 23, 2006 between
      HSW International and Jeffrey T. Arnold.
            
            S-4
            
            03/14/07
            
            10.11






76




Exhibit
              
              
              
              Registrant’s
              
              
              
              Exhibit
              
              FiledNumber
              
              Description
      of Document
              
              Form
              
              Dated
              
              Number
              
              Herewith10.14.1
              
              Amendment
      No. 1 to the Amended and Restated Consulting Agreement dated August 23,
      2006 between HSW International and Jeffrey T. Arnold.
              
              8-K
              
              9/23/08
              
              10.1410.15
              
              Amended
      and Restated Letter Agreement between HowStuffWorks, Inc. and
      HSW International, Inc. related to certain rights in India and
      Russia dated as of December 17, 2007.
              
              S-1/A
              
              01/14/08
              
              10.1510.16
              
              Amended
      and Restated Letter Agreement between HowStuffWorks, Inc. and
      HSW International, Inc. related to certain trademark rights
      dated as of December 17, 2007.
              
              S-1/A
              
              01/14/08
              
              10.1610.17
              
              Employment
      Agreement dated October 16, 2001 between INTAC
      International, Inc. and Wei Zhou (filed by INTAC
      International, Inc., Commission File No 000-32621).
              
              8-K
              
              10/30/01
              
              10.510.18
              
              Share
      Purchase Agreement, dated January 29, 2007, among INTAC
      International, Inc., INTAC International Holdings Limited, INTAC
      (Tianjin) International Trading Company, Cyber Proof Investments Ltd. and
      Wei Zhou.
              
              S-4/A
              
              07/10/07
              
              Annex
      R10.19
              
              First
      Amendment to Share Purchase Agreement dated as of August 23, 2007
      among INTAC International, Inc., INTAC International Holdings
      Limited, INTAC (Tianjin) International Trading Company, Cyber Proof
      Investments Ltd. and Wei Zhou.
              
              S-1/A
              
              01/14/08
              
              10.1910.20
              
              Termination
      Agreement by and between HSW International, Inc. and
      HowStuffWorks, Inc., dated as of December 17,
    2007.
              
              S-1/A
              
              01/14/08
              
              10.2010.21
              
              Stock
      Purchase Agreement between HSW International, Inc. and the investors named
      therein, dated February 15, 2008.
              
              8-K
              
              2/20/08
              
              10.2110.22
              
              Separation
      Agreement with J. David Darnell dated May 13, 2008.
              
              10-Q
              
              5/15/08
              
              10.2210.23†
              
              2008
      Executive Compensation Plan.
              
              8-K
              
              08/19/08
              
              10.2310.24†
              
              Content
      License Agreement dated September 17, 2008 between HSW International, Inc.
      and World Book, Inc.
              
              10-Q
              
              11/14/08
              
              10.24


77







Exhibit
              
              
              
              Registrant’s
              
              
              
              Exhibit
              
              FiledNumber
              
              Description
      of Document
              
              Form
              
              Dated
              
              Number
              
              Herewith10.25†
              
              Agreement
      and Plan of Merger dated as of November 26, 2008 by and among HSW
      International, Inc., DS Newco, Inc., Daily Strength, Inc. and Douglas J.
      Hirsch
              
              8-K
              
              12/03/08
              
              10.2514.1
              
              HSW
      International, Inc. Amended and Restated Code of Business Conduct and
      Ethics.
              
              8-K
              
              4/18/08
              
              14.123.2
              
              Consent
      of Grant Thornton, LLP.
              
              
              
              
              
              
              
              X31.1
              
              Certification
      by the Principal Executive Officer pursuant to Section 240.13a-14 or
      section 240.15d-14 of the Securities and Exchange Act of 1934, as
      amended.
              
              
              
              
              
              
              
              X31.2
              
              Certification
      by the Principal Financial and Accounting Officer pursuant to
      Section 240.13a-14 or section 240.15d-14 of the Securities and
      Exchange Act of 1934, as amended.
              
              
              
              
              
              
              
              X32*
              
              Certification
      by the Principal Executive Officer and Certification by the Principal
      Financial and Accounting Officer pursuant to 18 U.S.C. 1350 as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.
  ____________________________________________________


† The
registrant has requested confidential treatment with respect to certain portions
of this exhibit. Such portions have been omitted from this exhibit and have been
filed separately with the United States Securities and Exchange
Commission.





* This
exhibit is hereby furnished to the SEC as an accompanying document and is not to
be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of
1934 or otherwise subject to the liabilities of the Section nor shall it be
deemed incorporated by reference into any filing under the Securities Act of
1933 or the Securities Exchange Act of 1934.