Updated, February 17, 2011: The deal worked out last November to merge Newsweek with the Daily Beast went into effect February 1. Tina Brown, who founded the Web-only Beast is now editor-in-chief of the new combined publication. Sidney Harman, who bought Newsweek from the Washington Post Company for a buck and assumed many millions in the magazine’s debt, becomes executive chairman.

Whoever is actually putting out the weekly has been steering it back toward newsy covers—“Demise of the Dictators” and “Rage Goes Viral” about the Arab Revolution—and full-page pictures from the streets of Egypt. The editors have given former Post fashion critic Robin Givhan room to shine in a terrific piece on Lady Gaga and Giorgio Armani. Another Post refugee, art critic Blake Gopnik, has been penning great essays on design.

But Newsweek is still waiting for Brown’s redesign, which she promises in the coming months. The staff exodus from Newsweek continues. Long-time editor Daniel Klaidman, one of the last of the old guard, left the magazine in January. And the ad situation is precarious: the February 14 issue had 12 ad pages in a 52-page magazine.

Newsweek’s 78th birthday is today. It has a new editor, and a new owner. But what it needs is a radical new plan.  

Donald Graham was in anguish. It was late 2009, and Newsweek, the weekly magazine that his father, Philip, had bought in 1961 and that his mother, Katharine, had cherished—had become an albatross. In the good old days, Newsweek staffers affectionately called his mother Lady Katharine, but now her son was trying to cope with his role as executioner.

Bleeding ad revenue and subscribers, the magazine had lost $16 million in 2008, and the losses would double in 2009. The Washington Post Company’s board of directors had watched the company’s stock drop from nearly $1,000 a share in December 2004 to $322.50 in March 2009.

The Post Company’s board was pressuring Graham to plug Newsweek’s drain on profits and growth. Warren Buffett, the heaviest of heavy hitters among investors and board members, wanted to sell Newsweek and cut its losses.

At 64, Don Graham was the patriarch of the Graham family. Though he wasn’t the eldest, his mother had chosen him to preside over the family’s corporate jewels, first as publisher of the Washington Post and then as chairman of the Post Company, which had grown from a media business to a conglomerate dominated by its Kaplan education division.

The last thing Graham wanted to do was abandon Newsweek. He had installed a new editor, Jon Meacham, in 2006. He had supported redesigns in 2007 and 2009. He had watched Meacham turn the magazine from news and reporting to essays and argument.

Reporters in the Washington bureau rebelled in 2009 over Meacham’s management. “I must tell you,” one wrote in an anonymous letter sent to Graham’s home near DC’s Dupont Circle, “it is no exaggeration to describe what is going on right now as an act of corporate suicide.”

Toward the end of 2009, Graham met weekly with advisers and his sister, Elizabeth “Lally” Weymouth, to find ways to shore up the magazine’s finances. He and Weymouth, who had found a home as a writer at the magazine, pitched advertisers. By late 2009, he had three choices: Cut the staff, shut it down, or sell it.

“It was excruciatingly difficult for him,” one of his confidants says.

In May 2010, the world learned by official announcement that the Post Company was putting Newsweek on the block, but the board had voted to sell the magazine four months earlier. In January, Don Graham called close friends and family with the news. Among them were Rick Smith, the Newsweek lifer who had edited the magazine for eight years and retired as CEO in 2007, and Lally Weymouth.

“I was sad,” Weymouth says. “My father bought Newsweek 49 years ago. We cared deeply about the magazine and the people who worked there, but I understood the board’s business decision.”