**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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# **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, 2007**                                                    |
|                                                                                                    |
| **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**

 

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**HSW INTERNATIONAL, INC.**

(Exact name of Registrant as specified in its charter)

 

| ***Delaware***                  | *** *** | ***33-1135689***                     |
|---------------------------------|--------------|--------------------------------------|
| (State or other jurisdiction of |         | (I.R.S. Employer Identification No.) |
| incorporation or organization)  |         |                                 |

 

**One CapitalCity Plaza3350 Peachtree Road, Suite 1600Atlanta, Georgia 30326**(Address of principal executive offices, including zip code)

 

**(404) 926-0660******(Registrant’s telephone number, including area code)

 

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Securitiesregistered pursuant to Section 12(b) of the Act:

 

| **Title  of each class**       | ** ** | **Name of  each exchange on which registered** |
|--------------------------------|------------|------------------------------------------------|
| Common Stock, $0.001 Par Value |       | NASDAQ Global Market                           |

 

Securities registered pursuant to Section 12(g) of theAct:  **None.**

 

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

Yes o  No x

 

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

Yes o  No x

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934, as amended, during the preceding12 months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes x   No o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.x

 

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

| Large accelerated filer o                     |   | Accelerated filer o         |
|-----------------------------------------------|--------|----------------------------------|
|                                          |   |                             |
| Non-accelerated filer x                       |   | Smaller reporting company o |
| (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

 

State the aggregate market value of the voting and non-voting commonequity held by non-affiliates computed by reference to the price at which thecommon equity was last sold, or the average bid and asked price of such commonequity, as of the last business day of the registrant’s most recently completedsecond fiscal quarter.  Notapplicable.  Trading of the registrant’sCommon Stock on The NASDAQ Global Market did not commence until October 2, 2007.

 

At March 28, 2008, 53,574,919shares of the Registrant’s common stock, $0.001 par value per share, wereoutstanding.

 

**DocumentsIncorporated By Reference**

 

Portionsof the Registrant’s definitive Proxy Statement to be filed for its 2008 AnnualMeeting of Stockholders are incorporated by reference into Part III ofthis report.

 

 

 

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**ANNUALREPORT ON FORM 10-K**

 

**Table ofContents**

 
|                              |                                                                                                                | **Page** |
|-----------------------------------|---------------------------------------------------------------------------------------------------------------------|----------|
|                              |                                                                                                                |     |
| PART I                       |
|                              |                                                                                                                |     |
| Item 1.                           | Business                                                                                                            | 3        |
|                              |                                                                                                                |     |
| Item  1A.                         | Risk  Factors                                                                                                       | 10       |
|                              |                                                                                                                |     |
| Item 1B.                          | Unresolved Staff Comments                                                                                           | 20       |
|                              |                                                                                                                |     |
| Item 2.                           | Properties                                                                                                          | 20       |
|                              |                                                                                                                |     |
| Item  3.                          | Legal  Proceedings                                                                                                  | 20       |
|                              |                                                                                                                |     |
| Item 4.                           | Submission of Matters to a Vote of Security Holders                                                                 | 20       |
|                              |                                                                                                                |     |
| PART II                      |
|                              |                                                                                                                |     |
| Item 5.                           | Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer Repurchasesof Equity Securities | 21       |
|                              |                                                                                                                |     |
| Item  6.                          | Selected  Consolidated Financial Data                                                                               | 22       |
|                              |                                                                                                                |     |
| Item 7.                           | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                         | 24       |
|                              |                                                                                                                |     |
| Item 7A.                          | Quantitative and Qualitative Disclosures about Market  Risk                                                         | 31       |
|                              |                                                                                                                |     |
| Item 8.                           | Financial Statements and Supplementary Data                                                                         | 32       |
|                              |                                                                                                                |     |
| Item 9.                           | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure                               | 32       |
|                              |                                                                                                                |     |
| Item 9A(T).                       | Controls and Procedures                                                                                             | 32       |
|                              |                                                                                                                |     |
| Item  9B.                         | Other  Information                                                                                                  | 32       |
|                              |                                                                                                                |     |
| PART III                     |
|                              |                                                                                                                |     |
| Item 10.                          | Directors, Executive Officers and Corporate Governance                                                              | 33       |
|                              |                                                                                                                |     |
| Item 11.                          | Executive Compensation                                                                                              | 33       |
|                              |                                                                                                                |     |
| Item  12.                         | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    | 33       |
|                              |                                                                                                                |     |
| Item 13.                          | Certain Relationships and Related Transactions, and  Director Independence                                          | 33       |
|                              |                                                                                                                |     |
| Item 14.                          | Principal Accounting Fees and Services                                                                              | 33       |
|                              |                                                                                                                |     |
| PART IV                      |
|                              |                                                                                                                |     |
| Item 15.                          | Exhibits, Financial Statement Schedules                                                                             | 34       |
|                              |                                                                                                                |     |
| SIGNATURES                        | 35                                                                                                                  |
|                              |                                                                                                                |     |
| INDEX TO  EXHIBITS                | 36                                                                                                                  |
|                              |                                                                                                                |     |
| CONSOLIDATED FINANCIAL STATEMENTS | F-1                                                                                                                 |

 

 

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**PART I**

 

**Except for the historicalinformation contained herein, the matters set forth in this report include forward-lookingstatements within the meaning of the “safe harbor” provisions of the PrivateSecurities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertaintiesthat may cause actual results to differ materially.  These risks and uncertainties are detailed in“Part I—Item 1A.  Risk Factors” andelsewhere throughout the report, and will be further discussed from time totime in our periodic reports filed with the Commission.  The forward-looking statements included inthis report speak only as of the date hereof.**

 

**ITEM  1.             DESCRIPTION OF BUSINESS.**

 

**Overview**

 

We are a recently formedcompany whose primary focus is becoming an international online publishingcompany that develops and operates Internet businesses focused on providingconsumers in the world’s emerging digital economies with locally relevant, highquality content.  We entered theBrazilian online publishing market in March 2007, by utilizingroyalty-free and exclusively licensed digital content provided by HowStuffWorks, Inc.(referred to in this report as “HSW”) prior to the INTAC Merger discussedbelow.

 

We are entering theChinese online publishing market and utilizing a combination of the licensedand sublicensed content that we recently received from HSW with the benefits ofINTAC International, Inc.’s relationships and knowledge of the Chinesemarkets in obtaining our Internet licenses. INTAC International, Inc. (“INTAC”)is a company that recently became our wholly owned subsidiary as a result of a merger.  We expect to deploy our Internet platform inChina in mid-2008. We have hired Chinese personnel, received licenses toconduct certain business in China through the merger with INTAC and are in theprocess of translating and localizing our content for the China onlinepublishing business.

 

We launched our Brazilianwebsite in March 2007.  At December 31,2007, we had approximately 3,500 articles that were either (i) articlesfrom the HSW content database translated from English to Portuguese or (ii) originallycreated content. The web site address is *http://hsw.uol.com.br/*.  We are in the early development of ourbusiness in Brazil.  We continue toexpand by (i) adding original proprietary digital content designed to meetthe information needs of the Brazilian online community, (ii) expandingthe amount of translated content from HSW, and (iii) refining localmarketing strategies.

 

We also intend togenerate revenue by assembling our own library of digital content (includingoriginally authored content and content that has been acquired from thirdparties) for our own use and for licensing to various customers, which mayinclude HSW, in territories outside of our markets.

 

**OurHistory**

 

We were formed on March 14,2006, as a wholly owned subsidiary of HSW in order to (i) developbusinesses using exclusive digital publishing rights to HSW’s content for thecountries of China and Brazil and (ii) to effect the merger with INTACInternational, Inc. (the “INTAC Merger”). The INTAC Merger was done to assist in our primary business focus, thedevelopment of our digital content database exclusively licensed from HSW by (i) acceleratingour obtaining Internet licenses in China for launching our Internet platform, (ii) leveragingINTAC’s knowledge of the Chinese markets, relationships, and core competenciesto accelerate the growth of our Internet platform in China, and (iii) providingadditional cash flow from its established businesses.  These established businesses includedservices related to wireless telephone training and the development and sale ofeducational

 

 

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software delivered tocustomers in China(“INTAC Legacy Businesses”). As discussed below, these businesses weresubsequently disposed.

 

On October 2, 2007,we completed the INTAC Merger and related transactions pursuant to which (i) HSW contributedto us, in exchange for shares of our common stock, exclusive digital publishingrights to HSW’s existing content for the countries of China and Brazil for translationinto the predominant languages of China and Brazil (referred to in this reportas the HSW Contribution); (ii) a wholly owned subsidiary of ours wasmerged with INTAC, with INTAC surviving as a wholly owned subsidiary of ours,and holders of INTAC common stockreceived one share of our common stock in exchange for each of their shares ofINTAC common stock; and (iii) certain investors purchased oragreed to purchase shares of our common stock having an aggregate value ofapproximately $39.4 million, before expenses (referred to in this report as theequity financing, and together with the contribution, the relatedtransactions).

 

Ourstock 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 NASDAQCapital Market under the symbol “INTN”.

 

More specifically theHSW Contribution includes:

 

·                  A perpetual, royalty-free exclusive license in (i) thePeople’s Republic of China, or PRC, the Hong Kong Special Administrative Regionand the Macao Special Administrative Region and (ii) Brazil ((i) and (ii) collectively,the “territories”) to certain licensed and sublicensed content (referred to inthis report collectively as the “content”), which specifically includes theright to create translations in the Chinese and Portuguese languages (the “translationlanguages”) and derivative works thereof;

 

·                  A perpetual, royalty-free exclusivelicense in the territories to (i) publish the translated licensed contenton websites in the territories; and (ii) use limited excerpts of thetranslated licensed content in print format with limited distribution to businessessolely for purposes of marketing, business development, financings and othersimilar legitimate business purposes, provided that any such limited printexcerpts are not distributed publicly; and

 

·                  The same license rights as thosedescribed above with respect to any updates to the content by HSW in exchangefor a fee equal to: (i) one percent per territory of HSW’s fully allocatedcosts directly attributable to producing the updates purchased by us and (ii) HSW’sactual cost in transferring the purchased updates to us, plus (iii) fivepercent of (i) and (ii). Sublicensed content restrictions, ownership rights and terminationrights are the same as those granted pursuant to the contribution agreements.

 

As a result of the HSW and Discovery merger discussedbelow, we have access to the software code for HSW’s publishing platform at noadditional cost.  In addition we have theoption to acquire from HSW the exclusive digital publishing rights for thecontent in India and Russia on the same terms and conditions as those withrespect to China and Brazil.  We have theright to exercise this option until April 12, 2009; provided, however theoption cannot be exercised as long as the issuance of securities in connectionwith this exercise would result in HSW’s ownership of our common stock,directly or indirectly, exceeding 50%; provided further that the option shallbe extended for any time period during which it cannot be exercised inaccordance with the foregoing.

 

The INTAC Merger andrelated transactions were consummated pursuant to a merger agreement dated April 20,2006, as amended January 29, 2007. Contemporaneously with the merger and pursuant to a share purchaseagreement dated January 29, 2007, INTAC sold four wholly ownedsubsidiaries, which comprised its wireless handset and prepaid calling cardsdistribution business (“distribution companies”), to Cyber ProofInvestments Ltd., a corporation controlled by Wei Zhou, then INTAC’s ChiefExecutive Officer and President, in exchange for 3.0 million shares of ourcommon stock held by Mr. Zhou.**** In addition, INTAC transferred its rights andcontrol with respect to Beijing INTAC Meidi Technology DevelopmentCo., Ltd. to Cyber.  The 3.0 millionshares were recorded as treasury shares.

 

On October 2, 2007,in connection with the merger, certain investors (referred to in this report asthe American investors) purchased $22.5 million, before expenses, of ourcommon stock for a price per share of $6.57, the public

 

 

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announcement price.  Approximately 3.4 million shares of ourcommon stock in the aggregate were issued to the American investors.  On February 4, 2008, we issuedapproximately 2.7 million additional shares to the American investors pursuantto an adjustment mechanism in the stock purchase agreements we entered intowith such investors making the final price $3.68 per share.

 

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

 

As part of the investmentof the American and European investors, we filed shelf registrations statementscovering the resale of the shares purchased by such investors.

 

**Mergerof HSW and Discovery Communications, LLC**

 

Effective December 17,2007, the merger (the “Discovery Merger”) of HSW with a wholly owned subsidiaryof Discovery Communications, LLC (“Discovery”) closed.  In exchange for certain changes benefitingus, we agreed to certain amendments of our contractual agreements with HSW,which were established as conditions to the closing of the Discovery Merger.

 

·                  We entered into an amended and restated TrademarkLicense Option letter agreement with HSW establishing the licensing fee for useof HSW’s marks at 2% of our net revenue derived from HSW’s marks, capped at$100,000 annually for China and Brazil combined.  We also have the option to acquire HSW’s nameand associated trademarks in India and Russia on similar terms.

 

·                  Our services agreement with HSW has been terminatedbased on our determination that we are able to perform on our own the servicesprovided by HSW.  In connection with suchtermination, HSW licensed to us the software code for HSW’s content managementplatform at no cost.

 

·                  The agreement that provides us with the option toacquire digital publishing rights in the local languages to HSW content inIndia and Russia has been amended to provide that such option may be exerciseduntil April 12, 2009; provided, however it cannot be exercised for so longas the issuance of securities in connection with such exercise would result inHSW’s ownership of our common stock, directly or indirectly, exceeding 50%;provided further that the option shall be extended for any time period duringwhich it cannot be exercised in accordance with the foregoing.  Additionally, our limited right of firstrefusal relating to the distribution of HSW content in territories outside theUnited States other than in China, Brazil, India and Russia has beenterminated.  Exercise of this optionrequires our issuing additional shares to HSW and we will consider the cost ofthe option and the opportunities of the specific market when consideringwhether or not to exercise each option. At this time we have made no determination concerning whether theseoptions will be exercised.

 

·                  We entered into a First Amendment to Amended andRestated Stockholders Agreement with HSW and Wei Zhou.  As a result HSW received the right todesignate three members of our Board of Directors (one of whom is to be anindependent director), and the chairperson of the Nominating and GovernanceCommittee of our Board of Directors.  Allshares of our common stock owned by HSW in excess of 45% of the outstandingshares of our common stock as of any applicable record date, if any, shall bevoted in exact proportion to the vote of HSW International stockholders otherthan HSW.  HSW will have the right tovote 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.

 

As a result of theDiscovery Merger, HSW became a wholly owned subsidiary of Discovery.  HSW remains based in Atlanta, Georgia.  At December 31, 2007, Discovery, throughits wholly owned subsidiary HSW, owned approximately 46.5% of our outstandingcommon stock.  The Discovery Merger doesnot impact our publicly traded status, as we remain a separate and publiclytraded entity.

 

 

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We continue to have aperpetual, fully paid up, royalty-free, sublicensable exclusive license to theHSW content in local languages and brand for Brazil and China (the “Rights”).  We also maintain the option for those Rightsfor India and Russia.  As a result of theDiscovery Merger, we intend to enter into a mutually agreeable arrangement withDiscovery that will give us digital publishing rights for Brazil and China toDiscovery content that has been published on or integrated within thehowstuffworks.com website.  In addition,if such arrangement is entered into, it will provide that those rights wouldalso be extended to India and Russia if we exercise our option for thosecountries under the terms of its existing agreement with HSW.

 

The merger agreement between Discovery and HSW provided that payment toHSW shareholders for a significant portion of HSW’s ownership of our commonstock wouldn’t be paid at the October 2007 closing of the transaction, butinstead will be paid to HSW’s former shareholders in three semi-annualinstallments beginning in or about October 2008.  Such payments will be in the form of cash orshares of HSWI stock now held by HSW. Accordingly, the amount of shares of our common stock indirectly ownedby Discovery in the future may fall or rise due to a combination of thepotential distributions pursuant to the terms of the Discovery merger or ourexercise of the options to publish HSW content in local languages in Russia andIndia.  All of our rights to publish HSWcontent will remain effective regardless of the number of shares owned by HSWin the future.

 

**SubsequentSale of the INTAC Legacy Businesses and Related Transactions**

 

Due to an increased focusof our management and resources on our primary Internet publishing business, a change of control in our majorityownership leading to further refinement in our strategies, and an underperformance of the INTAC Legacy Businesses after the INTAC Merger, we decidedsubsequent to December 31, 2007, to dispose of these legacy businesses.The INTAC Legacy Businesses were comprised of two lines of business, includingservices related to wireless telephone training and the development and sale ofeducational software in China, both unrelated to our core Internet platformbusiness.

 

We had originallyestimated when deciding to acquire the INTAC Legacy Businesses that, in additionto accelerating our obtaining Internet licenses in China for launching ourInternet platform, INTAC would provide us (i) further knowledge of theChinese markets, relationships, and core competencies to accelerate the growthof our Internet platforms in China and (ii) additional cash flow from itsestablished businesses. Following the underperformance of the INTAC LegacyBusinesses in the fourth quarter of 2007 that resulted in short-term negativecash flow from these operations and a change-in-control of our business throughthe acquisition of our largest shareholder HSW, by Discovery, we reconsideredthe potential risk of excessive short-term consumption of cash and managementresources by our acquired non-core INTAC Legacy Businesses and refined ourstrategic direction.

 

We decided that it wascritical that all our current resources be fully focused on expanding ourBrazilian Internet platform and launching our Chinese Internet platform inmid-2008.  Although we believe we havebenefited in the short-term from INTAC’s relationships and knowledge of theChinese markets in obtaining our Internet licenses, this refined strategicfocus did not allow us the time required to realize the expected long-termsynergies from INTAC’s knowledge of the Chinese markets, relationships, andcore competencies.  In addition we wereprovided with and acted on an opportunity to sell the unrelated INTAC LegacyBusinesses for approximately their stand-alone appraised value, and throughsimultaneous sale of the treasury stock received, generate significantadditional cash resources for investing into our core Internet businesses.

 

On February 29,2008, we completed the sale of the subsidiaries that comprised the INTAC LegacyBusinesses in China.  These subsidiarieswere sold to China Trend Holdings Ltd., a British Virgin Islands corporationthat is owned by Wei Zhou, CEO, director and significant stockholder of INTACprior to the INTAC Merger in October 2007. Mr. Zhou was also on our board of directors from October to December 2007.  In accordance with the Share PurchaseAgreement with China Trend Holdings, we were to receive 5.0 million of ourcommon shares owned by Mr. Zhou. In addition, as a condition to the February 29,2008, INTAC Legacy Businesses disposition, the INTAC Legacy Businesses were toinclude $4.5 million in cash at closing. 

 

At the February 29,2008, INTAC Legacy Businesses disposition, we received 4.5 million shares ofour common stock from Mr. Zhou and accordingly, pursuant to an agreementwith Mr. Zhou, we only funded the INTAC Legacy Businesses with $2.7million in cash. Mr. Zhou delivered his remaining 0.5 million shares ofour stock to us on March 26, 2008 and we will release another $1.8 millionin cash to the INTAC Legacy Businesses.  Thedisposition resulted in a preliminary goodwill writeoff of approximately $22.5million in the fourth quarter of 2007.  Afterthis disposition all of HSWI’s assets are in our core Internet business and thesole assets we retain from the INTAC Merger are Internet Licenses for theChinese markets.

 

On February 15,2008, we entered into a Stock Purchase Agreement in which we agreed to sell,and two qualified institutional buyers agreed to purchase, the 5.0 millionshares of our common stock expected to be received from the INTAC LegacyBusinesses disposition at a purchase price of $3.68 per share.  Simultaneous with the February 29, 2008,disposition, we sold the 4.5 million shares we received from Mr. Zhou tothe institutional buyers.

 

 

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The additional 0.5million shares received from Mr. Zhou were sold on March 28, 2008, to theinstitutional buyers for $1.8 million pursuant to the Stock Purchase Agreement.

 

**Productsand Services**

 

We have entered theBrazilian online publishing market and are in the process of entering theChinese online publishing market by leveraging an expanding and proprietarydigital content database designed to meet the information needs of the onlinecommunity.  We are doing so utilizing acombination of the contributed assets from HSW with the benefit of INTAC’srelationships and knowledge of the Chinese market.  We also intend to generate revenue byassembling our own library of digital content (including originally authoredcontent and content that has been acquired from third parties) for our own useand for licensing to various customers, which may include HSW, in territoriesaround the globe.

 

Our initial focus in theonline publishing market is the online publishing of localized, translated Chineseand Brazilian editions of the HSW Internet site, utilizing strategiesbased on those practiced by HSW, as tailored to the needs of each localizedmarket.

 

We are also developingour own content and acquiring content from third parties that will be tailoredto the specific markets of China and Brazil. We further intend to explore opportunities for online publishing inother emerging markets, including determining whether to exercise our option toacquire the exclusive publishing rights to HSW content in local languagesof India and Russia.

 

We launched our BrazilianInternet website in March 2007, at the address *http://hsw.uol.com.br/*.  At December 31, 2007, we had approximately3,500 articles that were either (i) articles from the HSW content databasetranslated from English to Portuguese, or (ii) originally created contentin Portuguese. We are in the early stages of business development in Brazil aswe continue to expand our online presence by (i) adding originalproprietary digital content designed to meet the information needs of theBrazilian online community, (ii) increasing the amount of translatedcontent and original articles, and (iii) refining local marketingstrategies.

 

We expect to deploy ourInternet platform in China in mid-2008. We have established a business presencein China, hired Chinese personnel, received licenses to do business in China,and are in the process of translating and localizing our content for the Chinaonline publishing business.

 

**Sales &Support**

 

We have a sales office inBrazil and plans are being made for a future sales office in China to serviceadvertisers and customers for our businesses. Sales for the websites in Brazil are conducted through a direct salesforce as well as by entering into strategic relationships with companies whichcan represent advertising inventory, and we expect to utilize the same model inChina.

 

**Marketing**

 

Our primary businessmodel for our websites is anticipated to be the sale of advertising,sponsorships, and related products and services.  By focusing on providing high-quality webproperties to end users in Brazil and China, we intend to establish a user baseattractive to advertisers.  We expect tosell advertising based on the quantity of views delivered to advertisers or thesuccess of various advertising-related metrics.

 

We expect that much ofour marketing effort will be in fostering word-of-mouth momentum by providinghigh-quality products and services and using public relations efforts.  Additionally, we anticipate entering intorelationships with existing businesses to provide awareness of and traffic toour products and services.  We may alsoengage in advertising designed to inform potential users and customers aboutour products and services.

 

 

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** **

**Competition**

 

The online publishingbusiness is highly competitive.  Weexpect to encounter significant competition in each market in which we offerour products and services. Our competitors are expected to include nationalInternet portals in China such as Baidu, NetEase.com, Shanda InteractiveEntertainment, Sina, sohu.com and tom.com, and national websites in Brazil suchas Terra and UOL, which will compete with us for online advertising revenue andend users.

 

**IntellectualProperty**

 

We intend to rely uponpatent, trademark, copyright and trade secret laws in various jurisdictions aswell as confidentiality procedures and contractual provisions to protect ourproprietary assets and brand.  We do notpresently own any patent, trademark or copyright registrations, thoughapplication procedures have begun for certain of our intellectual property.

 

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

 

**GovernmentRegulations**

 

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

 

Additionally, theInternet infrastructures in China and Brazil are subject to regulatory controland, in the case of China, ownership by the Chinese government.  The PRC regulates its Internet sector byenacting legislation or issuing regulations regarding the legality of foreigninvestment in the PRC Internet sector and the existence and enforcement ofcontent restrictions on the Internet.  Webelieve that our current ownership structure and localized content complieswith PRC laws and regulations.  Thereare, however, substantial uncertainties regarding the interpretation of PRCInternet laws and regulations.  Accordingly,it is possible that the PRC government will ultimately take a view contrary toours.

 

The PRC Ministry ofInformation Industry (“MII”), the Chinese governmental agency which regulatesthe Internet in China, has stated that the activities of Internet contentproviders are subject to regulation by various PRC government authorities,depending on the specific activities conducted by the Internet contentprovider.  Various government authoritieshave stated publicly that they are in the process of preparing new laws andregulations that will govern these activities. The areas of regulation include, among others, online advertising,online news reporting, online publishing, online securities trading, onlinecommunity, online video, and the provision of industry specific (e.g.,pharmaceutical related) information over the Internet.  Other aspects of our online operations may besubject to regulation in the future.

 

The MII has alsopromulgated a directive, effective January 31, 2008, providing that onlinevideos can only be broadcast or streamed by state-owned or controlledcompanies.  Subsequent interpretation wasprovided to exclude certain websites which existed prior to such directive. Itis unclear what the effect of this directive will be for us; however, it mayprevent our Chinese website from displaying online videos, which could have amaterial effect on the business.

 

Because our services areaccessible worldwide, certain foreign jurisdictions may claim that we arerequired to comply with its laws, even where we have no local entity, employeesor infrastructure.

 

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**Employees**

 

As of December 31,2007, we had approximately 105 employees (including 70 employees from the INTACLegacy Businesses), located in Atlanta, Georgia, USA, Dallas, Texas, USA,Brazil and China.

 

**Seasonality**

 

We expect our business tobe affected by seasonal fluctuations in Internet usage and traditional retailseasonality.  Internet usage generallyslows during the summer months, and online shopping and related advertisingtypically increases in the fourth quarter of each year.  These seasonal trends will likely causefluctuations in quarterly results, including fluctuations in sequential revenuegrowth rates.

 

**Whereyou can find additional information**

 

Ourwebsite address is www.hswinternational.com. Information on our website is not incorporated by reference herein.  We make available free of charge through ourwebsite 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 soonas reasonably practicable after such material is electronically filed with orfurnished to the SEC.

 

**Executive Officers of theRegistrant**

 

The following table setscertain information about each of our executive officers as of March 1,2008.

 
| **Name**         | ** ** | **Age** | ** ** | **Position**                           |
|------------------|------------|---------|------------|----------------------------------------|
| Henry N. Adorno  |       | 60      |       | Vice Chairman                          |
| Gregory Swayne   |       | 49      |       | President and Chief  Operating Officer |
| J. David Darnell |       | 62      |       | Chief Financial Officer                |

 

**Henry N.Adorno**, is ViceChairman of HSW International, Inc.’s board of directors.  Mr. Adorno is also the founder andPresident of Adorno & Yoss, the largest certified minority-owned lawfirm in the country, with over 270 practicing attorneys.  Mr. Adorno began his career working withthe Dade County Attorney’s Office in the Major Crimes Division.  He later served as the Chief Assistant toState Attorney Janet Reno.  Beyond hisprofessional responsibilities, Mr. Adorno is the Chair of Our Kids, anon-profit organization which utilizes community outreach to manage childwelfare and protection for abused, abandoned, and neglected children.  Mr. Adorno holds a Bachelor of ArtsDegree and a Juris Doctor, both from the University of Florida. Mr. Adornois a member of the American Bar Association, The Florida Bar Association andthe Miami Business Forum.

 

**GregorySwayne**, is ourPresident and Chief Operating Officer.  Mr. Swaynewas previously the President and Chief Operating Officer of HowStuffWorks, Inc.,following its purchase by The Convex Group in 2002. Mr. Swayne joined TheConvex Group in 2001, and was part of the management team of N2 Broadband, oneof Convex’s first investments.  Prior toConvex, Mr. Swayne was the co-founder and President of publicly-listedA.D.A.M., Inc. and its predecessor Medical Legal Illustrations, Inc.A.D.A.M. provides health information services and benefit management solutionsto healthcare organizations, employers, benefit brokers, consumers and theeducational market through its online offerings of health information,decision-support applications, benefits management solutions and enrollmentservices.  Mr. Swayne holds aBachelor of Arts Degree from the University of South Carolina and a Master ofScience in Medical Illustration from the Medical College of Georgia.

 

**J. David Darnell,** became our Chief Financial Officer on October 2,2007.  He served as INTAC’s senior vicepresident and chief financial office from June of 2002 through October 2007.  From November 2000 to May 2002, Mr. Darnellserved as Senior Vice President and Chief Financial Officer of NucentrixBroadband Networks, Inc., a publicly-held provider of broadband wirelessInternet and multichannel video services. Mr. Darnell became one of INTAC’s directors on October 15,2001.  From 1997 to October 2000, heserved as Senior Vice President and Chief 

 

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Financial Officer of ILD Telecommunications, Inc.,a nationwide facilities-based provider of prepaid phone services andtelecommunications outsourcing services. From 1993 to 1997, Mr. Darnell was Senior Vice President, Financeand Chief Financial Officer for SA Telecommunications, Inc., a publiclyheld, full service interexchange carrier that provided a wide range oftelecommunications services.  From 1990to 1993, Mr. Darnell served as Chief Financial Officer of Messagephone, Inc.,a telecommunications technology and intellectual property firm.  Mr. Darnell is a certified publicaccountant.

 

**ITEM 1A.               RISKFACTORS**

 

This report contains forward-looking statements that involve risks anduncertainties.  Our actual results coulddiffer materially from those discussed in this report.  Factors that could cause or contribute tothese differences include, but are not limited to, those discussed below andelsewhere in this report and in any documents incorporated in this report byreference.

 

***We are in the early development of our business andprospects are difficult to evaluate.***

 

We have no significantoperating history, and no experience in marketing and selling the contributedassets in the Chinese and Brazilian markets. We are in the early development of our business with a limited operatinghistory upon which investors and others can evaluate our current business andprospects.  Our prospects must beconsidered in light of the many risks, uncertainties, expenses, delays, anddifficulties frequently encountered by companies in their early stages ofdevelopment.  Some of the risks anddifficulties we expect to encounter include our ability to:

 

·                  successfully commercialize and monetize thecontributed assets;

 

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

 

·                  manage our expense structure as a U.S. public companyincluding, without limitation, compliance with provisions implemented as aresult of the Sarbanes Oxley Act;

 

·                  manage the anticipated rise in operating expenses;

 

·                  manage and implement successfully new businessstrategies including, if applicable, new strategies resulting from theDiscovery Merger and the accompanying changes to the agreements betweenHSW and us;

 

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

 

·                  establish and take advantage of contacts and strategicrelationships;

 

·                  adapt to our potential diversification into otherindustries and geographic regions;

 

·                  manage and adapt to rapidly changing and expandingoperations;

 

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

 

·                  respond effectively to competitive developments;

 

·                  attract, retain and motivate qualified personnel; and

 

·                  manage each of the other risks set forth in thisreport.

 

Because of our lack ofoperating history and the early development of our business, we will havelimited insight into trends and conditions that may exist or might emerge andaffect our business, especially with respect to the online publishingmarket.  We cannot be certain that ourbusiness strategy will be successful or that it will successfully address theserisks.  Any failure by us to successfullyimplement our new business plans could have a material adverse effect on ourbusiness, results of operations and financial condition.

 

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

 

Our plans to market andmonetize the contributed assets in the Chinese and Brazilian online marketsthrough the Internet are new and unproven. Moreover, we will have limited experience in determining the pricing ofthe products and services that will be developed with the contributedassets.  Because we have never marketedor sold these products and services, we may not be successful in establishing acustomer base or strategic partnerships for the distribution of our productsand services.  If we are not successfulin developing, releasing and marketing these products and services on aprofitable basis, our results of operations would be materially and adverselyaffected.

 

We do not have significantexperience in the Brazilian marketplace. Additionally, we may not have the resources available to simultaneouslydevelop operations in China and Brazil. Accordingly, there may be a delay in developing such operations inBrazil, which could affect our business plan and results of operations.

 

In addition, any delay indeveloping our operations in Brazil and China may play a factor in our decisionto exercise our option to acquire the exclusive digital publishing rights forthe content in India and Russia.  Theoption expires as early as April 12, 2009 (unless such option period isextended pursuant to our agreement with HSW), and our failure to exercise suchoption may have an adverse affect on our ability to expand our internationaloperations, which could affect our business plan and results of operations. Exerciseof this option requires our issuing additional shares to HSW and we willconsider the cost of the option and the opportunities of the specific marketwhen considering whether or not to exercise each option. At this time we havemade no determination concerning whether these options will be exercised.

 

***The growth we seek is rare.***

 

Substantial future growthwill 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 ourbusiness as necessary, we expect that such growth will place a significantstrain on our managerial, operational and financial resources.  We must manage our growth, if any, throughappropriate systems and controls in each of these areas.  We must also establish, train and manage alarger work force.  If we do not managethe growth of our business effectively, our business, results of operations andfinancial condition could be materially and adversely affected.

 

***We will face intense competition, which could have anadverse effect on our business, financial condition and results of operations.***

 

The online publishingmarket is highly competitive.  We willencounter significant competition across our business lines and in each marketin which we offer our products and services. In the online publishing market, we expect that our competitors willinclude national Internet portals in China such as Baidu, NetEase.com, ShandaInteractive Entertainment, Sina, sohu.com and tom.com, which will compete with usfor online advertising revenue and end users.

 

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

 

INTAC’s wireless handsetdistribution business accounted for approximately 95% of its total revenues forthe third quarter of fiscal year 2007, and approximately 92% of its totalrevenues for the fiscal year ended September 30, 2006.  INTAC has shifted its business focus from thewireless handset distribution business, which INTAC Holdings has sold to Cyber,to the career training and development and education markets in order to focus onbusinesses with more attractive growth opportunities and higher margins thanthe wireless handset distribution business. We sold the INTAC Legacy Businesses in February 2008 whicheliminates future revenues from the INTAC Merger.  All future revenue will be derived fromonline publishing market using the contributed assets and other future businessstrategies.  There is no guarantee thatwe will be able to offset the sale of the wireless handset distributionbusiness and the INTAC Legacy Businesses through comparable growth in our onlinepublishing businesses.

 

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

 

We have agreed toregister for resale an aggregate of 33,634,192 shares of our common stock thatare to be held by INTAC affiliates, HSW and investors that participated in ourequity financing, although HSW has agreed to lock up 1/3 of its sharesuntil October 2008, 1/3 of its shares until April 2009 and 1/3 of itsshares until October 2009.  Inaddition, we granted HSW a warrant to purchase 500,000 (250,000 warrantswhich are now expired) shares of our common stock.  The issuance of these new shares and theresale of additional shares of our common stock could have the effect ofdepressing the market price for our common stock.

*** ***

***Certain factors could negatively affect the market price ormarket for our common stock***

 

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

 

·                  our common stock has been thinly traded; and

 

·                  no third party research is available regarding ourcompany.

 

Additionally, the terms of the Discovery merger provided that paymentto HSW shareholders for a significant portion of HSW’s ownership of our commonstock wouldn’t be paid at the October 2007 closing of the transaction andinstead will be paid to HSW’s former shareholders in three semi-annualinstallments beginning in or about October 2008.  Such payments will be in the form of cash orshares of HSWI stock now held by HSW. Accordingly, the amount of shares of our common stock indirectly ownedby Discovery in the future may fall or rise due to a combination of thepotential distributions pursuant to the terms of the Discovery merger or ourexercise of the options to publish HSW content in local languages in Russia andIndia.  All of our rights to publish HSWcontent will remain effective regardless of the number of shares owned by HSWin the future.  If Discovery and HSW’sformer shareholders’ representative elect to distribute shares of our commonstock to former HSW shareholders, a significant number of shares may be sold bysuch shareholders relative to the daily market trading volumes for our commonstock. While we intend to take reasonable measures aimed to ensure that anysuch potential sales are not disruptive to the market for our common stock, wecannot be certain as to the outcome.

 

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

 

***Our internal control over financial reporting and ourdisclosure controls and procedures may not prevent all possible errors thatcould occur.  Material weaknesses existedat September 30, 2006 and 2005, with INTAC’s internal control overfinancial reporting, and may exist with our internal control over financialreporting.  Internal control overfinancial reporting and disclosure controls and procedures, no matter how welldesigned and operated, can provide only reasonable, not absolute, assurancethat the control system’s objective will be met.***

 

INTAC made evaluations ofits internal control over financial reporting and its disclosure controls andprocedures, which included a review of the objectives, design, implementationand effect of the controls and information generated for use in INTAC’speriodic reports.  In the course of INTAC’scontrols evaluation, it sought to identify data errors, control problems and toconfirm that appropriate corrective action, including process improvements, wasbeing undertaken.  This type ofevaluation was conducted on a quarterly basis so that the conclusionsconcerning the effectiveness of INTAC’s controls could be reported in INTAC’speriodic reports.

 

INTAC management assessedthe effectiveness of INTAC’s internal control over financial reporting as of September 30,2005 and 2006, and that assessment identified material weaknesses in INTAC’sinternal control over financial reporting. INTAC management has taken various actions to improve the internalcontrols in the identified areas and these weaknesses were remediated andresolved.

 

Based upon the mostrecent pronouncements of the SEC, our first annual report on internal controlover financial reporting is due for inclusion in our Annual Report on Form 10-Kfor December 31, 2008.  There is noassurance that we can complete the implementation and review of internalcontrols or remediation thereof, in order to meet the December 31, 2008,timeframe.

 

A control system, nomatter how well designed and operated, can provide only reasonable, notabsolute, assurance that the control system’s objectives will besatisfied.  Internal control overfinancial reporting and disclosure controls and procedures are designed to givea reasonable assurance that they are effective to achieve theirobjectives.  We cannot provide absoluteassurance that all of our possible future control issues will be detected.  These inherent limitations include the realworld possibility that judgments in our decision making can be faulty, and thatisolated breakdowns can occur because of simple human error or mistake.  The design of our system of controls is basedin part upon certain assumptions about the likelihood of future events, andthere can be no assurance that any design will succeed absolutely in achievingour stated goals under all potential future or unforeseeable conditions.  Because 

 

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of the inherentlimitations in a cost effective control system, misstatements due to errorcould occur and not be detected.

 

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

 

We and our subsidiariesare subject to taxes in the United States and various foreignjurisdictions.  We believed that our taxreturns appropriately reflected our tax liability when those tax returns werefiled.  However, our tax positions may bechallenged by the applicable tax authorities. Any successful challenge to one or more of our prior tax positions couldresult in a material tax liability to us or to one or more of our subsidiaries,including INTAC, for one or more prior years.

 

***The state of the Internet infrastructure in China and Brazilmay limit our growth.***

 

We rely on the Internetfor certain aspects of our business, including the publication of contentonline and our Internet portals.  TheInternet infrastructures in China and Brazil are not well developed and aresubject to regulatory control and, in the case of China, ownership by theChinese government.  The cost of Internetaccess is high relative to the average income in China.  Failure to further develop theseinfrastructures could limit our ability to grow.  Alternatively, as these infrastructuresimprove and Internet use increases, we may not be able to scale our systemsproportionately.  Our reliance on theseinfrastructures will make us vulnerable to disruptions or failures in service,without sufficient access to alternative networks and services.  Such disruptions or failures could reduce ouruser satisfaction.  Should these risks berealized, our ability to increase revenues and profitability would be impaired.

 

***Our operations are vulnerable to natural disasters and otherevents.***

 

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

 

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

 

Internet usage coulddecline if any well publicized compromise of our security occurs.  “Hacking” involves efforts to gainunauthorized access to information or systems or to cause intentionalmalfunctions or loss or corruption of data, software, hardware or othercomputer equipment.  Hackers, ifsuccessful, could misappropriate proprietary information or cause disruptionsin our service.  We may be required toexpend capital and other resources to protect our website against hackers.  We cannot assure you that any measures we maytake will be effective.  In addition, theinadvertent transmission of computer viruses could expose us to a material riskof loss or litigation and possible liability, as well as materially damage ourreputation and decrease our user traffic.

 

***Unauthorized use of our intellectual property by thirdparties, and the expenses incurred in protecting our intellectual propertyrights, may adversely affect our business.***

 

We regard our copyrights,service marks, trademarks, trade secrets and other intellectual property ascritical to our success.  Unauthorizeduse of our intellectual property by third parties may adversely affect our businessand reputation.  We rely on trademark andcopyright law, trade secret protection and confidentiality agreements with ouremployees, customers, business partners and others to protect our intellectualproperty rights.  Despite ourprecautions, it is possible for third parties to obtain and use ourintellectual property without authorization. Furthermore, the validity, enforceability and scope of protection ofintellectual property in Internet related industries are uncertain and stillevolving.  In particular, the laws of thePRC, Brazil and certain other countries are uncertain or do not protectintellectual property rights to the same extent as do the laws of the UnitedStates.  Moreover, 

 

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litigation may benecessary in the future to enforce our intellectual property rights, to protectour trade secrets or to determine the validity and scope of the proprietaryrights of others.  Future litigationcould result in substantial costs and diversion of resources.

 

***We may be subject to intellectual property infringementclaims, which may force us to incur substantial legal expenses and, ifdetermined adversely against us, materially disrupt our business.***

 

We cannot be certain thatour products and services will not infringe valid patents, copyrights or otherintellectual property rights held by third parties.  We may in the future be subject to legalproceedings and claims from time to time relating to the intellectual propertyof others in the ordinary course of our business.  In particular, if we are found to haveviolated the intellectual property rights of others, we may be enjoined fromusing such intellectual property, and may incur licensing fees or be forced todevelop alternatives.  We may incur substantialexpenses in defending against these third party infringement claims, regardlessof their merit.  Successful infringementclaims against us may result in substantial monetary liability or maymaterially disrupt the conduct of our business.

 

***Our sublicensed content is subject to the terms andconditions of agreements between HSW and third parties.***

 

Under the terms of ourcontribution agreements with HSW, HSW transferred and contributed to usall rights, but only those rights, which belong to and are held byHSW pursuant to third party licenses. Some of those licenses, including HSW’s licenses with PublicationsInternational, Inc. (including the licenses for Consumer Guide) containrestrictions on the use of such content and termination provisions for breachesof the license agreements.  Accordingly,a breach of any third party license by HSW may cause us to lose ourlicense with such third party, which could have a material adverse effect onthe implementation of our business plan, value of our content offering andresults of our operations.

 

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

 

Initially all of ouroperations will be conducted in Brazil followed by China.  Although the PRC economy has grownsignificantly in recent years, we cannot assure you that such growth willcontinue and we may be sensitive to a slowdown in economic growth or otheradverse changes in the PRC and Brazil economies.  In response to adverse economic developments,companies may reduce spending on marketing and advertising.  As a result, a slowdown in overall economicgrowth, an economic downturn or recession or other adverse economicdevelopments in China or Brazil may materially reduce the demand for ourservices and materially and adversely affect our business.

 

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

 

The PRC regulates itsInternet sector by making pronouncements or enacting regulations regarding thelegality of foreign investment in the PRC Internet sector and the existence andenforcement of content restrictions on the Internet.  There are substantial uncertainties regardingthe interpretation of current PRC Internet laws and regulations, includingthose discussed below.

 

The PRC enactedregulations applying to Internet related services and telecom relatedactivities.  While many aspects of theseregulations remain unclear, they purport to limit and require licensing ofvarious aspects of the provision of Internet information services.  The MII has also stated that the activitiesof Internet content providers are subject to regulation by various PRCgovernment authorities, depending on the specific activities conducted by theInternet content provider.  Variousgovernment authorities have stated publicly that they are in the process ofpreparing new laws and regulations that will govern these activities.  The areas of regulation currently includeonline advertising, online news reporting, online publishing, online securitiestrading and the provision of industry specific (e.g., drug related) informationover the Internet.  Other aspects of ouronline operations may be subject to regulation in the future.

 

Under the agreementreached in November 1999 between the PRC and the United States concerningthe United States’ support of China’s entry into the World Trade Organization,or the WTO, foreign investment in PRC Internet 

 

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services will beliberalized to allow for 30% foreign ownership in key telecommunicationservices, including PRC Internet ventures, for the first year after China’sentry into the WTO, 49% in the second year and 50% thereafter.  China officially entered the WTO on December 11,2001.  However, the implementation ofChina’s WTO accession agreements is still subject to various conditions.

 

The interpretation andapplication of existing PRC laws and regulations, the directives of the MII andthe possible new laws or regulations have created substantial uncertaintiesregarding the legality of existing and future foreign investments in, and the businessesand activities of, PRC Internet companies, including us.  Accordingly, it is possible that the relevantPRC authorities could, at any time, assert that any portion or all of ourownership structure and business violate existing or future PRC laws,regulations or policies.  It is alsopossible that the new laws or regulations governing the PRC Internet sectorthat have been adopted or may be adopted in the future will prohibit orrestrict foreign investment in, or other aspects of, any of our proposedbusinesses and operations.  In addition,these new laws and regulations may be retroactively applied to us.

 

If we are found to be inviolation of any existing or future PRC laws or regulations, the relevant PRCauthorities 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 andpersonnel;

 

·                  shutting down our servers and/or blocking ourwebsites;

 

·                  requiring us to restructure our ownership structure oroperations; and

 

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

 

Any of these actionscould have a material adverse effect on our financial condition and results ofoperations.

 

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

 

Our online publishingbusinesses in China and Brazil are expected to derive significant revenue fromonline advertisements.  The onlineadvertising markets in China and Brazil are still developing, and future growthand expansion of such is uncertain.  Ifthese online advertising markets do not grow at expected rates, our results ofoperations and financial condition will be materially adversely affected.

 

***Our international operations will subject us to othersignificant risks.***

 

Our internationaloperations will expose us to a wide variety of other risks including increasedcredit risks, customs duties, import quotas and other trade restrictions,potentially greater inflationary pressures, the risk of failure or materialinterruption of wireless systems and services. Changes may occur in foreign trade and investment laws in theterritories and countries where we will operate.  U.S. laws and regulations relating toinvestment and trade in foreign countries could also change to our detriment.  Any of these factors could materially andadversely affect our revenues and profits. We will be subject to risk of political instability and trade sanctionswithin China.

 

China has traditionallybeen a closed market with strict political controls.  As China shifts to a market economy, growingeconomic and social freedoms may conflict with the more restrictive politicaland governmental policies.  In addition,democratic countries throughout the world have, from time to time, attempted touse economic and other sanctions to achieve political or social change in othercountries.  Each of these factors couldresult in economic sanctions, economic instability, the disruption of tradingand war within China and the Asia Pacific Rim, any of which could result in ourinability to 

 

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conduct businessoperations in China.  Because asubstantial amount of our business is expected to be within China, thedisruption of distribution channels into China would have material and adverseconsequences to our business.

 

In the past, theBrazilian government has intervened in the Brazilian economy and occasionallymade drastic changes in economic policy. The Brazilian government’s actions to control inflation and affect otherpolicies have included high interest rates, wage and price controls, currencydevaluations, 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 beadversely affected by changes in Brazilian government policies, as well asgeneral economic factors, including:

 

·                  currency fluctuations;

 

·                  exchange controls and restrictions on remittancesabroad, such as those that were briefly imposed on such remittances (includingdividends) 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 economicdevelopments in or affecting Brazil.

 

Also, the President ofBrazil has considerable power to determine governmental policies and actionsthat relate to the Brazilian economy and, consequently, affect the operationsand financial performance of businesses operating in Brazil.  We will have no control over, and cannotpredict what policies or actions the Brazilian government may take in thefuture.

 

Further risks relating tointernational operations include, but are not restricted to, unexpected changesin legal and regulatory requirements, changes in tariffs, exchange rates andother barriers, political and economic instability, possible effects of war andacts of terrorism, difficulties in account receivable collection, difficultiesin managing distributors or representatives, difficulties in staffing andmanaging international operations, difficulties in protecting our intellectualproperty overseas, seasonality of sales and potentially adverse taxconsequences.  Any of these factors couldmaterially and adversely affect our revenues and profits.

 

***Restrictions on currency exchange may limit our ability toutilize our revenues effectively.***

 

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

 

Additionally, some of ourrevenues and operating expenses are denominated in Brazilian *Reais*. Brazilian law allows the Brazilian government to impose restrictions onthe conversion of the *Real* intoforeign currencies and on the remittance to foreign investors of proceeds fromtheir investments in Brazil.  Thegovernment may impose such restrictions whenever there is a serious imbalancein Brazil’s balance of payments or there are reasons to foresee a seriousimbalance.  The Brazilian government lastimposed remittance restrictions for approximately six months in 1989 and early1990.  The likelihood that the Braziliangovernment would impose such restrictions again may depend on the extent ofBrazil’s foreign currency reserves, the availability of foreign currency in theforeign exchange markets on the date a payment is due, the size of Brazil’sdebt service burden relative to the economy as a whole, Brazil’s policy towardthe International Monetary Fund and other factors.

 

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Since a significantamount of our revenues will be denominated in Renminbi, existing and futurerestrictions on the exchange of Renminbi to other currencies may limit ourability to use revenue generated in Renminbi to fund our business activitiesoutside China, if any, or expenditures denominated in foreign currencies.  Similarly, in the event that a significantamount of our revenues will be denominated in *Reais*,any future restrictions on the exchange of *Reais*for other currencies or the remittance to foreign investors of proceeds fromtheir investments in Brazil may limit our ability to use revenue generated in *Reais* to fund our business activitiesoutside Brazil, or expenditures denominated in foreign currencies.

 

***We will be subject to risks of currency fluctuations andexchange restrictions.***

 

Currency fluctuations,devaluations and exchange restrictions may adversely affect our liquidity andresults of operations.  In somecountries, local currencies may not be readily converted into Euros or U.S.dollars (or other “hard currencies”) or may only be converted at governmentcontrolled rates, and, in some countries, the transfer of hard currenciesoffshore has been restricted from time to time. Very limited hedging transactions are available in China to reduce itsexposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effortto reduce our exposure to foreign currency exchange risk.  While we may decide to enter into hedgingtransactions in the future, the availability and effectiveness of these hedgesmay be limited and we may not be able to successfully hedge our exposure, if atall.  Our revenues as expressed in ourU.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 maybe magnified by PRC exchange control regulations that restrict our ability toconvert Renminbi into U.S. dollars or by Brazilian exchange control regulationsthat restrict our ability to convert *Reais*into U.S. dollars.

 

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

 

China has enactedregulations governing Internet access and the distribution of news and otherinformation.  Furthermore, the PropagandaDepartment of the Chinese Communist Party has been given the responsibility to censornews published in China to ensure, supervise and control a particular politicalideology.  In addition, the MII haspublished implementing regulations that subject online information providers topotential liability for content included on their portals and the actions of subscribersand others using their systems, including liability for violation of PRC lawsprohibiting the distribution of content deemed to be sociallydestabilizing.  Because many PRC laws,regulations and legal requirements with regard to the Internet are relativelynew and untested, their interpretation and enforcement may involve significantuncertainty.  In addition, the PRC legalsystem is a civil law system in which decided legal cases have limited bindingforce as legal precedents.  As a result,in many cases it is difficult to determine the type of content that may resultin liability for a website operator.

 

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

 

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

 

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

 

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Since spring of 2005, theNational People’s Congress and the State Council have begun legislative reviewof a draft Law for Protection of Personal Information which provides a widerscope of information protection than that required to merely protect the personalprivacy of a citizen.  Cellular phonenumber, home address, medical files and occupational information will all beprotected.  The draft further providesthat usage of such personal information by service providers (excluding thenational security authority, research institutions, and news agency) shall besubject to the prior authorization of each individual and violation under thislaw could result in administrative, civil, and even criminal liabilities.  If regulations are adopted addressing thecollection, transmission and commercial use of personal information or data, wecould be subject to these penalties, certain aspects of its business plan mayno longer be viable and our business would thus be adversely affected.

 

***Potential additional Chinese regulation could affect ourbusiness in China.***

 

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

 

***Political and economic policies of the PRC government couldaffect our business.***

 

A significant portion ofour business, assets and operations will be located in China and a significantportion of our future revenues are expected to be derived from our operationsin China.  Accordingly, our businesscould be adversely affected by changes in political, economic or socialconditions in China, adjustments in PRC government policies or changes in lawsand regulations.

 

The economy of Chinadiffers from the economies of most countries belonging to the Organization forEconomic 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 hasbeen primarily a planned economy subject to a system of macroeconomicmanagement.  Although the Chinesegovernment 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 economicreform and macroeconomic measures adopted by the Chinese government may have onour business or results of operations.

 

***The PRC legal system embodies uncertainties which couldlimit the legal protections available to us.***

 

The PRC legal system is acivil law system based on written statutes. Unlike common law systems, it is a system in which decided legal caseshave little precedential value.  In 1979,the PRC government began to promulgate a comprehensive system of laws andregulations governing economic matters in general.  We are subject to laws and regulationsapplicable to foreign investment in mainland China.  However, these laws, regulations and legalrequirements are relatively recent, and their interpretation and enforcementinvolve uncertainties.  These uncertaintiescould limit the legal protections available to us and other foreigninvestors.  In addition, we cannotpredict the effect of future developments in the PRC legal system, particularlywith regard to the Internet, our 

 

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ownership structure andcurrency exchange, including the promulgation of new laws, changes to existinglaws or the interpretation or enforcement thereof, or the preemption of localregulations by national laws.

 

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

 

Although the combinedcompany is incorporated in the State of Delaware, in the future a substantialportion of our assets could be located in the PRC.  As a result, it may be difficult forinvestors to enforce outside the United States any actions brought against usin the United States, including actions predicated upon the civil liabilityprovisions of the federal securities laws of the United States or of thesecurities laws of any state of the United States.  In addition, certain of our directors andofficers and all or a substantial portion of their assets may be locatedoutside the United States (principally in the PRC).  As a result, it may not be possible forinvestors to effect service of process within the United States upon thosedirectors and officers, or to enforce against them or us judgments obtained inUnited States courts, including judgments predicated upon the civil liability provisionsof the federal securities laws of the United States or of the securities lawsof any state of the United States.  Thereis doubt as to the enforceability in the PRC, in original actions or in actionsfor enforcement of judgments of United States courts, of civil liabilitiespredicated solely upon the federal securities laws of the United States or thesecurities laws of any state of the United States.

 

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

 

We will depend upon oursenior management and consultants for its business success.  Key members of the senior team include JeffArnold, a consultant and our current Chairman of the Board. Our consultingagreement with Mr. Arnold which commenced in 2006 has a term of only twoyears and is non-exclusive.  The loss ofthe service of any of the key members of our senior management maysignificantly delay or prevent the integration of the contributed assets andother business objectives.  Our abilityto attract and retain qualified personnel, consultants and advisors will becritical to our success.  It may beunable to attract and retain these individuals, and our failure to do so wouldadversely affect our business.

 

***The concentration of our stock ownership will likely limityour ability to influence corporate matters.***

 

HSW beneficiallyowns a majority of our outstanding common stock and entered into a stockholdersagreement.  The stockholders agreemententitles HSW to designate nominees to our board of directors.  Furthermore, Jeffrey Arnold, our currentChairman of the Board, is the Chief Executive Officer and Chairman of HSW, andanother member of our Board of Directors is President-Digital Media and BusinessDevelopment of HSW’s parent company, Discovery. As a result, HSW has the ability to influence our management and affairsand determine the outcome of matters submitted to stockholders for approval, includingthe election and removal of directors, amendments to the charter, approval ofequity-based employee compensation plans and any merger, consolidation or saleof all or substantially all of our assets.

 

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

 

As of March 1, 2008,HSW owns 42.8% of our outstanding shares of common stock.  As a result, it will be difficult for ourother stockholders to approve a takeover of us without the cooperation of HSW.

 

Furthermore, our Amendedand Restated Certificate of Incorporation and Amended and Restated Bylawscontain certain anti-takeover provisions, including but not limited to thefollowing provisions:

 

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

 

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

 

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·                  we have authorized undesignated preferred stock, theterms of which may be established and shares of which may be issued withoutstockholder approval; and

 

·                  we require advance notice for stockholder proposals ofnot less than 60 nor more than 90 days prior to a meeting at whichstockholder proposals may be introduced.

 

In addition, thestockholders agreement gives HSW the right to designate nominees to ourboard of directors.

 

These anti-takeoverdefenses could discourage, delay or prevent a transaction involving a change ofcontrol of us.  These provisions couldalso discourage proxy contests and make it more difficult for you and otherstockholders to cause us to take other corporate actions you may desire.

 

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

 

**ITEM 1B.               UNRESOLVEDSTAFF COMMENTS**

 

None.

 

**ITEM  2.                 PROPERTIES**

 

Our corporate headquartersare located at One Capital City Plaza, 3350 Peachtree Road, Suite 1600,Atlanta, Georgia, which consists of approximately 6,000 square feet of leasedspace.  At December 31, 2008, wealso leased 73 square feet in Beijing, China, as well as 4,111 in Curitiba and4,789 in Sao Paulo, Brazil. We are in the process of negotiating leased officespace in Beijing to accommodate the mid 2008 launch of our China Internetplatform.  We do not own any realproperty. We believe that our existing facilities are adequate to meet ourneeds in the near term.

 

As of December 31,2007, our current total remaining lease obligations are U.S. $717,776.

 

**ITEM  3.                 LEGAL PROCEEDINGS**

 

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

 

**ITEM  4.                 SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS**

 

No matters were submittedto a vote of our security holders during the fourth quarter of the year ended December 31,2007.

 

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**PART II**

 

**ITEM  5.****                                                 ****MARKET FOR THE REGISTRANTS COMMONEQUITY, RELATEDSTOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

 

Our common stock has beentraded 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 tablesets forth the high and low sales prices of our and INTAC’s common stock, asreported per the appropriate market.

 

| ** **                             | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------------------------------|------------|----------|------------|---------|------------|
| **Year ended December 31,  2006** |       |     |       |    |       |
| First Quarter                          |       | $        | 8.87       |    | $          | 3.83 |   |
| Second Quarter                         |       | 14.49    |       | 4.80    |       |
| Third Quarter                          |       | 8.02     |       | 5.67    |       |
| Fourth Quarter                         |       | 7.69     |       | 6.10    |       |
|                                   |       |     |       |    |       |
| **Year ended December 31,  2007** |       |     |       |    |       |
| First Quarter                          |       | $        | 8.92       |    | $          | 5.65 |   |
| Second Quarter                         |       | 8.00     |       | 6.50    |       |
| Third Quarter                          |       | 11.48    |       | 5.00    |       |
| Fourth Quarter                         |       | 11.25    |       | 4.18    |       |

 

**Holdersof Record**

 

As of March 28,2008, the last sale price of our common stock on NASDAQ Global Market was $4.95per share.  As of March 28, 2008,there were approximately 19 stockholders of record.

 

**DividendPolicy**

 

We have neither paid nordeclared dividends on our common stock since our inception and do not plan topay dividends in the foreseeable future. Any earnings that we may realize will be returned to finance our growth.

 

**Sales of Unregistered Securities**

 

On October 2, 2007,accredited institutional investors referred to in this report as the Americaninvestors purchased approximately 3.4 million shares of our common stock for$22.5 million, or $6.57 per share, in a private placement pursuant to Section 4(2) ofthe Securities Act of 1933.  We did notuse an underwriter in this transaction. On February 4, 2008, we issued approximately 2.7 million additionalshares to the American investors pursuant to an adjustment mechanism in thestock purchase agreements making the final price $3.68 per share.

 

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**ITEM  6.                 SELECTEDFINANCIAL DATA**

 

The following table setsforth consolidated financial data with respect to us as of and for the periodfrom inception (March 14, 2006) to December 31, 2006, and as of and forthe year ended December 31, 2007. The selected consolidated financial data below should be read inconjunction with the audited consolidated financial statements and relatednotes included elsewhere in this Annual Report on Form 10-K and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”included in Item 7.  This is particularlytrue because our historical financial data is difficult to compare from periodto period because of the mergers and business dispositions we have recentlyconsummated, as described therein.

 

The following data,insofar as it relates to the year ended December 31, 2007, and for theperiod from  inception (March 14,2006) through December 31, 2006, has been derived from the auditedconsolidated financial statements, including the consolidated balance sheets atDecember 31, 2007, and 2006, and the related consolidated statements ofoperations, cash flows and stockholders’ equity and comprehensive income forthe year ended December 31, 2007, and for the period from  inception (March 14, 2006) through December 31,2006, and notes thereto appearing elsewhere in this report.

 

As discussed in Notes 1,2, and 3 to the consolidated financial statements included elsewhere in thisreport, HSWI merged with INTAC International Inc. on October 2, 2007, andthe INTAC Legacy Businesses were subsequently disposed on February 29,2008.  The audited consolidatedinformation for the year ended December 31, 2007, includes INTAC’s resultsof operations from October 2, 2007, through the December 31, 2007,and balance sheet information as of December 31, 2007.  Following the disposition, the sole asset wewill retain from INTAC is the indefinite lived Internet Licenses intangible andno revenue was realized from this asset in 2007.

 

However we do not believethat the historical results (including INTAC) for the year ended December 31,2007, are indicative of our ongoing trends and future continuingoperations.  Accordingly, we have alsoincluded in the Selected Financial Data below, pro forma unaudited results ofoperations for the period from October 2, 2007, (date of the merger) to December 31,2007, and certain balance sheet information for the INTAC Legacy Businesses aswell as pro forma unaudited results of operations and certain balance sheetinformation for HSWI, excluding the results of the INTAC Legacy Businesses.

 

We have also not includedthe selected financial data of INTAC, as predecessor, for the years 2003through 2005 because (i) that financial data includes the most significantINTAC business segment which was sold simultaneously with the INTAC Merger and (ii) theINTAC Legacy Businesses were subsequently sold on February 29, 2008.  Such historical information is neithercomparable nor indicative of HSWI’s future trends or future continuingoperations.

 

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**Consolidated Statement of Operations Data:**

 
| ** **                                         | ** ** | ** **                  | ** **    | ** **                  | ** ** | **INTAC  Legacy**           | ** ** | ** **                  | ** **  |
|----------------------------------------------------|------------|-----------------------------|---------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|-------------|
| ** **                                         | ** ** | ** **                  | ** **    | ** **                  | ** ** | **Businesses**              | ** ** | ** **                  | ** **  |
| ** **                                         | ** ** | **HSWI**                    | ** **    | ** **                  | ** ** | **For the  Period**         | ** ** | ** **                  | ** **  |
| ** **                                         | ** ** | **For the  Period**         | ** **    | ** **                  | ** ** | **from  October 2,**   | ** ** | **HSWI**                    | ** **  |
| ** **                                         | ** ** | **from  March 14,**    | ** **    | ** **                  | ** ** | **2007  (date of**          | ** ** | **For the  Year Ended**     | ** **  |
| ** **                                         | ** ** | **2006  (date of**          | ** **    | **HSWI**                    | ** ** | **merger)  to**             | ** ** | **December 31,  2007** | ** **  |
| ** **                                         | ** ** | **inception)  to**          | ** **    | **For the  Year Ended**     | ** ** | **December 31,  2007** | ** ** | **Pro  Forma**              | ** **  |
|                                               | ** ** | **December 31,  2006** | ** **    | **December 31,  2007** | ** ** | **(unaudited)**             | ** ** | **(unaudited)**             | ** **  |
|                                               |       |                        |          |                        |       |                        |       |                        |        |
| Operating revenue                                  |       | $                           | —        |                        | $          | 346,162                     |       | $                           | 198,627     |   | $ | 147,535 |   |
|                                               |       |                        |          |                        |       |                        |       |                        |        |
| Cost of services                                   |       | —                      |          | 1,352,470                   |       | 110,218                     |       | 1,242,252                   |        |
|                                               |       |                        |          |                        |       |                        |       |                        |        |
| Gross loss                                         |       | —                      |          | (1,006,308                  | )          | 88,409                      |       | (1,094,717                  | )           |
|                                               |       |                        |          |                        |       |                        |       |                        |        |
| Operating expenses                                 |       | 12,556,817                  |          | 38,517,631                  |       | 24,776,435                  |       | 13,741,196                  |        |
|                                               |       |                        |          |                        |       |                        |       |                        |        |
| Loss from operations                               |       | (12,556,817                 | )             | (39,523,939                 | )          | (24,688,026                 | )          | (14,835,913                 | )           |
|                                               |       |                        |          |                        |       |                        |       |                        |        |
| Other expense                                      |       | (148,942                    | )             | (15,366                     | )          | 67                          |       | (15,433                     | )           |
|                                               |       |                        |          |                        |       |                        |       |                        |        |
| Net loss                                           |       | $                           | (12,705,759   | )                           | $          | (39,539,305                 | )          | $                           | (24,687,959 | ) | $ | (14,851,346 | ) |
|                                               |       |                        |          |                        |       |                        |       |                        |        |
| Per share data:                                    |       |                        |          |                        |       |                        |       |                        |        |
|                                               |       |                        |          |                        |       |                        |       |                        |        |
| Basic loss per share                               |       | $                           | (1,270,575.90 | )                           | $          | (3.42                       | )          |                        |        | $ | (1.29 | ) |
|                                               |       |                        |          |                        |       |                        |       |                        |        |
| Diluted loss per share                             |       | $                           | (1,270,575.90 | )                           | $          | (3.42                       | )          |                        |        | $ | (1.29 | ) |
|                                               |       |                        |          |                        |       |                        |       |                        |        |
| Weighted average shares outstanding – basic   |       | 10                          |          | 11,544,818                  |       |                        |       | 11,544,818                  |        |
|                                               |       |                        |          |                        |       |                        |       |                        |        |
| Weighted average shares outstanding – diluted |       | 10                          |          | 11,544,818                  |       |                        |       | 11,544,818                  |        |

** **

** **

**Consolidated Balance Sheet Data:**

 

 
| ** **                      | ** ** | ** **                  | ** ** | ** **                  |       | **INTAC  Legacy**           |       | **HSWI**                    |       |
|---------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                      | ** ** | ** **                  | ** ** | ** **                  |       | **Businesses**              |       | **Pro  Forma**              |       |
| ** **                      | ** ** | **HSWI**                    | ** ** | **HSWI**                    | ** ** | **December 31,  2007** | ** ** | **December 31,  2007** | ** ** |
| ** **                      | ** ** | **December 31,  2006** | ** ** | **December 31,  2007** | ** ** | **(unaudited)**             | ** ** | **(unaudited)**             | ** ** |
|                            |       |                        |       |                        |       |                        |       |                        |       |
| Cash and cash equivalents       |       | $                           | 233,262    |                        | $          | 3,639,831                   |       | $                           | 163,158    |   | $ | 3,476,673 |   |
|                            |       |                        |       |                        |       |                        |       |                        |       |
| Goodwill and other  intangibles |       | $                           | —     |                        | $          | 25,133,933                  |       | $                           | 15,133,933 |   | $ | 10,000,000 |   |
|                            |       |                        |       |                        |       |                        |       |                        |       |
| Total Assets                    |       | $                           | 1,917,058  |                        | $          | 34,745,160                  |       | $                           | 19,988,029 |   | $ | 14,757,131 |   |
|                            |       |                        |       |                        |       |                        |       |                        |       |
| Total liabilities               |       | $                           | 4,811,830  |                        | $          | 9,834,723                   |       | $                           | 6,163,131  |   | $ | 3,671,592 |   |
|                            |       |                        |       |                        |       |                        |       |                        |       |
| Stockholders’ equity       |       | $                           | 1,917,058  |                        | $          | 24,910,437                  |       | $                           | 13,824,898 |   | $ | 11,085,539 |   |

 

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**ITEM  7.****                                         ****MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS**

**                                                                                               ****OF OPERATIONS**

 

*The**following**discussion of ourfinancial condition and results of operations should be read in conjunctionwith the consolidated financial statements and the notes to those statementsincluded elsewhere in this Annual Report on Form 10-K.  This discussion contains predictions,estimates and other forward-looking statements that involve a number of risksand uncertainties, including those discussed under “Part I—Item 1A. RiskFactors” and elsewhere in this Annual Report on Form 10-K.  These risks could cause our actual results todiffer materially from those anticipated in these forward-looking statements.*

 

**BusinessOverview and Recent Events**

 

We were formed on March 14,2006, as a wholly owned subsidiary of HowStuffWorks, Inc. (“HSW”) in orderto (i) develop businesses using exclusive digital publishing rights to HSW’scontent for the countries of China and Brazil and (ii) to effect themerger with INTAC International, Inc. (the “INTAC Merger”).Our ongoing primary focus is to become aninternational online publishing company that develops and operates Internetbusinesses focused on providing consumers in the world’s emerging digitaleconomies with locally relevant, high quality content.

 

**The INTAC Merger**

 

The INTAC Merger was doneto assist in the development of our digital content database exclusivelylicensed from HSW by (i) accelerating our obtaining Internet licenses inChina for launching our Internet platform, (ii) obtaining INTACInternational, Inc. (“INTAC”) knowledge of the Chinese markets, relationships,and core competencies to accelerate the growth of our Internet platforms in Chinaand (iii) providing additional cash flow from INTAC’s establishedbusinesses.  These established businessesinclude services related to wireless telephone training and the development andsale of educational software delivered to customers in China(“INTAC Legacy Businesses”).  As discussed below, the INTAC LegacyBusinesses were subsequently disposed.

 

Prior to the consummationof the merger with INTAC, we had only limited assets and operations incident toour formation and in preparation for the merger with INTAC and subsequentbusiness.

 

On October 2, 2007,we completed the INTAC Merger and related transactions pursuant to which:

 

·                  HSW contributed to us, in exchange for our common stock, amongother items more fully discussed elsewhere in this Annual Report to Form 10-K,perpetual, fully paid up, royalty-free exclusive digital publishing rights toHSW’s existing content for the countries of China and Brazil which we aretranslating and localizing into the predominant languages of China and Brazil.

 

·                  A wholly owned subsidiary of ours was merged with INTAC surviving as awholly owned subsidiary of ours and holdersof INTAC common stock received one share of our common stock in exchange foreach of their shares of INTAC common stock.

 

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

 

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

 

·                  In connection with and as a condition of the INTACMerger, INTAC sold its wireless handset and prepaid calling cards distributionbusinesses (“distribution companies”), to an entity controlled by Wei Zhou,INTAC’s Chief Executive Officer and President, in exchange for 3.0 millionshares of our common stock

 

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                        held by Mr. Zhou. The 3.0 million shares of our common stock were recorded as treasuryshares valued at cost as determined by a third party valuation.

 

As more fully discussedin Note 2 to the consolidated financial statements included in this AnnualReport to Form 10-K, the preliminary allocation of the purchase price of$47.9 million resulted in approximately $29.0 million of goodwill primarilyfrom our expectations that we could utilize INTAC’s knowledge of the Chinesemarkets, relationships, and core competencies to accelerate the growth of ourInternet platforms in China. However, as discussed below we decided to disposeof the entire INTAC Legacy Businesses subsequent to December 31, 2007,such disposition occurring on February 29, 2008.

 

**HSWMerger with Discovery Communications, LLC.**

 

In December 2007,HSW was acquired by Discovery Communications, LLC (“Discovery”) and became awholly owned subsidiary of Discovery.  Asa result, certain of our contributions from HSW were modified.  See “Merger of HSW and DiscoveryCommunications, LLC” in Item 1, Description of Business, contained elsewhere inthis Annual Report to Form 10-K.  AtDecember 31, 2007, Discovery, through its wholly owned subsidiary HSW,owned approximately 46.5% of our outstanding common stock.

 

**Our Operations**

 

Our initial focus in theonline publishing market will be the online publishing of localized, translatedChinese and Brazilian editions of HowStuffWorks.com, utilizing strategies basedon those utilized by HSW and described above, as tailored to the needsof each localized market.

 

We launched our Brazilianwebsite in March 2007.  At December 31,2007, we had approximately 3,500 articles that were either (i) articlesfrom the HSW content database translated from English to Portuguese or (ii) originallycreated content. The web site address is *http://hsw.uol.com.br/*.  We are in the early development of ourbusiness strategy in Brazil as we continue to expand by (i) addingoriginal proprietary digital content designed to meet the information needs ofthe Brazilian online community, (ii) expanding the amount of translatedcontent from HSW, and (iii) refining local marketing strategies.

 

We are entering theChinese online publishing market and utilizing a combination of the licensedand sublicensed content that we recently received from HSW with the benefits ofINTAC’s relationships and knowledge of the Chinese markets in obtaining ourInternet licenses.  We expect to deployour Internet platform in China in mid-2008. We have hired Chinese personnel,received licenses to conduct certain business in China and are in the processof translating and localizing our content for the China online publishing business.

 

We also intend togenerate revenue by assembling our own library of digital content (includingoriginally authored content and content that has been acquired from thirdparties) for our own use and for licensing to various customers, which may includeHSW, in territories outside of our markets. Both China and Brazil represent significant, growing markets forour initial online publishing strategy.

 

**Subsequent Sale of the INTAC Legacy Businesses andRelated Transactions**

 

Due to an increased focusof our management and resources on our primary Internet publishing business, a change of control in our majorityownership leading to further refinement in our strategies, and an underperformance of the INTAC Legacy Businesses after the INTAC Merger, we decidedsubsequent to December 31, 2007, to dispose of these legacy businesses.The INTAC Legacy Businesses were comprised of two lines of business, includingservices related to wireless telephone training and the development and sale ofeducational software in China, both unrelated to our core Internet platformbusiness.

 

We had originallyestimated when deciding to acquire the INTAC Legacy Businesses that in additionto accelerating our obtaining Internet licenses in China for launching ourInternet platform, INTAC would provide us (i) further knowledge of theChinese markets, relationships, and core competencies to accelerate the growthof our Internet platform in China and (ii) additional cash flow from INTAC’sestablished businesses. Following the underperformance of the INTAC LegacyBusinesses in the fourth quarter of 2007, that resulted in short-term negativecash flow from 

 

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these operations and achange-in-control of our business through the acquisition of our largestshareholder HSW, by Discovery, we reconsidered the potential risk of excessiveconsumption of short-term cash and management resources by our acquirednon-core INTAC Legacy Businesses and refined our strategic direction.

 

We decided that it wascritical that all our current resources be fully focused on expanding ourBrazilian platform and launching our Chinese Internet platform inmid-2008.  Although we believe we havebenefited in the short-term from INTAC’s relationships and knowledge of theChinese markets in obtaining our Internet licenses, this refined strategicfocus did not allow us the time required to realize the expected long-termsynergies from INTAC’s knowledge of the Chinese markets, relationships, andcore competencies.  In addition, we wereprovided with and acted on an opportunity to sell the unrelated INTAC LegacyBusinesses for approximately their stand-alone appraised value, and throughsimultaneous sale of the treasury stock received, generate significantadditional cash resources for investing in our core Internet businesses.

 

At December 31,2007, we recognized in loss from operations before income taxes in thestatement of operations, a preliminary goodwill write off of approximately$22.5 million related to the February 29, 2008, INTAC Legacy Businessesdisposition.  All the goodwill resultingfrom the INTAC acquisition was included in the INTAC Legacy Businesses when wedetermined the potential write off, because such operations had not beenintegrated with our online publishing segment prior to our decision to disposeof the INTAC Legacy Businesses.

 

On February 29,2008, we completed the sale of the INTAC Legacy Businesses.  The INTAC Legacy Businesses were sold toChina Trend Holdings Ltd., a British Virgin Islands corporation that is ownedby Wei Zhou, CEO, director and significant stockholder of INTAC prior to theINTAC Merger in October 2007.  Mr. Zhouwas also on our board of directors from October to December 2007.  In accordance with the Share Purchase Agreementwith China Trend Holdings, we were to receive 5.0 million of our common sharesowned by Mr. Zhou. In addition, as a condition to the February 29,2008, INTAC Legacy Businesses disposition, the INTAC Legacy Businesses were toinclude $4.5 million in cash at closing.

 

At the February 29,2008 INTAC Legacy Businesses disposition, we received only 4.5 million of ourshares from Mr. Zhou and accordingly, we only funded the INTAC LegacyBusinesses with $2.7 million in cash. Mr. Zhou delivered his additional 0.5million shares of our stock to us on March 26, 2008, and, we will releaseanother $1.8 million in cash to the INTAC Legacy Businesses. After thisdisposition, all of HSWI’s assets are in our core Internet business and thesole asset we retain from the INTAC Merger is the Internet Licenses we areusing to enter the Chinese markets.

 

On February 15,2008, we entered into a Stock Purchase Agreement where we agreed to sell andtwo qualified institutional buyers agreed to purchase the 5.0 million shares ofour common stock received from the INTAC Legacy Businesses disposition at apurchase price of $3.68 per share. Simultaneously with the February 29, 2008 disposition, we sold the4.5 million shares we received to the institutional buyers.  The additional 0.5 million shares received fromMr. Zhou were sold on March 28, 2008, to the institutional buyers for $1.8million.

 

***Resultsof Operations***

 

Prior to the consummationof the merger with INTAC, we had only limited assets and operations incident toour formation and in preparation for the merger with INTAC and subsequentbusiness.

 

The following table setsforth Results of Operations with respect to us for the period from inception (March 14,2006) to December 31, 2006, and for the year ended December 31, 2007.** **Asdiscussed in Notes 1, 2, and 3 to the consolidated financial statementsincluded elsewhere in this Annual Report on Form 10-K, HSWI merged withINTAC International Inc. on October 2, 2007, and the INTAC LegacyBusinesses were subsequently disposed on February 29, 2008.  Following the disposition, the sole asset weretain from INTAC is the indefinite lived Internet Licenses intangible and norevenue was realized from this asset in 2007. The audited results of operations for the year ended December 31, 2007,includes INTAC’s results of operations from October 2, 2007, through the December 31,2007.

 

However, we do notbelieve that the results of operations including INTAC for the year ended December 31,2007, are indicative of our ongoing trends and future continuingoperations.  Accordingly, we have alsoincluded in the results of operations below, INTAC Legacy Businesses pro formaunaudited results of operations for the period from October 2, 2007, (dateof the merger) to December 31, 2007, as well as pro forma unauditedresults of operations for HSWI, excluding the results of the INTAC LegacyBusinesses.  Accordingly, the discussionsthat

 

26

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follow regarding our yearover year results of operations are comparing the HSWI audited results ofoperations from inception to December 31, 2006, to HSWI unaudited proforma results of operations for the year ended December 31, 2007, unlessotherwise noted.

 

**HSW INTERNATIONAL, INC. and SUBSIDIARIES**

**PRO FORMA STATEMENT OF OPERATIONS**

**(expressed in U.S. Dollars)**

 
| ** **                                            | ** ** | ** **              | ** **  | ** **         | ** ** | **INTAC Legacy**         | ** ** | ** **                 | ** **  |
|-------------------------------------------------------|------------|-------------------------|-------------|--------------------|------------|--------------------------|------------|----------------------------|-------------|
| ** **                                            | ** ** | **HSWI**                | ** **  | ** **         | ** ** | **Businesses**           | ** ** | ** **                 | ** **  |
| ** **                                            | ** ** | **For the Period**      | ** **  | ** **         | ** ** | **For the Period**       | ** ** | ** **                 | ** **  |
| ** **                                            | ** ** | **from March 14,** | ** **  | ** **         | ** ** | **from October 2,** | ** ** | **HSWI**                   | ** **  |
| ** **                                            | ** ** | **2006 (date of**       | ** **  | **HSWI**           | ** ** | **2007 (date of**        | ** ** | **For the Year Ended**     | ** **  |
| ** **                                            | ** ** | **inception) to**       | ** **  | **For the Year**   | ** ** | **merger) to**           | ** ** | **December 31, 2007** | ** **  |
| ** **                                            | ** ** | **December 31,**   | ** **  | **Ended December** | ** ** | **December 31,**    | ** ** | **Pro Forma**              | ** **  |
| ** **                                            | ** ** | **2006**                | ** **  | **31, 2007**       | ** ** | **2007 (unaudited)**     | ** ** | **(unaudited)**            | ** **  |
| ** **                                            | ** ** | ** **              | ** **  | ** **         | ** ** | ** **               | ** ** | ** **                 | ** **  |
| **Operating revenues**                                | ** ** | ** **              | ** **  | ** **         | ** ** | ** **               | ** ** | ** **                 | ** **  |
| Digital online publishing                             |       | $                       | —      |               | $          | 147,535                  |       | $                          | —      |   | $ | 147,535 |   |
| Career development services                           |       | —                  |        | 198,627            |       | 198,627                  |       | —                     |        |
| ** **                                            | ** ** | ** **              | ** **  | ** **         | ** ** | ** **               | ** ** | ** **                 | ** **  |
| **Cost of services**                                  | ** ** | ** **              | ** **  | ** **         | ** ** | ** **               | ** ** | ** **                 | ** **  |
| Digital online publishing                             |       | —                  |        | 1,242,252          |       | —                   |       | 1,242,252                  |        |
| Career development services                           |       | —                  |        | 110,218            |       | 110,218                  |       | —                     |        |
| Total cost of services                                |       | —                  |        | 1,352,470          |       | 110,218                  |       | 1,242,252                  |        |
| ** **                                            | ** ** | ** **              | ** **  | ** **         | ** ** | ** **               | ** ** | ** **                 | ** **  |
| **Gross (profit) loss**                               |       | —                  |        | (1,006,308         | )          | 88,409                   |       | (1,094,717                 | )           |
| ** **                                            | ** ** | ** **              | ** **  | ** **         | ** ** | ** **               | ** ** | ** **                 | ** **  |
| **Operating expenses**                                | ** ** | ** **              | ** **  | ** **         | ** ** | ** **               | ** ** | ** **                 | ** **  |
| Selling, general and administrative                   |       | 12,552,917              |        | 13,934,417         |       | 250,969                  |       | 13,683,448                 |        |
| Product development                                   |       | —                  |        | 516,350            |       | 516,350                  |       | —                     |        |
| Provision for doubtful accounts                       |       | —                  |        | 1,210,631          |       | 1,210,631                |       | —                     |        |
| Depreciation and amortization                         |       | 3,900                   |        | 337,851            |       | 280,103                  |       | 57,748                     |        |
| Goodwill write off related to disposition             |       | —                  |        | 22,518,382         |       | 22,518,382               |       | —                     |        |
| Total operating expenses                              |       | 12,556,817              |        | 38,517,631         |       | 24,776,435               |       | 13,741,196                 |        |
|                                                  |       |                    |        |               |       |                     |       |                       |        |
| Loss from operations                                  |       | (12,556,817             | )           | (39,523,939        | )          | (24,688,026              | )          | (14,835,913                |        |
|                                                  |       |                    |        |               |       |                     |       |                       |        |
| **Other income (expense)**                            | ** ** | ** **              | ** **  | ** **         | ** ** | ** **               | ** ** | ** **                 | ** **  |
| Interest income (expense), net                        |       | (148,942                | )           | 11,909             |       | 67                       |       | 11,842                     |        |
| Other (expense)                                       |       | —                  |        | (27,275            | )          | —                   |       | (27,275                    | )           |
| Total other (expense)                                 |       | (148,942                | )           | (15,366            | )          | 67                       |       | (15,433                    |        |
|                                                  |       |                    |        |               |       |                     |       |                       |        |
| **Loss before income taxes**                          |       | (12,705,759             | )           | (39,539,305        | )          | (24,687,959              | )          | (14,851,346                | )           |
| ** **                                            | ** ** | ** **              | ** **  | ** **         | ** ** | ** **               | ** ** | ** **                 | ** **  |
| Income taxes                                          |       | —                  |        | —             |       | —                   |       | —                     |        |
|                                                  |       |                    |        |               |       |                     |       |                       |        |
| **Net loss**                                          |       | $                       | (12,705,759 | )                  | $          | (39,539,305              | )          | $                          | (24,687,959 | ) | $ | (14,851,346 | ) |
| ** **                                            | ** ** | ** **              | ** **  | ** **         | ** ** | ** **               | ** ** | ** **                 | ** **  |
| Basic and diluted weighted average shares outstanding |       | 10                      |        | 11,544,818         |       |                     |       | 11,544,818                 |        |
| Net loss per basic and diluted share                  |       | $                       | (1,270,576  | )                  | $          | (3.42                    | )          |                       |        | $ | (1.29 | ) |

 

 

27

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** **

**Revenues**

** **

During 2006, we had notlaunched a website in either Brazil or China and accordingly, had no revenuesfor the year ended December 31, 2006. The revenue for the year ended December 31, 2007 of $147,535 isrevenue generated in Brazil since the website launch in March 2007.  For the year ended December 31, 2007,approximately 22% of the revenue was generated from paid-for impressionadvertising and 78% was generated from pay for performance ads. There was noChina digital online publishing revenue from inception through December 31,2007, as the website in China had not yet been launched.

 

**Cost ofServices**

 

Cost of services includesthe ongoing third party translation costs incurred by third party vendors forservices of translating, localizing, and enhancing articles in English toPortuguese and Mandarin Chinese. Portuguese article translation costs totaled $0.7 million and Chinesetranslation costs totaled $0.5 million for the year ended December 31,2007, respectively. There were no significant translation costs incurred in theperiod from inception (March 14, 2006) to December 31, 2006.

 

**Operations—Selling,General and Administrative Expenses**

 

Our total selling, general and administrative****expenses increased by $1.1 millionto $13.7 million for the year ended December 31, 2007 from thecomparable period in 2006.  The increaseis primarily attributable to increased costs relating to the launching of theBrazil website in 2007, the preparation for entering the China market, and theincreased costs of becoming a public company. These increases over 2006 arecomprised of $3.0 million in personnel related costs, $0.3 million infacility costs, and $0.3 selling expenses. These increases are partially offset by a $2.6 million decrease instock-based compensation expense (See Note 10 to Notes to the ConsolidatedFinancial Statements included in this Annual Report to Form 10-K).

 

**OtherIncome (Expense)**

 

Other income (expense)comprised of interest income (expense) as well as other expenses declined $0.1million for the year ended December 31, 2007, compared to the comparableperiod in 2006.  The interest expense inboth 2007 and 2006 related to the interest on the Affiliated Party Loan (SeeNote 11 to Notes to the Consolidated Financial Statements included in thisAnnual Report to Form 10-K) which was paid off in the fourth quarter of2007.  The interest income exceeds ourinterest expense for the year ended December 31, 2007, because of thefunds invested from the sale of our stock to certain investors simultaneouslywith the October 2, 2007, INTAC Merger. (See Notes 1 and 10 to the Consolidated Financial Statements includedherein).  Other expense is statefranchise fees in 2007.

 

**INTACLegacy Businesses**

 

The discussion that follows all relates to the INTAC LegacyBusinesses results of operations from October 2, 2007, date of merger, to December 31,2007.  Career development revenues ofapproximately $0.2 million are for services related to wireless telephonetraining and the development and sale of educational software in China.  The cost of such revenue, approximately $0.1million, is primarily comprised of service fees paid for the provision ofsoftware training and technological services and amortization of the software.

 

Product development costs of $0.5 are primarily fromthe development, production and delivery of our career development services,including salaries and facility costs. Selling, general and administrative expenses of $0.2 million areprimarily occupancy, insurance costs and personnel related expenses.  The provision for doubtful accounts of $1.2million resulted from our continuation of INTAC’s reserve policy of reservingaccounts receivables that have aged in excess of fifteen months.

 

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

 

 

28

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***Critical Accounting Policies***

 

Our discussion andanalysis of our financial condition and results of operations are basedupon our consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United States.  We believe that of our significant accountingpolicies, revenue recognition, stock-based compensation and long-lived assets including goodwill and otherintangible****assets mayinvolve a higher degree of judgment and complexity.

 

**RevenueRecognition**

 

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

 

We recognize these revenueswhen the services have been provided, and the other criteria set forth in StaffAccounting Bulletin (“SAB”) No. 104, “Revenue Recognition” have been met;namely, the fees we charge are fixed or determinable,  we and our advertisers understand the specificnature and terms of the agreed-upon transactions and the collectability isreasonably assured.

 

The INTAC Legacy Businesses are classified as career developmentservices. Product revenue from the perpetual license of the our softwareproducts is recognized in accordance with SAB No. 104 when persuasiveevidence of an arrangement exists, the product has been delivered, the fee isfixed or determinable, and collection of the resulting receivable is reasonablyassured, and, if applicable, upon acceptance when acceptance criteria arespecified or upon expiration of the acceptance period. Maintenance and supportrevenue for customer support is deferred and recognized ratably over theservice period unless it is included in the initial license fee, provided forless than one year and is not a significant portion of the total licenserevenue.  In this case, maintenance support revenue is recognized when allrevenue recognition criteria under Statement of Position 97-2, *“*SoftwareRevenue Recognition,” (“SOP 97-2”), Statement of Position 98-9*“*Modification of SOP 97-2, Software Revenue Recognition, With Respect toCertain Transactions,*”* (“SOP98-9”) and SAB 104 have been met.  Product upgrades and enhancementrevenue is deferred and recognized ratably over the service period unless it isincluded in the initial license fee and is not significant.  Training andconsulting revenue is recognized as services are performed and billableaccording to the terms of the service arrangement.

 

We apply the provisions of SOP 97-2 as amended bySOP 98-9 to all transactions involving the sale of all our softwareproducts.

 

For arrangements with multiple obligations (e.g.undelivered maintenance and support bundled with term licenses), we allocaterevenue to each component of the arrangement using the residual value methodbased on evidence of the fair value of the undelivered elements, which isspecific to the use.  The vendor specific objective evidence of the fairvalues for the ongoing maintenance and support obligations for term licensesare based upon the prices paid for the separate renewal of these services bythe customer or upon substantive renewal rates stated in the contractualarrangements. In this case, maintenance support revenue is recognized when allrevenue recognition criteria under SOP 97-2, SOP 98-9 and SAB 104 have beenmet. Vendor specific objective evidence of the fair value of other services,primarily consulting and training services, is based upon separate sales ofthese services.

 

**Stock-BasedCompensation**

 

Under the “2006 Equity Incentive Plan” adopted April 13,2006, HSWI authorized 8,000,000 shares for grant as part of a long termincentive plan to attract, retain and motivate its eligible executives,employees, officers, directors and consultants.  Options to purchasecommon stock under the Plan have been granted to our officers and employeeswith an exercise price equal to the fair market value of the underlying shareson the date of grant.  At December 31,2007, no options had been exercised under this plan.

 

We account for stock based compensation in accordancewith Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised2004), Share-Based Payment (“SFAS 123R”) which requires us to recognizeexpense related to the fair value of our stock-based compensation awards.

 

 

29

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SFAS 123R requires the use of a valuation model tocalculate the fair value of the stock based awards.  We have elected to use the Black-Scholesoptions pricing model to determine the fair value of stock options on the datesof grant, consistent with that used for pro forma disclosures under SFAS No. 123,Accounting for Stock-Based Compensation. We measure stock-based compensation based on the fair values of allstock-based awards on the dates of grant, and recognize stock-basedcompensation expense using the straight-line method over the vestingperiods.  Stock-based compensationexpense was $7.2 million and $9.8 million for the year ended December 31,2007 and for the period from inception to 2006, respectively.  (See Note 10 to Consolidated FinancialStatements included in this Annual Report to Form 10-K).

 

**Long-Lived Assets Including Goodwilland Other Intangible Assets**

 

We review property and equipment and intangible assets,excluding goodwill, for impairment whenever events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable.Recoverability of these assets is measured by a comparison of the carryingamounts to future net cash flows the assets are expected to generate. If theseassets are considered to be impaired, the impairment to be recognized equalsthe amount by which the carrying value of the assets exceeds its fair marketvalue.  Assets to be disposed of arereported at the lower of the carrying amount or fair value less costs to sell.

 

In accordance with SFAS No. 142, “Goodwill andOther Intangible Assets”, we test goodwill for impairment at least annually ormore frequently if events or changes in circumstances indicate that this assetmay be impaired.  SFAS No. 142 alsorequires that intangible assets with definite lives be amortized over theirestimated useful lives and reviewed for impairment whenever events orcircumstances indicate an asset’s carrying value may not be recoverable inaccordance with SFAS No. 144, “Accounting for the Impairment of Long-LivedAssets and for Long-Lived Assets and for Long-Lived Assets to be Disposed Of”.  We amortize our acquired intangibles withdefinite lives over four or five years

 

***Liquidity and Capital Resources***

 

Our core Internetpublishing platforms in Brazil and China are our only remaining businesssegment subsequent to the February 29, 2008, INTAC Legacy Businessesdisposition and are in the early development phase of our strategy.  We launched our Brazilian Internet platformin March 2007.  At December 31,2007, we had approximately 3,500 articles and we will continue to expand theplatform by (i) adding original proprietary digital content designed tomeet the information needs of the Brazilian online community, (ii) expandingthe digital data base with translated content and (iii) refining localmarketing strategies.

 

We expect to deploy ourInternet platform in China in mid-2008. We have hired Chinese personnel and in2008 will hire additional Chinese personnel to translate and localize ourcontent for the China online publishing business as well as adding originalproprietary digital content designed to meet the information needs of theChinese online community.

 

We also intend toassemble a library of digital content and license it to various customers,which may include HSW in territories outside of our markets. It is anticipatedthat this content will include originally authored content as well as contentacquired from other parties.

 

We expect to expendsignificant resources in launching, expanding and gaining market share for ourInternet platforms in these significant, growing markets. We believe that withthe completed equity financings and disposition of non-core INTAC LegacyBusinesses that our current cash balance and expected cash generated fromfuture operations will be more than sufficient to fund operations for the nexttwelve months. If cash from equity financings, dispositions, and generated fromoperations, is insufficient to satisfy our working capital and capitalexpenditure requirements, we may be required to sell additional equity orobtain additional credit facilities. There is no assurance that such financingwill be available or that we will be able to complete financing on satisfactoryterms, if at all.

 

Due to the start upnature of the online publishing segment of HSWI, no revenues were recorded in2006 while revenues for the year ended December 31, 2007, were only $0.1million.  The revenue from the INTAC Legacy Businesses from October 2,2007, the date of the INTAC Merger through December 31, 2007, was only$0.2 million, and as discussed in Note 3 in Notes to the Consolidated FinancialStatements, these businesses were sold on February 29, 2008.

 

 

30

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As of December 31,2007, our cumulative losses were $52.2 million which included non-cash expensesof $17.0 million for stock-based compensation and $22.5 million for thegoodwill write off related to disposition of the INTAC Legacy Businesses.  We used a significant amount of the $21.0million net proceeds from the October 2, 2007, sale of stock to paytransaction costs, to pay off advances from HSW, and to fund operations. As discussed above, in the first quarter of 2008, we received $33.4million before expenses from the sale of our stock.  (See Notes 3 and 10 to Consolidated FinancialStatements included in this Annual Report to Form 10-K).  We believe the proceeds from the sale of ourstock in early 2008 will provide us sufficient working capital to establish ouroperations in Brazil and China and provide sufficient working capital throughat least December 2008.

 

**Cash flows fromoperations**

 

We used $9.9 million more cash from operations duringthe year ended December 31, 2007 compared to the period of inceptionthrough December 31, 2006.  Theincrease is primarily due to:  (1) beingin existence for all of 2007 versus 10.5 months in 2006; (2) theBrazil operation launched in 2007 with minimal comparable expenditures in 2006;and (3) increased personnel expenses in 2007 as a result of the INTAC Mergeractivity, the Brazilian Internet launch in 2007, and becoming a public company.

 

**Cash used in investing activities**

 

Net cash of $0.6 million wasused in investing activities during the year ended December 31, 2007compared to $1.6 million for the period of inception through December 31,2006.  The decrease was mainly due todeclining INTAC Merger transaction costs (the merger transaction activity,negotiations and filings commenced in early 2006 when the transaction costswere heavier) offset by a $0.1 million increase in property and equipmentexpenditures.

 

**Cash flows from financing activities**

 

Advances from HSW totaled$4.5 million for the year ended December 31, 2007, compared to advances of$4.3 million during the period from inception through December 31,2006.  We repaid $8.7 million of theadvances from HSW during the year ended December 31, 2007.  In addition, cash flows from financingactivities in 2007 included the $21.0 million (net of expenses) raised from thesale of common stock to certain investors on October 2, 2007. (See Notes 1and 10 to the Consolidated Financial Statements included in this Annual Reportto Form 10-K).

 

**ITEM 7A.               QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

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

 

Financial instruments that potentially subject us to aconcentration of credit risk consist principally of cash and accountsreceivables. At December 31, 2007, 95% of our cash was denominated in U.S.dollars, and 5% represented cash denominated in either Chinese Renminbi or HongKong dollars.  The amount of cash at December 31,2007 denominated in Brazilian Reais was de minimus. All our cash is placed withfinancial institutions we believe are of high credit quality.  At year end99% of our trade receivables are from the INTAC Legacy Businesses that weresold on February 29, 2007.

 

We do not use financial instrumentsto hedge our foreign exchange exposure because the effects of the foreignexchange rate fluctuations are not material. We do not use financial instruments for trading purposes.  The net assets of our foreign operations at December 31,2007, were approximately $10.0 million.

 

During2006, our wholly owned subsidiary in Brazil entered into six separate unsecurednotes payable with a related party with principal and interest due datesranging from March through August 2007.  Interest on these loans is based on theInterbank Certificate of Deposit rate plus .3% through .5%.  As of December 31, 2006, the balanceof 

 

 

31

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the notes payableoutstanding was $195,848, including accrued interest.  The notes payable balance of $280,380including accrued interest was paid in full in the fourth quarter of 2007.

 

Other than the Braziliannotes previously described, we have not entered into long-term agreements orborrowing arrangements with third parties. Therefore, we do not believe there is any material exposure to marketrisk changes in interest rates.

 

We do not use anyderivative financial instruments to mitigate any of our currency risks.  We do not currently have any creditfacilities and therefore are not subject to interest rate risk. Due to thenature of our short-term investments and our lack of debt, we have concludedthat we face no material market risk exposure. Therefore, no quantitative tabular disclosures are required.

 

**ITEM 8.                  FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

The information requiredby this Item is set forth in the consolidated financial statements and notesthereto beginning at page F-1 of this report.

 

**ITEM 9.****                                                    ****CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

**ITEM9A(T).         CONTROLS AND PROCEDURES**

 

This annual report does notinclude a report of management’s assessment regarding internal control overfinancial reporting or an attestation report of our registered publicaccounting firm due to a transition period established by rules of theSecurities and Exchange Commission for newly public companies.

 

This annual report does not include an attestationreport of our registered public accounting firm regarding internal control overfinancial reporting. Management’s report was not subject to attestation byour  registered public accounting firmpursuant to temporary rules of the Securities and Exchange Commission thatpermit the us to provide only management’s report in this annual report.

 

**ITEM 9B.               OTHER INFORMATION**

 

None.

 

 

32

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**PART III**

 

**ITEM 10.               DIRECTORS,EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**

 

Incorporated byreference from the information in our proxy statement for the 2008 AnnualMeeting of Stockholders, which we plan to file with the Securities and ExchangeCommission within 120 days of the end of the fiscal year to which thisreport relates.

 

The informationrequired by Item 10 with respect to identification of our executiveofficers has been included in Item 1 of this Form 10-K in reliance onGeneral Instruction G of Form 10-K and Instruction 3 to Item 401(b) ofRegulation S-K.

 

**ITEM 11.               EXECUTIVECOMPENSATION**

 

Incorporated byreference from the information in our proxy statement for the 2008 AnnualMeeting of Stockholders, which we plan to file with the Securities and ExchangeCommission within 120 days of the end of the fiscal year to which thisreport relates.

 

**ITEM 12.****                                             ****SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT AND RELATED STOCKHOLDER MATTERS**

 

The informationrequired by this item is incorporated by reference from the information in ourproxy statement for the 2008 Annual Meeting of Stockholders, which we plan tofile with the Securities and Exchange Commission within 120 days of theend of the fiscal year to which this report relates.

 

**ITEM 13.               CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE**.

 

Incorporated byreference from the information in our proxy statement for the 2008 AnnualMeeting of Stockholders, which we plan to file with the Securities and ExchangeCommission within 120 days of the end of the fiscal year to which thisreport relates.

 

**ITEM 14.               PRINCIPALACCOUNTANT FEES AND SERVICES**

 

Incorporated byreference from the information in our proxy statement for the 2008 AnnualMeeting of Stockholders, which we plan to file with the Securities and ExchangeCommission within 120 days of the end of the fiscal year to which thisreport relates.

 

 

33

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**PART IV**

 

**ITEM 15                EXHIBITSAND FINANCIAL STATEMENT SCHEDULES**

 

(a)(1) Index toConsolidated Financial Statements

 

Please see theaccompanying Index to Consolidated Financial Statements which appears on page F-1of this report. The Reports of Independent Registered Public Accounting Firm,Consolidated Financial Statements and Notes to Consolidated FinancialStatements which are listed in the Index to Consolidated Financial Statementsand which appear beginning on page F-2 of this report are included in Item8 above.

 

(a)(2) FinancialStatement Schedule

 

Schedule 11:  Valuation and Qualifying Accounts

 

All other schedules havebeen omitted because they are not required, not applicable, or the requiredinformation is otherwise included.

 

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

 

(b)     Exhibits.

 

See the Exhibit Indexfollowing the signature pages of this report.

 

(c)     Financial Statement Schedule

 

See the description underItem 15. (a)(2) above.

 

 

34

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**SIGNATURES**

 

                Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, as amended,the registrant has duly caused this report to besigned on its behalf by the undersigned, thereunto duly authorized this 31stday of March 2008.

 
|   | **HSW I****NTERNATIONAL****, Inc.** |
|--------|------------------------------------------|
|   |                                     |   |
|   | By:                                      | **/s/****Henry N. Adorno** |
|   |                                     | **Henry N.  Adorno** |
|   |                                     | **Vice  Chairman** |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, as amended, thisreport has been signed below by the following persons on behalf of theRegistrant and in the capacities and on the       day of March 2008.

 
|                      |   |                                              |
|---------------------------|--------|---------------------------------------------------|
| **Name**                  |   | **Title**                                         |
|                      |   |                                              |
| **/s/ Henry  N. Adorno**  |   | Vice Chairman  (Principal Executive Officer) and  |
| **Henry N.  Adorno**      |   | Director                                          |
| ** **                |   |                                              |
| **/s/ J. David Darnell**  |   | Chief Financial Officer  (Principal Financial and |
| **J. David  Darnell**     |   | Accounting Officer)                               |
| ** **                |   |                                              |
| **/s/ Jeffrey T. Arnold** |   | Chairman of the Board                             |
| **Jeffrey T.  Arnold**    |   |                                              |
|                      |   |                                              |
| **/s/ Theodore P. Botts** |   | Director                                          |
| **Theodore  P. Botts**    |   |                                              |
|                      |   |                                              |
| **/s/ Bruce Campbell**    |   | Director                                          |
| **Bruce  Campbell**       |   |                                              |
|                      |   |                                              |
| **/s/ Boland Jones**      |   | Director                                          |
| **Boland  Jones**         |   |                                              |
|                      |   |                                              |
| **/s/ Arthur Kingsbury**  |   | Director                                          |
| **Arthur  Kingsbury**     |   |                                              |
|                      |   |                                              |
| **/s/ Kai-Shing  Tao**    |   | Director                                          |
| **Kai-Shing  Tao**        |   |                                              |

 

 

35

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      (b)  Exhibits.

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                             | ** ** | **Registrant’s** | ** ** | ** ** | ** ** | **Exhibit** | ** ** | **Filed**    |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------|------------|-------------|------------|--------------|
| **Number**  | ** ** | **Description of Document**                                                                                                                                                                                            | ** ** | **Form**              | ** ** | **Dated**  | ** ** | **Number**  | ** ** | **Herewith** |
|        |       |                                                                                                                                                                                                                   |       |                  |       |       |       |        |       |         |
| 2.1         |       | 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 A     |       |         |
|        |       |                                                                                                                                                                                                                   |       |                  |       |       |       |        |       |         |
| 2.2         |       | 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 B     |       |         |
|        |       |                                                                                                                                                                                                                   |       |                  |       |       |       |        |       |         |
| 2.3         |       | 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   |       | 2.3         |       |         |
|        |       |                                                                                                                                                                                                                   |       |                  |       |       |       |        |       |         |
| 3.1         |       | Amended and  Restated Certificate of Incorporation of HSW International, Inc.                                                                                                                                |       | 8-A                   |       | 10/03/07   |       | 99.2        |       |         |
|        |       |                                                                                                                                                                                                                   |       |                  |       |       |       |        |       |         |
| 3.2         |       | Second Amended  and Restated Bylaws of HSW International, Inc.                                                                                                                                                    |       | 8-K                   |       | 12/18/07   |       | 3.2         |       |         |
|        |       |                                                                                                                                                                                                                   |       |                  |       |       |       |        |       |         |
| 4.1         |       | Specimen certificate  of common stock of HSW International, Inc.                                                                                                                                                  |       | S-4/A                 |       | 07/10/07   |       | 4.1         |       |         |
|        |       |                                                                                                                                                                                                                   |       |                  |       |       |       |        |       |         |
| 4.2         |       | HSW  International 2006 Equity Incentive Plan.                                                                                                                                                                         |       | S-8                   |       | 11/05/07   |       | 4.2         |       |         |
|        |       |                                                                                                                                                                                                                   |       |                  |       |       |       |        |       |         |
| 4.3         |       | Registration  Rights Agreement among HSW International, Inc., HowStuffWorks, Inc. and  Wei Zhou dated as of October 2, 2007.                                                                                 |       | 8-K                   |       | 10/09/07   |       | 10.6        |       |         |
|        |       |                                                                                                                                                                                                                   |       |                  |       |       |       |        |       |         |
| 4.4         |       | Registration  Rights Agreement among HSW International, Inc. and American investors  dated as of October 2, 2007.                                                                                            |       | 8-K                   |       | 10/09/07   |       | 10.5        |       |         |
|        |       |                                                                                                                                                                                                                   |       |                  |       |       |       |        |       |         |
| 4.5         |       | Affiliate  Registration Rights Agreement dated as of October 2, 2007.                                                                                                                                             |       | 8-K                   |       | 10/01/07   |       | 10.7        |       |         |
|        |       |                                                                                                                                                                                                                   |       |                  |       |       |       |        |       |         |
| 10.1        |       | 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 H     |       |         |
|        |       |                                                                                                                                                                                                                   |       |                  |       |       |       |        |       |         |
| 10.2        |       | 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        |       |         |
|        |       |                                                                                                                                                                                                                   |       |                  |       |       |       |        |       |         |
| 10.3        |       | Contribution  Agreement (PRC Territories) between HowStuffWorks, Inc. and  HSW International, Inc., dated as of October 2, 2007.                                                                   |       | 8-K                   |       | 10/09/07   |       | 10.2        |       |         |
|        |       |                                                                                                                                                                                                                   |       |                  |       |       |       |        |       |         |
| 10.4        |       | Contribution  Agreement (Brazil) between HowStuffWorks, Inc. and HSW International, Inc.  dated as of October 2, 2007.                                                                                  |       | 8-K                   |       | 10/09/07   |       | 10.1        |       |         |
|        |       |                                                                                                                                                                                                                   |       |                  |       |       |       |        |       |         |
| 10.5        |       | Update  Agreement between HowStuffWorks, Inc. and  HSW International, Inc. dated as of October 2, 2007.                                                                                            |       | 8-K                   |       | 10/09/07   |       | 10.4        |       |         |

 

 

36

----

 
| 10.6   |   | 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-a |   |   |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|----------|--------|-----------|--------|--------|
|   |   |                                                                                                                                                                                                                                                                                                                                                 |   |   |   |     |   |      |   |   |
| 10.7   |   | 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 |   | 10.7      |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                 |   |   |   |     |   |      |   |   |
| 10.8   |   | 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-b |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                 |   |   |   |     |   |      |   |   |
| 10.9   |   | 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 |   | 10.9      |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                 |   |   |   |     |   |      |   |   |
| 10.10  |   | 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-c |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                 |   |   |   |     |   |      |   |   |
| 10.11  |   | 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 |   | 10.11     |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                 |   |   |   |     |   |      |   |   |
| 10.12  |   | Stock  Purchase Agreement dated April 20, 2006 between HSW International  and DWS Finanz-Service GmbH.                                                                                                                                                                                                                                     |   | S-4/A  |   | 07/10/07 |   | Annex K   |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                 |   |   |   |     |   |      |   |   |
| 10.13  |   | 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 L   |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                 |   |   |   |     |   |      |   |   |
| 10.14  |   | Amended and  Restated Consulting Agreement dated August 23, 2006 between  HSW International and Jeffrey T. Arnold (filed as  Exhibit 10.11 to the Form S-4 filed on March 14, 2007 and  incorporated herein by reference).                                                                                             |   | S-4    |   | 03/14/07 |   | 10.11     |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                 |   |   |   |     |   |      |   |   |
| 10.15  |   | 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 |   | 10.15     |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                 |   |   |   |     |   |      |   |   |
| 10.16  |   | 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 |   | 10.16     |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                 |   |   |   |     |   |      |   |   |
| 10.17  |   | 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    |   | 10/16/01 |   | 10.5      |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                 |   |   |   |     |   |      |   |   |
| 10.18  |   | 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 (included as Annex R to the Form S-4/A filed on July 10, 2007  and incorporated herein by reference). |   | S-4/A  |   | 07/10/07 |   | Annex R   |   |   |

 

 

37

----

 
| 10.19     |   | 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 |   | 10.19  |   |   |
|-----------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|--------|----------|--------|--------|--------|--------|
|      |   |                                                                                                                                                                                                                                                        |       |       |   |     |   |   |   |   |
| 10.20     |   | Termination  Agreement by and between HSW International, Inc. and  HowStuffWorks, Inc., dated as of December 17, 2007.                                                                                                                  |       | S-1/A      |   | 01/14/08 |   | 10.20  |   |   |
|      |   |                                                                                                                                                                                                                                                        |       |       |   |     |   |   |   |   |
| 23.1 23.2 |   | Consent of Grant Thornton, LLP

Consent of W.T. Uniack & Co. CPA’s  P.C.                                                                                                                                                                           |       |       |   |     |   |   |   | X      |
|      |   |                                                                                                                                                                                                                                                        |       |       |   |     |   |   |   |   |
| 31.1      |   | 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.                                                                                        |       |       |   |     |   |   |   | X      |
|      |   |                                                                                                                                                                                                                                                        |       |       |   |     |   |   |   |   |
| 31.2      |   | 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.                                                                         |       |       |   |     |   |   |   | X      |
|      |   |                                                                                                                                                                                                                                                        |       |       |   |     |   |   |   |   |
| 32.1      |   | Certification by the Principal Executive  Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002.                                                                                                    |       |       |   |     |   |   |   | X      |
|      |   |                                                                                                                                                                                                                                                        |       |       |   |     |   |   |   |   |
| 32.2      |   | 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.                                                                                    | ** ** | ** ** |   |     |   |   |   | X      |

 

 

38

----

 

INDEXTO CONSOLIDATED FINANCIAL STATEMENTS

AND RELATED FINANCIALSTATEMENT SCHEDULE

 

CONSOLIDATED FINANCIALSTATEMENTS

 

| Reports of Independent Registered Public Accounting Firm                                 |   | F-2 |
|------------------------------------------------------------------------------------------|--------|-----|
| Consolidated  Balance Sheets                                                             |   | F-4 |
| Consolidated  Statements of Operations                                                   |   | F-5 |
| Consolidated Statements of Stockholders’ Equity  (Deficit) and Comprehensive Income |   | F-6 |
| Consolidated Statements of Cash Flows                                                    |   | F-7 |
| Notes to Consolidated Financial Statements                                               |   | F-8 |

 

FINANCIAL STATEMENT SCHEDULE

 

SCHEDULE 11-VALUATION ANDQUALIFYING ACCOUNTS

 

All other schedules not listed above have been omittedbecause the information required to be set forth therein is not applicable oris shown in the financial statements or notes thereto.

 

 

F-1

----

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

Boardof Directors and Shareholders

HSWInternational, Inc. and subsidiaries:

 

Wehave audited the accompanying consolidated balance sheet of HSW International, Inc.(a Delaware corporation) and subsidiaries (“the Company”) as of December 31,2007, and the related consolidated statements of operations, stockholders’equity and comprehensive income, and cash flows for the year then ended.**Our audit of the basic financialstatements included the consolidated financial statement schedule listed in thetable of contents appearing under**Item 8 Schedule II. Theseconsolidated financial statements and financial statement schedule are theresponsibility of the Company’s management.**Ourresponsibility is to express an opinion on these consolidated financialstatements and financial statement schedule based on our audit.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States).**Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.**The Company is not required tohave, nor were we engaged to perform an audit of its internal control overfinancial reporting.**Our auditincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting.**Accordingly,we express no such opinion.**An audit alsoincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall financial statement presentation.**We believethat our audits provide a reasonable basis for our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of HSW International, Inc.and subsidiaries as of December 31, 2007, and the results of itsoperations and its cash flows for the year then ended in conformity with accountingprinciples generally accepted in the United States of America. Also in ouropinion, the related financial statement schedule, when considered in relationto the basic financial statements taken as a whole, presents fairly, in allmaterial respects, the information set forth therein.

 

 

/s/Grant Thornton LLP

Atlanta,Georgia

March 26,2008

 

F-2

----

 

**INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM’S REPORT**

 

June 14, 2007

 

To the Board of Directors and Shareholders ofHSW International, Inc. (HSWI) Atlanta, Georgia

 

        Wehave audited the accompanying consolidated balance sheet of HSWI (a Delawarecorporation) and subsidiaries as of December 31, 2006, and the relatedconsolidated statements of operations, stockholder’s deficit and cash flows forthe period March 14, 2006 inception and through the year ended December 31,2006. These consolidated financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audit.

 

        Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudit provides a reasonable basis for our opinion.

 

        In ouropinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of HSWI andsubsidiaries as of December 31, 2006, and the results of its operationsand cash flows for the period ended December 31, 2006, in conformity withU.S. generally accepted accounting principles.

 

        Theaccompanying consolidated financial statements have been prepared assuming thatthe Company will continue as a going concern. The Company has sufferedrecurring losses and has a net capital deficiency. These conditions raisesubstantial doubt about its ability to continue as a going concern. Thefinancial statements do not include any adjustments relating to therecoverability and classification of asset carrying amounts or the amount andclassification of liabilities that might result should the Company be unable tocontinue as a going concern.

 

/s/ W.T. UNIACK & CO. CPA’S P.C.*Certified Public Accountants*Atlanta, Georgia

 

F-3

----

 

**HSW INTERNATIONAL, INC. andSUBSIDIARIESCONSOLIDATED BALANCE SHEETS**

**(expressedin U.S. Dollars)**

 
| ** **                                                                                                                                                                                          | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                          | ** ** | **2007**              | ** ** | **2006** | ** ** |
|                                                                                                                                                                                                |       |                  |       |   |   |
| **Assets**                                                                                                                                                                                          | ** ** | ** **            | ** ** | ** ** | ** ** |
|                                                                                                                                                                                                |       |                  |       |   |   |
| Current assets                                                                                                                                                                                      |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                                                           |       | $                     | 3,639,831  |   | $ | 233,262 |   |
| Trade accounts receivable (net of allowance for doubtful accounts of  $1,210,631 and $0 at December 31, 2007 and 2006, respectively)                                                           |       | 3,021,520             |       | — |   |
| Prepaid expenses and other current assets                                                                                                                                                           |       | 2,253,601             |       | 56,923 |   |
| Total current assets                                                                                                                                                                                |       | 8,914,952             |       | 290,185 |   |
|                                                                                                                                                                                                |       |                  |       |   |   |
| Property and equipment,  net                                                                                                                                                                        |       | 584,435               |       | 110,994 |   |
| Other assets                                                                                                                                                                                        |       | 111,840               |       | 168,800 |   |
| Goodwill                                                                                                                                                                                            |       | 6,432,871             |       | — |   |
| Licenses to operate in  China                                                                                                                                                                       |       | 10,000,000            |       | — |   |
| Other intangibles, net                                                                                                                                                                              |       | 8,701,062             |       | — |   |
| Capitalized transaction  costs                                                                                                                                                                      |       | —                |       | 1,347,079 |   |
|                                                                                                                                                                                                |       |                  |       |   |   |
| Total assets                                                                                                                                                                                        |       | $                     | 34,745,160 |   | $ | 1,917,058 |   |
|                                                                                                                                                                                                |       |                  |       |   |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                       | ** ** | ** **            | ** ** | ** ** | ** ** |
|                                                                                                                                                                                                |       |                  |       |   |   |
| Current liabilities                                                                                                                                                                                 |       |                  |       |   |   |
| Accounts payable                                                                                                                                                                                    |       | $                     | 586,114    |   | $ | 287,571 |   |
| Accrued expenses and other current liabilities                                                                                                                                                      |       | 5,104,433             |       | — |   |
| Payable to affiliates                                                                                                                                                                               |       | 41,143                |       | — |   |
| Affliated party loan                                                                                                                                                                                |       | —                |       | 195,848 |   |
| Advances from shareholder                                                                                                                                                                           |       | 72,927                |       | 4,328,411 |   |
| Total current liabilities                                                                                                                                                                           |       | 5,804,617             |       | 4,811,830 |   |
|                                                                                                                                                                                                |       |                  |       |   |   |
| Deferred tax liability                                                                                                                                                                              |       | 4,030,106             |       | — |   |
|                                                                                                                                                                                                |       |                  |       |   |   |
| Commitments and  contingencies                                                                                                                                                                      |       |                  |       |   |   |
|                                                                                                                                                                                                |       |                  |       |   |   |
| Stockholders’ equity  (deficit)                                                                                                                                                                |       |                  |       |   |   |
| Preferred stock, $.001 par value, 10,000,000 shares authorized, none  issued                                                                                                                        |       | —                |       | — |   |
| Common stock, $.001 par value, 200,000,000 shares authorized,  49,306,107 issued, and 46,306,107 outstanding and 10 shares issued and  outstanding at December 31, 2007 and 2006, respectively |       | 49,306                |       | — |   |
| Additional paid-in-capital                                                                                                                                                                          |       | 85,980,746            |       | 9,810,987 |   |
| Accumulated other comprehensive income                                                                                                                                                              |       | 112,291               |       | — |   |
| Retained deficit                                                                                                                                                                                    |       | (52,245,064           | )          | (12,705,759 | ) |
| Less: cost of treasury stock, 3,000,000 shares in 2007                                                                                                                                              |       | (8,986,842            | )          | — |   |
| Total stockholders’ equity (deficit)                                                                                                                                                           |       | 24,910,437            |       | (2,894,772 | ) |
| Total liabilities and stockholders’ equity                                                                                                                                                     |       | $                     | 34,745,160 |   | $ | 1,917,058 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

F-4

----

** **

**HSW INTERNATIONAL, INC. andSUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS**

**(expressed in U.S. Dollars)**

 
| ** **                                                                                                                                    | ** ** | ** **                  | ** **  | **For the Period**           | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|-------------|------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **For the**                 | ** **  | **from March 14, 2006** | ** ** |
| ** **                                                                                                                                    | ** ** | **Year Ended**              | ** **  | **(date of inception) to**   | ** ** |
|                                                                                                                                          | ** ** | **December 31,  2007** | ** **  | **December 31,  2006**  | ** ** |
|                                                                                                                                          |       |                        |        |                         |       |
| **Operating revenue**                                                                                                                         | ** ** | ** **                  | ** **  | ** **                   | ** ** |
| Digital online publishing                                                                                                                     |       | $                           | 147,535     |                         | $          | — |   |
| Career development services                                                                                                                   |       | 198,627                     |        | —                       |       |
| Total revenue                                                                                                                                 |       | 346,162                     |        | —                       |       |
| ** **                                                                                                                                    | ** ** | ** **                  | ** **  | ** **                   | ** ** |
| **Cost of services**                                                                                                                          | ** ** | ** **                  | ** **  | ** **                   | ** ** |
| Digital online publishing                                                                                                                     |       | 1,242,252                   |        | —                       |       |
| Career development services                                                                                                                   |       | 110,218                     |        | —                       |       |
| Total costs of services                                                                                                                       |       | 1,352,470                   |        | —                       |       |
| ** **                                                                                                                                    | ** ** | ** **                  | ** **  | ** **                   | ** ** |
| **Gross loss**                                                                                                                                |       | (1,006,308                  | )           | —                       |       |
| ** **                                                                                                                                    | ** ** | ** **                  | ** **  | ** **                   | ** ** |
| **Operating Expenses**                                                                                                                        | ** ** | ** **                  | ** **  | ** **                   | ** ** |
| Selling, general and administrative (including stock-based compensation  expense of $7,203,738 and $9,810,987 in 2007 and 2006, respectively) |       | 13,934,417                  |        | 12,552,917                   |       |
| Product development                                                                                                                           |       | 516,350                     |        | —                       |       |
| Provision for doubtful accounts                                                                                                               |       | 1,210,631                   |        | —                       |       |
| Depreciation and amortization                                                                                                                 |       | 337,851                     |        | 3,900                        |       |
| Goodwill write off related to disposition                                                                                                     |       | 22,518,382                  |        | —                       |       |
| Total operating expenses                                                                                                                      |       | 38,517,631                  |        | 12,556,817                   |       |
|                                                                                                                                          |       |                        |        |                         |       |
| Loss from operations                                                                                                                          |       | (39,523,939                 | )           | (12,556,817                  | )          |
|                                                                                                                                          |       |                        |        |                         |       |
| **Other income (expense)**                                                                                                                    | ** ** | ** **                  | ** **  | ** **                   | ** ** |
| Interest income (expense), net                                                                                                                |       | 11,909                      |        | (148,942                     | )          |
| Other (expense)                                                                                                                               |       | (27,275                     | )           | —                       |       |
| Total other (expense)                                                                                                                         |       | (15,366                     | )           | (148,942                     | )          |
|                                                                                                                                          |       |                        |        |                         |       |
| **Loss before income taxes**                                                                                                                  |       | (39,539,305                 | )           | (12,705,759                  | )          |
| ** **                                                                                                                                    | ** ** | ** **                  | ** **  | ** **                   | ** ** |
| Income taxes                                                                                                                                  |       | —                      |        | —                       |       |
|                                                                                                                                          |       |                        |        |                         |       |
| **Net loss**                                                                                                                                  |       | $                           | (39,539,305 | )                            | $          | (12,705,759 | ) |
| ** **                                                                                                                                    | ** ** | ** **                  | ** **  | ** **                   | ** ** |
| Basic and diluted weighted average shares outstanding                                                                                         |       | 11,544,818                  |        | 10                           |       |
|                                                                                                                                          |       |                        |        |                         |       |
| Net loss per basic and diluted share                                                                                                          |       | $                           | (3.42       | )                            | $          | (1,270,576 | ) |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

F-5

----

 

**z**

**HSW INTERNATIONAL, INC. and SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITY (DEFICIT) AND COMPREHENSIVE INCOME**

**(expressedin U.S. Dollars)**

 
| ** **                                                          | ** ** | ** **       | ** ** | ** **  | ** ** | ** **     | ** ** | ** **  | ** ** | ** **      | ** ** | **Accum-** | ** ** | ** **  | ** ** | ** **             | ** ** |
|---------------------------------------------------------------------|------------|------------------|------------|-------------|------------|----------------|------------|-------------|------------|-----------------|------------|------------|------------|-------------|------------|------------------------|------------|
| ** **                                                          | ** ** | ** **       | ** ** | ** **  | ** ** | ** **     | ** ** | ** **  | ** ** | ** **      | ** ** | **ulated** | ** ** | ** **  | ** ** | ** **             | ** ** |
| ** **                                                          | ** ** | ** **       | ** ** | ** **  | ** ** | ** **     | ** ** | ** **  | ** ** | ** **      | ** ** | **Other**  | ** ** | ** **  | ** ** | **Total**              | ** ** |
| ** **                                                          | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **  | ** ** | ** **      | ** ** | **Comp-**  | ** ** | ** **  | ** ** | **Stockholders’** | ** ** |
| ** **                                                          | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Treasury**   | ** ** | **hensive** | ** ** | **Accumulated** | ** ** | **Equity** | ** ** |
| ** **                                                          | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Shares**  | ** ** | **Stock**       | ** ** | **Income** | ** ** | **Deficit** | ** ** | **(Deficit)**          | ** ** |
|                                                                |       |             |       |        |       |           |       |        |       |            |       |       |       |        |       |                   |       |
| **Balances at March 14, 2006 (inception)**                     | ** ** | —           |       | $           | —     |           | $          | —      |       | —          |       | $          | —     |        | $          | —                 |       | $ | — |   | $ | — |   |
| Net loss for period from inception to December 31, 2006        |       | —           |       | —      |       | —         |       | —      |       | —          |       | —     |       | (12,705,759 | )          | (12,705,759            | )          |
| Issuance of shares at inception                                     |       | 10               |       | —      |       | —         |       | —      |       | —          |       | —     |       | —      |       | —                 |       |
| Share based compensation expense                                    |       | —           |       | —      |       | 9,810,987      |       | —      |       | —          |       | —     |       | —      |       | 9,810,987              |       |
|                                                                |       |             |       |        |       |           |       |        |       |            |       |       |       |        |       |                   |       |
| **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    |       | —      |       | 112,291                |       |
| Total Comprehensive loss:                                           |       |             |       |        |       |           |       |        |       |            |       |       |       |        |       | (39,427,014            | )          |
| Issuance of shares to HSW in exchange for digital publishing rights |       | 22,940,717       |       | 22,941      |       | (22,941        | )          | —      |       | —          |       | —     |       | —      |       | —                 |       |
| Issuance of shares due to merger with INTAC                         |       | 22,940,727       |       | 22,941      |       | 38,965,425     |       | —      |       | —          |       | —     |       | —      |       | 38,988,366             |       |
| Issuance of shares to investors, net                                |       | 3,424,653        |       | 3,424       |       | 21,036,695     |       | —      |       | —          |       | —     |       | —      |       | 21,040,119             |       |
| Share based compensation expense                                    |       | —           |       | —      |       | 7,203,738      |       | —      |       | —          |       | —     |       | —      |       | 7,203,738              |       |
| Treasury 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 | ) | $ | 24,910,437 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

F-6

----

 

 

**HSWINTERNATIONAL, INC. and SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(expressedin U.S. Dollars)**

 
| ** **                                                                                | ** ** | ** **                 | ** **  | **For the Period**           | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------|-------------|------------------------------|------------|
| ** **                                                                                | ** ** | **For the**                | ** **  | **from March 14, 2006** | ** ** |
| ** **                                                                                | ** ** | **Year Ended**             | ** **  | **(date of inception) to**   | ** ** |
| ** **                                                                                | ** ** | **December 31, 2007** | ** **  | **December 31, 2006**   | ** ** |
|                                                                                      |       |                       |        |                         |       |
| **Cash flows from operating activities:**                                                 | ** ** | ** **                 | ** **  | ** **                   | ** ** |
| Net loss                                                                                  |       | $                          | (39,539,305 | )                            | $          | (12,705,759 | ) |
| Adjustments to reconcile net loss to net cash used by operating  activities               |       |                       |        |                         |       |
| Depreciation and amortization                                                             |       | 337,851                    |        | 3,900                        |       |
| Stock based compensation                                                                  |       | 7,203,738                  |        | 9,810,987                    |       |
| Provision for doubtful accounts                                                           |       | 1,210,631                  |        | —                       |       |
| Goodwill write off related to disposition                                                 |       | 22,518,382                 |        | —                       |       |
| Changes in operating assets and liabilities:                                              |       |                       |        |                         |       |
| Accounts receivable                                                                       |       | 351,482                    |        | —                       |       |
| Other assets and prepaid expenses                                                         |       | (584,457                   | )           | (56,923                      | )          |
| Accounts payable, accrued expenses, and other liabilities                                 |       | (4,144,455                 | )           | 256,475                      |       |
| Payable to affliates                                                                      |       | 86,611                     |        | —                       |       |
|                                                                                      |       |                       |        |                         |       |
| **Net cash used by operating activities**                                                 |       | (12,559,522                | )           | (2,691,320                   | )          |
| ** **                                                                                | ** ** | ** **                 | ** **  | ** **                   | ** ** |
| **Cash provided by (used in) investing activities:**                                      | ** ** | ** **                 | ** **  | ** **                   | ** ** |
| Purchases of fixed assets and software                                                    |       | (262,105                   | )           | (114,894                     | )          |
| Investment in content translation                                                         |       | —                     |        | (168,800                     | )          |
| Merger related costs, net of cash received                                                |       | (339,892                   | )           | (1,315,983                   | )          |
|                                                                                      |       |                       |        |                         |       |
| **Cash used in investing activities**                                                     |       | (601,997                   | )           | (1,599,677                   | )          |
| ** **                                                                                | ** ** | ** **                 | ** **  | ** **                   | ** ** |
| **Cash used in financing activities:**                                                    | ** ** | ** **                 | ** **  | ** **                   | ** ** |
| Shareholder advance                                                                       |       | 4,460,529                  |        | 4,328,411                    |       |
| Proceeds from issuance of common stock, net                                               |       | 21,040,119                 |        | —                       |       |
| Affiliated party loan                                                                     |       | —                     |        | 195,848                      |       |
| Repayment of affiliated party loan                                                        |       | (280,320                   | )           | —                       |       |
| Repayment of advance from shareholder                                                     |       | (8,716,013                 | )           | —                       |       |
|                                                                                      |       |                       |        |                         |       |
| **Cash provided by financing activities**                                                 |       | 16,504,315                 |        | 4,524,259                    |       |
| ** **                                                                                | ** ** | ** **                 | ** **  | ** **                   | ** ** |
| **Net change in cash and cash equivalents**                                               |       | 3,342,796                  |        | 233,262                      |       |
| Impact of currency translation on cash                                                    |       | 63,773                     |        | —                       |       |
| Cash and cash equivalents at the beginning of the period                                  |       | 233,262                    |        | —                       |       |
| **Cash and cash equivalents at the end of the  period**                                   |       | $                          | 3,639,831   |                         | $          | 233,262 |   |
|                                                                                      |       |                       |        |                         |       |
| **Supplemental disclosure of Cash Flow  Information:**                                    | ** ** | ** **                 | ** **  | ** **                   | ** ** |
| Cash paid for taxes                                                                       |       | $                          | —      |                         | $          | — |   |
|                                                                                      |       |                       |        |                         |       |
| Cash paid for interest                                                                    |       | $                          | 56,208      |                         | $          | — |   |
| ** **                                                                                | ** ** | ** **                 | ** **  | ** **                   | ** ** |
| **Non-cash business acquisition activities**                                              | ** ** | ** **                 | ** **  | ** **                   | ** ** |
| Issuance of equity including $100,000 fair value of options assumed.                      |       | $                          | 38,988,366  |                         | $          | — |   |
| Deferred tax liabilities                                                                  |       | 4,055,000                  |        | —                       |       |
| Net liabilities assumed, excluding cash                                                   |       | 3,155,656                  |        | —                       |       |
| **Other non-cash financing and investing  activities**                                    | ** ** | ** **                 | ** **  | ** **                   | ** ** |
| ** **                                                                                | ** ** | ** **                 | ** **  | ** **                   | ** ** |
| Issuance of shares for digital publishing rights                                          |       | $                          | 22,941      |                         | $          | — |   |
|                                                                                      |       |                       |        |                         |       |
| Receipt of shares for sale of INTAC distribution companies                                |       | $                          | 8,986,842   |                         | $          | — |   |
|                                                                                      |       |                       |        |                         |       |
| The  accompanying notes are an integral part of these consolidated financial  statements. |

 

F-7

----

** **

**HSW INTERNATIONAL, INC.and SUBSIDIARIESNotes to Consolidated Financial Statements**

**(expressedin U.S. Dollars)**

 

**1.****             ****DESCRIPTION OF ORGANIZATION ANDBUSINESS OPERATIONS**

 

HSW International, Inc(the “Company”, or “HSWI” or “we”, or “our”), is a Delaware corporation thatwas formed on March 14, 2006, as a wholly owned subsidiary ofHowstuffworks, Inc. (“HSW”) in order to (i) develop businesses usingexclusive digital publishing rights to HSW’s content in local languages for thecountries of China and Brazil and (ii) to effect the merger with INTACInternational, Inc. (“INTAC”) (“the INTAC Merger”).

 

Our primary focus isbecoming an international online publishing company that develops and operatesInternet businesses focused on providing consumers in the world’s emergingdigital economies with locally relevant, high quality content.  We enteredthe Brazilian online publishing market in March 2007, by utilizing aroyalty-free and exclusively licensed digital content database provided by HSWprior to the INTAC Merger.

 

We are preparing to enterthe China market utilizing a combination of the contributed assets from HSWwith the benefit of INTAC’s relationships and knowledge of the Chinese marketsin obtaining our Internet licenses.  Wecurrently maintain offices in China, Brazil, and Atlanta, Georgia, ourcorporate headquarters.

 

During the periodsreported, our revenues were derived primarily from advertising revenue from ourInternet website in Brazil, and the INTAC legacy businesses revenue (suchlegacy businesses disposed of subsequent to December 31, 2007, whichinclude services related to wireless telephone training and the development andsale of educational software in China).

 

Prior to the INTAC Merger and related financingtransactions our sole shareholder was HSW, a privately-held online publishingcompany founded in 1999 that provides objective and useful information forpeople to learn about the world around them and make informed decisions. HSW’swebsite, HowStuffWorks.com, offers in-depth, easy-to-understand explanations,expert product reviews, comprehensive buying guides and informational videos,simplifying thousands of topics in the areas of health, science, travel,automotive, electronics, consumer products and many other areas. On December 17,2007, HSW, our largest shareholder, merged with Discovery Communications, LLC (“Discovery”)becoming a wholly-owned subsidiary of Discovery. As of December 31, 2007,Discovery, through its wholly owned subsidiary HSW, owned approximately 46.5%of our outstanding common stock.  HSWremains based in Atlanta, Georgia.

 

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

 

·                  HSW contributed to us in exchange for shares of ourcommon stock, exclusive digital publishing rights to HSW’s content for thecountries of China and Brazil which we translate and localize into thepredominant languages of China and Brazil.

 

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

 

·                  Certain investors purchased or agreed to purchaseshares of our common stock (equity financings) having an aggregate value ofapproximately $39.4 million of which $22.5 million and $16.9 million (bothbefore 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 INTACMerger, INTAC sold its wireless handset and prepaid calling cards distributionbusiness (“distribution companies”), to an entity controlled by Wei Zhou,INTAC’s Chief Executive Officer and President, in exchange for 3.0 millionshares of our common stock held by Mr. Zhou.  The 3.0 million shares of our common stockwere recorded as treasury shares valued at cost as determined by a third partyvaluation.

 

F-8

----

 

On February 29,2008, based on an increased focus on our Internet based publishing segment, wedisposed of all INTAC’s remaining legacy businesses which included servicesrelated to wireless telephone training and the development and sale ofeducational software in China (“INTAC Legacy Businesses”).  Following the disposition the sole asset weretain from the INTAC acquisition is the Internet Licenses intangible we areusing to enter the Chinese market.  Theoperations from the INTAC Legacy Businesses will be reflected as discontinuedoperations in our consolidated financial statements in subsequent periods.  All intercompany balances and transactionshave been eliminated.

 

Our core Internetpublishing platforms in Brazil and China are our only remaining businesssegment subsequent to the February 29, 2008, INTAC Legacy Businessesdisposition and we are in the early development of our businesses.  We launched our Brazilian Internet website inMarch 2007.  At December 31, 2007,we had approximately 3,500 articles that were either (i) articles from theHSW content database translated from English to Portuguese or (ii) originallycreated content.  We will continue toexpand the website by (i) adding original proprietary digital contentdesigned to meet the information needs of the Brazilian online community, (ii) expandingthe amount of translated content from HSW, and (iii) refining localmarketing strategies.

 

We expect to deploy ourInternet platform in China in mid-2008. We have hired Chinese personnel,received licenses to do business in China through the INTAC Merger and are inthe process of translating and localizing our content for the China onlinepublishing business. We also intend to generate revenue by assembling our ownlibrary of digital content (including originally authored content and contentthat has been acquired from third parties) for our own use and for licensing tovarious customers, including HSW, in territories outside of our markets.

 

We expect to expendsignificant resources in launching, expanding and gaining market share for ourInternet platforms in these significant, growing markets for our onlinepublishing business. We believe that with the completed equity financings andthe February 29, 2008, INTAC Legacy Businesses disposition (non-corebusinesses) that our current cash balance and expected cash generated fromfuture operations will be more than sufficient to fund operations for the nexttwelve months. If cash from equity financings, dispositions, and generated fromoperations, is insufficient to satisfy our working capital and capitalexpenditure requirements, we may be required to sell additional equity orobtain additional credit facilities. There is no assurance that such financingwill be available or that we will be able to complete financing on satisfactoryterms, if at all.

 

**2. ACQUISITION OF INTAC INTERNATIONAL, INC.**

 

On October 2, 2007, the INTAC Merger becameeffective with INTAC becoming our wholly owned subsidiary.  The results ofthe INTAC Legacy Businesses have been included in the consolidated financialstatements since that date. At the date of the INTAC Merger, holders of INTACcommon stock received one share of our common stock in exchange for each oftheir shares of INTAC common stock.

 

INTAC was acquired to assist in our primary businessfocus, the development of our digital content database exclusively licensedfrom HSW by (i) accelerating our obtaining Internet licenses in China forlaunching our Internet platform, (ii) obtaining INTAC’s knowledge of theChinese markets, relationships, and core competencies and (iii) providingadditional cash flow from its established businesses.

 

In the INTAC acquisition we also obtained two legacybusinesses - services related to wireless telephone training and thedevelopment and sale of educational software delivered to customers in China.However, due to (i) an increased focus of our management and resources onour primary Internet publishing business, (ii) a change of control in ourmajority ownership leading to further refinement in our strategies, and (iii) anunder performance of the INTAC Legacy Businesses subsequent to the INTAC Merger, we sold these legacy businesses on February 29,2008. (See Note 3).  Following thedisposition the sole asset we will retain from the INTAC acquisition is theInternet Licenses intangible we are using to enter the China market.

 

F-9

----

 

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 shares  outstanding including $100 of fair value for options assumed |   | $      | 38,988 |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|
| Direct acquisition costs                                                                                                     |   | 1,774  |   |
| Other                                                                                                                        |   | 47     |   |
|                                                                                                                         |   | 40,809 |   |
| Net liabilities assumed                                                                                                      |   | 3,037  |   |
| Deferred tax liabilities                                                                                                     |   | 4,055  |   |
| Total purchase price                                                                                                         |   | $      | 47,901 |   |

 

 

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

 

We noted that SFAS 141, “BusinessCombinations” states that “the fair value of securities traded in the market isgenerally more clearly evident than the fair value of the acquired entity” and “thatthe quoted market price of a security issued to effect a business combinationgenerally should be used to estimate the fair value of an acquired entity afterrecognizing possible effects of price fluctuations, quantities traded, issuescosts and the like.”  However, HSWI asthe acquirer was not publicly traded until after the merger with INTAC. Inaddition we considered the unique facts and circumstances in the INTAC Merger,including HSWI’s limited historical operations; the transaction being a mergerof equals; and lastly, using INTAC’s public stock price, and determined INTAC’spublic stock price was also not a fair value of the equity security because,among other reasons, (i) the public stock price was affected by historicalperformance of the INTAC distribution business which was sold simultaneouslywith the Merger, (ii) the INTAC stock was thinly traded and (iii) amajority of the stock was held by insiders. As a result, we obtained an independent valuation, (using recognizedvaluation techniques) of our enterprise value post-merger to determine the fairvalue of our common stock issued for the INTAC common shares.

 

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

 

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

 

The following table summarizes the estimated fairvalues of the assets acquired and liabilities assumed at the date ofacquisition (dollars in thousands).  Weare in the process of obtaining third-party valuations of certain assets andliabilities including tax and deferred tax balances; thus the allocation of thepurchase price is subject to refinement.

 

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

 

F-10

----

 

The purchase priceallocation is based on estimates of the fair value of the tangible andintangible assets acquired and liabilities assumed. These estimates werearrived at utilizing recognized valuation techniques with the assistance of anindependent valuation firm. Goodwill of approximately $29.0 million resultedprimarily from our expectation that we could utilize INTAC’s knowledge of theChinese markets, relationships, and core competencies to accelerate the growthof our Internet platform in China. However as discussed in Note 3, subsequentto December 31, 2007, we decided to dispose of the entire INTAC LegacyBusinesses prior to our integrating INTAC with our online publishing segment.Accordingly all goodwill at December 31, 2007, along with all other intangiblesand net assets acquired except for the Internet Licenses intangible wasallocated to the INTAC Legacy Businesses in our determination of theappropriate carrying values of our acquired INTAC assets, considering ourexpected 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 vendorendorsement, are being amortized over their useful lives of 4.0 to 5.0 yearswith a weighted-average amortization period of 4.62 years. We recorded noin-process research and development related to this acquisition.

 

Unaudited pro forma financial information presentingour combined results with INTAC as if the acquisition had occurred at thebeginning of 2007, and/or at the inception our operations is not presentedgiven our disposition of the INTAC Legacy Businesses on February 29, 2008(See Note 3). Such unaudited pro forma financial information would haveincluded adjustments for amortization of identifiable intangible assets thatwere acquired. In management’s opinion, the unaudited pro forma combinedresults of operations are not indicative of the actual results that would haveoccurred had the acquisition been consummated at the beginning of 2007 orinception, nor are they indicative of future operations of the combinedcompanies in any regard because the INTAC Legacy Businesses were sold on February 29,2008, prior to the issuance of our December 31, 2007, consolidated financialstatements.

 

Following the disposition, the sole asset we retainfrom the INTAC Legacy Businesses is the Internet Licenses intangible that hasan indefinite life and is not amortized and from which no revenue has beengenerated from the date of acquisition to December 31, 2007.  Therefore, any pro forma information assumingthe acquisition of this remaining asset as of the beginning of the respectiveperiods would provide no additional useful information.

 

In connection with and asa condition of the INTAC Merger, INTAC sold its wireless handset and prepaidcalling cards distribution business (“distribution companies”), to an entitycontrolled by Wei Zhou, INTAC’s Chief Executive Officer and President, inexchange for 3.0 million shares of our common stock held by Mr. Zhou.  The 3.0 million shares of our common stockwere recorded as treasury shares valued at cost as determined by a third partyvaluation for similar reasons that an independent valuation was performed tovalue the INTAC Merger, discussed above.

 

**3. SUBSEQUENT SALE OF THE INTACLEGACY BUSINESSES**

 

Due to an increased focusof our management and resources on our primary Internet publishing business, a change of control in our majorityownership leading to further refinement in our strategies, and an underperformance of the INTAC Legacy Businesses after the INTAC Merger, we decidedsubsequent to December 31, 2007, to dispose of these legacy businesses.The INTAC Legacy Businesses were comprised of two lines of business includingservices related to wireless telephone training and the development and sale ofeducational software in China, both unrelated to our core Internet platformbusiness.

 

We had originallyestimated when deciding to acquire the INTAC Legacy Businesses that, inaddition to accelerating our obtaining Internet licenses in China for launchingour Internet platform, INTAC would provide us (i) further knowledge of theChinese markets, relationships, and core competencies to accelerate the growthof our Internet platforms in China and (ii) additional cash flow from itsestablished businesses. Following the underperformance of the INTAC LegacyBusinesses in the fourth quarter of 2007, that resulted in short-term negativecash flow from these operations of $1.1 million, and a change-in-control of ourbusiness through the acquisition of our largest shareholder, HSW, by Discovery,we reconsidered the potential risk of excessive short-term consumption of cashand management resources by our acquired non-core INTAC Legacy Businesses andrefined our strategic direction.

 

We decided that it wascritical that all our current resources be fully focused on expanding ourBrazilian platform and launching our Chinese Internet platform inmid-2008.  Although we believe we havebenefited in the short-term 

 

F-11

----

 

from INTAC’srelationships and knowledge of the Chinese markets in obtaining our Internetlicenses, this refined strategic focus did not allow us the time required torealize the expected long-term synergies, embodied in our acquired INTACgoodwill, from INTAC’s knowledge of the Chinese markets, relationships, andcore competencies.   In addition we wereprovided with and acted on an opportunity to sell the unrelated INTAC LegacyBusinesses for approximately their stand-alone appraised value, and throughsimultaneous sale of the treasury stock received, generate significantadditional cash resources for investing into our core Internet businesses.

 

On February 29,2008, we completed the sale of the subsidiaries that comprised the INTAC LegacyBusinesses in China.  These subsidiarieswere sold to China Trend Holdings Ltd., a British Virgin Islands corporationthat is owned by Wei Zhou, CEO, director and significant stockholder of INTACprior to the INTAC Merger in October 2007. Mr. Zhou was also on our board of directors from October to December 2007.  In accordance with the Share PurchaseAgreement with China Trend Holdings, we were to receive 5.0 million of ourcommon shares owned by Mr. Zhou. In addition, as a condition to the February 29,2008, INTAC Legacy Businesses disposition, the INTAC Legacy Businesses were toinclude $4.5 million in cash at closing.

 

At the February 29,2008, INTAC Legacy Businesses disposition, we received only 4.5 million sharesof our common stock from Mr. Zhou and accordingly, we only funded theINTAC Legacy Businesses with $2.7 million in cash.  Mr. Zhou delivered his additional 0.5million shares of our common stock to us on March 26, 2008, and we will releaseanother $1.8 million in cash to the INTAC Legacy Businesses. After thisdisposition, all of HSWI’s assets are in our core Internet business and thesole asset we retain from the INTAC Merger is the Internet Licenses intangiblewe are using to enter the Chinese markets. (See Note 10).

 

In the year ended December 31, 2007 we recognizedin loss from operations before income taxes in the statement of operations, apreliminary goodwill write off ofapproximately $22.5 million related to the February 29, 2008 INTAC LegacyBusinesses disposition.  All goodwillresulting from the INTAC acquisition was included with the INTAC LegacyBusinesses when we determined the potential write off, because such operationshad not been integrated with our online publishing segment prior to ourdecision to dispose of the INTAC Legacy Businesses. The goodwill write off dueto disposition resulted from the fair value of the expected net proceeds of 5.0million shares of our common stock valued at $3.68 per share (less estimateddisposal costs) being less than the combined cash to be transferred in thedisposition plus the carrying value of the net assets and intangibles sold inthe disposition. The disposition proceeds of 5.0 million shares of our commonstock (4.5 million at closing with an additional 0.5 million shares expected tobe delivered to us on or before March 28, 2008) were recorded to treasurystock 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 topurchase 5.0 million shares of our common stock at a purchase price of $3.68per share.  (See Note 10).

 

The estimated goodwill write off due to disposition,based on the expected fair value resulting from disposition is preliminary andmay be subject to further adjustment. We are continuing to analyze with ourexternal valuation consultants tax liabilities and deferred tax assets andliabilities resulting from the initial INTAC subsidiaries acquisition purchaseprice allocation, which is also preliminary, and as a result, any such changesmay affect the final loss on disposition recorded as a reduction in thecarrying value of goodwill. Any adjustment to the estimated loss based on anyrefinement of the measurement of the impairment loss will be recognized in thesubsequent reporting period.

 

The following tablereflects the net assets disposed as if the February 29, 2008, INTAC LegacyBusinesses disposition had occurred at December 31, 2007.  Other than the $4.5 million in cashtransferred and to be transferred subsequent to December 31, 2007, to the INTACLegacy Businesses the other assets and liabilities are the carrying value ofthe INTAC Legacy Businesses assets and liabilities at December 31, 2007(in thousands):

 

F-12

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| Cash and cash equivalents                                                 |   | $      | 164    |   |
|---------------------------------------------------------------------------|--------|--------|--------|--------|
| Trade accounts and other  receivables                                     |   | 2,998  |   |
| Property and equipment                                                    |   | 291    |   |
| Prepaid expenses and other                                                |   | 1,401  |   |
| Vendor endorsement in  China                                              |   | 4,400  |   |
| Acquired database, net                                                    |   | 1,268  |   |
| Acquired software, net                                                    |   | 1,425  |   |
| Coursework books, net                                                     |   | 970    |   |
| Franchise agreements, net                                                 |   | 638    |   |
| Goodwill                                                                  |   | 6,433  |   |
| **Total assets disposed**                                                 |   | 19,988 |   |
|                                                                      |   |   |   |
| Accrued liabilities and  other                                            |   | 4,633  |   |
| Deferred tax liabilities                                                  |   | 1,530  |   |
| **Total liabilities disposed**                                            |   | 6,163  |   |
|                                                                      |   |   |   |
| **Net assets disposed before cash  transferred to disposed subsidiaries** |   | 13,825 |   |
| Cash transferred to  disposed subsidiaries                                |   | 4,500  |   |
| **Net assets disposed**                                                   |   | $      | 18,325 |   |

 

 

After adjustingthelist of assets and liabilitiesabove forclosingcosts and existing cashon the balance sheet, the assets disposed afterthe write down of goodwill, approximates the value of the 5.0 million shares at$3.68 per share, or $18.4 million.

 

The assets and liabilitiesof the INTAC Legacy Businesses are not classified as held for sale or presentedseparately in the asset and liability sections, respectively, of theaccompanying balance sheets since we decided subsequent to our year-end todispose of these operations. Since the disposition was completed on February 29,2008, all subsequent reports will include the INTAC Legacy Businesses asdiscontinued operations.

 

The following unauditedcondensed pro forma results of operations provide additional informationregarding our results of operations as if the INTAC disposition had occurred onOctober 2, 2007 (the earliest date of its operations being included inHSWI’s results of operations):

 
| ** **                                 | ** ** | **HSWI  For the Year   Ended   December 31,   2007** | ** **  | **INTAC Legacy   Businesses  For the Period from   October 2, 2007 (date   of merger) to   December 31, 2007   (unaudited)** | ** ** | **HSWI  For the Year   Ended December   31, 2007  Pro Forma  (unaudited)** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------------|-------------|----------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
|                                       |       |                                                      |        |                                                                                                                                   |       |                                                                            |       |
| Revenue                                    |       | $                                                         | 346,162     |                                                                                                                                   | $          | 198,627                                                                         |       | $ | 147,535 |   |
|                                       |       |                                                      |        |                                                                                                                                   |       |                                                                            |       |
| Cost of Revenue                            |       | 1,352,470                                                 |        | 110,218                                                                                                                                |       | 1,242,252                                                                       |       |
|                                       |       |                                                      |        |                                                                                                                                   |       |                                                                            |       |
| Gross profit (loss)                        |       | (1,006,308                                                | )           | 88,409                                                                                                                                 |       | (1,094,717                                                                      | )          |
|                                       |       |                                                      |        |                                                                                                                                   |       |                                                                            |       |
| Operating expense                          |       | 15,999,249                                                |        | 2,258,053                                                                                                                              |       | 13,741,196                                                                      |       |
|                                       |       |                                                      |        |                                                                                                                                   |       |                                                                            |       |
| Goodwill write off related  to disposition |       | 22,518,382                                                |        | 22,518,382                                                                                                                             |       | —                                                                          |       |
|                                       |       |                                                      |        |                                                                                                                                   |       |                                                                            |       |
| Loss from operations                       |       | (39,523,939                                               | )           | (24,688,026                                                                                                                            | )          | (14,835,913                                                                     | )          |
|                                       |       |                                                      |        |                                                                                                                                   |       |                                                                            |       |
| Other income (expense),  net               |       | (15,366                                                   | )           | 67                                                                                                                                     |       | (15,433                                                                         | )          |
|                                       |       |                                                      |        |                                                                                                                                   |       |                                                                            |       |
| Net loss                                   |       | $                                                         | (39,539,305 | )                                                                                                                                      | $          | (24,687,959                                                                     | )          | $ | (14,851,346 | ) |

 

F-13

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In management’s opinion, the above unaudited pro formaresults of operations are not indicative of the actual results that would haveoccurred had the disposition been consummated at the date of the INTAC Merger,nor are they indicative of our future continuing operations.  The pro forma information should be read inconjunction with the related historical information.

 

 

**4.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**Principles of Consolidation:**

 

The consolidatedfinancial statements include the accounts of (1) HSWI; 2) our wholly-ownedsubsidiary HSW Brazil LLC (‘‘HSW Brazil’’), 3) HSW (Hong Kong) Inc. Limited,Bonet (Beijing) Technology Limited Liability Company and, Bowenwang Technology(Beijing) Limited Liability Company, some of which are partially owned by local management in order to complywith Chinese ownership and regulatory requirements; and 4) the operations ofINTAC since October 2, 2007, the date of the INTAC Merger.  As discussed in Note 3, the INTAC LegacyBusinesses will be reflected as discontinued operations in our consolidatedfinancial statements in subsequent periods.

 

All intercompany balancesand transactions have been eliminated.  Net losses from HSW InternationalBrazil for the year ended December 31, 2007 and the period from inceptionthrough December 31, 2006 were $3.7 million and $0.9 million,respectively.  The net loss from INTAC for the period from the date ofmerger, October 2, 2007, through December 31, 2007 was $24.7 millionwhich included $22.5 million as the result of the goodwill write off related tothe sale of the INTAC Legacy Businesses.

 

**Revenue Recognition Policies:**

 

***OnlinePublishing Revenue***

 

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

 

We recognize theserevenues when the service have been provided, and the other criteria set forthin Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition” havebeen met; namely, the fees we charge are fixed or determinable, we and our  advertisers understand the specific natureand terms of the agreed-upon transactions and the collectability is reasonablyassured .

 

***CareerDevelopment Services***

 

Revenue generated from the INTAC Legacy Businesses,classified as career development services in the accompanying financialstatements for the period from the October 2, 2007 (date of merger) to December 31,2007, totaled $0.2 million.   As furtherdiscussed in Note 3, the businesses were sold subsequent to December 31,2007.

 

Product revenue from the perpetual license of the oursoftware products is recognized in accordance with SAB No. 104 whenpersuasive evidence of an arrangement exists, the product has been delivered,the fee is fixed or determinable, and collection of the resulting receivable isreasonably assured, and, if applicable, upon acceptance when acceptancecriteria are specified or upon expiration of the acceptance period. Maintenanceand support revenue for customer support is deferred and recognized ratablyover the service period unless it is included in the initial license fee,provided for less than one year and is not a significant portion of the totallicense revenue.  In this case, maintenance support revenue is recognizedwhen all revenue recognition criteria under Statement of Position 97-2, *“*SoftwareRevenue Recognition,” (“SOP 97-2”), Statement of Position 98-9*“*Modification of  SOP 97-2,Software Revenue Recognition, With Respect to Certain Transactions,*”* (“SOP 98-9”) and SAB 104 havebeen met.  Product upgrades and enhancement revenue is deferred andrecognized ratably over the service period unless it is included in the initiallicense fee and is not significant.  Training and consulting revenue isrecognized as services are performed and billable according to the terms of theservice arrangement.

 

F-14

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We apply the provisions of SOP 97-2 as amended bySOP 98-9 to all transactions involving the sale of all its softwareproducts.

 

For arrangements with multiple obligations (e.g.undelivered maintenance and support bundled with term licenses), we allocaterevenue to each component of the arrangement using the residual value methodbased on evidence of the fair value of the undelivered elements, which isspecific to us.  The vendor specific objective evidence of the fair valuesfor the ongoing maintenance and support obligations for term licenses are basedupon the prices paid for the separate renewal of these services by the customeror upon substantive renewal rates stated in the contractual arrangements. Inthis case, maintenance support revenue is recognized when all revenuerecognition criteria under SOP 97-2, SOP 98-9 and SAB 104 have been met. Vendorspecific objective evidence of the fair value of other services, primarilyconsulting and training services, is based upon separate sales of theseservices.

 

**Cost ofRevenues:**

 

***OnlinePublishing***

 

The online publishing cost of revenue represents thecost of translating and localizing content and acquiring original articleswritten by third parties.

 

***Career Development Services***

 

The career development services cost of revenue isprimarily comprised of the service fees paid for the provision of softwaretraining and technological services, and the amortization of acquired software.

 

**Liquidity:**

 

Our core Internetpublishing platforms in Brazil and China are our only remaining businesssegment subsequent to the sale of the INTAC Legacy Businesses.  Our Internet publishing platforms are in theearly development of our business. (See Note 1).

 

Due to the start upnature of the online publishing segment of HSWI, no revenues were recorded in2006, while revenues for the year ended December 31, 2007, were only $0.1million.  The revenue from the INTAC Legacy Businesses from October 2,2007, the date of the INTAC Merger through December 31, 2007, was only$0.2 million, and as discussed in Note 3, these businesses were sold on February 29,2008.

 

As of December 31,2007, our cumulative losses were $52.2 million which included non cash expensesof $17.0 million for stock-based compensation and $22.5 million for thegoodwill write off related to disposition of the INTAC Legacy Businesses.  We used a significant amount of the $21.0million net proceeds from the October 2, 2007, sale of stock in the equityfinancing to pay transaction costs, to pay off advances from HSW, and to fundoperations.   In the first quarter of 2008, we received $33.4 million fromthe sale of our stock.  (See Notes 3 and10).   We believe the proceeds from thesale of our stock in early 2008 will provide us sufficient working capital toestablish our operations in Brazil and China and provide sufficient workingcapital through at least December 2008.

 

**Concentrationof Credit Risk and Accounts Receivable:**

 

Financial instruments that potentially subject us to aconcentration of credit risk consist principally of cash and accountsreceivables.  At December 31, 2007,95% of our cash was denominated in U.S. dollars, and 5% represented cashdenominated in either Chinese Renminbi or Hong Kong dollars.  The amount of cash at December 31, 2007,denominated in Brazilian Reias was de minimus. All our cash is placed withfinancial institutions we believe are of high credit quality.

 

We believe we are not exposed to a significantconcentration of credit or accounts receivable risk. However, cash is subjectto foreign currency fluctuations against the U.S. dollar.  Our risk in foreign currency is somewhatmitigated at this time as U.S. funds are transferred monthly to Brazil andChina to fund that month’s operating activity. If however the U.S. dollar isdevalued significantly against the Brazilian Reias or the Chinese Renminbi, thecost to 

 

F-15

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further develop our website in Brazil and the developmentof our website in China could exceed our original estimates.

 

At year end 99% of our trade receivables are from theINTAC Legacy Businesses.  Thesereceivables are primarily from the sale of educational software to Chineseschool districts which are ultimately funded by the Chinese government.  Historically these receivables have takenmany months to collect which is the normal business process in China.  They are not collateralized and are notinterest bearing.

 

We have continued INTAC’s reserve policy which is toreserve receivables that have aged in excess of fifteen months and haveprovided an additional $1.2 million provision for doubtful accounts from the October 2,2007 (date of the INTAC Merger) through December 31, 2007.  These receivables were included with theINTAC Legacy Businesses that was sold on February 29, 2008.  There was no reserve in 2006 as HSWI had nosales in 2006.

 

**Cash and Cash Equivalents:**

 

We consider all highly liquid investments withoriginal maturities of three months or less to be cash equivalents.  We maintain our cash in high qualityfinancial institutions and do not believe any undue risk is associated with ourcash balances. A large portion of the cash balance is maintained at onefinancial institution.

 

**FairValue of Financial Instruments:**

 

The carrying value of ourassets and liabilities which qualify as financial instruments under SFAS No. 107,“Disclosure About Fair Value of Financial Instruments,” approximates fairvalue.

 

**Use ofEstimates:**

 

The preparation of consolidated financial statementsin conformity with accounting principles generally accepted in theUnited States requires us to make estimates and assumptions that affectamounts reported and disclosed in the consolidated financials statements andaccompanying notes.  Actual results coulddiffer materially from those estimates. On an ongoing basis, we evaluate our estimates, including those relatedto accounts receivable, intangible assets and goodwill, useful lives ofintangible assets, property and equipment, and income taxes, among otherthings.

 

**Income taxes:**

 

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

 

Effective January 1, 2007, we adopted theprovisions of FASB Interpretation No. 48, Accounting for Uncertainty inIncome Taxes (“FIN 48”). FIN 48 clarifies the accounting for uncertainty inincome taxes recognized in a company’s financial statements in accordance withFASB Statement No. 109, “Accounting for Income Taxes”.  FIN 48requires a company to determine whether it is more-likely-than-not that a taxposition will be sustained upon examination based upon the technical merits ofthe position. If the more-likely-than-not threshold is met, a company mustmeasure the tax position to determine the amount to recognize in the financialstatements.

 

In May 2007, the Financial Accounting StandardsBoard (FASB) issued FASB Staff Position No. FIN 48-1, “Definition ofSettlement in FASB Interpretation No. 48” (“FSP FIN 48-1”). FSP FIN 48-1amends FIN 48, to provide guidance on how an enterprise should determinewhether a tax position is effectively settled for the purposes of recognizingpreviously unrecognized tax benefits. We are required to apply the guidanceprovided in FSP FIN 48-1, the application of which has not had a materialeffect on our financial position, results of operations, or cash flows.

 

The application of income tax law is inherentlycomplex. Laws and regulation in this area are voluminous and are oftenambiguous. As such, we are required to make many subjective assumptions andjudgments regarding our income tax exposures.  Interpretations of and guidance surrounding income tax laws andregulations change over 

 

F-16

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time.  As such,changes in our subjective assumptions and judgments can materially affectamounts recognized in the balance sheets and statements of operations.

 

We intend to classify interest and penalties arisingfrom unrecognized income tax positions in the statement of operations asgeneral and administrative expenses if they occur. At December 31, 2007,we had no accrued interest or penalties related to uncertain tax positions. Thetax year 2006 is not or has not been under examination but remains open toexamination under IRS statute.

 

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

 

**StockBased Compensation:**

 

We account for stock based compensation in accordancewith Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised2004), Share-Based Payment (“SFAS 123R”) which requires us to recognizeexpense related to the fair value of our stock-based compensation awards.

 

SFAS 123R requires the use of a valuation model tocalculate the fair value of the stock based awards.  We have elected to use the Black-Scholesoptions pricing model to determine the fair value of stock options on the datesof grant, consistent with that used for pro forma disclosures under SFAS No. 123,Accounting for Stock-Based Compensation. We measure stock-based compensation based on the fair values of allstock-based awards on the dates of grant, and recognize stock-basedcompensation expense using the straight-line method over the vesting periods.

 

**ForeignCurrency:**

 

The functional currency of our internationalsubsidiaries is the local currency, Reais in Brazil, Renminbi in China or HongKong dollars.  The financial statementsof these subsidiaries are translated to U.S. dollars using month-end rates ofexchange for assets and liabilities, and average rates of exchange forrevenues, costs and expenses. Translation gains and losses are recorded inaccumulated other comprehensive income as a component of stockholders’ equity.Net gains and losses resulting from foreign exchange transactions are recordedin other expense, net. Both currency translation and transaction losses during2007 and 2006 were not material to our consolidated financial statements.

 

**Capitalized Transaction Costs:**

 

The Company complies with SFAS 141, “BusinessCombinations,” which requires all internal costs associated with a merger to beexpensed as incurred.  SFAS 141 also requires companies to capitalize andinclude in the purchase accounting all incremental costs to outside consultantsand other professionals directly associated with the merger.  Accordingly,the Company capitalized $1.3 million at December 31, 2006, for vendorcosts, principally legal costs, directly associated with the INTAC Merger,which together with an additional $0.4 incurred in 2007, were included in thepurchase price for the INTAC Merger. (See Note 2).

 

The Company also complies with the requirements of theSEC Staff Accounting Bulletin (SAB) Topic 5A — “Expenses of Offering”.  In2007, we incurred $1.5 million of costs related to the equity financing closedin 2007.  These costs were netted againstthe proceeds from the transaction and included in additional paid in capital.

 

**Propertyand Equipment**

 

Property and equipment is stated at cost lessaccumulated depreciation.  Depreciationis computed using the straight-line method over the estimated useful lives ofthe assets, generally one to three years for computer equipment and softwareand three to five years for building improvements and office equipment.  Costs represent the purchase price and anydirectly attributable costs of bringing the asset to working condition for itsintended use.  Repairs and maintenanceare expensed as incurred.  Betterments andcapital improvements are capitalized and depreciated over the remaining usefullife of the related asset.

 

**Legal and Auditing Fees:**

 

Legal and auditing fees are expensed in the periodincurred.

 

F-17

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**Advertising Expenses:**

 

We expense advertising costs in the year in which theyare incurred.  Advertising expense forthe year ended December 31, 2007, was $0.2 million.  There was no advertising expense for theperiod from inception to December 31, 2006.

 

**Commitments and Contingencies:**

 

Liabilities for loss contingencies arising fromclaims, assessments and litigation and other sources are recorded when it isprobable that a liability has been incurred and the amount of the assessmentcan be reasonably estimated. In the opinion of management, after consultationwith legal counsel, there are no claims, assessments and litigation against theCompany.

 

**Long-Lived Assets Including Goodwilland Other Intangible Assets:**

 

We review property and equipment and intangibleassets, excluding goodwill, for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. Recoverability of these assets is measured by a comparison of thecarrying amounts to future net cash flows the assets are expected to generate.If these assets are considered to be impaired, the impairment to be recognizedequals the amount the carrying value of the assets exceeds its fair marketvalue.  Assets to be disposed of arereported at the lower of the carrying amount or fair value less costs to sell.

 

In accordance with SFAS No. 142, “Goodwill andOther Intangible Assets”, we test goodwill for impairment at least annually ormore frequently if events or changes in circumstances indicate that this assetmay be impaired.  SFAS No. 142 alsorequires that intangible assets with definite lives be amortized over theirestimated useful lives and reviewed for impairment whenever events orcircumstances indicate an asset’s carrying value may not be recoverable inaccordance with SFAS No. 144, “Accounting for the Impairment of Long-LivedAssets and for Long-Lived Assets to be Disposed Of”.  We amortize our acquired intangibles withdefinite lives over four or five years.

 

**Taxescollected from customers:**

 

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

 

**Net loss per Share:**

 

We compute net loss per share in accordance with SFAS No. 129,“Earnings per Share” which requires dual presentation of basic and dilutedearnings or loss per share (“EPS”).

 

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

 

**Effect of Recent AccountingPronouncements:**

 

In September 2006, the FASB issued Statement ofFinancial Accounting Standards No. 157, “Fair Value Measurements” (“FAS 157”).FAS 157establishes a framework for measuring fair value and expandsdisclosures about fair value measurements. The changes to current practiceresulting from the application of this statement relate to the definition offair value, the methods used to measure fair value, and the expandeddisclosures about fair value measurements. FAS 157 is effective for fiscal years beginning after November 15,2007.  However, on December 14,2007, the FASB issued proposed FSP FAS 157-B which would delay the effective dateof FAS 157 for all nonfinancial assets and nonfinancial liabilities, exceptthose that are recognized or disclosed at fair value in the financialsstatements on a recurring basis (at least annually).  This proposed FSP partially defers theeffective date of FAS 157 to fiscal years beginning after November 15,2008, and interim periods within those fiscal years for items within the scopeof the FSP.  Effective for 2008, we willbe required to adopt the provisions on FAS 157 except as it applies tothose nonfinancial assets and nonfinancial liabilities as noted in proposed FSP157-B.  We are currently 

 

F-18

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evaluating what the impact of FAS 157 and therelated FSP will have on our financial position, cash flows, and results ofoperations.

 

In February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities —Including an Amendment of FASB Statement No. 115,” which is effective forfiscal years beginning after November 15, 2007. This statement permits anentity to choose to measure many financial instruments and certain other itemsat fair value at specified election dates. Subsequent unrealized gains andlosses on items for which the fair value option has been elected will bereported in earnings. We are currently evaluating what the impact ofFAS 159 will have on our financial position, cash flows, and results ofoperations.

 

**5. GOODWILL AND INTANGIBLE ASSETS:**

 

All our intangibles are the result of the INTACMerger.

 

At the date of the INTAC Merger, we recorded goodwillof $29.0 million which resulted from the excess of the purchase price over thefair value of identifiable assets and liabilities and other intangiblesacquired.  (See Note 2).  As a result of the February 29, 2008INTAC Legacy Businesses disposition, we recorded a preliminary estimatedgoodwill write off due to the disposition of approximately $22.5 million at December 31,2007.  (See Note 3).

 

The other non-amortizable intangible asset resultingfrom the INTAC Merger was the $10.0 million for licenses to operate in Chinawhich is the sole asset we retain after the disposition at February 29,2008.

 

Intangibles resulting from the INTAC Merger includethe following.

 
| ** **                   | ** ** | ** **        | ** ** | **Gross**          | ** ** | **Accumulated**  | ** ** | **Net Carrying** | ** ** |
|------------------------------|------------|-------------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| ** **                   | ** ** | **Original Life** | ** ** | **Carrying Value** | ** ** | **Amortization** | ** ** | **Value**        | ** ** |
| Acquired database            |       | 5  years          |       | $                  | 1,335,000  |             | $          | 66,750           |       | $ | 1,268,250 |   |
| Acquired software            |       | 5  years          |       | 1,500,000          |       | 75,000           |       | 1,425,000        |       |
| Coursework books             |       | 4  years          |       | 1,035,000          |       | 64,688           |       | 970,312          |       |
| Franchise agreement          |       | 4  years          |       | 680,000            |       | 42,500           |       | 637,500          |       |
| Vendor endorsement in  China |       | Indefinite  life  |       | 4,400,000          |       | —           |       | 4,400,000        |       |
|                         |       |              |       |               |       |             |       |             |       |
| Total                        |       |              |       | $                  | 8,950,000  |             | $          | 248,938          |       | $ | 8,701,062 |   |

 

Amortization expense was $0.2 million for the yearended December 31, 2007, and we recorded no such expense for the periodfrom inception to December 31, 2006.

 

Approximately 60% of our goodwill and other intangibleassets relate to the INTAC Legacy Businesses in China and the remaining 40%relate to the online publishing business in China.  We have no goodwill or intangibles thatrelate to our Brazil operation.

 

**6. PREPAID EXPENSES AND OTHER CURRENT ASSETS**

 

As of December 31, 2007 and 2006, prepaidexpenses and other assets consisted of the following:

 

| ** **         | ** ** | **December 31,** | ** ** |
|--------------------|------------|-----------------------|------------|
| ** **         | ** ** | **2007**              | ** ** | **2006** | ** ** |
| VAT Receivable     |       | $                     | 1,205,206  |   | $ | — |   |
| Prepaid insurance  |       | 788,674               |       | — |   |
| Deposits and other |       | 259,721               |       | 56,923 |   |
| Total              |       | $                     | 2,253,601  |   | $ | 56,923 |   |

 

F-19

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**7. PROPERTY AND EQUIPMENT, NET**

 

As of December 31, 2007 and 2006, property andequipment consisted of the following:

 

|                                            |   | **December 31,** |    |
|-------------------------------------------------|--------|-----------------------|---------|
|                                            |   | **2007**              |    | **2006** |   |
| Computer equipment and  software                |   | $                     | 76,697  |   | $ | 47,160 |   |
| Furniture and fixtures                          |   | 431,901               |    | 14,884 |   |
| Office equipment                                |   | 94,092                |    | 52,850 |   |
| Leasehold improvements                          |   | 74,558                |    | — |   |
| Total                                           |   | 677,248               |    | 114,894 |   |
| Less accumulated  depreciation and amortization |   | (92,813               | )       | (3,900 | ) |
| Property and equipment,  net                    |   | $                     | 584,435 |   | $ | 110,994 |   |

 

Approximately 53%, 28% and 19% ofour property and equipment, net are in China, Brazil and the United States,respectively.

 

**8. INCOME TAXES**

 

We are subject to income taxes on income arising in orderived from the tax jurisdictions in which we are domiciled and operate.  Due to net operating losses for book and taxpurposes, no U.S. Federal or Foreign current or deferred tax provisions havebeen made for the year ended December 31, 2007, or for the period frominception, (March 14, 2006), through December 31, 2006.

 

We have substantial net operating loss carryforwardsin some of our companies.  As a result,most of these companies have net deferred tax assets.  We have, however, provided a valuationallowance for all these deferred tax assets based on the uncertainty ofgenerating future taxable income.

 

The valuation allowance as of December 31, 2007,includes an approximate $1.8 million allowance resulting from the INTAC Merger.

 

The provision for income taxes for the year ended December 31,2007, and for the period from inception through December 31, 2006, differsfrom the amount computed by applying the U.S. income tax rate of 34% to lossbefore taxes as follows:

 

| ** **                                                   | ** ** | ** **            | ** **  | **For the period**           | ** ** |
|--------------------------------------------------------------|------------|-----------------------|-------------|------------------------------|------------|
| ** **                                                   | ** ** | **Year ended**        | ** **  | **From March 14, 2006** | ** ** |
| ** **                                                   | ** ** | **December 31,** | ** **  | **(date of inception) to**   | ** ** |
| ** **                                                   | ** ** | **2007**              | ** **  | **December 31, 2006**   | ** ** |
|                                                         |       |                  |        |                         |       |
| Computed “expected” tax  expense                   |       | $                     | (13,443,364 | )                            | $          | (4,319,958 | ) |
| Tax effect of  non-deductible goodwill                       |       | 7,656,250             |        | —                       |       |
| Change in valuation  allowance                               |       | 4,349,967             |        | 4,220,312                    |       |
| Tax effect of losses and  rates in non-US jurisdictions |       | 1,515,959             |        | 126,108                      |       |
| Tax effect of other  permanent items                         |       | (78,812               | )           | (26,462                      | )          |
| ** **                                                   |       | $                     | —      |                         | $          | — |   |

 

F-20

----

 

| ** **                       | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2007**              | ** ** | **2006** | ** ** |
|                             |       |                  |       |   |   |
| **Deferred tax assets:**         | ** ** | ** **            | ** ** | ** ** | ** ** |
| Net operating loss carryforwards |       | $                     | 3,986,811  |   | $ | 785,382 |   |
| Amortization                     |       | 175,482               |       | 99,559 |   |
| Deferred income and reserves     |       | 477,266               |       | — |   |
| Stock-based compensation expense |       | 5,785,006             |       | 3,335,735 |   |
| **Total deferred tax assets**    |       | 10,424,565            |       | 4,220,676 |   |
| **Deferred tax liabilities:**    | ** ** | ** **            | ** ** | ** ** | ** ** |
| Acquired intangibles             |       | (4,030,106            | )          | — |   |
| Depreciation of fixed assets     |       | (7,340                | )          | (364 | ) |
| Valuation allowance              |       | (10,417,228           | )          | (4,220,312 | ) |
| **Net deferred tax liability**   |       | $                     | (4,030,109 | ) | $ | — |   |

 

The net operating losses available at December 31,2007, to offset future taxable income in the U.S., Hong Kong, China and Brazilare $6,759,814, $2,178,001, $3,351,803 and $3,209,280 respectively.  The income tax rates for Hong Kong, China andBrazil are 17.5%, 25.0% and 15%, respectively. A portion of the net operatinglosses generated in China expire beginning in 2008 if not utilized.  The net operating losses generated in HongKong have no expiration date and carry forward indefinitely.

 

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

 

We file U.S., state, andforeign income tax returns in jurisdictions with varying statutes oflimitations. The 2006 through 2007 tax years generally remain subject toexamination by federal and most state tax authorities.  In significant foreign jurisdictions, the2002 through 2007 tax years generally remain subject to examination by theirrespective tax authorities.

 

**9.  ACCRUEDLIABILITIES AND OTHER CURRENT LIABILITIES**

 

As of December 31, 2007 and 2006, accruedliabilities and other current liabilities consisted of the following:

 

|                           |   | **December 31,** |       |
|--------------------------------|--------|-----------------------|------------|
|                           |   | **2007**              | ** ** | **2006** |   |
| Accrual for services  received |   | $                     | 2,415,963  |   | $ | — |   |
| VAT payable                    |   | 1,323,964             |       | — |   |
| Deferred revenue               |   | 218,851               |       | — |   |
| Other accrued expenses         |   | 1,145,655             |       | — |   |
|                           |   | $                     | 5,104,433  |   | $ | — |   |

 

**10. STOCKHOLDERS’ EQUITY**

 

                                                ***Common Stock***

 

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

 

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

 

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

 

F-21

----

 

·                  We sold 3,424,653 shares of our common stock tocertain investors for $22.5 million prior to expenses. On February 4,2008, we issued 2,689,464 additional shares to these investors pursuant to anadjustment mechanism provided for in their stock purchase agreement.  The stock purchase agreement with theseinvestors requires shelf registration statements covering the resale of their shares.  The registration has been filed but is notyet effective.

 

·                  We entered into a stock purchase agreement withcertain investors who agreed to purchase shares of our common stock,conditioned upon the shares being publicly registered. Such registration wassubsequently declared effective on January 14, 2008.  On January 31, 2008, we issued 1,579,348shares 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 $11.0million in cash before expenses.

 

On February 29,2008, we completed the INTAC Legacy Businesses disposition. In accordance withthe Share Purchase Agreement, we were to receive 5.0 million of our commonshares 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 onlyfunded the INTAC Legacy Businesses with $2.7 million in cash.  (See Note 3).  Concurrently we sold the 4.5 million sharesof common stock to two qualified institutional buyers for $16.6 million in cashbefore expenses.  Our stock purchaseagreement with the investors allows them to request registration of resale oftheir stock within 180 days of the sale, if they are not able to sell theirshares under Rule 144 at that time.

 

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

 

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

 

                                                ***Stock Based Compensation***

 

Under the “2006 Equity Incentive Plan” adopted April 13,2006, HSWI authorized 8,000,000 shares for grant as part of a long termincentive plan to attract, retain and motivate its eligible executives,employees, officers, directors and consultants.  Options to purchasecommon stock under the Plan have been granted to our officers and employeeswith an exercise price equal to the fair market value of the underlying shareson the date of grant.

 

On August 23, 2006, we completed a stock optiongrant covering 6,337,500 shares, (“the 2006 Grant”) at an exercise price of $6.50. Of the 6,337,500 options granted, 2,000,000 vested on the date of grant,2,000,000 vest 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 the remaining 1,737,500 options granted vest over three years.

 

On October 10, 2007, we completed a stock optiongrant covering 730,000 shares, (“the 2007 Grant”) at an exercise price of $7.10per share.   Of the 730,000 optionsgranted, 218,889 vested on the date of grant, 319,444 vest monthly over theperiod from date of grant through August 23, 2009, 76,667 vest annuallyover two years ending August 23, 2009, 40,000 vest annually over threeyears 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.

 

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 Grantand  2007 Grant, respectively.  We use the Black-Scholes options pricingmodel to value our options, using the assumptions in the following table.  Expected volatilities are based on thehistorical volatility of the stock combined with other factors.  The expected term of options represents theperiod of time that the options granted are expected to be outstanding. Therisk-free rate of periods during the contractual life of the option is based onthe U.S. Treasury yield curve in effect at the time of grant.

 

| ** **              | ** ** | **2007 Grant** | ** ** | **2006 Grant** | ** ** |
|-------------------------|------------|----------------|------------|----------------|------------|
| Expected Volatility     |       | 50             | %          | 50             | %          |
| Expected Life in years  |       | 6              |       | 5.6            |       |
| Dividend yield          |       | 0              |       | 0              |       |
| Risk free interest rate |       | 4.49           | %          | 4.83           | %          |

 

F-22

----

 

In accordance with SFAS No. 123R, stock-basedcompensation cost is measured at grant date based on the fair value of theaward, and is recognized as an expense over the employee’s requisite serviceperiod.  Stock-based compensation expense for the year ended December 31,2007 and from inception to December 31, 2006, was $7.2 million and $9.8million, respectively.  Unrecognizedcompensation expense as of December 31, 2007, relating to non-vested stockoptions approximated $5.6 million and is expected to be recognized through2009.  At December 31, 2007, nooptions have been exercised under this plan.

 

A summary of stock option activity and relatedinformation as of December 31, 2007, and changes during the year thenended is presented below:

 

| ** **                                     | ** ** | ** **          | ** ** | ** **   | ** ** | **Weighted**        | ** ** | ** **    | ** ** |
|------------------------------------------------|------------|---------------------|------------|--------------|------------|---------------------|------------|---------------|------------|
| ** **                                     | ** ** | ** **          | ** ** | **Weighted** | ** ** | **average**         | ** ** | ** **    | ** ** |
| ** **                                     | ** ** | ** **          | ** ** | **average**  | ** ** | **remaining**       | ** ** | **Aggregate** | ** ** |
| ** **                                     | ** ** | **Number**          | ** ** | **exercise** | ** ** | **contract**        | ** ** | **intrinsic** | ** ** |
| **Options**                                    | ** ** | **of options** | ** ** | **price**    | ** ** | **term (yrs)** | ** ** | **value**     | ** ** |
| Outstanding at  January 1, 2007           |       | 6,337,500           |       | $            | 6.50       |                | 9.6        |          | —     |   |
| Granted                                        |       | 730,000             |       | $            | 7.10       |                | —     |          | —     |   |
| Forfeited or Expired                           |       | (384,444            | )          | $            | 6.56       |                | —     |          | —     |   |
| Exercised                                      |       | —              |       | —       |       | —              |       | —        |       |
| Total Outstanding at  December 31, 2007   |       | 6,683,056           |       | $            | 6.56       |                | 8.8        |          | —     |   |
| Options Exercisable at  December 31, 2007 |       | 3,499,098           |       | $            | 6.54       |                | 8.7        |          | —     |   |

 

 

The aggregate intrinsic value in the above tablesrepresents the total pre-tax intrinsic value (the difference between the HSWIclosing stock price on the last trading date of the periods presented and theexercise price, multiplied by the number of options).  The amount of aggregate intrinsic value willchange based on the fair market value of our stock.

 

The fair value of options vested during the year endedDecember 31, 2007, and for the period from inception to December 31,2006, is $4.0 million and $7.9 million, respectively.

 

We assumed 500,000 INTACstock options as part of the INTAC Merger and exchanged them for an equalamount of HSWI options.  All of theseoptions were either already fully vested at the time of the merger or vested infull as a result of the INTAC Merger. Therefore, the fair value of the assumedoptions 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 allof 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 fairvalue options assumed is $0.33). The fair value of each option grant wasestimated on the date of grant using the following assumptions: underlyingstock price of $1.95; no dividend yield; expected volatility of 50%; risk-freeinterest rate of 5.0%; and expected life of seven years.

 

| ** **                                     | ** ** | ** **          | ** ** | ** **   | ** ** | **Weighted**        | ** ** | ** **    | ** ** |
|------------------------------------------------|------------|---------------------|------------|--------------|------------|---------------------|------------|---------------|------------|
| ** **                                     | ** ** | ** **          | ** ** | **Weighted** | ** ** | **average**         | ** ** | ** **    | ** ** |
| ** **                                     | ** ** | ** **          | ** ** | **average**  | ** ** | **remaining**       | ** ** | **Aggregate** | ** ** |
| ** **                                     | ** ** | **Number**          | ** ** | **exercise** | ** ** | **contract**        | ** ** | **intrinsic** | ** ** |
| **Options**                                    | ** ** | **of options** | ** ** | **price**    | ** ** | **term (yrs)** | ** ** | **value**     | ** ** |
| Outstanding at  October 2, 2007           |       | 500,000             |       | $            | 7.90       |                | 4.6        |          | $          | 768,000 | ** ** |
| Forfeited or Expired                           |       | (250,000            | )          | $            | 10.53      |                | —     |          | —     | ** ** |
| Exercised                                      |       | —              |       | —       |       | —              |       | —        | ** ** |
| Total Outstanding at  December 31, 2007   |       | 250,000             |       | $            | 5.49       |                | 2.8        |          | $          | 409,500 | ** ** |
| Options Exercisable at  December 31, 2007 |       | 250,000             |       | $            | 5.49       |                | 2.8        |          | $          | 409,500 | ** ** |

 

F-23

----

 

 

 

In conjunctionwith merger, simultaneously with the assumption of the INTAC stock options andas discussed in Note 2, 500,000 warrants were issued to HSW on the same termsas the INTAC stock options with a provision that as the exchanged stock optionsare forfeited or expire, a similar amount of the warrants expire.  At December 31, 2007, there were 250,000warrants outstanding.

 

*Earnings per Share*

 

The following is areconciliation of the numerators and denominators of our basic and dilutedearnings per share computations:

 
| ** **                                                           | ** ** | ** **                 | ** **  | **For the Period**           | ** ** |
|----------------------------------------------------------------------|------------|----------------------------|-------------|------------------------------|------------|
| ** **                                                           | ** ** | **For the**                | ** **  | **from March 14, 2006** | ** ** |
| ** **                                                           | ** ** | **Year Ended**             | ** **  | **(date of inception) to**   | ** ** |
| ** **                                                           | ** ** | **December 31, 2007** | ** **  | **December 31, 2006**   | ** ** |
|                                                                 |       |                       |        |                         |       |
| **Net loss**                                                         |       | $                          | (39,539,305 | )                            | $          | (12,705,759 | ) |
|                                                                 |       |                       |        |                         |       |
| Shares outstanding  March 14, 2006 through October 1, 2007 |       | 10                         |        | 10                           |       |
|                                                                 |       |                       |        |                         |       |
| Shares issued  October 2, 2007:                                 |       |                       |        |                         |       |
| To HSW                                                               |       | 22,940,717                 |        |                         |       |
| To INTAC shareholders                                                |       | 22,940,727                 |        |                         |       |
| To certain investors                                                 |       | 3,424,653                  |        |                         |       |
| Treasury shares received October 2, 2007                        |       | (3,000,000                 | )           |                         |       |
|                                                                 |       |                       |        |                         |       |
| Net additional shares  October 2, 2007                          |       | 46,306,097                 |        |                         |       |
|                                                                 |       |                       |        |                         |       |
| **Basic shares outstanding**                                         |       | 46,306,107                 |        | 10                           |       |
|                                                                 |       |                       |        |                         |       |
| **Weighted average shares  outstanding**                             |       | 11,544,818                 |        | 10                           |       |
|                                                                 |       |                       |        |                         |       |
| **Net loss per share**                                               |       | $                          | (3.42       | )                            | $          | (1,270,576 | ) |
|                                                                 |       |                       |        |                         |       |
| Weighted average shares  outstanding                                 |       | 11,544,818                 |        | 10                           |       |
|                                                                 |       |                       |        |                         |       |
| Dilutive stock options and  warrants                                 |       | —                     |        | —                       |       |
|                                                                 |       |                       |        |                         |       |
| **Total common shares and  dilutive securities**                     |       | 11,544,818                 |        | 10                           |       |

 

Stock options and warrantsare not included in the diluted earnings per share calculation above as theyare anti-dilutive.

 

**11. RELATED PARTY TRANSACTIONS**

 

At December 31, 2006, HSW had advanced us $4.3million for organizational start-up costs, direct acquisition costs and othercorporate expenses reflecting all material costs of doing business. Theyadvanced us an additional $4.5 million in 2007. No interest was charged on the advances.  All but $0.1 million ofthe advance was paid in the fourth quarter 2007, with proceeds from the equityfinancings.  (See Notes 1 and 10.)

 

In August 2006, HSW Brazil entered into a36 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.  Monthly fees for these services are $66,197(U.S. Dollars). The terms of the agreement also provided to Capela 800,000stock options at $6.50, the market value on the contract, and with annualvesting over the three year contract period. These options are included in theoptions described in Note 10.

 

F-24

----

 

During 2006, we entered into six unsecured notespayable with Capela that had various maturity dates in 2007.  Interest on these loans was based on theInterbank Certificate of Deposit rate plus .3% through .5%.  As of December 31, 2006, the balance ofthe notes payable outstanding was $195,848, including accrued interest.  The notes payable balance of $280,380including accrued interest was paid in full in the fourth quarter of 2007.

 

Capela is deemed an affiliate because that company hasan ownership in HSW, indirectly our largest shareholder.

 

**12.  SEGMENTREPORTING**

 

As a result of the INTAC Merger, at December 31, 2007, we had tworeportable segments:  (i) digital online publishing and (ii) careerdevelopment services.  The reportablesegments are components of HSWI which offer different products and services,are separately managed, have separate financial information available that isseparately evaluated regularly by management in determining the performance ofthe business.

 

The career development service segment represents the INTAC LegacyBusinesses and accordingly, only includes results of operations since October 2,2007, the date of the merger. (See Note 2). The information regarding operating segments is presented in thefollowing tables:

 
| ** **                                                                                 | ** ** | ** **   | ** ** | **Segment**       | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------|------------|-------------------|------------|
| ** **                                                                                 | ** ** | **Revenues** | ** ** | **Profit (Loss)** | ** ** |
| **For the Year Ended  December 31, 2007**                                             | ** ** | ** **   | ** ** | ** **        | ** ** |
| Digital Online Publishing                                                                  |       | $            | 147,535    |              | $          | (14,835,913 | ) |
| Career Development                                                                         |       | 198,627      |       | (24,688,026       | )          |
| Total                                                                                      |       | $            | 346,162    |              | $          | (39,523,939 | ) |
| **For the Period from  March 14, 2006 (date of inception) to December 31, 2006** | ** ** | ** **   | ** ** | ** **        | ** ** |
| Digital Online Publishing                                                                  |       | $            | —     |              | $          | (12,556,817 | ) |
| Career Development                                                                         |       | —       |       | —            |       |
| Total                                                                                      |       | $            | —     |              | $          | (12,556,817 | ) |

 

A reconciliation from the segment information to the net loss for the yearended December 31, 2007, and for the period from March 14, 2006,(date of inception) to December 31, 2006:

 
| ** **    | ** ** | **For the Year   Ended December   31, 2007** | ** **  | **For the Period   from March 14,   2006 (date of   inception) to   December 31, 2006** | ** ** |
|---------------|------------|---------------------------------------------------|-------------|---------------------------------------------------------------------------------------------------|------------|
| Segment loss  |       | $                                                 | (39,523,939 | )                                                                                                 | $          | (12,556,817 | ) |
| Other expense |       | (15,366                                           | )           | (148,942                                                                                          | )          |
| Net Loss      |       | $                                                 | (39,539,305 | )                                                                                                 | $          | (12,705,759 | ) |

 

Total assets for the operating segments at December 31, 2007 and 2006are as follows:

 
|                      |       | **December 31,** |       |
|---------------------------|------------|-----------------------|------------|
| ** **                | ** ** | **2007**              | ** ** | **2006** |   |
| Digital online publishing |       | $                     | 14,757,131 |   | 1,917,058 |   |
| Career development        |       | 19,988,029            |       | — |   |
| Total assets              |       | $                     | 34,745,160 |   | $ | 1,917,058 |   |
|                           |            |                       |            |  |  |  |  |

 

F-25

----

 

**13. COMMITMENTS AND CONTINGENCIES**

 

We have entered into operating leases for officespace. Rental expense for operating leases, which is recognized on astraight-line basis over the lease term, was $194,431million and $43,703 for year ended December 31,2007, and for the period from inception to December 31, 2006,respectively. We have not entered into any capital leases.

 

The following table summarizes the approximate futureminimum rentals under noncancelable operating leases in effect at December 31,2007, including operating leases related to INTAC Legacy Businesses (See Note3) through February 29, 2008, the date of sale of those businesses:

 

| ** ** | ** ** | **Minimum** | ** ** |
|------------|------------|-------------|------------|
| ** ** | ** ** | **Rentals** | ** ** |
| 2008       |       | $           | 417,632    |   |
| 2009       |       | 235,235     |       |
| 2010       |       | 64,909      |       |
| 2011       |       | —      |       |
| 2012       |       | —      |       |
| Thereafter |       | —      |       |
| Total      |       | $           | 717,776    |   |

 

 

**14.**  **QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)**

 

The following table sets forth, for the periodspresented, our unaudited quarterly results of operations for the eight quartersended December 21, 2007.  The INTACLegacy Businesses are only included in the results of operations since October 2,2007, the date of the INTAC Merger, in the quarterly information presentedbelow. (See Note 2).

 

 
| ** **                                                 | ** ** | **Three  Months Ended** | ** ** |
|------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                 | ** ** | **Mar. 31,**       | ** ** | **June, 30** | ** ** | **Sept.  30,** | ** ** | **Dec. 31,** | ** ** |
| ** **                                                 | ** ** | **2007**                | ** ** | **2007** | ** ** | **2007** | ** ** | **2007** | ** ** |
| **Revenue:**                                               | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Digital online publishing**                              |       | $                       | —     |   | $ | 32,674 |   | $ | 60,288 |   | $ | 54,573 |   |
| **Career development services**                            |       | —                  |       | — |   | — |   | 198,627 |   |
| ** **                                                 | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Operating expenses**                                     |       | (2,884,315              | )          | (3,226,048 | ) | (3,411,630 | ) | (30,348,109 | ) |
|                                                       |       |                    |       |   |   |   |   |   |   |
| **Loss from operations**                                   |       | (2,884,315              | )          | (3,193,374 | ) | (3,351,342 | ) | (30,094,909 | ) |
| ** **                                                 | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other income (expense)**                                 |       | (2,470                  | )          | (104,783 | ) | (73,398 | ) | 165,284 |   |
|                                                       |       |                    |       |   |   |   |   |   |   |
| **Net loss**                                               |       | $                       | (2,886,785 | ) | $ | (3,298,156 | ) | $ | (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  average shares outstanding** |       | 10                      |       | 10 |   | 10 |   | 45,802,780 |   |

 

F-26

----

 
| ** **                                                 | ** ** | **For the Period**      | ** ** | ** **             | ** ** | ** **         | ** ** | ** **             | ** ** |
|------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                                                 | ** ** | **from March 14,** | ** ** | ** **             | ** ** | ** **         | ** ** | ** **             | ** ** |
| ** **                                                 | ** ** | **2006 (date of**       | ** ** | ** **             | ** ** | ** **         | ** ** | ** **             | ** ** |
| ** **                                                 | ** ** | **inception) to**       | ** ** | ** **             |
| ** **                                                 | ** ** | **March 31,**      | ** ** | **Three Months Ended** | ** ** |
| ** **                                                 | ** ** | **2006**                | ** ** | **June 30, 2006** | ** ** | **Sept. 30, 2006** | ** ** | **Dec. 31, 2006** | ** ** |
| **Revenue**                                                |       | $                       | —     |                   | $          | —             |       | $                      | —     |   | $ | — |   |
| ** **                                                 | ** ** | ** **              | ** ** | ** **             | ** ** | ** **         | ** ** | ** **             | ** ** |
| **Operating expenses**                                     |       | (81,565                 | )          | (1,199,522             | )          | (8,234,226         | )          | (3,041,504             | )          |
|                                                       |       |                    |       |                   |       |               |       |                   |       |
| **Loss from operations**                                   |       | (81,565                 | )          | (1,199,522             | )          | (8,234,226         | )          | (3,041,504             | )          |
| ** **                                                 | ** ** | ** **              | ** ** | ** **             | ** ** | ** **         | ** ** | ** **             | ** ** |
| **Other expense**                                          |       | —                  |       | —                 |       | —             |       | (148,942               | )          |
|                                                       |       |                    |       |                   |       |               |       |                   |       |
| **Net loss**                                               |       | $                       | (81,565    | )                      | $          | (1,199,522         | )          | $                      | (8,234,226 | ) | $ | (3,190,446 | ) |
|                                                       |       |                    |       |                   |       |               |       |                   |       |
| **Net loss per basic and diluted  share**                  | ** ** | $                       | (8,157     | )                      | $          | (119,952           | )          | $                      | (823,423   | ) | $ | (319,045 | ) |
|                                                       |       |                    |       |                   |       |               |       |                   |       |
| **Basic and diluted weighted  average shares outstanding** | ** ** | 10                      | ** ** | 10                     | ** ** | 10                 | ** ** | 10                     | ** ** |

 

F-27

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SCHEDULE II: VALUATION AND QUALIFIYING ACCOUNTS

 

For the period from March 14, 2006 (date ofinception) to December 31, 2006, and for the year ended December 31,2007

** **

**ScheduleIIHSW International Inc.Valuation & Qualifying Accounts**

** **
| ** **                                       | ** ** | ** **        | ** ** | **Allowance**  | ** ** | **Additions**  | ** ** | ** **     | ** ** | ** **     | ** ** |
|--------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|
| ** **                                       | ** ** | **Balance at**    | ** ** | **resulting**  | ** ** | **charged to** | ** ** | ** **     | ** ** | **Balance at** | ** ** |
| ** **                                       | ** ** | **beginning**     | ** ** | **from INTAC** | ** ** | **costs and**  | ** ** | ** **     | ** ** | **end**        | ** ** |
| **Classification**                               | ** ** | **of the period** | ** ** | **Merger**     | ** ** | **expenses**   | ** ** | **Deductions** | ** ** | **of year**    | ** ** |
| **Allowance for Doubtful  Accounts:**            | ** ** | ** **        | ** ** | ** **     | ** ** | ** **     | ** ** | ** **     | ** ** | ** **     | ** ** |
|                                             |       |              |       |           |       |           |       |           |       |           |       |
| 2006                                             |       | $                 | —     |           | —     |           | —     |           | —     |           | $          | — |   |
|                                             |       |              |       |           |       |           |       |           |       |           |       |
| 2007                                             |       | $                 | —     |           | —     |           | 1,210,631  |           | —     |           | $          | 1,210,631 |   |
|                                             |       |              |       |           |       |           |       |           |       |           |       |
| **Valuation Allowance for Deferred Tax Assets:** | ** ** | ** **        | ** ** | ** **     | ** ** | ** **     | ** ** | ** **     | ** ** | ** **     | ** ** |
|                                             |       |              |       |           |       |           |       |           |       |           |       |
| 2006                                             |       | $                 | —     |           | —     |           | 4,220,312  |           | —     |           | $          | 4,220,312 |   |
|                                             |       |              |       |           |       |           |       |           |       |           |       |
| 2007                                             |       | $                 | 4,220,312  |           | 1,846,949  |           | 4,349,967  |           | —     |           | $          | 10,417,228 |   |

 

F-28

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