Okay, here's the Malladin's Gate Story...
Malladin's Gate Press began a long time ago with myself and Nigel McClelland colaborating on system ideas back when we were at University.
I started writing my own RPG Product before D20 started. It began as a system for a Vampire LARP myself and Nigel were running at Leeds Uni. We wanted to move away from the typical WoD background so that our players didn't know what else was out there. We created a system that would work equally well as LARP or tabletop and fleshed out a modern horror setting.
The game ran very successfully for a short time, but (as is often the case with Vampire LARP, in my experience) it imploded due to to internal politics within the referees. They players were very distraught that we canned the game and some of them tried to resurrect it themselves. I don't know how successful this attempt was.
So after this Nigel and myself started to write up the game to tout around to publishers. However, we found that during the time we took to write it D20 had burst onto the scene and we couldn't get a look in with a non-d20 product. We got a little way with Mongoose but they said they wouldn't accept anything non-d20 in the end. We had a good response from John Wick, but then he just seemed to vanish off the face off the planet.
Anyway, so we then decided that we might be better tapping in to the D20 market and can up with a couple of ideas to tout around, one of which was a class book for Paladins. We got quite far with this with one publisher but then had the plug pulled at the last minute for reasons that don't make much sense to us still. So we decided to publish it our self, which is when we discovered RPGNow. It seemed such a perfect option for us, and just £60 ($100) started us off with all the stuff we needed to get going.
Forgotten Heroes: Paladin got off to a flying start, mainly thanks to a number of fantastic reviews both here and at RPGNow, and I think we'd made a proffit after the first few days.
So, being very surprised with our success (and thinking Yah-Boo-Sucks-to-You to those who rejected us) we planned our next few products and began writing them. Our next product was a mixed class/setting book for Abjurers and did not do anywhere near as well as Paladin. We were at a loss as to why, but got some really good advice from people on these forums about marketting, and found that our third product fared much better.
Since then we've ended up slowing down our production, mainly due to a bunch of real-life issues cutting back on our time, but our products seem to get constant good reviews, and this definately sells products.
One final note I think I want to point out is that timing is crucial. I think we were just too late at jumping on the PDF bandwaggon to get any of the print deals that the likes of Chuck, Nat 20 and Ambient got.
That said, we're hopeful we might be able to tie something up for a print deal with our Etherscope game, if we can find the time to get it written and not miss any window of opportunity that might have opened to us.
Just to quickly comment on some other people's experiences. I think Phil Reed has exactly the right products for the PDF market place. They are short (and take hime even less time to write than I suspected

) and priced very cheaply. We find we're very bad at keeping our products to a sensible page count and spend far to long discussing and playtesting and not actually writing things down. But, hell, we're in this for fun, not for $$$! Even as a relatively successful PDF publisher we're only bringing back an average of $30 a month each. It's no living, but it's good to get nice reviews and to think that your ideas are being used by some people you've never met.
Hoep that's helpful.
Ben